Fonterra takes $81m hit in Sri Lanka

A rapid decline of the Sri Lankan rupee means it takes more Sri Lankan Rupee to pay for Fonterra product purchased from New Zealand, which is sold in US dollars.

Fonterra chief executive Miles Hurrell says this resulted in an $81 million adverse revaluation of the co-op’s Sri Lankan business payables owing to New Zealand.

The Sri Lankan business, part of Fonterra’s Asia-Pacific (APAC) division, impacted the co-op’s profitability. Earnings before interest and taxes (EBIT) were down $132m for the third quarter this financial year compared with the same period last year.

“While our Australian business and Ingredients channel continued to perform well, this was more than offset by the unprecedented economic challenges in Sri Lanka, margin pressure from the higher milk price and other Covid-19 related challenges,” says Hurrell.

“While historically a good business for us, the significant deterioration of economic conditions in Sri Lanka has seen the rapid devaluation of the Sri Lankan Rupee against the US dollar.”

Sri Lanka was plunged into turmoil as the country struggled to pay for essential imports, while foreign exchange reserves have been depleted to critically low levels.

As lines for cooking fuel, gasoline, diesel fuel and food grow longer and crippling power cuts leave homes in darkness for hours, public anger has increased, with spontaneous protests by people from all walks of life – students, the middle class and low-income workers.

Sri Lanka is one of the few countries in the world where Fonterra collects and processes milk.

According to its website, since 1997, Fonterra Brands Lanka has been collecting milk from its local farmers for set and stirred yoghurt, drinking yoghurt, fresh milk and flavoured milk. Currently, milk is collected from 4,500 local dairy farmers.

Sri Lanka is also a key market for milk powder from NZMP.

While Sri Lanka impacted Fonterra’s APAC business, the co-operative’s Africa, Middle East, Europe, North Asia and the Americas division (AMENA) continued to deliver a strong performance.

Normalised EBIT for AMENA was $406 million, up 30% due to improved gross margins in the ingredients channel, and a strong performance from the Chilean business.

However, Fonterra also took a hit in its Greater China divisions, thanks to Covid lockdowns in key cities.

In Greater China, ingredients continued to benefit from increased sales of higher margin products. However, normalised EBIT was down 17% to $317 million, due to continued pressure on margins from the higher milk price, particularly in foodservice, as well as the Covid-19 lockdowns.

Hurrell says he expects the impact of the lockdowns to show up in our fourth quarter results.

“Aside from some supermarkets, all restaurants and other food outlets were closed in Shanghai in early April to contain the Omicron outbreak.

“While restrictions have started to ease, a number of food outlets remain closed, while other cities across China are facing Covid-19 restrictions.

“The impacts of this, and the disruptions to supply chains, have been felt across the market and are reflected in our Greater China sales volumes which are down on the same time last year.”

For nine months ending April 30, total normalised EBIT was $825 million, down $134 million, reflecting lower sales volumes, continued pressure on margins from the significantly higher milk price, on-going Covid-19 disruptions, and the rapid decline of the Sri Lankan Rupee.

This was also reflected in Fonterra’s net profit, down $131m to $472m.

Hurrell says despite significant market disruption, the co-op continued to deliver a strong milk price and solid earnings.

“As an exporter, many of the markets we operate in have been prone to sudden shocks, which can impact what we sell, where we sell it and when, but right now we’re feeling the impact of multiple events across multiple markets.

“We are actively managing the challenges arising from Covid-19 and other geopolitical and macroeconomic events.

“However, increasing market volatility and uncertainty, on-going supply chain disruptions and growing inflationary pressures have added increased complexity. 

“I want to thank our employees for delivering a solid financial performance despite the challenging global conditions, and also our farmer owners, sharemilkers and contract milkers who are managing increasing costs on-farm.”