Fonterra Co-operative Group Ltd has provided its Q3 business update, announcing a substantial profit after tax of NZD 1,158 million, up NZD 119 million on this time last year.
As a result of these strong earnings, the Co-op has narrowed its year-end earnings range to NZD 0.65-NZD 0.75 per share, at the upper end of the guidance provided in March, which was NZD 0.55-NZD 0.75 per share.
At the same time, Fonterra announced an opening forecast Farmgate Milk Price for the 2025/26 season of NZD 10.00 per kilogram of milk solids (kgMS), driven by stable near-term market demand.
CEO Miles Hurrell said Fonterra is committed to delivering strong shareholder returns through both earnings and the Farmgate Milk Price.
“We’ve delivered strong shareholder returns through FY25, including a 22-cent interim dividend, and as we get closer to the end of the year, we are focused on maintaining this momentum,” said Hurrell.
“Our forecast Farmgate Milk Price for the current season is driven by strong demand for our milk price reference product, and our range is unchanged at NZD 9.70- NZD 10.30 with a midpoint of NZD 10.00 per kgMS. We’re also pleased to tighten our year-end forecast earnings within the existing range, given the strength of our third quarter performance.”
2025/26 season opening Farmgate Milk Price
Looking ahead to the season, Hurrell has anticipated that this demand will continue for now; however, he acknowledged the ongoing geopolitical uncertainty and the potential for a range of outcomes across the season.
Therefore, the opening forecast Farmgate Milk Price for the 2025/26 season of NZD 10.00 per kgMS falls within a wide forecast range of NZD 8.00 to NZD 11.00 per kgMS.
For the current season, the milk price of NZD 10.00 per kilogram of milk solids (kgMS) equates to approximately NZD 15 billion in the New Zealand economy. The majority of this flows into regional New Zealand, where it plays a strong role in helping to sustain local communities.
Business performance
Fonterra’s focus on optimising its product mix has driven a Q3 normalised profit after tax of NZD 1,158 million, equivalent to 70 cents per share, with operating profit of NZD 1,740 million, up NZD 267 million on last year.
This result reflects the scale and ongoing strength of the Ingredients channel, as well as volume growth in the Foodservice and Consumer channels, with each channel outperforming its third-quarter performance compared to the same period last year.
The rolling 12-month Return on Capital is 11 per cent, which is above the previous target for FY25 and within the long-term target range of 10-12 per cent.
The full year forecast earnings range of 65-75 cents per share assumes flat earnings in Q4 of FY25 due to the seasonality of milk collections, the higher input prices for Consumer and Foodservice businesses, ongoing investment in the ERP system and an increase in costs associated with shaping the Co-op post divestment to execute the strategy.
“We are heading into year-end with a strong balance sheet and full year debt metrics on track to be below the Co-op’s target range.”
Strategic delivery
Hurrell added that a priority for Fonterra this year has been the implementation of its strategy, which deepens the Co-op’s focus on its high-performing Ingredients and Foodservice businesses.
“Last year, we announced a step-change in our strategic direction, including a decision to divest our global Consumer and associated businesses. This step was grounded in an understanding of how we best create value for farmer shareholders and ultimately for New Zealand,” he said.
“We have been thoroughly testing the terms and value of both a trade sale and an initial public offering (IPO) as divestment options. This work is on track as planned, and we will seek farmer shareholder approval to divest through a vote in due course."
Given Fonterra's confidence in its strategy, it has a firm conviction that divestment is the right choice for the Co-op and its owners.
“Our financial results show we have an impressive business as a global B2B dairy player, powered by our home base of New Zealand milk and operations. If we divest our Consumer business, we will still be a Co-op with global reach and scale, and a diverse product mix sold to customers in more than 100 countries.”
By focusing on its core strengths and the sales channels that deliver the highest returns, the co-op has the confidence to target an average Return on Capital of 10-12 per cent, which is above its five-year average. This is in addition to paying farmers the highest sustainable Farmgate Milk Price.
Fonterra has continued to target a significant capital return to shareholders and unit holders following divestment.
