Fonterra will profit up to 50 percent in interim results from the 2023 financial year. The cooperative profit is NZD 546 million, with 33 cents earned per share. This is up to NZD 182 million difference compared to last year. The return on capital for Fonterra in the previous 12 months is 8.6 percent.
As a result, Fonterra has decided to pay an interim dividend of 10 cents per share alongside a Farmgate milk solid production price range forecast between NZD 8.20 to 8.80.
The cooperative has also upgraded its full-year forecast normalised earnings from 50-70 cents per share to 55-75 cents per share, with a proposed tax-free capital return to farmer-owners and unit holders of around 50 cents per share, subject to the completion of the sale of its Chilean Soprole business.
Fonterra CEO Miles Hurrell stated the year's first half results show the cooperative is performing well, with profit up 50 per cent, against ongoing market volatility.
Hurrell explained that the cooperative scale and diversification across channels and markets had enabled Fonterra to navigate through the disruption caused by extreme weather events and, otherwise, the enterprise to make the most of favourable market conditions in several areas.
“While milk powder prices have softened recently, impacting our forecast Farmgate Milk Price range, protein prices have been high, reflected in the lift in earnings we’re reporting today," revealed Hurrell.
Fonterra's improved earnings are the direct reason behind its ability to pay an interim dividend of 10 cents per share, with an optimistic chance of the cooperative paying a full-year dividend in addition to its proposed capital return.
“The outlook for high-quality, sustainable New Zealand dairy remains positive. We have a clear strategy and are well-positioned for this demand."
Hurrell explained that the increased earnings could be attributed to the cooperative's scale and ability to move farmer owners' milk into products and markets where the enterprise found a favourable margin.
“With total milk powder prices down, we moved more milk into skim milk powder and cream products to optimise our Farmgate Milk Price."
The most favourable profit margins were made with its cheese and protein portfolios, achieved by moving a higher proportion of current-season milk into those products. These higher margins are reflected in Fonterra's Ingredient Channel Performance, with earnings before interest and taxes (EBIT) up NZD 494 million, equalling 118 percent, on the same time last year to NZD 911 million.
Hurrell described that improved in-market prices benefited Fonterra's consumer and food service channels. Foods service normalised EBIT up to NZD 81 million, equalling 95 percent to NZD 166 million.
However, Hurrell stated that higher input costs for the industry, including ongoing pressure on margins, impacted the overall consumer channel performance.
“Our domestic consumer business, Fonterra Brands New Zealand (FBNZ), has been under margin pressure for some time and is not improving as fast as planned. Performance of our Asia consumer brands is impacted by weakening currency in the markets they operate, higher interest rates and a declining economic environment in some South East Asian markets."
For those reasons, Fonterra has revised the valuation of FBNZ by NZD 92 million and our Asia consumer brands Anlene, Chesdale and Anmum by NZD 70 million.
“Due to market conditions and the impact of impairments, our overall Consumer channel normalised EBIT is down NZD 177 million to a loss of NZD 94 million."
Reportable segments for this year have been updated to reflect an organisational change to better support the enterprise's strategy. Group Operations is shown as a separate segment, and the previous results of the AMENA (Africa, the Middle East, Europe, North Asia and the Americas and Asia Pacific) are now combined into the new Global Markets segment.
“Group Operations represents the business activities that collect and process New Zealand milk through to selling the products to our customer-facing regional business units, Global Markets and Greater China.
Group Operations normalised EBIT increased NZD 412 million to NZD 501 million due to higher ingredient prices, specifically proteins and cheese, relative to the product portfolio, which informs the Farmgate Milk Price.
When reviewing Fonterra's customer-facing regional business units, its global markets normalised EBIT was down four percent to NZD 267 million. Global markets ingredients channel in-market earnings increased by NZD 145 million, mainly due to higher sales volumes and improved pricing. However, the impairments and increased operating costs in its Consumer channel offset this.
Greater China's normalised EBIT decreased by one percent to NZD 215 million, with the food service channel resilient to market disruption from the pandemic. However, the Consumer channel offset this, which included a proportion of the Anlene brand impairment.
"Our Total Group normalised operating expenses are up from NZD 1.1 billion to NZD 1.4 billion due to the New Zealand consumer business and Asia brands impairments, increased costs including inflation and foreign exchange, and last year having a one-off favourable item."
Since year-end, Fonterra has improved its net debt and working capital position through improved earnings and clearing the higher year-end inventory.
However, severe weather conditions, including the Auckladn Anniversary floods and Cyclone Gabrielle, temporarily delayed exporting products. Fonterra remained focused on inventory management, which seasonally peaks through February and March.
The proposed capital return of Fonterra to farmer-owners and unit holders is intended to return around 50 cents per share and unit after the enterprise also reduces debt following the sale of Solprole. The deal follows the outcome of reviews of the enterprise's ownership of Fonterra Australia and Chilean Sorprole businesses. The enterprise will retain full ownership of Fonterra Australia.
The sale of Soprole will remain subject to the satisfaction of conditions previously announced by Fonterra, including the commencement of an irrevocable public tender offer process in Chile for the outstanding shares in Soprole not already owned by Fonterra.
“We aim for a record date for the proposed tax-free capital return in late September 2023, with cash to be received by our farmer-owners and unit holders the following month."
Implementing the capital return will require a scheme of arrangement that must be voted on by shareholders and approved by the High Court, a typical process for this type of transaction. Fonterra is committed to maintaining its A band credit rating, confirming it will provide more information to its farmer-owners and unit holders.
Hurrell shared that Fonterra has made substantial progress towards its 2030 targets through its strategic choices to focus on New Zealand milk, sustainability and leadership in dairy innovation and science.
Fonterra's new Flexible Shareholding capital structure is designed to support sustainable milk supply, which is fundamental to achieving its 2030. Simultaneously the new capital structure will support a stable balance sheet while protecting farmer ownership and control.
“Fonterra has been working with the Government to make relevant changes to the Dairy Industry Restructuring Act (DIRA) to support the new structure. Parliament passed these legislative changes in November 2022, and the transition to our new capital structure will occur on the 28th of March 2023.”
Fonterra has allocated up to $300 million to support liquidity as farmers transition to Flexible Shareholding, including new market-maker arrangements designed to help liquidity over the long term.
The enterprise recognised that farmers might require further liquidity support during the transition. In anticipation of this, it has approved an on-market share buyback. This will commence from the 28th of March 2023, with an approximate continuation until the 9th of June.
The buyback is structured to give the cooperative the capacity to buy shares each week with additional flexibility to accommodate differing levels of liquidity across the proposed period, with a maximum of NZD 75 million collective shares included within the buyback structure.
Fonterra has committed to sustainability action. At its Annual meeting last year, it notified farmers it would announce a target for its on-farm emissions. The enterprise believes this will help secure and retain high-value consumers and enable the cooperative and farmer-owners to meet regulatory requirements and access finance.
While it acknowledges that implementing on-farm changes is difficult, it will communicate with farmer-owners about collectively achieving the target. At the same time, Fonterra continues to invest in new technologies, with 18 methane reduction projects currently underway and 30 active trials of potential solutions.
The enterprise aims to transition its manufacturing sites out of coal by 2037.
"At our Waitoa site, we’re converting one of our boilers to wood biomass. The new boiler, which will be operating later this year, will reduce the site’s annual emissions by 48,000 tonnes of CO2e, the equivalent of taking 20,000 cars off New Zealand’s roads."
Hurrell proudly shared Fonterra's progress in its partnership with PolyJoule, a Massachusetts Institute of Technology (MIT) spin-off. The partnership will trial the world’s first industrial-scale organic battery. It has been installed at the Waitoa manufacturing site to improve energy security.
Meanwhile, the enterprise has also established a new start-up company with Royal DSM to accelerate developing and commercialising fermentation-derived proteins with dairy-like properties, to match increasing consumer demand for plant-based products.
