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Fonterra reported a record annual profit of $1.6 billion and is returning record dividends to its shareholders.
The co-operative’s profit increased by $994 million in the year to the end of July, from $583m the previous year. Excluding one-time items such as assets sales and impairments, profit increased by $738m to $1.3b. Units in the Fonterra Shareholders’ Fund jumped 5.2% to $3.46 on the NZX on Thursday.
Fonterra’s earnings were bolstered by strong returns in its largest business unit, ingredients, where profit doubled to $1.2b after it inked new deals in Asia Pacific and Africa, helping it sell down inventory from the previous year and lift margins due to higher sales of protein products like casein and cheese as demand for whole milk powder weakened.
“Our cheese and protein portfolio in particular has been the star performer this year,” said chief executive Miles Hurrell. “We can very quickly move products into channels and markets where there was a better value and we’re seeing that play out this year.”
Fonterra’s foodservice business also reported an improved performance, with profit jumping to $241m from $70m as it benefited from increased prices and higher demand as China’s lockdown restrictions started to ease from the start of this calendar year.
The foodservice business, which supplies bakeries, tea houses, coffee shops, restaurants, convenience store chains and supermarkets with specialist dairy products, was started in 2013 and Fonterra aims to grow its revenue to $5b by 2030.
Hurrell called it “the jewel in the crown” and said the business, which had been predominantly focused on the Chinese market, had grown in Southeast Asia and Australia over the past year.
However the performance of the company’s consumer business worsened, with the annual loss widening to $164m from $27m, although higher prices strengthened its performance in the second half of the year.
But the long-term outlook saw the co-operative write down the value of its Asia Brands business by $101m and its Fonterra Brands New Zealand business by $121m.
The annual earnings included a $260m gain on the sale of Fonterra’s Soprole dairy business in Chile. Selling overseas assets helped Fonterra reduce its net debt to $3.2b from $5.3b the previous year, and the co-operative is tracking ahead of its targets.
STUFF
The co-operative is selling overseas assets to focus on getting more value from NZ milk. (First published September 2022)
Fonterra is paying shareholders a record dividend for the year. The co-operative has already paid a 10 cent first-half dividend, and a 50c special dividend from the sale of overseas assets, and will pay a final dividend of 40c. That’s ahead of its 20c annual dividend the previous year.
The payments will help partially offset a lower farmgate milk price and higher costs impacting farmers this season.
The co-operative confirmed its final farmgate milk price payment for last season at $8.22 per kilogram of milk solids, ahead of the $8.20 per kgMS midpoint of its forecast range.
While it is the third-highest payment Fonterra has ever made, it is down from the co-operative’s opening forecast for the season of $8.25 to $9.75 per kgMS, with a midpoint of $9 per kgMS, and lower than the record $9.30 per kgMS payment the previous season due to a drop in demand for whole milk powder.
Fonterra retained its forecast farmgate milk price for this season of $6 to $7.50 per kgMS, with a midpoint of $6.75 per kgMS. That’s down from its opening forecast of $8 per kgMS in May and below DairyNZ’s breakeven milk price of $7.51 per kgMS, meaning many farmers will be unprofitable this season.
Global dairy prices have fallen sharply this season amid lacklustre demand from China, the world’s biggest dairy importer and Fonterra’s largest market for whole milk powder.
“Demand for imported powders, specifically in China, remains soft but it is early in the season,” Hurrell said.
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Fonterra chief executive Miles Hurrell acknowledged that a lower farmgate milk price was challenging for many farmers.
Fonterra has used its strong balance sheet to tweak its advance rate payment to get cash to farmers earlier in the season.
“We are aware that there are challenging conditions on the ground for many of our farmers,” Hurrell said.
“We acknowledge that across the year, farmers will continue to feel the pressure from high input costs and a reduced farmgate milk price. We’ll continue to do all that we can to support farmers through this challenging period.”
He said Fonterra was watching market dynamics closely and believed there were indications demand for New Zealand milk powders will start to return from early 2024.
Demand for other products, including foodservice and value-added ingredients, continued to be robust, he said.
Hurrell said while the favourable price relativities over the last year had reduced from their peaks, the co-operative was expecting improved margins across its consumer and foodservice channels this year.
Fonterra forecast earnings from continuing operations of 45 to 60 cents per share for the current financial year. It reported normalised earnings of 80cps last year, at the top end of its 65 to 80cps forecast and ahead of 35cps the previous year.
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