Dairy co-operative Fonterra has executed a recovery with a record $1.6 billion profit. But milk product demand is declining in China and farmers are facing financial pressure.
Dairy giant Fonterra rewarded chief executive Miles Hurrell with a $300,000 pay rise for a stellar lift in the co-operative’s 2023 financial performance, taking his remuneration to $4.6 million.
However, that was only what he was actually “paid” in the financial year - what he will “earn” is $4.9m, undera new remuneration regime which addresses a longer-term portion of senior executive pay.
New Zealand’s biggest business announced a 170 per cent lift in reported profit after tax to a record $1.6 billion. It posted full-year reported earnings of 95c per share, up from 36c the previous year.
The full-year dividend to its farmer-shareholders and unit holders was 50c a share, including an interim dividend of 10c a share.
Hurrell, a long-term Fonterra executive, was appointed CEO in 2018. He succeeded Dutchman Theo Spierings, whose annual pay reached $8m.
Hurrell’s FY23 paid fixed remuneration increased $125,800 on the previous year, while the benefits portion of his salary rose $8720 to $134,202 and his performance pay increased by $164,800 to $2.1m.
Fonterra chairman Peter McBride’s total remuneration increased by $29,600 to $475,808. He is believed to be New Zealand’s highest-paid chair.
Fonterra chairman Peter McBride got a pay rise.
The number of employees paid $100,000 or more jumped by 1916. Hurrell said Fonterra had a large unionised workforce and a number of employees covered by union-negotiated contracts had moved into the $100,000-plus bracket during the year.
Fonterra’s reported after-tax profit was $994m up on FY22. Excluding the net gain from divestments of $248m, normalised profit after tax was $1.3b, up $738m on the previous period. The farmer-owned co-operative reported a return on capital of 12.4 per cent, compared to 6.8 per cent.
Net debt fell $2.1b on the strong earnings, a $900m reduction in working capital and proceeds from divestments.
The strong performance, fuelled largely by higher earnings from cheese and protein exports, came as New Zealand dairy farmers struggle against a global dairy price downturn for commodity milk powders, with weaker Chinese demand.
Fonterra responded to the powder price slump by putting more milk into higher-margin cheese and protein products.
About the only gremlin in the result was a loss of $164m in the consumer channel business.
After-tax profit in the channel decreased $137m on the previous year, mainly due to impairments in the New Zealand domestic consumer business ($121m) and Asia brands ($101m).
Kiwis paying what they see as high prices for dairy products may struggle to understand how such a major market player failed to make a profit in its local consumer business.
Hurrell responded that Fonterra did not set retail prices.
“The outlook for the New Zealand business is not as strong as we’d like ... but not for lack of effort by our teams, who’ve gone out in pretty trying times.
“While $8.22 [the 2022-2023 final farmgate milk price] was back on the year prior, it’s still a relatively strong milk price we’ve had to use as a cost of goods to then go and add a margin on top for our consumer business.” (The New Zealand business doesn’t get a discount on milk supply - it has to pay the farmgate milk price.)
Hurrell said the challenge was also that the New Zealand market was small, servicing just five million people, and “relatively congested”.
While Fonterra, the world’s ninth-biggest dairy company, collects just under 80 per cent of this country’s raw milk production, Hurrell said milk collection and consumer market share were two quite different things.
“It’s a competitive market. While in the North Island we maintain a pretty good market share with fresh white milk, in the South Island, we’re certainly not as strong as some of the other players. I wouldn’t suggest we hold the lion’s share in all categories.”
There was “work to do” on the New Zealand consumer business, but he ruled out a sale.
Total capital invested in FY23 was $747m, compared to $617m last year.
This comprised capital expenditure of $668m and “other” capital of $79m.
Fonterra is buying fewer tankers as it becomes more efficient at milk collection.
Hurrell said additions to processing plants for cream cheese, UHT cream and mozzarella accounted for most of the increase, with some investment in new business partnerships.
“There was also an increase in core maintenance capital to keep facilities in top shape ... less tankers have been purchased in the last year and will be in the foreseeable future as we become more efficient at picking up milk, and there was also sustainability capital investment in removing coal from our facilities and waste treatment.
“That trajectory will continue for the next couple of years as we go heavily into our decarbonisation plans.”
Hurrell said too much shouldn’t be read into the company announcing it would give a strategic plan update early next year.
“We put out the last one a couple of years ago ... we’ve had a pretty good year and we want to give confidence that either we are still on track, or if there’s anything we need to advise the market of.
“At the same time, we didn’t think it right to talk about a long-term position when our focus is, and needs to be on, supporting our shareholders. It’s tough going out there. Now’s not the time to be talking about 2020 and 2040. But we’re certainly still focused on the outlook for the medium to long term for the industry.”
Hurrell said the company would also announce before Christmas its target for Scope 3 emissions - those not made by Fonterra but by those who supply it.
Farmers have been nervous all year about this target, which was to have been made mid-year, anticipating it will add to their cost burdens.
Hurrell said customer demand was dictating “hard” that Fonterra take a leadership position on sustainability.
The upcoming announcement wouldn’t be a “by farm target” but a percentage reduction commitment for the total co-operative.
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.
