Dairy giant Fonterra said its net profit dropped by $60 million in its latest financial year, driven by high milk prices.
The co-op said milk prices were likely to stay strong, which may crimp future earnings.
It also laid out plans to sell assets in Chile and Australia.
Fonterra's "reported" net profit came to $599m for the year, compared to $659m in 2020, while its "normalised" profit after tax came to $588m, up $190m.
The co-op announced a dividend of 15c a share, taking the total to 20c, compared with last year's total of just 5c.
On a normalised basis, Fonterra's earnings per share came to 34 cents, the top end of its guidance of 25 to 35 cents.
The co-op settled on a $7.54 per kg of milksolds milk price for the season just finished, taking the total payout for 2020/21 to $7.74/kg.
Fonterra announced a 2021/22 earnings guidance range of 25-40 cents per share and has also reaffirmed its 2021/22 forecast farmgate milk price range of $7.25 - $8.75 per kgMS, with a midpoint of $8 per kgMS.
Chief executive Miles Hurrell said the strong milk price trend was likely to continue.
"A high milk price is good for farmers and good for the New Zealand economy. However, this does have the potential to squeeze our sales margins and impact earnings," he said.
For the current season, Fonterra's forecast has remained at $7.25 - $8.75 per kgMS, with a midpoint of $8 per kgMS.
Hurrell said Fonterra has an opportunity to differentiate New Zealand milk further on the world stage, with the aim of getting more value.
This would require Fonterra to focus its capital and people on enhancing New Zealand milk and for these reasons the Co-op has reviewed the ownership of its two other milk pools – in Australia and Chile.
"Soprole is a leading Chilean dairy brand, and Prolesur is a subsidiary of Soprole focused on sourcing milk and manufacturing products in Southern Chile.
"The operations do not require any New Zealand-sourced milk or expertise, and in this context, we are starting the process to divest our integrated investment in Chile."
Soprole's annual report shows its profit came to 22.5 billion Chilean pesos (CLP), or NZ$45.8 million, up from 19.25 billion CLP in the previous year, which was hit by falling sales and declining milk supply.
Australia unit IPO?
Hurrell said Australia remained an important export market for New Zealand milk, especially for foodservice products and advanced ingredients.
"We are considering the most appropriate ownership structure for this business, one option is an IPO, with the intention that we retain a significant stake," he said.
"We see both these moves as critical to enabling greater focus on our New Zealand milk and, importantly, allowing us to free up capital, much of which is intended to be returned to shareholders."
Hurrell said the last three years had been about resetting the business.
"We've stuck to our strategy of maximising the value of our New Zealand milk, moved to a customer-led operating model and strengthened our balance sheet," he said.
Fonterra also presented a revised capital structure proposal that it will discuss with farmers over the coming weeks before deciding whether to proceed to a shareholder vote.
The "Flexible Shareholding" structure is a progression on the preferred option put forward at the start of the consultation process in May, but with key changes based on farmer feedback and further expert advice.
The changes are:
New minimum shareholding requirement - set at 33 per cent of milk supply (around 1 share per 3 kgMS), compared to the current compulsory requirement of 1 share per 1 kgMS. This is intended to strike a balance between providing a meaningful level of flexibility for those who need it, which is critical to maintaining a sustainable milk supply, while ensuring all farmers having some capital-backed supply.
New maximum shareholding requirement - set at 4x milk supply, compared to the current 2x milk supply. This is intended to strike a balance between supporting liquidity in the farmer-only market – by ensuring more capacity for farmers to buy shares from those who want to sell – while avoiding significant concentration of ownership.
More types of farmers could buy shares - including sharemilkers, contract milkers and farm lessors. This is intended to recognise their connection to Fonterra, provide a pathway for future farmer owners and increase the number of potential participants in the farmer-only market by around 4,000 to support liquidity.
Exit provisions - extended and entry provisions would be eased. Existing shareholders would have up to 15 seasons initially to exit, reducing annually to 10 seasons, which would also support liquidity and give these farmers greater choice about how long they retain an investment in the Co-operative. Meanwhile any new entrants would have up to six seasons to achieve the 33% minimum shareholding requirement. This compares to a standard three seasons for both entry and exit under the current structure.
The Fonterra Shareholders' Fund (the Fund) - capped to protect farmer ownership and control. If greater flexibility was provided without making any other changes to the current structure, the thresholds relating to the size of the Fund could be exceeded relatively quickly. That's because farmers would be able to hold fewer shares and non-farmers would be able to invest more through the Fund.
The Fonterra Shareholders' Market (FSM) - continue to operate as a farmer-only market, but shares would no longer be able to be exchanged into units in the Fund. As communicated in May, this means the share price may trade at a discount to the unit price, referred to as a restricted market discount. But aside from this initial adjustment, the farmer-only market should enable the Co-operative's share price to better reflect the higher costs of capital many farmers have compared to external investors with more diversified investment portfolios.
Additional measures to support liquidity - in the farmer-only market recognising there may be lower levels of trading, so the share price could move more on small volumes. The Co-operative has sourced expert advice to determine the measures it would take to support liquidity. This includes allocating up to $300 million to support liquidity as farmers transition to the proposed structure, through an on-market share buy-back programme and other tools.
Fonterra Chairman Peter McBride says changing the Co-operative's capital structure is a critical decision and not something the Board and senior management are taking lightly.
"We are confident that this proposal would support the sustainable supply of New Zealand milk that our long-term strategy relies on. One enables the other, and together they give our Co-operative the potential to deliver the competitive returns that will continue to support our families' livelihoods from this generation to the next.
"Our future success relies on our ability to maintain a sustainable milk supply in an increasingly competitive environment, and one that is rapidly changing due to factors such as environmental pressures, new regulations and alternative land uses.
"We see total New Zealand milk supply as likely to decline, and flat at best. Our share of that decline depends on the actions we take with our capital structure, performance, productivity and sustainability.
"If we do nothing, we are likely to see around 12-20 per cent decline by 2030 based on the scenarios we have modelled."
The proposed changes would also protect against the uncertain and recurring risk to the
co-operative's balance sheet, he added.