Fonterra reported its annual result today. Photo / Michael Craig
Dairy giant Fonterra said its annual net profit shot up 170 per cent to a record $1.6 billion, driven by strong margins in its cheese and protein portfolios.
Excluding a net gain from divestments of $248m, the co-op’s normalised profit after tax was $1.329b, up $738m compared with the same time last year, and ahead of market expectations of $1.2b.
This included the impact of impairments and was equivalent to 80 cents per share - the top end of Fonterra’s 65c to 80c forecast range.
The co-op also reported a return on capital for the past 12 months to July 31 of 12.4 per cent, up from 6.8 per cent in the comparable period.
“There were a number of key drivers that helped us deliver this result, including favourable margins in our Ingredients channel, in particular the cheese and protein portfolios,” chief executive Miles Hurrell said.
The full-year dividend came to 50 cents per share, including interim dividend of 10 cents per share - compared with last year’s total of 20c.
The co-op made massive inroads into its debt.
Fonterra’s debt to ebitda ratio now stands at 29 per cent, down from 42 per cent last year, and well down from 50 per cent in 2019.
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In August, Fonterra paid a special dividend of 50c from proceeds of the sale of Chile’s Soprole.
Fonterra kept its farmgate milk price forecast for this year at $6-$7.50 per kgMS, with a midpoint of $6.75/kg.
The co-op set its milk price for the season just finished at $8.22 per kgMS, up 2c from a previously advised mid-point.
In the outlook, Hurrell said: “We are watching market dynamics closely and there are indications demand for New Zealand milk powders will start to return from early 2024.
“Demand for other products, including Foodservice and our value-added ingredients, continues to be robust.”
Fonterra’s 2024 forecast earnings range for continuing operations was 45-60 cents per share.
Using the “reported” net profit, Fonterra’s earnings per share came to 95c, up from 36c last year.
Fonterra’s record earnings were against the backdrop of steady declines in the so-called “reference” products - mostly whole milk powder and skim milk powder - which trade on the Global Dairy Trade platform.
Commenting at a news conference on the explosive lift in earnings - the highest since the co-op was formed in 2001 - Hurrell said Fonterra’s cheese and protein portfolio was the standout.
“We have flexibility to move products around, and we saw that play out through Covid,” he said. “Where we saw certain markets and channels contract we were able to move product very quickly to channels where we could get better value,” he said.
“We have seen that play out this year. We saw cheese and protein values significantly higher than the reference products, so we could move product in that direction so that’s been the star performer for us.
“Our 2022/23 season farmgate milk price was impacted by reduced demand for whole milk powder from key importing regions,” Hurrell said.
As the financial year progressed, farmers saw Global Dairy Trade prices drop, with the average whole milk powder price down 16 per cent compared with last season.
Fonterra had recognised the impact the reduced milk price had on farmers’ businesses and had used its strong balance sheet to introduce a new advance rate schedule guideline to assist on-farm cash flow.
In addition, the co-op returned tax-free 50 cents per share to shareholders and unit holders in August, following the divestment of Soprole, giving a final cash payout to farmers of $9.22 per share backed kgMS.
Hurrell said there had been an improved performance in Fonterra’s food service channel due to increased product pricing and higher demand as China’s lockdown restrictions started to ease from early this year.
“Further, across the second half, the operating performance of our consumer channel strengthened due to improved pricing.
“However, we adjusted the long-term outlook for our Asia Brands and Fonterra Brands New Zealand business, resulting in full-year impairments of $101m and $121m respectively.”
Fonterra recognised a gain on sale from its Chilean Soprole business of $260m during the year.
Fonterra’s core operations reported profit after tax increased $532m to $572m, due to higher ingredient margins.
The Global Markets division’s reported profit after tax was up $77m to $385m, mainly because of higher sales volumes and improved pricing.
This was partially offset by the impairments in its Consumer channel.
“Greater China’s reported profit increased $11m to $284m, with the food service channel showing improved margins and resilience to market disruption from Covid-19. However, this was offset by the consumer channel, which included a proportion of the Asia brand impairment,” the company added.
Fonterra released its long-term strategy in September 2021.
This year, Fonterra completed the divestment of China Farms and Soprole as part of its strategic choice to focus on New Zealand milk.
Hurrell said Fonterra was updating its long-term strategy and planned to update this market early next year.
Greenpeace this morning said it corralled a herd of “disaster cows” in front of Fonterra’s Auckland headquarters.
Greenpeace spokeswoman Christine Rose said the group wanted to bring attention to Fonterra “capitalising on climate pollution caused by too many cows”.
Rose said the industry had been downplaying its role in the climate crisis and delaying action to cut climate pollution for far too long.
“Big Dairy is New Zealand’s worst climate polluter.”
According to Stats NZ, livestock produced 88.9 per cent of the country’s gross methane emissions.
Stats NZ last year said gross carbon dioxide emissions were mainly produced by transport (38 per cent), manufacturing industries and construction (19.1 per cent), and public electricity and heat production (13.4 per cent).
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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