Fonterra profit eases, rows back on Aussie sell-down plan

Fonterra chief executive Miles Hurrell. Photo / NZ Herald.

Fonterra's "reported" net profit eased by 3 per cent to $583 million in the July year but came in at the top end of its guidance range.

Earnings per share came to 35c, up one cent, and at the top end of a 25 to 35 cent guidance range.

The company said it had decided to keep its Australian business - which had been under review - and that the sale of its Chilean business, Soprole, was progressing.

Group revenue was $23.4 billion, up 11 per cent, and net debt bumped up by $1b to $5.3b due in part to a build-up of inventory.

Fonterra's total dividend was 20 cents a share.

The co-op's final farmgate milk price for the season was set at $9.30 per kg of milk solids.

Fonterra stuck to its forecast for 2022/23 of a farmgate milk price range of $8.50–$10.00 per kgMS, with a midpoint of $9.25 per kg.

Its forecast 2022/23 normalised earnings guidance is in a range of 45 to 60 cents.

The final cash pay-out for farmers for the 2021/22 year was $9.50 a kg.

Chief executive Miles Hurrell said despite challenges including increased costs associated with supply chain volatility, 2021/22 was a good year.

"These results demonstrate that our decisions relating to product mix, market diversification, quality products and resilient supply chain, mean the co-op is able to deliver both a strong milk price and robust financial performance in a tough global operating environment," he said.

Fonterra rowed back on its plan to return $1 billion to shareholders. Hurrell said it was in Fonterra's best interests to retain its Australian operation.

"Australia plays an important role in our consumer strategy with a number of common and complementary brands and products and as a destination for our New Zealand milk solids," he said.

"The business is going well, and it will play a key role in helping us get to our 2030 strategic targets."'

Fonterra has a goal of returning $1 billion to shareholders and unitholders, which anticipated divestments including Soprole and a stake in our Australian business.

"Even though we have decided not to sell a stake in our Australian business, we are still committed to targeting a significant capital return to our shareholders and unitholders.

"The amount of any capital return will ultimately be determined on a number of factors including the successful completion of the divestment programme as well as our ongoing debt and earnings levels," he said.

Hurrell said despite tight supply there was robust demand from global customers for dairy, which helped Fonterra deliver a strong milk price and financial performance.

Strong margins in the Ingredients channel, especially in the final quarter, resulted in an increase in its gross profit.

But total gross margin was down due to the higher cost of milk on the company's food service and consumer channels during the year.

The company said total group normalised ebit of $991m, up 4 per cent, reflected improved margins in the Ingredients channel - but the higher milk price partially offset that.

The higher milk prices placed pressure on margins in the consumer and food service channels.

As expected, Fonterra took a hit from its small but significant Sri Lanka operation due to the economic crisis there.

There was an $80 million adverse revaluation of the co-op's Sri Lankan business payables, due to the devaluation of the Sri Lankan Rupee.

There was higher than usual inventory at the end of the 2022 financial year due to stronger milk collections towards the end of the season.

These collections coincided with factory constraints, short-term impacts on demand and shipping disruptions.

Fonterra said 88 per cent of its year inventory was contracted, which meant the sale price was agreed upon and the product contracted.

But the inventory had not been shipped at the balance date.

The first six weeks of the new financial year showed good progress with the shipment of this inventory.

Fonterra said increased inventory coupled with the higher milk price increased working capital throughout the year and the net debt position at year-end.

Fonterra's gearing ratio increased from 38.5 per cent to 42.4 per cent.

"We expect these measures to improve as our working capital returns to normal levels," Hurrell said.

Hurrell said the longer-term outlook for dairy remained positive.

"And in the medium-term, we expect to see an easing in some of the geopolitical events, namely the Covid-19 lockdowns in China and the economic challenges in Sri Lanka.

Fonterra said it was monitoring several risks.

"The strength of our balance sheet means we remain in a strong position to weather uncertainty and market volatility."