Fonterra has a lot to digest in making decisions on Australian and Chilean businesses

Fonterra chief executive Miles Hurrell. Photo / Dean Purcell.

Around $1 billion is hanging on it but dairy goliath Fonterra won't be rushed into decisions over two major overseas businesses - and those decisions have got a bit more complicated.

New Zealand's biggest business plans to return around $1 billion of capital to its farmer-shareholders and listed unit holders by FY24. It said in September it would do this by selling its Chilean business Soprole and reviewing ownership of its Australian operation.

Those hopeful for decisions on either business in last week's mid-year financial results were disappointed.

Fonterra said both operations, which have turned in disappointing performances in the past and no longer sit comfortably in a re-set business strategy focusing on New Zealand milk, are doing well.

The intentions hadn't changed, but the farmer-owned co-operative said it would take its time to get the best deals out of both processes. Chief executive Miles Hurrell said it remained confident of delivering on the $1b return plan.

Also likely to be figuring in the decision-making is booming global demand - and prices - for dairy products due to lower supply, and world economic uncertainty. (Fonterra said the average cost of milk - its main input cost - was up nearly 30 per cent on the same period last year. It paid $635 million for non-New Zealand sourced milk, compared to $577m. New Zealand-produced milk cost it $8.8b compared to $7.2b.)

The global picture has changed a bit since the September announcement and has already led to speculation in Australia that Fonterra may delay an initial public offering on the business there.

But an IPO has never been announced. The company said in September an IPO was an option, with the intention that it retains a significant stake.

"The ownership review is looking at all options and an IPO is only one, and no decisions have been made yet. Since our announcement in September, there has been heightened interest in the industry. Our priority is to determine the best path for the Australian business while keeping the business performing strongly," the company said in a response statement to the Herald.

So, how did the Australian business - comprising manufacturing and retail consumer product sales - look in the mid-year 2022 results?

Ebit for the six months ended January 31 was $59m, up 84 per cent on the corresponding period the previous year, when it was $32m.

Mid-year revenue was $916m, up 2 per cent. Gross profit at $137m was 33 per cent higher, and gross margin was 15 per cent compared to 11.5 per cent for the previous period. Milk collection in Australia was 2 per cent down at 68m kg/milksolids.

The company said the Australian ingredients business benefited from the support of the robust Australian foodservice and consumer channels, which remained stable compared to the previous corresponding period due to rising input (milk) costs being reflected in Fonterra's in-market sales prices.

The cost of goods sold was $779m, down 2 per cent on the previous period which recorded $796m.

Fonterra pays its Australian farmer milk suppliers less than its New Zealand farmers because it doesn't operate there as a farmer-owned co-operative. Australian suppliers currently receive an average farmgate milk price of A$7.30/kg milksolids ($7.84/kg).

Its New Zealand owners are forecasted to receive a record range midpoint of $9.60/kg this season.

Fonterra is mulling decisions on two major offshore operations. Photo / Michael Craig

Fonterra's Latin America operation, mostly comprising Chilean business Soprole but also including business in Brazil, posted a 51 per cent increase in mid-year ebit to $62m.

Revenue was 10 per cent up on the previous period at $538m.

Cost of goods sold was $376m, up 7 per cent. Gross margin was 30.1 per cent compared to 28.2 per cent. Gross profit at $162m was 17 per cent up on the previous period.

Fonterra was a benefactor of the Chilean Government's support programmes to support citizens and the economy through Covid.

Emergency family income payments and several occasions of citizens being allowed to withdraw some of their private pension funds contributed to more demand for dairy products by consumers.

Increased sales were also supported by stronger milk collections in Chile.

Fonterra said the lift in gross profit was largely driven by an improved product mix, with a shift from lower-margin products such as cheese to high-margin categories including yoghurt and desserts. A range of new product releases had also supported the improved performance.

The company said gross margin also benefited from Soprole being able to leverage its No 1 market share to lift in-market prices. Increased sales volumes also improved economies of scale, reducing the fixed costs per unit to offset higher raw milk costs.