Fonterra has weathered a challenging operating environment thanks to a strong demand for dairy across multiple markets and products, the co-op revealed in its newly-published annual results.
Total cash pay-out to farmers was NZ$9.50 per kgMS, up from NZ$7.74 in 2021. This is the highest pay-out to date for the co-op. Milk collections were down 3.6% in total; in New Zealand, ‘challenging weather conditions’ were blamed for the reduction of 4.2%; in Australia, Fonterra’s market share had improved with total milk volumes in line with the prior period. The co-op recorded its strongest milk collection increase in Chile at 5.2% along with a market share gain of 1.3%.
Profit after tax was lower by NZ$16m and stood at NZ$583 but Fonterra explained this with benefitting from large gains from sale of non-core assets in 2021 from selling its China farms last year compared to selling global dairy auction platform Global Dairy Trade this year and accruing impairment costs from DPA Brazil, Fonterra’s JV with Nestlé.
Normalized profit after tax had slightly increased by NZ$3m, with higher operating expenses (NZ$155m, up 7%) impacting performance most significantly but higher product prices (NZ$226) absorbing some of that impact to arrive at normalized profit after tax of NZ$591m.
“Our normalized profit after tax of NZ$591m was up 1% on last year, due to higher earnings,” Fonterra chief executive Miles Hurrell reflected. “We have higher inventory than usual at the end of the 2022 financial year due to stronger milk collections towards the end of the season coinciding with factory constraints, short-term impacts on demand and shipping disruptions. 88% of our year inventory is contracted, which means the sale price has been agreed and the product contracted, however the inventory had not been shipped at the balance date. The first six weeks of the new financial year have showed good progress with shipment of this inventory. We have flexibility in relation to inventory levels due to the strength of our balance sheet.
“The increased inventory, coupled with the higher milk price, has also increased our working capital throughout the year, and our net debt position at year end. Our net debt was NZ$5.3 billion, up NZ$1 billion, and as a result our Debt/EBITDA ratio increased to 3.2x from 2.7x and our gearing ratio increased from 38.5% to 42.4%. We expect these measures to improve as our working capital returns to normal levels. Even with the higher working capital, our return on capital has increased from 6.6% to 6.8%, as a result of the improvement in our EBIT.”
Regionally, AMENA normalized EBIT was up 57% to a total of NZ$527m, due to improved gross margin in Ingredients. Normalized EBIT for APAC rose by 22% to NZ$237 but margins were reduced in both foodservice and consumer categories by 77% and 45% respectively due to ‘weaker market conditions’ and cost of milk increases. Greater China normalized EBIT was NZ$432 million, up 7% with improved performance in Ingredients but lower margins in the foodservice and consumer categories.
Group reported EBIT increased by NZ$17m to NZ$976m (2%) with NZ$15m normalizations compared to NZ$7m in 2021. Normalizations comprised the partial sale of Global Dairy Trade, with total impact of NZ$42m to EBIT; and a pre-tax impairment of NZ$57m made to the full value of DPA Brazil, the sale of which is hoped to be completely in a year’s time.
Ingredients and active living
The co-op’s ingredients portfolio performed strongly with normalized EBIT increasing from NZ$365m to NZ$916m, with revenue up by 15% and higher margins achieved, particularly across protein products. The strong performance has been driven by the revenue price difference between reference products (which inform the Farmgate Milk Price) and non-reference products (which inform EBIT), with the gap between the two widening over the course of the year and particularly in the last quarter.
The ingredients portfolio’s favorable performance had been offset slightly by the impact of higher milk input costs in its foodservice and consumer channels, the co-op said.
In addition to a strong ingredients portfolio results, Fonterra’s active living products were in strong demand. In particular, casein, WPC and milk protein concentrates were highly sought-after across North Asia, the Americas and Greater China. The co-op’s offering in the two largest active living markets, the US and Europe, had also strengthened.
Outlook
Fonterra has announced a forecast 2022/23 Farmgate Milk Price range of NZ$8.50–$10.00 per kgMS, with a midpoint of NZ$9.25 per kgMS. The Co-op also forecasts 2023 normalized earnings guidance of NZ$0.45-0.60 per share.
Hurrell concluded: “The longer-term outlook for dairy remains 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. This has been reflected in our earnings guidance and forecast Farmgate Milk Price for the 2022/23 season.
“We continue to monitor a number of risks. The strength of our balance sheet means we remain in a strong position to weather uncertainty and market volatility. Our ability to refocus our product mix through our diverse and flexible operations footprint, means the Co-op’s milk will continue to be delivered to wherever the most value can be obtained for our farmer owners.”
