Fonterra posts record NZ$1.6bn profits on the back of strong protein and cheese margins
Fonterra’s normalized profit after tax was NZ$1.3bn, an increase of NZ$738m compared to the same time last year. The co-op completed the divestment of its Chilean business Soprole (a gain of NZ$260m) and China JV, China Farms, resulting in profit after tax of NZ$1.6bn, up NZ$994m.
Favorable margins across Ingredients, particularly in the protein and cheese portfolios, and improved performance in the Foodservice and Consumer channels were among the key drivers behind the results, which helped deliver a return on capital of 12.4% (up 6.8%) for the last 12 months. However, the co-op adjusted the long-term outlook for Asia Brands and Fonterra Brands New Zealand, resulting in full-year impairments of NZ$101m and $NZ121m respectively.
The group operating expenses had also increased by NZ$344m due in large part to the impact of impairments and increased costs from inflation and a one-off favorable item of NZ$44m the previous year.
The co-op announced it has held talks with farmers on introducing an on-farm emissions target (scope 3) and said it would reveal its target by the end of 2023.
Core Operations reported profit after tax increased NZ$532m to NZ$572m, due to higher Ingredient margins.
Global Markets reported profit after tax was up NZ$77m to NZ$385m, mainly due to higher sales volumes and improved pricing. This was partially offset by the impairments in its Consumer channel.
Greater China reported profit increased NZ$11m to NZ$284m, with the Foodservice channel showing improved margins and resilience to market disruption from COVID-19. This was offset by the Consumer channel, which included a proportion of the Asia brands impairment.
Total Group Operating Expenses were NZ$2.8bn up from NZ$2.4bn
Two new metrics were also introduced – cash operating expenses per kgMS – targeting a 4% cash operating cost improvement per year ‘to support long-term discipline’ in global overheads; and gross profit from Core Operations per kgMS – targeting a 2% New Zealand operational cash cost improvement per year. The co-op’s long-term strategy is also set to be updated and revealed early next year.
Milk collections ended at 1,480m kgMS, in line with the co-op’s October 2022 forecast. CEO Miles Hurrell said: “This is in spite of significant challenges that many farmers faced across New Zealand including rising input costs and adverse weather events in the North Island early in calendar year 2023.
“In addition, Fonterra’s balance sheet metrics are better than target levels, even after adjusting for the impact of providing for the payment of the Capital Return, with a gearing ratio of 28.8% and debt to EBITDA of 1.3x.”
Fonterra’s 2023/24 forecast farmgate milk price range is NZ$6.00-NZ$7.50 per kgMS with a midpoint of NZ$6.75 reflecting reduced demand for WMP from key importing regions. Hurrell said the co-op was ‘watching market dynamics closely’, adding that ‘there are indications demand for New Zealand milk powders will start to return from early 2024’.
“We acknowledge that across the year, farmers will continue to feel the pressure from high input costs and a reduced Farmgate Milk Price. We'll continue to do all that we can to support farmers through this challenging period.”
Demand for other products, including Foodservice and Fonterra’s value-added Ingredients, continues to be ‘robust’ he said.
The CEO concluded: “Our FY24 forecast earnings range for continuing operations is 45-60 cents per share. While the favourable price relativities we’ve experienced across FY23 have reduced from their peaks, we are forecasting improved margins across our Consumer and Foodservice channels for FY24.
