The CEO of Fonterra Co-operative Group Ltd, Miles Hurrell, said that milk supply and demand dynamics remain ‘finely balanced’ as he warned that China imports are yet to recover.
The chief executive said Fonterra will adopt ‘a cautious approach’ ahead of the new season as the co-op expects softer earnings in the fourth quarter and higher operating costs and increased IT spend.
But in Q3, the co-op reported continuing operations profit of NZ $1,013 million, a 2% increase or NZ $20m (US $12.2m). Reported profit – which includes Soprole’s performance and net gain on divestments – decreased 27% or NZ $ 973m (US $595m).
The co-op’s consumer and foodservice channels saw volume increases of 7% and 4% respectively year on year, while ingredients were down.
Continuing operations earnings before tax came up to NZ $1,440m, down 6%, and the FY24 earnings guidance was increased to 60-70 cents per share.
Fonterra also announced next season’s forecast farmgate milk price, setting it at NZ $7.25-8.75 per kgMS with a midpoint of $8.00 per kgMS.
Current season’s forecast farmgate milk price has been narrowed to $7.70-$7.90 per kgMS with a midpoint of $7.80.
‘Cautious approach'
CEO Miles Hurrell said that global dairy trade prices have increased over the past two months to levels last seen at the start of the calendar year, but warned the risk of volatility in global markets remains.
“Looking to the 2024/25 season, milk supply and demand dynamics remain finely balanced and China import volumes have not yet recovered to historic levels,” he said, announcing FY25’s forecast farmgate milk price.
“Given the early point in the season, the uncertainty in the outlook and ongoing risk of volatility in global markets, we are starting the season with a cautious approach.”
Turning to Fontrra’s business performance, Hurrell said higher volumes in foodservice and consumer channels had lifted the co-op’s sales volumes ‘slightly’ on 2023 by 38kMT, or 1%.
“We also saw price relativities ease over the quarter, and we anticipate them to narrow further in Q4 as they return to more historic levels,” he continued.
“Gross margins remain strong across all three channels as our in-market teams continue to drive pricing and volume. Foodservice and Consumer volumes are up 4% and 7% respectively year on year, with margins consistent with Q2.
“Our EBIT of NZ$1,440 million reflected improved performance in Foodservice and Consumer, with Ingredients down year on year following record highs in FY23.”
“Our increased earnings range assumes softer earnings in Q4 due to the seasonality of our milk collections, the higher cost of inputs in the Foodservice and Consumer channels, and the impact of the investments in modernising our IT systems.”
He explained that across the business, operating expenses were up due to inflation, upfront costs of driving efficiency improvements and increased IT spend. “Historically, some of this IT spend would have been treated as capex and capitalised on the balance sheet,” the CEO added.”
Hurrell also said that the co-op was ‘progressing work’ on its new strategy now that the business has committed to divesting from its global consumer and integrated divisions.
“We have received a high volume of interest from parties looking to be involved in the potential divestment of our consumer and associated businesses,” Hurrell explained.
“It’s still early days in this process, and we commit to providing farmer shareholders, unit holders, our people and the market updated on new developments as they occur.”