High cheese and protein margins key to Fonterra’s interim profit increase

Fonterra Co-operative Group Ltd published its FY23 interim results, demonstrating a strong performance on the back of high dairy prices and ingredient sales.

The dairy giant's after-tax profits were lifted by 50% to NZ$546m (up NZ$182), leading the co-op to increase its share forecast from 50-70c per share to 55-75c. Fonterra also announced plans to introduce a tax-free capital return to farmer owners and unit holders of around 50c per share.

CEO Miles Hurrell attributed the positive results to the co-op’s diversified portfolio - in particular, favorable margins across its cheese and protein portfolios and strong ingredients channel performance.

“This lift in earnings is thanks to our co-op’s scale and ability to move our farmer owners’ milk into products and markets where we’re seeing favourable prices,” commented Hurrell.

“With whole milk powder prices down, we moved more milk into skim milk powder and cream products to optimise our farmgate milk price. We also made the most of favourable margins in our cheese and protein portfolios, by moving a higher proportion of current season milk into these products which has benefited our earnings.”

Fonterra has been able to pay a dividend of 10c per share (compared to 5c per share announced last year) and Hurrell said he expected the co-op to pay ‘a strong full year dividend, in addition to our proposed capital return’.

Shares for the Fonterra Co-Operative Group (FCG) were trading at NZ$2.72 this morning (March 16, 2023), up from from NZ$2.60 the day before.

Strong Ingredients performance but weakened Consumer channel

Higher margins in the cheese and protein portfolios enabled the co-op’s Ingredients division to record normalized EBIT of NZ$911m, up NZ$494m, a 118% change on last year.

Foodservice recorded normalized EBIT of NZ$166m, up NZ$81m or 95%, but the overall Consumer channel was impacted due to high input costs and pressure on margins, with normalized EBIT down NZ$177m to a loss of NZ$94m.

The performance of Fonterra’s Asia consumer brands in particular had been affected by weakening currency and higher interest rates as well as declining economic environment in some South East Asian markets. “For these reasons, we have revised down the valuation of FBNZ by NZ$92m and our Asia consumer brands Anlene, Chesdale and Anmum by NZ$70m,” Hurrell announced.

Fonterra has made changes to its reportable segments, combining the previous results of AMENA and Asia Pacific into a new Global Markets segment, while Group Operations is shown as a separate segment. Global Markets normalized EBIT was down 4% to NZ$267m. The segment’s Ingredients channel produced an in-market earnings increase of NZ$145m through higher pricing and sales volume, but this was offset by impairments and operating costs in the Consumer division. Greater China EBIT also decreased 1% after favorable results by the Foodservice channel were offset by the Consumer division.

Total group expenses were up slightly from NZ$1.1bn to NZ$1.4bn on the back of inflation and foreign exchange and the impact of impairments to the New Zealand consumer business and Asia brands.

Capital returns

With the sale of Fonterra’s Chile dairy business Sorpole, Fonterra intends to reduce debt and return about 50c per share and unit, or around NZ$80m. “We are aiming for a record date for the proposed tax-free capital return in late September 2023, with cash to be received by our farmer owners and unit holders the following month,” Hurrell explained.  

“Implementation of the capital return will require a Scheme of Arrangement to be voted on by shareholders, and approval by the High Court, which is a common process for this type of transaction. More information on this process will be provided to our farmer owners and unit holders in due course.”

The Fonterra CEO also announced that the transition to its new Flexible Shareholding capital stricture is set to take place on March 28, 2023. To support liquidity as farmers transition to the new structure, the co-op has allocated up to NZ$300m.

“We…recognise that during the transition phase, further liquidity support may be appropriate, and we have approved an on-market share buyback that will commence on March 28, 2023 and is expected to continue until June 9, 2023,” Hurrell said.

“The transitional buyback will be structured in a way that gives the co-operative capacity to buy back shares throughout the entire 11-week period. This involves having capacity to buy shares in each week as well as additional flexibility to accommodate different levels of liquidity across the period. Fonterra can buy up to a maximum of 75 million co-operative shares as part of this buyback.”

New season farmgate milk price forecast expected in May

In February, Fonterra reduced its 2022/23 season forecast farmgate milk price range from NZ$8.50-$9.50 per kgMS to NZ$8.20 - $8.80 per kgMS, with higher milk collections for the season and soft demand for whole milk powder, particularly from Greater China, being key reasons for the price cut.

During the interim results announcement, there were no further changes to the current forecast. Hurrell maintained that the outlook for dairy was positive, adding the co-op will reveal its opening forecast farmgate milk price for the 2023/24 season in May.

“There are a number of risks we continue to watch, including the impact of recent weather events in New Zealand on supply chain and milk production. 

“Our co-op’s scale, diversity and strong balance sheet positions us well to manage these challenges and we will continue to prioritise higher value products and channels to deliver sustainable returns for farmer owners and unitholders,” the Fonterra CEO concluded.