Fonterra is New Zealand's biggest business, collecting just under 80 per cent of the country's raw milk. Photo / Supplied
Perhaps it’s no more than New Zealanders expect of a company handed a whopping dairy market share prize on the promise it would be “a national champion”, but Fonterra’s robust 2023 half-year financial results appear to be something for the country to smile about in a gloomy economic time.
Postinga 50 per cent lift in net profit after tax to $546 million, a proposal to return $800m to share and unit holders, a doubled interim dividend of 10c per share, and earnings per share of 33c, New Zealand’s biggest business continues to move deeper into positive performance territory, a much-changed entity from the massive loss-maker it was just four years ago.
Full year forecast normalised earnings were upgraded from 50-70c per share to 55-75c per share.
The big farmer-owned co-operative (it still has 78 per cent of the country’s raw milk market, 22 years after its creation from an industry mega-merger) is also confident the good news will continue, with chief executive Miles Hurrell saying the outlook for New Zealand’s high-quality milk remains positive and global milk supply is likely to continue to be constrained.
Notably, the man who, with a largely new board of directors, has steered the world’s sixth biggest dairy company by revenue out of the sour 2019 performance of a $605m net loss after tax, and a historic, first-ever net loss of $196m in 2018, believes the outlook for Fonterra in a recently opened post-Covid China, its biggest market, is “huge”.
“Having not long got back from China I’m really confident in the outlook. We are starting to see demand emerge and customers we haven’t seen for quite some time come back.
“When you look to the very long term, diets are changing in China. The consumer wants more healthy product and wants to move to products more aligned to our ‘active living’ products, so we see huge opportunities for growth in the Chinese market.”
Meantime he said the Chinese market had been “slow” in the past 12 months compared with previous years. This was reflected in a $2m ebit (earnings before interest and tax) decline to $215m in the Greater China result for the first six months of the 2023 financial year. The decline was over all three of Fonterra’s earnings channels - ingredients, foodservice and consumer goods. China sales volumes were down 20 per cent at 455,000 tonnes.
On the brighter side, total group operations ebit rose $412m to $501m on favourable margins in ingredients product sales, particularly protein and cheese. Total group normalised ebit was $940m, up from $607m in the previous period.
Global market sales, excepting China, were 18 per cent up at 1.2m metric tonnes, though total global market ebit fell 18 per cent to $267m.
There was also some negative news on the consumer business side.
While Fonterra’s consumer and foodservice businesses benefited from improved global market prices for protein, with foodservice normalised ebit up $81m to $166m on the previous period, higher input costs and ongoing pressure on margins due to the price the company has to pay farmers for milk amid strong global demand had negatively impacted overall consumer business performance.
Its New Zealand consumer business was not improving as fast as planned, and the Asia consumer brand operation had been impacted by weakening currencies in those markets, higher interest rates and a declining economic environment in some South Asia markets.
As a result, Fonterra had revised down the value of its New Zealand consumer business by $92m and the value of Asia consumer brands Anlene, Chesdale and Annum by $70m.
The outcome of these impairments and market conditions was that normalised ebit for the overall consumer business was down $177m to a loss of $94m.
This prompted Jarden head of research Arie Dekker to say in a market note that ongoing impairments in the consumer business “beg the question on Fonterra’s long-term ownership of these businesses...
“We will be looking for Australia and other non-core businesses to be reviewed periodically for exit,” Dekker said.
Fonterra has sold its Brazil business and is completing the sale of its Chile operation, both moves which contribute to the board’s proposal to return around 50c per share or $800m to farmer-owners and holders of listed units in Fonterra shares. However after a review it has decided to retain full ownership of Fonterra Australia.
Dekker said while Fonterra’s long-planned capital restructure, which will be implemented from the end of this month, “further marginalises” its unit holders by capping the market at $325m and makes institutional interest even more challenging, Jarden believed there was scope for re-rating the stock over the next few months.
Return on capital was 8.6 per cent, up from 6.1 per cent for the six months ended January 31.
Capital expenditure was $330m compared with $195m in the previous period.
Net debt was $5.8b, up on the previous period’s $5.3b, mainly due to higher working capital requirements which the company said were largely offset by increased earnings.
New Zealand-produced milk ebit was up 59 per cent at $864m, with sales volume up 5 per cent at 1.6 billion tonnes.
Non-New Zealand produced milk increased 1 per cent in volume, with ebit up 65 per cent at $117m.
Fonterra’s forecast farmgate milk price range for this season is $8.20-$8.80/kg milksolids. Milk collection to date this season was 1016m kg milksolids compared with 1033m in the previous period.