Fonterra reports a $585m net profit- and $13.7bn in payments to farmers from the milk price will flow into the economy

New Zealand’s  big dairy  co-op Fonterra, reporting  its  annual  result  with  revenue  rising 11%  to  $23.4bn  says  it  has  an “exciting  future”.

Net profit  of  $585m took a $80m hit from its Sri Lankan business following economic disruption in the nation.

But chief executive Miles  Hurrell says the co-op is making tangible progress on  its strategy  to focus on New Zealand milk, be a leader in sustainability and a leader in dairy innovation and science.

Hurrell reckons  the result  shows  decisions relating to product mix, market diversification, quality products and resilient supply chain are enabling the co-op to deliver both a strong milk price and robust financial performance in a tough global operating environment.

He  says the co-op is paying a total dividend of 20c per share for its farmer owners and unit holders. And this year’s higher Farmgate Milk Price is the strongest it has ever been, “which is great news for our farmers”.

The New Zealand economy benefits from this, with $13.7bn flowing through from milk price payments alone this year.

So what’s  exciting  about the  future?

Hurrell says Fonterra’s  long-term strategy  – to  increase  the  value  of  every  drop  of  milk— is  “working”.

In the  belief  NZ milk is the highest quality and most-sought-after  in the world, Fonterra  says

“… its milk has a carbon footprint, one third the global average for milk production due to the grass-fed farming model. Pleasingly, the co-op has maintained its share in a very competitive market.“

Reporting on its achievements in the 12 months to 31 July 2022, Fonterra says it has continued to strive for a better future for the environment “upon which we depend’’.

It has made solid progress against some  key sustainability targets.

• Water use by manufacturing sites in water-constrained regions reduced, now 6.6% below FY18 baseline, and
• Around 71% of shareholder farms now have a Farm Environment Plan – a substantial undertaking by its  farmer shareholders and the Farm Source team.

“To respond to the ongoing expectations of customers and communities for more sustainable products, we have continued to reduce our greenhouse gas emissions, and transition away from the use of coal. We continue to progress the decarbonisation of our light and heavy vehicle fleets, and we have progressed the on-farm trial of Asparagopsis seaweed as supplemental feed for dairy cows. We are also working in partnership with the NZ government on an agricultural emissions partnership”.

In 2021/22 Fonterra maintains it led the way in dairy science and innovation.

Two examples of this innovation are the MinION genome-sequencing device, which provides dairy DNA results at pace and at a quarter of the previous cost, and the launch of an exciting new Whey Protein Concentrate (WPC) which can be used to create different textures in high protein yoghurt.

Turning  to  other  issues,  Hurrell  noted  that  while Fonterra is divesting  overseas assets to focus on NZ milk, it has decided not to sell its Australian business, which may reduce the $1bn in returns slated for shareholders.

He said the sale of the company’s Chilean assets was progressing.  Dairy brand Soprole and its milk supplier, Prolesur, do not require any NZ-sourced milk or expertise whereas its Australian business uses both Australian and New Zealand milk.

Hurrell  says  Australia plays an important role in the  co-op’s consumer strategy with a number of common and complementary brands and products and as a destination for  NZ milk solids.

“The business is going well, and it will play a key role in helping us get to our 2030 strategic targets.”

Last year, Fonterra published its strategy to 2030, which included plans to return about $1b to shareholders and unitholders by 2024.

Hurrell said the return anticipated the divestments of Soprole and a stake in its Australian business.

“Even though we have decided not to sell a stake in our Australian business, we are still committed to targeting a significant capital return to our shareholders and unitholders,” he said.

“The amount of any capital return will ultimately be determined on a number of factors including the successful completion of the divestment programme as well as  ongoing debt and earnings levels.”

The co-operative generated 35 cents of earnings per share, in line with its forecast for earnings towards the top end of its 25c to 35c range and ahead of 34c the previous year.

Fonterra will pay a final dividend of 15c per share, taking the annual dividend to 20c, in line with the previous year.

Here,  for  those who relish the  figures, is  a  summary :

• Total Group Revenue: NZ$23.4 billion, up 11%
• Reported Profit After Tax: NZ$583 million, down 3%
• Normalised Profit After Tax: NZ$591 million, up 1%
• Total Group normalised EBIT: NZ$991 million, up 4%
• Net Debt: NZ$5.3 billion, up NZ$1 billion
• Normalised earnings per share: 35 cents per share, up 1 cent
• Final 2021/22 Farmgate Milk Price: NZ$9.30 per kgMS
• FY22 Total Dividend: 20 cents per share (interim: 5 cents; final: 15 cents)
• Milk collections: 1,478 million kgMS, down 4%
• NZ$13.7 billion delivered to the New Zealand economy through the Farmgate Milk Price pay-out to farmers
• FY23 Outlook: Forecast 2022/23 Farmgate Milk Price range of NZ$8.50–$10.00 per kgMS, with a midpoint of NZ$9.25 per kgMS. Forecast 2022/23 normalised earnings guidance range of 45-60 cents per share.

The data strongly suggest the  big  co-op is fulfilling   the  promise  its  founders  believed  would  flow from  striving  to become  a  world -lass performer  in the  production   and  manufacture  of  high-quality  dairy  foods.

In  its  current  phase Fonterra  has  still  to  complete its  capital   restructuring  and  it  may  need  to  accelerate  the  development  and  production  of  its  new  high-nutritional products.

But under  Hurrell’s  leadership it is  making  the  kind of  progress  which  should   fill   its farmer-shareholders  with   confidence  as  they – and their cows –  do  the  hard  graft  and produce the raw goods in  the  dairy sheds.