Friday, December 8, 2023

Consumer products, Australia drag at Fonterra’s heels

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Not every division shone in co-op’s stellar annual results.
The election to fill two seats on the Fonterra board begins on October 18 and closes on November 8.
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Fonterra’s stellar 2023 financial results contained some stinkers that prevented the net profit being even higher than the reported $1.6 billion.

Chief among them was the overall performance of the consumer products channel, which had a negative return on capital of 4.6%, considerably worse than in FY22, when the figure was minus 0.4%.

In contrast the ingredients division had a plus 16.4% return on capital, nearly double that of the previous year, and foodservice was 15.7%, nearly triple the previous year.

Chief financial officer Neil Beaumont said the consumer business performance was unacceptable but had improved in the second half of the financial year.

Two-thirds of the loss in consumer occurred in the first half, one-third in the second half.

In the profit after tax contributions from different products and markets, the consumer division was negative $164 million, while ingredients made $1.164bn and foodservice made $241m.

The negative result included $222m of impairments in Fonterra Brands NZ and in the Anlene and Anmum brands in southeast Asia.

The earnings for both foodservice and consumer channels are forecast to improve in the current financial year due to the lag effect of higher dairy product prices and as the lower cost of milk flows through.

Facing flat to declining milk production in NZ and Australia, Fonterra continues to look closely at its asset footprint.

Beaumont did not go into detail about plants and their age, eight of which are in Australia.

Fonterra Australia remains part of the co-operative after a review of its future. The business is doing well and is complementary to NZ brands and products, chief executive Miles Hurrell said.

Operating expenses in Australia were up due to inflation and the settlement of the class action brought by farmers concerning the 2015/16 season.

Fonterra Australia carries $283m of goodwill and brands, compared with Fonterra Brands NZ $390m.

Non-NZ milk contributed 11% of the co-op’s revenue, mainly in Australia, where revenue was $2.5bn and the profit after tax only $23m, one-third of the previous year.

Total revenue was $26bn, up $2.5bn on the year before.

NZ milksolids allocation to whole milk powder manufacture was reduced and increased to skim milk powder, cream and cheese, where returns are more favourable.

An additional 1.5% of total milk went to non-reference products last year, and they now use 31.4% of the total milk flow, compared with 27% five years ago.

Core ingredients, both reference and non-reference, took 75% of milk, active living products 5%, foodservice 13% and consumer products 6.5%.

China imports of dairy products fell by 11% during the year and those of Asian countries outside of China were down 6%.

Middle Eastern imports were steady on the volumes of the previous year and Latin America was up 13%.

The $2/kg reduction in farmgate milk prices from the FY22 year to the FY23 was offset by $1 gain from foreign exchange.

Milk was collected from 8440 farms, down about 150 on the year before, and the average per farm was 171,000kg milksolids, about 2% up.

The cost of collecting milk has risen from 2.4c a litre to 3.1c over the past two years, most notably through the increased cost of diesel.

At balance date, supplying shareholders held 83.75% of total shares, ceased shareholders were 8.62% and the FSF fund 6.7%

Close to 1000 shareholders now hold fewer shares than the 1:1 share standard, down as low as the minimum 33% requirement for 245 of them.

In contrast, 1276 farms hold at least 20% more than their supply share standard.

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