Fonterra’s 2023 financial results smashed its own key metrics in its Strategy 2030, giving rise to new targets for the consolidation of gains already made.
The results were embarrassingly good, well in advance of the end of the decade.
They were largely shaped by non-reference products, cheese and casein, attracting huge premiums over reference products, milk powders and fats.
Not only are Fonterra’s targets blown, but the milk price framework of reference products is now questionable.
Reported profit after tax of $1.6 billion was up 170% from FY22 and massively exceeded the 2030 goal of $800-$900 million.
The return on capital – with a goal of 9-10% – came in at 12.4%, nearly double that of the year before.
The August capital return of 50c a share was matched by a dividend of 50c, bringing total payout to $9.22/kg milkfat, the second highest in Fonterra’s history.
Reported earnings were 95c a share, compared with 36c in FY22, so the dividend payout was 52% and the co-operative retained 45c or $750m.
Debt has been hammered, down $2bn to $3.2bn and the 2030 gearing ratio target of plus-30% is already below 30%.
Inventory valuations and working capital movements have played a big part in debt reduction, along with a net $200m from the sale of Soprole in Chile.
To help maintain this momentum, chief executive Miles Hurrell has published two new strategic goals – inflation-adjusted cash operating expenses reduction of 4% annually and gross profit increase from core operations of 2% annually.
Those operational savings will help Hurrell meet other Strategy 2030 goals in capital expenditure and investments in sustainability and higher-value products.
Rather modestly, he said: “We released our long-term strategy in September 2021 and since then have made good progress towards our 2030 goals.
“Our FY23 performance demonstrates that we are focusing on the right strategic priorities.
“This said, we are aware that there are challenging conditions on the ground for many of our farmers.”
Strategy 2030 contains a milk price range of $6.50 to $7.50 average for the decade, which unfortunately for Fonterra’s farmers looks a lot like the unwelcome 2024 season forecast of $6 to $7.50.
In the two years since that target was set the break-even for farmers has increased from $6.50 to $8.30, including a $1 of additional interest costs, according to AgFirst Waikato.
Fonterra chair Peter McBride said the tailwinds from stream returns are forecast to ease back to normal and that Strategy 2030 is being examined and will be revised early in 2024.
There will be years ahead that deliver results ahead of or behind the targets set in 2021, he said.
“For example, the $6.50-$7.50 milk price was not a target but a working assumption for the modelling,” he said.
“The whole business environment has changed, and inflation has certainly impacted farmers’ costs since 2021, so our goals need right-sizing.
“But the direction of travel hasn’t changed and its all about continuous improvement, because in co-operatives good-enough never is.”
McBride said the two new goals of operating expense reductions and gross profit improvements have a natural tension.
“We are not going to just take out costs at the expense of growth.”