Monday, April 22, 2024

Fonterra’s added-value margins come roaring back

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Interim dividend of 15c represents about $22,500 for the average-sized Fonterra supply farm.
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High margins and sales volumes in Foodservice and Consumer products have delivered record numbers for Fonterra in its first-half results for the 2024 financial year.

Earnings from continuing operations were up 14% to just under $1 billion and reported net profit after tax rose 23% to $647 million,

Earnings per share of 40c have taken a big bite out of the full-year guidance of 50c-65c and enabled an interim dividend of 15c, up from 10c a share in the previous financial year.

Net debt has been dragged down by $1.6bn to $4.2bn.

Revenue was down $2bn to $11.2bn, due to lower prices for ingredients, and operating expenses were down $1bn.

Large earnings losses and writedowns in the Consumer division in FY23 were comprehensively improved this year by $300m to post $177m and the Foodservice division improved by $200m to $342m.

They combined to outweigh the earnings reversal in Ingredients, down $383m to $467m.

Last year Ingredients contributed all the interim earnings and this year that share fell to 46%.

Higher margins in Foodservice and Consumer came about because of lower milk input costs compared with the two prior seasons and momentum from higher market prices achieved after worldwide covid restrictions were relaxed.

“Gross margins are expected to continue to tighten in the second half of FY24 reflecting the recent increase in the price of reference products on GDT that inform the cost of milk,” Fonterra said.

Chief executive Miles Hurrell said his team delivered a strong first half in a trading environment with a backdrop of market volatility and geopolitical uncertainty.

The strong balance sheet had allowed the co-operative to pay the extra dividend.

He said the drop in earnings in ingredients was more than offset by the lift in Consumer and Foodservice.

Hurrell called global supply and demand “finely balanced”, while the fundamentals remain positive overall.

“There are signs of demand stabilising. China’s domestic milk production is re-balancing and their inventory levels are normalising,” he said.

The softer demand from China over the past year saw an in-flow of volumes from Latin America, Africa and the Middle East. Demand from the rest of Asia is also up compared to the same time last year, he said.

Hurrell’s sixth financial year as chief executive has already set trading and balance sheet records.

Looking back to his first year in charge, FY19, the interim net profit was a miniscule $80m and the debt load $7.4bn.

While net profits quickly improved into the $400m to $500m range in following years, debt remained stubbornly above $5bn.

His key performance targets included bringing debt way down and ramping up return on capital, which has jumped from 8.6% in January 2023 to 13.4% this year.

The gearing ratio is now 34% compared with 50% when he first took over.

Following the interim results announcements the share market price of Fonterra Shareholder Fund (FSF) units rose 10c to $3.70 and that of Fonterra Co-operative Group (FCG) supply shares rose 5c to $2.42.

The interim dividend of 15c will be paid on April 11 and represents about $22,500 for the average-sized Fonterra supply farm.

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