Fonterra rethinks sale of Australia business after hailing strong annual results

Robust demand helped the co-op overcome global challenges and it will retain the Australian arm because of its ‘important role in our consumer strategy’

New Zealand dairy co-op Fonterra has hailed a “strong set of results” for the year to 31 July, with group revenue up 11% to NZ$23.4bn (£12.1bn).

Total group normalised earnings before interest and tax (EBIT) was $991m (£514m), up 4%; normalised profit after tax rose 1% to $591m (£306m).

Making the announcement, the co-op said it was rethinking plans to sell its Australian business. CEO Miles Hurrell said his team had looked at a number of options and “decided it’s in the co-op’s best interests to maintain full ownership”.

Plans to sell Fonterra’s Chilean business, Soprole, will still go ahead.

Fonterra says its results reflect a 2021/22 farmgate milk price of NZ$9.30 per kgMS. With a total dividend of 20 cents per share to fully shared-up farmers, the final cash pay-out for farmers is $9.50.

CEO Miles Hurrell says despite the challenges including increased costs associated with supply chain volatility, 2021/22 was a good year for the co-op.

“Our decisions relating to product mix, market diversification, quality products and resilient supply chain, mean the co-op is able to deliver both a strong milk price and robust financial performance in a tough global operating environment,” he added.

“This year’s higher Farmgate Milk Price is the strongest it has ever been, which is great news for our farmers. New Zealand also benefits from this, with $13.7bn returned into the economy in milk price payments alone this year.

“Importantly, one year on, the co-op is making tangible progress against our strategy – namely to focus on New Zealand milk, be a leader in sustainability and a leader in dairy innovation and science.”

Looking at the reprieved Australian venture, Hurrell said: “Australia plays an important role in our consumer strategy with a number of common and complementary brands and products and as a destination for our New Zealand milk solids. The business is going well, and it will play a key role in helping us get to our 2030 strategic targets. 

“As part of our strategy to 2030, we set a goal of a return of about $1bn to shareholders and unitholders which anticipated divestments including Soprole and a stake in our 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. 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 our ongoing debt and earnings levels. 

“Our positive performance in 2021/22 would not have been possible without the continuing hard work of employees and our farmer owners, and I want to thank every one of them for their commitment and support.”

Hurrell said the performance was helped by robust demand for dairy and strong margins in the ingredients channel, although higher milk prices had tightened margins.

“A series of geopolitical and economic events also impacted our performance,” he added, “including a NZ$80m adverse revaluation of the Co-op’s Sri Lankan business payables, due to the devaluation of the rupee. 

Hurrell said he was pleased with progress on Fonterra’s new business strategy, capital restructure and sustainability efforts, adding: “We believe a globally competitive farmer owned Co-op is in the best interests of the dairy industry, rural communities and New Zealand.

Fonterra has announced a forecast 2022/23 Farmgate Milk Price range of NZ$8.50–$10.00 per kgMS, with a midpoint of NZ$9.25 per kgMS. The Co-op also forecasts 2023 normalised earnings guidance of 45-60 cents per share.

“The longer-term outlook for dairy remains positive. And in the medium-term, we expect to see an easing in some of the geopolitical events, namely the Covid-19 lockdowns in China and the economic challenges in Sri Lanka.”