Fonterra to retain Australian business, may reduce $1b return to shareholders
The co-operative is selling overseas assets to focus on getting more value from NZ milk.
Fonterra, which has been divesting overseas assets to focus on New Zealand milk, has decided not to sell a stake in its Australian business, which may reduce the $1 billion in returns slated for shareholders.
Under chief executive Miles Hurrell’s leadership, Fonterra has been selling assets after a period of global expansion failed to deliver the promised profits and left it saddled with too much debt. Hurrell has moved the co-operative’s focus back to New Zealand where he is looking to eke out more value from the milk produced by its 10,000 farmer shareholders.
Hurrell said the sale of the company’s Chilean assets was progressing, but after looking at a number of options for its Australian business, Fonterra had decided it was in the co-operative’s best strategic interests to maintain full ownership and it didn’t investigate sale options.
Fonterra’s Chilean assets, dairy brand Soprole and its milk supplier Prolesur, do not require any New Zealand-sourced milk or expertise while its Australian business used both Australian and New Zealand milk.
* Fonterra first-half profit falls 7% as record high milk prices hurt margins
* Fonterra lifts farmgate milk price to new record; sees $14b cash boost to economy
* Fonterra lifts farmgate milk price to record level; sees $13.2b economic boost
“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,” Hurrell said. “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 the end of its 2024 year.
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 our ongoing debt and earnings levels.”
Fonterra expects to sell its Hangu China Farm and its Brazil consumer and foodservice business in the coming year, after both sales were delayed.
It had initially agreed to sell its Hangu farm to the minority 15% shareholder, but that fell through and it bought the minority stake in January and is actively marketing the farm for sale. It wrote down the value of its Brazil venture by $57 million, noting the sales process was delayed due to market conditions related to Covid-19 but said it remains committed to the sale.
Units in the Fonterra Shareholders’ Fund, which gives investors outside the co-operative access to its dividends, fell 2.3% to $3.35 in mid-afternoon trading on the NZX.
Fonterra reported a 3% decline in profit to $583m in the year to the end of July. That included an $80m hit to its Sri Lankan business following economic disruption in the nation.
Revenue rose 11% to $23.4b, but sales volumes fell due to short-term shifts in demand and ongoing shipping and supply disruptions. Operating expenses rose 7% to $2.4b, reflecting inflationary pressures and supply costs.
The co-operative was holding more inventory than usual at the end of the year as stronger milk collections towards the end of the season coinciding with factory constraints, short-term impacts on demand and shipping disruptions.
“We did that really intentionally, taking advantage of the strength of the balance sheet so that we can sell that inventory in an orderly manner to get the best possible economic return,” said chief financial officer Marc Rivers.
Some 88% of the inventory had been contracted, and the company had made good progress in shipments in the first six weeks of the new financial year.
The increased inventory, coupled with a higher milk price, increased Fonterra’s net debt by $1b to $5.3b, although this was expected to improve as inventory levels returned to normal.
Hurrell said shipping had improved from earlier in the pandemic when ships sometimes failed to turn up in New Zealand, and he was hopeful that shipping delays would resolve by the end of this calendar year and into next year and return to a more reliable schedule.
The co-operative generated 35 cents of earnings per share, at the top end of its 25c to 35c range and ahead of 34c the previous year. The measure is based on normalised earnings.
It expects per share earnings of 45c to 60c in the coming year as it benefits from higher prices for non-reference products, particularly cheese and protein products such as casein.
Hurrell said despite tight supply there was robust demand from global customers for dairy and the longer-term outlook remained positive. In the medium-term, Fonterra expected to see an easing in some geopolitical events, such as the Covid-19 lockdowns in China and the economic challenges in Sri Lanka.
Fonterra will pay a final dividend of 15c per share, taking the annual dividend to 20c, in line with the previous year.
The co-operative confirmed its final farmgate milk price for the 2021/22 season was a record $9.30 per kilogram of milk solids, injecting $13.7b into the economy. That’s ahead of $7.54 per kgMS the previous season.
For the coming season, the co-operative has forecast a milk price of $8.50 to $10 per kgMS, suggesting a payment of $9.25 per kgMS to farmers.