Fonterra Co-operative Group Limited Analysis

Overview

Fonterra Co-operative Group Limited (Fonterra) is a dairy co-operative, owned and supplied by nearly 9,000 farming families in Aotearoa, New Zealand. Through the spirit of co-operation and a can-do attitude, Fonterra’s farmers, along with 20,000 employees around the world, share the goodness of our milk through innovative consumer, foodservice and ingredient brands. Sustainability is at the heart of everything we do, and we’re committed to leaving things in a better way than we found them. Everyday people working hard to be Good Together in the community.

The Fonterra Shareholders' Fund (FSF) is a registered managed investment scheme under the Financial Markets Conduct Act 2013. The FSF provides investors an opportunity to invest in the performance of Fonterra. Outside investors who are not allowed to hold shares in Fonterra can invest in units in the FSF which gives them access to economic rights (such as distributions and capital movements), similar to those of a share.

Performance

The following information was extracted from Fonterra Co-operative Group Limited's market update, released 29 May 2024:

• Continuing operations’* earnings per share: 61 cents

• Reported earnings per share: 58 cents

• Continuing operations’ profit after tax: NZ $1,013 million up $20m, or 2%

• Reported profit after tax: NZ $973 million down 27% with the prior period including Soprole performance and net gain on divestments

• Continuing operations’ EBIT: NZ $1,440 million down 6%

• Return on Capital: 11.9% up from 11.7% year on year

• Lift in forecast FY24 continuing operations’ earnings range: from 50-65 cents per share to 60-70 cents per share

• Opening forecast Farmgate Milk Price for 2024/25 season: $7.25-$8.75 per kgMS with a mid-point of $8.00 per kgMS

• Current season forecast Farmgate Milk Price: midpoint maintained at $7.80 per kgMS, range narrowed to $7.70-$7.90 per kgMS

Fonterra Co-operative Group Ltd today provided its Q3 business update, announcing profit after tax from continuing operations’* of $1,013 million, up $20 million or equivalent to 61c per share. This result is driven by continued strong earnings across all three of the Co-op's product channels.

CEO Miles Hurrell says the Co-op's Foodservice and Consumer channels in particular had a strong third quarter with a lift in earnings compared to the same time last year.

“As a result of this performance, we have lifted our forecast FY24 continuing operations’ earnings range to 60-70 cents per share, up from 50-65 cents per share” says Mr Hurrell.

Fonterra also announced an opening 2024/25 season forecast Farmgate Milk Price of $7.25-8.75 per kgMS with a midpoint of $8.00 per kgMS.

Business Performance

Fonterra’s earnings from continuing operations’* year to date equates to 61 cents per share, up 1 cent on prior year.

“Fonterra’s sales volumes were up slightly on last year by 38kMT, or 1%, due to higher sales volumes in our Foodservice and Consumer channels.

“We also saw price relativities ease over the quarter, and we anticipate them to narrow further in Q4 as they return to more historic levels.

“Gross margins remain strong across all three channels as our in-market teams continue to drive pricing and volume. Foodservice and Consumer volumes are up 4% and 7% respectively year on year, with margins consistent with Q2.

“Our EBIT of $1,440 million reflected improved performance in Foodservice and Consumer, with Ingredients down year on year following record highs in FY23.

“Our increased earnings range assumes softer earnings in Q4 due to the seasonality of our milk collections, the higher cost of inputs in the Foodservice and Consumer channels, and the impact of the investments in modernising our IT systems.

“Across Fonterra, operating expenses are up due to inflation, upfront costs of driving efficiency improvements and increased IT spend. Historically, some of this IT spend would have been treated as capex and capitalised on the balance sheet.

“We are heading into year end with a strong balance sheet, with Fonterra’s underlying performance and lower debt position helping to further reduce our financing costs.

“For the 12 months rolling Return on Capital we are sitting at 11.9%, in line with our forecast. This is expected to be in our 10-11% target range for end of year,” says Mr Hurrell.