Fonterra reports strong earnings amid challenges in FY23

Fonterra Milk tanker at Te Rapa Dairy Factory. Image credit: Fonterra

New Zealand dairy giant Fonterra announced its financial results for the fiscal year ending on 31 July 2023, with full-year earnings of 95 cents per share, profit after tax of $1.6 billion, and a final Farmgate Milk Price of $8.22 per kgMS for the 2022/23 season. 

Despite strong earnings and progress in key strategic initiatives, the ASX-listed company said it faced challenges due to a drop in the Farmgate Milk Price caused by reduced demand for whole milk powder in key markets.

To support farmers during this period, Fonterra introduced a new Advance Rate Schedule guideline to help with on-farm cash flow. 

Amid the challenges, the company announced a strong full-year dividend of 50 cents per share, including an interim dividend of 10 cents per share and a final dividend of 40 cents per share. 

Additionally, the co-op returned a tax-free 50 cents per share to shareholders and unit holders in August, resulting in a final cash payout to farmers of $9.22 per share backed per kgMS.

Fonterra reported a profit after tax of $1,577 million, up $994 million from the previous year, excluding the net gain from divestments of $248 million. 

The company also achieved a return on capital of 12.4 per cent for the last 12 months, up from 6.8 per cent in the comparable period.

Key drivers for this performance included favourable margins in the Ingredients channel, particularly in cheese and protein portfolios. 

Improved performance in the food service channel was also noted due to increased product pricing and higher demand as lockdown restrictions eased in Greater China.

In September 2021, Fonterra unveiled its comprehensive long-term strategy, and the company has been diligently working towards its ambitious 2030 objectives ever since. 

One notable achievement involved the successful divestment of China Farms and Soprole, a pivotal step in Fonterra’s strategic decision to concentrate on New Zealand’s dairy production. 

This strategic shift reflects Fonterra’s commitment to maximising the potential of New Zealand’s premium milk sources.

Fonterra’s commitment to sustainability remains at the forefront of its agenda, and the company has intensified its efforts to reduce emissions, introducing a new goal for a 50 per cent absolute reduction in Scope 1&2 emissions by 2030 compared to a 2018 baseline. 

This represents a significant enhancement over the previous target of a 30 per cent reduction by 2030. 

Discussions have also taken place with farmers regarding the introduction of a Scope 3, or on-farm emissions target, with an announcement expected by the end of 2023.

The company’s focus on innovation has led to the establishment of Vivici, a joint venture with Royal DSM, which explores commercial opportunities in fermentation-derived ingredients. 

Additionally, Fonterra’s corporate ventures arm, Nutrition Science Solution (NSS), marked its inauguration by making its maiden strategic investment – a minority stake in Pendulum Inc, a biotech firm specialising in metabolic health.

Looking ahead, Fonterra forecasts a 2023/24 Farmgate Milk Price range of $6.00 – $7.50 per kgMS, reflecting reduced demand for whole milk powder. 

The company said it expects improved margins in the Consumer and Foodservice channels for the fiscal year 2024.