Fonterra is bullish on the year ahead as it delivers solid FY22 results. Photo / Grant Bradley
Turbulent world events played a role in Fonterra’s decision not to sell part of its Australian business, but the dairy-exporting juggernaut won’t admit its speech later cooled over a $1 return plan
Billions to shareholders in 2024.
New Zealand’s largest company announced solid FY22 results in a particularly challenging year marked by record milk payments to farmers and said after considering options for its Australian operation it had decided it was in the best interest of the cooperative was to retain full ownership.
The potential partial sale and divestment of its Chilean business, Soprole, underpins Fonterra’s previously announced plan to return $24 billion to its farmers and shareholders by the end of the fiscal year.
“While we have elected not to sell any interest in our Australian business, we remain committed to providing our shareholders and shareholders with a significant return on capital,” said Chief Executive Miles Hurrell.
“The level of any return on investment will ultimately be determined by a number of factors, including the successful completion of the divestiture program and our continued debt and earnings levels.”
He later told the Herald the review of Australia’s operation “never got to the point of assessments”.
“However, of course, the market for external investments is not as robust as it used to be. But I wouldn’t say that played a role in our decision – you look at these short-term situations when you make a big strategic decision like this.”
When asked if doing business in a world that seems more chaotic has become more difficult than it was when he took the job, Hurrell said while Fonterra was used to working in global crisis situations, “at the moment there probably is bigger situations and more time at the same time”.
Achieving strong results in this global scenario demonstrated its “true strength” in product channel diversity and market adaptability.
“Let’s be honest, that played a part in our decision to go with Australia. It’s a good business, it has its own milk, its own production facilities and it can complement what we’re doing from New Zealand.”
While the $1 billion capital return plan agreement was heavily dependent on divestitures, with Chile “playing an absolutely huge role,” Hurrell didn’t concede that the tone of voice had changed.
“We no longer have two assets that would make up the cash to determine the level of return to shareholders. We need to determine the sales process and how it is progressing and looking like before we determine the outcome, along with our earnings and debt position in fiscal 2024.”
Hurrell said it is too early to discuss where the Chilean company’s sales process is.
When asked if he was confident of getting a good price in a recessionary global environment, he said: “I am. It’s a very, very good deal and a very, very good brand in a relatively stable market – one of the most stable in South America.”
Total group revenue increased 11 percent to $23.4 billion and “reported” after-tax profit was $583 million, down 3 percent. Normalized after-tax income was $591 million, up 1 percent. The group’s total normalized EBIT was $991 million, up $30 million, or 4 percent. A total dividend of 20 cents per share to farmers brought their total cash payout to $9.50/kg of milk solids.
One highlight was a big jump in projected normalized earnings guidance — from 35 cents per share for 2022 to a range of 45 to 60 cents per share for 2022 through 2023.
Hurrell told the Herald the confidence was due to the gap between the “reference” product price (the price of milk) and the non-reference products (cheese and egg whites), which have historically been close and have continued to widen.
“In the first half (FY22) they were pretty close, in the second half the gap really started to widen, which has helped us a lot with the results this year. Looking ahead to the year ahead, this gap has continued into the first part of ( FY23).
“If they are close together, that puts pressure on our margin. The combination of cheese and protein ingredients looks very healthy.”
Hurrell “received” a total of $4.3 million in compensation, lump sum in FY21. But under Fonterra’s CEO compensation system, he “earned” a total of $5.38 million — $902,000 of which was for the company Benefit to be paid with deferred payment until fiscal year 2023.
Chairman Peter McBride received $446,122, up from $362,327 in FY21. McBride said the FY21 payment was not for a full year and that he did not receive any additional payment that year for his work leading Fonterra’s proposed capital restructuring .
The number of Fonterra employees making more than $100,000 increased by 1,054 to 8,440.
Hurrell said last year that a “significant” number of employees made $90,000 to $100,000, a range the company was not required to disclose. Wage increases, including those obtained through union negotiations, had pushed more into the $100,000+ range.
But offshore workers made the biggest contribution when movements in the local currency against the New Zealand dollar pushed them above the $100,000 threshold with no potential change in their local currency salary, he said.
Fonterra, which collects nearly 80 percent of the country’s raw milk production, now reports that it has 9,000 shareholder farmers, compared to 10,000 last year.
Hurrell said this is the result of farm consolidations in the industry – “it’s not a trend we’re worried about.”
The cooperative’s milk collection fell 4 percent in the year ended July 31.
Hurrell attributed this to poor spring and summer weather conditions.
“A key point here is that for the first time in over a decade we have maintained our market share [of milk] in New Zealand.
“It shows that our business is doing well. It is a vote of confidence from the shareholders. Milk production has been falling across the country, but we have maintained our market share.”
When asked if the company was reviewing its processing site numbers amid flat to declining national milk production, Hurrell said it viewed the 4 percent drop as an anomaly.
“Of course, if we were to see significant year-on-year declines of this magnitude, we would have to re-evaluate our resource footprint…we have no plans at this time to streamline any of our facilities, but that’s something we need to keep in mind.”