The Co-op releases it's 2023/24 Annual Results and its revised strategy.
The last week of September was a big one for Fonterra with the Co-op releasing its 2023/24 Annual Results and its revised strategy.
Annual Results
The Co-op maintained the positive momentum seen in 2022/23 and once again released a strong result with a profit after tax of NZ$1,168 million and return on capital of 11.3%.
The total dividend of 55 cents per share is the second largest since Fonterra was formed. It includes a 15 cent interim dividend and a 25 cent final dividend. In addition, the Co-op’s ongoing balance sheet strength enabled it to return an extra 15 cents per share to farmer shareholders through a special dividend. In addition, for the 2024/25 season the Co-op is modifying its dividend policy to a range of 60%-80% of net earnings, up from 40%-60%.
There was continued strong performance across Ingredients, Foodservice and Consumer sales channels with highlights including:
- Improved margins in Foodservice with more of the Co-op’s milk solids allocated to this high-performing channel.
- The Consumer business also improved margins while lowering its operating expenses.
- Ingredients’ earnings were down when compared to last year’s historic highs, but overall, ingredients’ earnings performance is well above the Co-op’s five-year average.
As part of the results, Fonterra also announced a 50 cent lift to the 2024/25 forecast Farmgate Milk Price. The new forecast range is $8.25-$9.75 per kgMS with a midpoint of $9.00 per kgMS.
This follows further recent strengthening in Global Dairy Trade prices and constrained milk supply in key producing regions.
Organic farmers were well rewarded for their work in the 2023/24 season. Capitalising on a deficit of organic supply across both the US and much of Europe, the organics team was able to announce a record payout of $10.92 kg/MS.
Fonterra CEO Miles Hurrell says the overall results reflect the continued strong earnings performance and long-term resilience of the Co-op.
“Our Co-op is in good shape, and I’m pleased to have delivered another year of solid returns to farmer shareholders and unit holders. We remain focused on making progress against our two efficiency metrics while also investing in the areas that will improve long-term performance and the resilience of the Co-op. Our balance sheet position remains strong, providing optionality and flexibility for the future and resilience against volatility."
“Looking ahead, we’re well placed to implement the next phase of our strategy to grow long-term value for the Co-op.”
Revised strategy
The week after the Annual Results were shared, Fonterra released its revised strategy, which includes six strategic choices aimed at growing end-to-end value for farmers.
The strategy will see the Co-op deepen its focus on its high-performing Ingredients and Foodservice businesses.
It follows a strategic review that confirmed the Co-op’s strengths as a business-to-business dairy nutrition provider, resulting in Fonterra’s decision to explore divestment options for its global Consumer businesses.
Chairman Peter McBride says the revised strategy creates a pathway to greater value creation, allowing the Co-op to announce enhanced financial targets and policy settings.
“The Co-op exists to provide stability and manage risk on farmers’ behalf, while maximising the returns to farmers from their milk and the capital they have invested in Fonterra. Through implementation of our strategy, we can grow returns to our owners while continuing to invest in the Co-op, maintaining the financial discipline and strong balance sheet we’ve worked hard to build over recent years."
“We have increased our target average return on capital to 10-12%, up from 9-10%, and announced a new dividend policy of 60-80% of earnings, up from 40-60%. At all times, we remain committed to maintaining the maximum sustainable Farmgate Milk Price,” says Peter.
CEO Miles Hurrell says Fonterra is in a strong position, delivering results well above its five-year average, which puts it in a position to think about the next evolution of its strategic delivery.
“Following our recent strategic review, we are clear on the parts of the business that create the most value today and where there is further headroom for growth. These are our innovative Ingredients and Foodservice businesses, supported by efficient and flexible operations.
“By streamlining the Co-op to focus on these areas, we can grow greater value for farmer shareholders and unit holders, even if we divest our Consumer businesses,” says Miles.
Through implementation of the revised strategy, Fonterra is targeting:
- Maintaining the highest sustainable Farmgate Milk Price
- A lift in target average return on capital to 10-12%, up from 9-10%
- Returning more of the Co-op’s earnings to shareholders, through an enhanced dividend policy of 60- 80% of earnings, up from 40-60%
- A significant capital return if the Consumer business is divested.
To achieve these targets and policy settings, the Co-op is focused on six strategic choices:
- Deliver the strongest farmer offering – work alongside farmers to enable on-farm profitability and productivity and support the strongest payout.
- Unleash our Ingredients engine – deepen our position as a world-leading provider of sophisticated dairy ingredients and build our trading capability to grow both the Farmgate Milk Price and earnings.
- Keep up the momentum in Foodservice – expand our successful Foodservice business in China and other key markets to grow earnings.
- Invest in operations for the future – an efficient manufacturing and supply chain network that allows us to flexibly allocate milk to the highest returning product and sales channel.
- Build on our sustainability position – further improve the Co-op’s sustainability credentials and strengthen partnerships with customers who value our position.
- Innovate to drive our advantage – use science and technology to solve the Co-op’s challenges and build on our competitive advantages.
Peter says the Co-op’s strategic vision, to be the source of the world’s most valued dairy, recognises the ambition to grow economic value for farmers by drawing on the Co-op’s strengths.
“As we enter a more expensive and volatile world, where customer expectations are evolving, having a Co-op that is aligned to our competitive advantages is fundamental.
“Our scale, flexibility and strong trading relationships continue to provide significant opportunity for us, alongside our strength in making innovative products.”
Miles says it’s the right strategy for the Co-op, with a clear-eyed view of where Fonterra best generates returns for farmer shareholders and unit holders.
“Together, Fonterra’s Board and Management are looking forward to working alongside our Co-op’s farmers and employees to deliver on our vision to be the source of the world’s most valued dairy.”
Visit www.fonterra.com/nz/en/our-co-operative/our-strategy for further information.