8 Dec 2022

Fonterra first quarter profit up 84 percent to $214m

10:07 am on 8 December 2022
Fonterra milk truck

The dairy cooperative has lifted its earnings guidance to 50-70 cents a share, up from 45-60 cents per share. Photo: RNZ / Rebekah Parsons-King

Fonterra has upgraded its profit guidance by as much as 55 percent due to the performance of its ingredients business, particularly in medical nutrition.

The dairy cooperative expected full year profit for the year ending July to be in a range of 50-70 cents per share (cps) from 45-60 cps.

The forecast farmgate milk price was in a range of $8.50-$9.50 per kilogram of milk solids, narrowing from $8.50-$10.00, with a midpoint of $9.00, with a steady advance rate.

Fonterra chief executive Miles Hurrell said it was a positive start to the year given the current global operating environment.

"We continue to feel the impact of geopolitical and macroeconomic events, with higher costs at every point in our supply chain. It's a similar story behind the farm gate with our farmer shareholders managing significantly higher input costs.

"Globally, milk supply from key exporting regions is down over the last 12 months."

Production in Europe and Australia continued to be down, while the United States milk supply showed a slight improvement in recent months.

"Here in New Zealand, our milk production is down 2.9 percent on the same point last season," he said.

"Global market volatility has prompted some softening of demand for whole milk powder, particularly in Greater China and this is reflected in our forecast farmgate milk price range."

Hurrell said the ingredients business continued to see favourable margins in its protein portfolio, particularly for casein and caseinate products used in medical nutrition, driving the group's underlying profit growth.

Underlying earnings were up 94 percent to $368 million, compared with last year, while normalised profit after tax rose 84 percent to $214m, or 13 cps compared with 7 cps.

"The sustained strong margins in our protein portfolio give us the confidence to upgrade our earnings guidance, although the wider range reflects the volatility in the market which we expect to continue in the short to medium term. If these conditions continue for a further extended period, it could have an additional positive impact on forecast earnings."

The co-op's food service business was also improved relative to the same period last year, but Hurrell said high milk prices had put significant pressure on margins in both the food service and consumer channels.

Fonterra had also made significant progress in supply chain management, he said.

"As planned, inventory volume has returned to normal levels. Lower milk collections at the start of the season have also contributed to the reduced inventory levels."

In terms of its longer-term 2030 strategy, Hurrell said the co-op was making good progress despite short-term pressures.

"There's no doubt that we're in a period of increased global uncertainty. Inflationary pressures are being felt both on farm and across our business but looking further out, the fundamentals for dairy remain positive."

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