Fonterra’s first-quarter profit jumped 84% as it benefits from strong margins in its protein and cheese products.
The country’s largest dairy processor said normalized after-tax profit increased to $214 million in the three months to October 31, from $116m last year. Sales rose 32% to $5.79 billion.
Under chief executive Miles Hurrell’s leadership, Fonterra has been selling overseas assets, pulling the co-operative’s focus back to New Zealand where he is looking to eke out more value from the milk produced by its 9,000 farmer shareholders.
Hurrell said Fonterra was making good progress, and the long-term outlook for dairy remained strong. Fonterra raised its forecast for full-year earnings to 50-70 cents per share from 45-60cps.
“It’s a very strong upgrade to guidance,” said Jeremy Sullivan, an investment adviser at Hamilton Hindin Greene. “They’re making progress, and it’s flowing through into a very strong operational performance for the first quarter.”
In the latest quarter, Fonterra’s ingredients business benefited from favorable margins in its protein portfolio, particularly for casein and caseinate products used in medical nutrition, and whey protein concentrate used in products such as high-protein beverages.
“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 short to medium term,” Hurrell said.
“If these conditions continue for extended periods, it could have an additional positive impact on forecast earnings.”
Units in the Fonterra Shareholders’ Fund, which gives investors outside the co-operative access to its dividends, jumped 4.3% to $3.13 in midday trading on the NZX on Thursday.
The co-operative’s food service business improved relative to the same period last year, but the high milk price put significant pressure on margins in both its food service and consumer divisions, Hurrell said.
While higher milk prices benefit farmers, they can squeeze profit margins for milk processors like Fonterra unless they can also sell their products at higher prices.
The group’s profit margin lifted to 16.3% from 15.1% due to strong product prices, partially offset by higher milk prices to farmers.
The co-operative lowered and narrowed its farmgate milk price forecast for the 2022/23 season to $8.50 to $9.50 per kilogram of milk solids, from its previous forecast of $8.50 to $10 per kgMS. That suggests a payment of $9 per kgMS for the season, down from last season’s record $9.30 per kgMS payment.
“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.
“We continue to feel the impact of geopolitical and macroeconomic events, with higher costs at every point in our supply chain,” he said. “It’s a similar story behind the farm gate with our farmer shareholders managing significantly higher input costs.”
In the first quarter, Fonterra’s operating expenses increased 13% to $581m.
Hurrell noted global milk supply from key exporting regions had fallen over the past year, to 268 billion litres in the year to September, from 271 billion litres the previous year.
In New Zealand, milk supply so far this season was down 2.9% compared with the same point last season.