Fonterra plans to return $800m to shareholders after asset sale

Fonterra boosted first-half profit 50% and announced plans to return $800 million to shareholders from asset sales.

Under chief executive Miles Hurrell’s leadership, Fonterra has been selling overseas assets after a period of global expansion failed to deliver the promised profits and left it saddled with too much debt.

The co-operative plans to return $800m from the sale of its Chilean Soprole business to its farmer owners and unit holders in October, equating to about 50 cents per share. That’s down from the $1 billion return it initially proposed, after it decided not to sell a stake in its Australian business.

First-half profit jumped to $546m in the six months to the end of January, from $364m in the year earlier period as Fonterra benefited from strong demand for protein even as global milk prices softened.

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“This lift in earnings is thanks to our co-op’s scale and ability to move our farmer owners’ milk into products and markets where we’re seeing favourable prices,” Hurrell said.

“With whole milk powder prices down, we moved more milk into skim milk powder and cream products. We also made the most of favourable margins in our cheese and protein portfolios, by moving a higher proportion of current season milk into these products which has benefited our earnings.”

Last month, Fonterra lowered its forecast milk payment to farmers for this season, as soft demand from the key Chinese market weighed on global prices. It expects to pay between $8.20 and $8.80 per kilogram of milk solids, suggesting a farmer payment of $8.50 per kgMS. That’s down from a record $9.30 per kgMS payment last season, but would still be the second-highest level on record.

“While milk powder prices have softened recently, impacting our forecast farmgate milk price range, protein prices have been high, and this is reflected in the lift in earnings we’re reporting today,” he said.

Hurrell said the company’s improved earnings and strong balance sheet enabled it to pay a 10c first-half dividend, double the 5c dividend paid at the same time last year.

“We also expect to be able to pay a strong full-year dividend, in addition to our proposed capital return,” he said.

Shares in Fonterra’s NZX-listed fund, which gives investors access to dividends, rose 3.3% to $3.15 after the market opened for trading on Thursday.

Fonterra raised its forecast for full-year earnings for a third time to between 55 and 75 cents per share, from its December forecast for 50c to 70c. That’s ahead of 35c last year.

The lift in returns will be welcomed by farmers who are facing a challenging time of rising costs, increased regulation and uncertain global markets.

Hurrell has moved the co-operative’s focus back to New Zealand where he is looking to eke out more value from the milk produced by its 10,000 farmer shareholders.

“The outlook for high quality sustainable New Zealand dairy remains positive,” he said. “We have a clear strategy and are well-positioned to take advantage of this demand.”

Fonterra agreed in November to sell its Soprole dairy business in Chile to Peruvian firm Gloria Foods for 591.07 billion Chilean pesos (NZ$1.055 billion). It will use some of the proceeds to pay down debt.

The asset sale is part of Fonterra’s strategy to 2030, which included plans to return about $1b to shareholders and unitholders by the end of its 2024 year.

Hurrell has previously warned that its consumer business in New Zealand was “struggling,” with low margins and slumping profits as it faced higher costs at a time when inflation was biting into the purchasing power of consumers.

As part of its first-half earnings, the company has revised down the valuation of its domestic consumer business by $92m.

“Our domestic consumer business, Fonterra Brands New Zealand (FBNZ), has been under margin pressure for some time and is not improving as fast as planned,” Hurrell said.

The company also wrote down the value of its Asian consumer brands business by $70m due to weakening currency in those markets, higher interest rates and a declining economic environment in some South East Asian markets.