Day, thank you for standing by. Welcome to the Fonterra 2023 interim results investor briefing conference call. At this time, all participants are in a listen-only mode. Please be advised that today's conference is being recorded. I would now like to hand the conference over to speaker today, Miles Hurrell, CEO.
Thank you. Kia ora, and good afternoon. Welcome to the Q&A session this afternoon. I'm Miles Hurrell, joined here by Neil Beaumont, our new Chief Financial Officer, Simon Till, and Chris Rowe. As you've seen this morning, we released to the market, our update for our 2023 interim results, hopefully you've had a chance to review them and watch the briefing video, which we also put on the website this morning. In summary, we've had a good, strong first half with a lift in our earnings. Our profit after tax is up 50% from NZD 364 million - NZD 546 million. Earnings per share for the six months is NZD 0.33, up from NZD 0.22 last year. The strong earnings performance and the strength of our balance sheet has enabled us to pay an interim dividend of NZD 0.10.
We also upgraded our full year forecast normalized earnings from NZD 0.50-NZD 0.70 per year to NZD 0.55-NZD 0.75 per share. We've also announced a proposed capital return to shareholders and unitholders of around NZD 0.50 per share, which is approximately NZD 800 million subject to the completion of the sale of Soprole. I'm now happy to open for questions with any of the team. Thank you.
Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Matt Montgomerie of Forsyth Barr. Please proceed with your question.
Hey, guys. Well done on a good result. I might just start on guidance. The last GDT auction saw a reasonable roll-off in the stream returns proxy. Just interested to hearing your comments on what's baked in at the upper and lower end in terms of the stream returns relative to what was experienced in the first half. Then related to that, do you think that reversion in the last auction was the beginning of, you know, mean reversion or do you think that's more one-off in nature? How are you seeing the demand-supply response in market of late?
Neil Beaumont here. Maybe I'll offer up sort of the following. I think that, you know, you are right. When we think about our forward guidance, we obviously do have regard to kind of the range of outcomes in terms of stream returns. That's partly the reason why you actually see a, you know, a fairly wide range. You know, that said, we obviously do contract out on a forward basis. You know, a lot of that, you know, a lot of that revenue.
I would say, though, there are, you know, there are a number of other factors in terms of, you know, change in fair values of some of the assets that we also are marking to market now, which play, you know, play a role in terms of that, in terms of that range. You know, in terms of former, you know, specific guidance that you're asking for in terms of, you know, when do we see stream returns and getting some mean reversion there, you know, we don't sort of tend to think in terms of that level of specificity, so I wouldn't necessarily offer anything up to your sort of specific question there.
I think, the co-op is certainly benefiting from, you know, a diversified, asset base, diversified by market, geography and, and channel. What you're seeing in the results is, you know, these things can move quite a bit, and so having the exposure to cross all those different streams is actually the thing that adds the most value, over long horizons.
Great. That's useful. maybe on the dividend, how are you thinking about that in light of, you know, the very strong stream returns and subsequently earnings? Like, would you look to fix outside the policy given the inflated earnings base or, you know, is the policy consistent irrespective of this dynamic?
I mean, clearly, won't be till year-end before we get to a final outcome, but the policy that remains, 40% - 60%, will flow through irrespective of the results that we have.
Great. Maybe one more. Just looking ahead slightly further, given, you know, the probable normalizing of market dynamics, you know, NZD 0.45-NZD 0.55 per share FY 2024 EPS guidance, you know, just any comments you can make, you know, how you think the broader business was tracking or base earnings away from the stream returns?
Yeah.
You know, and specifically in relation to that.
Yeah, sure. I think probably the easiest way to respond to that is that our LTA, our strategy we put out there to go still stands. Sort of the position we put out there to 2030. We always said there'd be some unders and overs to get to 2030. The outcome of that hasn't changed. In fact, we're probably gonna go through a bit of a look to see if there's some things that need to move given, you know, cost of capital's changed significantly. Milk price has probably moved off our input that we put into there. That position we've got out there to 2030 remains unchanged at this point.
Probably the other point to note, though, is You know, it's, we are in sort of unprecedented times with extreme returns that we've seen as you know. You know, with less milk does give us more flexibility versus the squeeze that may have been on through peak that we may have experienced in previous years. You're seeing that play out in the result too, that we can have the ability more so during peak production to follow the best stream returns, which in some cases you don't get that flex when you're under pressure with milk volume.
Great. That's helpful. That's all for me tonight. Cheers.
One moment for our next question. Our next question comes from the line of Joshua Dale of Craigs Investment Partners. Please proceed with your question.
Good afternoon. Just a quick question from me. Your normalized earnings adjust for NZD 4 million of impairments related to Hangu China Farms, but not the NZD 162 million of impairments relating to the New Zealand and Asia consumer businesses. Can you just remind us what the earnings base is from which you calculate dividends in the 40%-60% payout policy?
We use an attributable earnings basis. It's our overall earnings less any positive one-off items, and those positive one-off items are considered separately as to whether they should form part of the dividend payment. In relation to Hangu, that's sort of the tail end of the strategic reset. We the main normalized items we have relate to asset disposals, whereas the impairments are like any other asset mark-to-market activity is the way we think about it.
Okay. Even though they're non-cash, you don't sort of consider them, well, you're effectively reducing your dividend off, you know, off the back of a non-cash write down. Is that how you're sort of operating?
Yes. Yes.
Okay. Thanks for clarifying.
One moment for our next question. Our next question comes from the line of Marcus Curley with UBS. Please proceed with your question.
Good afternoon. I just wonder if we can start with China. It's obviously had a, you know, relatively strong performance in food service in the last six months, and obviously, you know, the market's reopening out there. I just wondered if you can talk about, you know, what you're seeing at the moment in terms of demand in food service and maybe in consumer brands as well, and whether you think, you know, the performance that you saw in the last six months is like, just, you know, forms a base that you can accelerate from looking forward?
Yeah. Marcus, Miles. I mean, the simple answer is yeah, we are seeing good demand, you know, post the lockdowns that China experienced in food service. We are expecting that to continue. Of course, you know, you get into this late stage of the year where there's, you know, milk constrained, you're not gonna see a massive windfall on the back of not having the supply. As, you know, when we look out sort of into the new season and beyond, we're still, you know, very positive about the Chinese market. The consumer market is still a bit lackluster, I guess, is probably the easiest description.
Previously we had a high exposure to Hong Kong in there, which has been impacted for a number of reasons for the last couple of years. We haven't seen the demand shift in the consumer that we'd like. Overall, in food service, they're very positive still.
No demand impact from... I look at things quite material price increases you put through, Miles?
We have had some price increases earlier in the year, benefited of course by the Europeans having quite strong pricing too, so that's been helpful. You do get to a point where consumers start to think about what they do and don't purchase. That's we're sort of starting to hit those points now if we're not careful.
Then just pivoting secondly, into the, you know, the consumer brands, obviously you put some write downs through there. You know, does that signal that, you know, that there needs to be a sort of a broader review of some of the brands you're operating, and separately or, and, you know, in addition to that, you know, the Australian milk prices is going back to very high levels. You know, does that change your attitude, you know, with regard to some of the Australian-based brands or ingredients offerings?
The simple answer is no. No, it doesn't. I mean, the consumer numbers that you see there are obviously being pulled down by the impairment, both in FBNZ and the consumer brands in Southeast Asia that sort of has masked what is not a bad performance against what is a relatively high milk price in the over the long term. Overall doing okay, but again, it comes back to the point Neil raised earlier around the channel and market flexibility we had. You know, consumer was sort of the hero going back a couple of years at a time when food service really struggled through China. Having that flex is important.
We've just seen a couple of headwinds in the New Zealand market in particular, and then the impairments through Southeast Asia, which is sort of more macro economic issues as well, which is when you look at the holding business. Maybe you wanna comment a bit on that, yeah.
Yeah, I mean, as people on this call would appreciate well, you know, changes in discount rates as federal banks sort of change their rates make impact on value. Once we're down to sort of fair value, you know, we're taking the good and the bad in terms of changes in value on things that are just macroeconomic factors. The other thing that obviously has a big impact on the consumer business is just foreign exchange, which obviously, you know, we'll hedge over periods of time. At the end of the day, we ultimately take those underlying economics. That's a factor.
I did just want to sort of reiterate maybe a point, Miles was making, which is, you know, I think as, as we continue to seek to be disciplined allocators of capital, you know, you always wanna think about those decisions sort of through the business cycle. We do happen to be in a pretty highly inflationary part of the cycle right now. As a result, it's not entirely surprising to see, you know, consumer-facing channel, not performing as well. I think the strength of the co-op is having that diversification across market channel and products. Any decisions that were ever made, either to invest more or invest less, you really gotta look through the business cycle.
Just, yeah, changing direction to ingredients, you know, you know, what do you think your position will be as you see some moderation in the ingredients commodity prices on price premium? Like, it looks from the data, and I think you've commented on this before, Miles, that, you know, there's probably been some reasonable underachievement in non-reference, you know, products, given the strength, you know, of the base commodity price. Do you think those price premiums return, you know, as you see some easing off of, you know, the commodity prices?
And you're specifically talking, milk price products here or generally?
No, I'm talking, you know, you know, Casein and Cheddar and, yeah, so the, I suppose the non-reference products, like my observation is, given the price achievement that you've published relative to GDT, you know, you know, the gap or the price premium, as I always call it, you know, has contracted a lot. It does feel like, you know, when you look at the numbers that you've given up price premiums, you know, because of the, just the strength of the underlying commodity relative to the milk price.
You know, my question is, if that is sort of broadly accurate, you know, do you sort of regain, you know, those price premiums as, you know, as you see commodity prices ease, you know...
I think I understand the question, but we can pick it up offline if need be. You know, when you do get a bit of softening in the commodity pricing, as we're starting to see in recent times, it does give you the ability to push a bit harder 'cause you don't get into that burn off of demand. That said, you still at the whim of the international market and what the international players and the commodity markets are doing. Probably the challenge I'd put is that to Chris, I think that the margins for cheese and proteins have actually been quite strong.
While maybe in New Zealand dollar terms, they may have come back somewhat, you know, in purchasing power in the markets, we operate actually still in pretty good space. I'm feeling okay about the margins across our ingredient business. The bigger question I think was asked earlier on around, do we see a mean reversion over time of stream returns? The response really is, you know, clearly our job is to hold onto that as best we can. The flexibility in our plants now without having peak milk, such we do, gives us more opportunity to take advantage of it.
And then just-
Marcus, we can pick that up offline with the team, if you like.
Yeah. Just, finally, I just wondered if you can, you know, talk to what you think your net cash proceeds will be over the next, you know, six or nine months, you know, as all the asset sales settle.
Well, the big one that we've got sitting out there is Soprole. We've, we've published what the sales price, net sales price or net receipts on that transaction is. That's. There's a little bit of movement around that, but that information hasn't really changed.
Several billion, NZD 1 billion is what we announced for the proceeds.
Yes.
I wouldn't expect there to be too much out of DPA by the time we repay debt in that, in that, asset sale.
Okay. NZD 1 billion in, NZD 800 million out. Net debt reduction of NZD 200 million?
Yeah. That's a good way to look at it.
Thank you.
Cheers.
One moment for our next question. Our next question comes from the line of Arie Dekker of Jarden. Please proceed with your question.
Hey, guys. Yeah, just on China food service, and you sort of talked about the constraints you've, you know, got in the latter part of the year just in terms of volume and that. If you sort of look beyond that in terms of volume growth sort of expectations as that business, you know, I guess normalizes from a market access perspective on that, are you sort of targeting mid-single digit sort of volume growth again over the next few years?
Yeah, that's probably a good place to start, Arie. We'll get to a point at some point, at some stage where we need to think about the next wave of capacity to cater for that. We've got a few programs underway to unlock additional capacity with no capital requirements, but then that runs out at some point. Certainly that, the number you talk about is probably a fair reflection into the years ahead.
Sure. Just on casein, I mean, I guess first question, just for a bit of context, like in terms of the stream benefit that you've been deriving, how much would you put down to casein versus the other non-reference products?
Do you have that handy, Chris, at all?
That's not one that we separate out as part of the result announcement. Certainly there's a variety of different forms of protein products sitting in that stream returns results. There's caseins, caseinate, MPCs. They all, they've all contributed strongly, but differently, at slightly different levels, at least through that stream returns result.
Yeah. Look, you know, obviously visibility is a little bit limited. Then also, you know, I don't sort of live and breathe in the world of casein and caseinate and that. You know, like I understand the demand dynamic sort of, you know, driving the strong pricing and returns you've been getting. Just on the supply side, you know, and I think you call out manufacturing capacity in that. You know, what do you sort of understand about, you know, manufacturing capacity coming on to sort of, you know, respond, I guess, to those very high prices? I understand there might be a bit in the U.S. that's come on recently. What are you sort of seeing there?
First thing is, Arie, you should get into casein. It'll help your tennis. we are seeing a bit of additional capacity both in the casein, caseinate space and also MPC. they'll be playing at the bottom end of the commodity end of those products, if I can sort of put that in inverted commas. There is. You know, our job is to continue to evolve those products and move them into, you know, functional foods, medical nutrition, active living categories. there's MPC and there's MPC, if I can say it in that regard.
It's a relatively new product for some of our international competitors, and our job is to keep innovating to be ahead of the curve on that.
Yeah. Okay. No, I understand. Just on the consumer businesses and and obviously, you both gave a bit of color on that and and the impairments and that. I mean, I guess they're sort of businesses, you know, and I accept that, you know, there are points in time where they sort of, you know, have contributed positively. You know, if you, if you sort of look through the cycle, you know, these aren't the first impairments we've sort of seen in some of these consumer businesses. I guess a couple of things. Just the... You know, and I haven't had a look at the detail, but that $160 million of impairment, what is that sort of relative to the value those businesses have been held at, firstly?
In terms of as you do reviews like you have and coming to a value, on them, you know, has it given you reason to sort of think about, you know, long-term ownership of them at all?
I'll let Chris respond to the first part in terms of the impairment versus the current holding value. You know, like all these things, Arie, making the best use of the capital is an ongoing conversation and it's something that is right in our crosshairs. We'll continue to evaluate all assets, not just the ones performing as we've seen the impairments on, but it's certainly a way that we look at the business on an ongoing basis now.
In terms of the impairments, they're at around about the 15%-20% level.
Okay. No, great. Thank you. That's all for me. Yeah, I mean, well done on such a strong result.
Thanks, Arie.
One moment for our next question. Our next question comes from the line of Nick Marvie, Macquarie. Please proceed with your question.
Good afternoon. Just in terms of Australia, obviously reasonably good result there. Are there any other thoughts about whether or not you'd reopen a discussion about sort of divesting that business in part or some other kind of structure around it?
No, it's not up for discussion. I mean, other than the comment I made to Arie there, that of course we should be looking at all our assets at any given time. No, we are comfortable with our hold call on Australia. We've actually got ourselves into a pretty solid position there, certainly around our Cheddar category, which is going from strength to strength for us. Pleased with how that business is performing.
Great. Then just at a sort of high level, some sort of data showing that, you know, average cost for farmers is sort of north of NZD 7 a kilo now. You know, how do you think about that in the context of where long-term milk prices are and sort of how sustainable, you know, the cost structure of farms, and therefore your ability to sort of pay for milk and make a profit while they're sort of, you know, operational in a good way, sort of all fit together?
Yeah. Firstly, I mean, NZD 7 has probably been an old number now to speak by the time some of the debt rolls over, for some farmers, I'd suggest. That aside, you know, clearly it's something that we're mindful of. You know, we'll drive the revenue line and the OpEx line to try and give a decent return back, whether it be through non-milk price products or of course, milk price, the best we can. Farm Source is the other area where we try and remove cost and complexity for our farmers through our retail offering, to try and use our scale to give them sort of, you know, on-farm, cost advantage.
You know, there is a, there is an element of the market is the market as well. While we're certainly cognizant of the, of the significant increase in cost that farmers are having to bear, you know, it's not something we have a huge influence over, as I say, apart from a few inputs that we can support them where possible.
I guess what would it take for you to have to take a view that the farmers need, you know, support outside of, you know, the milk price and the dividend? Obviously, it was quite some years ago, and it was even exceptional circumstance where there were, you know, farmer support measures put in. You know, can you rule out having to do that again, given, you know, farmers have ridden through quite a few good years? Or is it sort of something that you'll always be open to fix in a balance sheet, you know, to support farmers?
Yeah. I mean, it's not something that's part of our at this point. you know, we get the farmers are feeling the pinch from a cash flow perspective. you know, I think the results that we've put out today, you know, should be relatively well received, I think, across the farm base. there's certainly nothing in our agenda to think about, you know, support mechanisms for farmers at the moment.
Thank you.
Thank you. At this time, I would like to hand back to management for closing remarks.
Well, thank you very much for your time today and your questions. Of course, the team are on hand to answer any follow-up questions if you need more detail. Again, thanks for your support and we'll be in touch soon. Thank you.
Thank you.