The staff key follows by the number one on your telephone keypad. I'll now like to hand the conference over to Peter McBride, Chair of Fonterra. Please go ahead.
Kia ora, thanks everyone for joining us today, and welcome to Fonterra's FY25 Interim Results Briefing. I'm Fonterra's Chair, Peter McBride, and I'm joined by Miles Hurrell, our CEO, and Andrew Murray, our CFO. I want to acknowledge the positive results the Co-op delivered for the first half of FY25. These results show Fonterra's strategy and action and represent a lot of hard work by Miles and the team against what is a challenging operating environment for many businesses.
As I've said before, Fonterra is an extension of our own farmers' businesses. It exists to provide certainty and manage risk on their behalf while maximizing their returns. Farmer shareholders will be pleased to see the Co-op reliably delivering earnings, especially in the context of a high forecast farmgate milk price and the geopolitical uncertainty that continues to ramp up globally. I'll now hand over to Miles and Andrew to speak to the results. Thanks, Miles.
Okay, thanks, Peter. Starting first with our strategy, we've made good progress on implementation while continuing to drive financial performance. We're getting cash to farmers sooner by accelerating the advance rate schedule. As we focus on delivering the strongest farmer offering, we've announced new funding for farmers with lower emissions milk and expanded the fixed milk price program. We're also looking to the future with investments in site upgrades to create capacity and unlock growth in our ingredients and food service channels. Turning to the numbers, we've had a strong first half with our lift in operating performance. Profit after tax is up 8% to NZD 729 million, or equivalent to NZD 0.44 a share. Our return on capital for the 12 months to 31 January is 10.2%, slightly ahead of our targeted range.
Overall, our earnings performance and strong balance sheet have enabled us to pay a fully imputed interim dividend of $0.22 per share, compared with an unimputed $0.15 dividend last year. Looking now at our global supply and demand, overall dairy market conditions remain favorable with continued strong demand from key importing regions. On the supply side, the U.S. and Europe are slowly improving as both regions recover from animal health challenges. New Zealand and Australia have both had favorable weather conditions compared to last year, a key driver in the improved productivity. However, both parts of the country are experiencing drier conditions now. On the demand side, we continue to see robust demand coming from most regions, and it is pleasing to see China continuing to recover, with the last three months up 3.9% year on year.
As we look ahead, the global geopolitical outlook is increasingly uncertain, but we're well positioned to manage volatility through our channel and market diversification. I'll now hand over to Andrew to take us through more of the detail. Thank you.
Thanks, Miles. Looking at the drivers of the improved operating profit for the Co-op's continuing operations, we have had a $192 million increase in gross profit. This is largely due to the ingredients channel achieving better margins and a favorable product mix compared to last year. Operating expenses increased $99 million and partially offset that improved gross profit. The higher expenses relate to the ongoing upgrade to our enterprise resource planning system, as well as the proposed consumer divestment. The spend on upgrading our ERP system was $52 million for the first half of the year. We expect that the total spend on this upgrade will be around $450-$500 million over a six-year period, with approximately $250 million of that spent within this year and the next.
The growth in the Co-op's operating profit was partially offset by a NZD 106 million increase in net financing costs and tax, with tax making up NZD 103 million of that. NZD 59 million of the tax increase is attributable to the change in tax treatment that was announced last year and is related to the imputation credits that we're now attaching to the Co-op's dividends. This matrix view shows the diversification of our operating profit across channels and markets where we have optimized our product mix to capture value. Ingredients has continued to perform strongly this half, with operating profit up NZD 229 million to NZD 696 million. NZD 136 million of the ingredients channel increase was from core operations, which benefited from favorable margin hedging in the New Zealand non-reference product portfolio.
72 million was within the global markets ingredients channel, and that reflects better alignment between domestic milk prices and global commodity prices in Australia, as well as strong protein prices in Europe. It was pleasing to see our food service and consumer channels both had better operating profits in the second quarter following a tough first quarter, with materially better gross margins reflecting stronger pricing, which offset the higher input costs. However, both channels do remain down for the six-month period compared to last year. Food service is down NZD 112 million to NZD 230 million, and consumer is down NZD 4 million to NZD 173 million.
It's worth noting that the prior year's food service performance was a record for the Co-op when input costs were much lower than they have been this year, and also that the consumer channel had good sales volume growth, up 8.5%, to largely offset the impact of the costs related to divestment. If we turn now to the balance sheet, our net debt position of NZD 5.5 billion is NZD 1.3 billion higher than this time last year, which reflects the accelerated advance rate, increased milk collections, and the higher value of milk. This ability to get more cash back to our farmer owners earlier highlights the optionalities that a strong balance sheet provides the Co-op. In line with that debt position, the Co-op's gearing ratio has increased to 39.4%, and that's due to that higher debt.
If we're looking a little bit more detail around the Co-op's return on capital, for the 12 months to the 31 January, the return on capital is 10.2% and is on track for our 8-10% target, which was the range that we put out for FY2025. Ingredients and food service have continued to perform well this half, and while consumer has improved, it is still below the required rate of return for our farmer shareholders. It is also worth noting that the tax treatment change that occurred at the start of FY2025 contributed 1.5 percentage points to the reduction in return on capital year on year. Taking a look at the channels, and this is how the Co-op is progressing its strategic choices and tracking to its targets.
If we start with ingredients, we are on target to allocate around 76% of milk solids on a full year basis in FY2025 to this channel, which is in line with our strategy. The allocation of milk solids to the reference portfolio is expected to reduce 2 percentage points as we focus on shifting milk solids to high-value customers and products. Allocation of milk solids to our non-reference ingredients portfolio is expected to be broadly stable year on year. We're focused on growing value through our advanced ingredients product portfolio, and over the next four years, the high protein dairy category is projected to grow by close to $10 billion. To this end, we have made a NZD 75 million investment to increase manufacturing capacity for high-value proteins at our Studholme site, and construction on that has started, with product expected to roll off around August next year.
If we look into food service, we're on track to allocate just under 16% of milk solids to the channel in FY2025, which is a 12% increase on last year. The growth this year is mainly due to increased demand in the cheese portfolio, where UHT cream volume has been stable so far this year, following very significant growth last year. Looking ahead, UHT cream is a key growth product for us, with global demand forecast to grow 4% per annum. To unlock further growth, we are investing NZD 150 million in a new UHT plant at Edendale, and this will provide up to 20 million kilogram milk solids additional capacity from FY2026. If we look at the consumer channel, we are forecasting an increase in allocation of milk solids to nearly 8% for the full year.
Sales volume growth has been driven by higher powder volumes in South Asia and the greater China, and overall our consumer business is in good shape. Earnings performance has improved following impairments over the past few years. However, you can see from the numbers that our ingredients and food service businesses deliver far more higher returns. That is why we're pursuing a divestment of our global consumer business. We're currently progressing both a trade sale and IPO as divestment options before selecting one of those to fit to farmer shareholders for approval. By choosing to focus on ingredients and food service, we know that we can grow value for farmers and the New Zealand economy, and we continue to target a significant capital return to farmer shareholders and unit holders following the divestment. Miles?
Thanks, Andrew. Looking ahead, we have narrowed the forecast farmgate milk price range to NZD 9.70-NZD 10.30, maintaining our midpoint of NZD 10 a kilogram. This reflects stable demand for our reference product and the fact our sales book is well contracted for this time of the year. It also acknowledges we are in an increasingly volatile world, hence maintaining our 60 cent spread. Our full year earnings forecast range remains unchanged following the recent upgrade to $0.55-$0.75 per share.
The range reflects momentum in both the ingredients business and resilience in food service and consumer channels on the back of significantly higher milk costs against this time last year. It is better acknowledged at the start, these results show Fonterra's strategy in action. They are a reflection of the hard work right across the Co-op through to our farmers, owners, through to our end market sales teams. We'll now open for questions.
Kia ora, take your break for some time. You've acknowledged fear about the volatility in global farm [uncertain] fee. How worried are you going forward about the impacts, and what would you in particular be worried about?
Of course, we play in most markets globally, so what's going on in the uncertain world that we live in will have an impact on our business across the board. That said, we are well set up and geared up for those challenges, and as you see from the results, have managed to navigate those very well in the last six months and intend to do so into the future. In terms of where our focus goes, it's about what the things we can control. As you know, if we sit here as the CEO of Fonterra, a lot of those things are well outside of the control of what we have in our control, but at the same time, we acknowledge some of the things that are going on in the world, and our job is to navigate those accordingly.
Are you worried at all about the flow on impacts of tariffs, for instance, and how could they potentially affect you?
Certainly at the highest level, we advocate for free trade on a global basis and being a long way from our international markets. It's an important piece of our portfolio. That said, we live in a world where most of our markets are restricted in some way or another. To see these increased tariffs come on is not great, I think, for the consumers in those markets, but as I say, our job is to navigate those accordingly.
On free trade, obviously, the Prime Minister's in India talking up that free trade agreement. How worried are you that that may not include dairy, or what will you do to ensure it does include dairy?
It was pleasing to see a couple of days ago they acknowledged that dairy is certainly a part of those negotiations, and we wish the negotiating teams all the best. We recognize the importance to the agricultural sector and the Indian economy. It is certainly the largest consumer, but also the largest producer of dairy in the world, the Indian market. We think we have a heck of a lot to offer that market as well, and we wish those negotiators all the best.
Is it realistic? Do you think you can get into the market given the importance of dairy to the Indians?
Yes, I think we can. As I say, we have a lot to offer, not just in products, but some of the services that we can offer as well to support the growing Indian economy.
Just back home, Kiwis paying nearly NZD 10 for a block of butter. We'll look at these results and say, "Why on earth am I being ripped off at the supermarket?
Ripped off is certainly not the term that I would talk to. You can see the international market, which is feeding the milk price, the cost of goods sold that we have to deal with, and that flows back to our farmer shareholders from a milk price perspective. The international market is demanding what we provide here in New Zealand, and it's a great news story.
Why is there no way you can say to the domestic market, "Give Kiwis a break here?" Things are still pretty tough in the economy, and it's pretty tough to look at that butter price nearly doubling in the past year.
As you've seen from the results, our consumer business is the lower performing channel across all our markets, which suggests that ingredients and food service are the higher returning markets that we see internationally. You could already argue that there's some form of subsidy that's taking place in that regard, but ultimately the price of butter and cheese and liquid milks is in the domain of the retailers.
Hello. Just a question on the consumer sales business. Do you see this result as a positive or a hindrance to going forward in regards to the roadshows and pitching this to investors? Yeah, what's your thoughts on that?
It's a very positive story because it shows that what we set out to deliver a year ago is happening, and the teams are on the road now and that roadshow, as you refer to, and we're seeing that confidence come through those conversations we're having with potential investors.
Right. Just one other, I know you do not release new season's forecast until May, but there are pundits out there saying that it looks as if it is going to be another decent season for farmers in terms of the milk price forecast. Any comment around what that could mean for, I guess, farmers, the Co-op, and the wider market if indeed it does turn out to be another decent payout? It tends to yo-yo, go up and down in the past. What are your thoughts on that?
Yeah, of course, we'll come out, I think, towards the end of May with our forecast for the new season here, but I have seen the information that's been provided by some other parties, which does reflect, as you say, another solid year for our farmer owners, and that's important, but the questions have already been asked around the geopolitics that are in play in the global market, and we live in a very uncertain world at the moment, and my message back to farmer shareholders is just be mindful that we're dealing in an international market.
I just wondered, the high milk price has normally been a bit of a break, hasn't it, on the Co-op's earnings. Could you tell us how you've managed to come up with a pretty strong result in the face of a record milk price?
Firstly, it shows that if you're focused and targeted, you have a lot better chance of being successful, and I think you've seen it play out, Jamie, in the first six months of this year and, in fact, in the year prior also. It is the rate of change that we see of a milk price that has the biggest impact. When you get a bit of stability around your cost of goods, i.e., milk price, and can work with the markets in which you're operating in to recover the margin, that is more helpful than a market that moves very quickly and can you recover those costs.
We have seen a little bit of stability in here. The milk price has come up quite significantly from a year or two ago, but at least we've been able to see that coming as opposed to significant moves that we've seen historically.
That $10 milk price, would you see that as just being part of the natural ebb and flow of commodities up and down, or is there something a bit more enduring going on there in the world?
I think it also reflects the way our farmers farm here in New Zealand, and the time I spend offshore, our customers in the international markets do appreciate the way that we farm, the natural system that we operate, the free-roaming cows, pasture feed farming system that we operate, and so there's certainly an element of that that plays into it. In terms of how the commodity markets play out, it's too far to sort of judge where that may play out in the year ahead.
Hey, thanks. Just a quick question in relation to the you mentioned there's funding for farmers with low emissions milk. I wondered if you could explain that a little bit more.
Yeah, we have been working closely with some of those key customers in the international market that, again, going back to the point I made earlier, value what our farmers do on farm, and I've identified some additional payments that we'll be supporting farmers with for those that have the lowest emissions milk, and those payments will take place from June this year.
Sorry, and how much is that?
It's in the detail pack that we've provided already, so you'll see that play out.
I read the other day that in China, the government over there has put in a subsidy to try and encourage people to have more children. I'm just wondering the impact of that on the infant formula market over there. Do you see any positives in that?
The birth rates in China, as we've seen, have been subdued for a while now, so I can't comment on what that subsidy will or won't do, but it's certainly encouraging from a population point of view where it's been relatively stagnant. That'll be a positive news story, I think, and it just plays into our strategy of working closely with that middle class in places like China.
What do you think of live exports resuming, and can those be done safely?
We do not have a view on live animal exports from a Fonterra perspective. I know that it is a conversation that is underway at the moment, and our farmers will make their own calls on that, but we do not get involved in live animal exports.
Do you approve of your farmers undertaking that practice?
They'll make their own calls on that.
I've got the—sorry, Rob's stopped on the post here. We've got the Genetic Technology Bill going through Parliament at the moment. How do you see New Zealand's future with GM?
We see it as a positive step insofar as it means that we can control—as New Zealand, we can control our own destiny as opposed to looking at legislative positions that other countries have had. From that perspective, we see it from a positive perspective. That said, it's important we understand the risks that are involved in that, and our submission back to the select committee is that making sure we have the right controls in place, whether it be from a risk perspective around trade, that we think about that at the same time.
Yeah, it kind of felt like GM grass and ryegrass and clover, okay, GM cows, probably not at this point. Was that right?
Again, it's a bit early to sort of get into some of that detail, but we're open-minded around what the bill will tell us we can and can't do.
Any comment around the effect that's had on the market?
I mean, obviously, we take quite a significant hedge position. In terms of the volatility, we tend to manage it within more of a sort of a band. I think if you look at what's happened, whilst it has been relatively volatile, it's actually been within a relatively narrow band. From that perspective, it has been a small positive for us.
Are there any questions online?
Yes, thank you. If you would like to ask a question, please press star one on your telephone and wait for your name to be announced. If you'd like to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Joshua Dale from Craigs Investment Partners. Please go ahead.
Good morning. Two quick questions from me. Just an easy one to start. How much did stream returns contribute to the 44 cents of EPS?
Stock price relatively is about $0.04 in this half.
Okay. Brilliant. The second question is, given ingredients operating profit is up 49%, that's very strong given stream returns didn't appear to be a huge help this half. Can you dig into the drivers of the strong ingredients result a bit more and whether you see those continuing or not going forward?
Yep. Obviously, there's quite a number of things at play in that perspective. I think maybe it's worthwhile just taking it offline and having a more detailed conversation. If I look at the overall, it's about the product mix, so the move towards a non-reference portfolio and is capturing some more higher margin within that space.
Okay. Great. Thank you.
Thank you. Your next question comes from Nick Mar from Macquarie. Please go ahead.
Morning, guys. Just on the advance rates, obviously, those are elevated at present despite sort of a pretty strong milk price. Can you just talk about whether you think the current payout for the advance rate is a new normal, or is that proportion going to come back down over time as you sort of see some better commissions in the milk?
Yeah, look, that's something that we definitely consider on an ongoing basis. It was announced for this season only at this rate, and we'll look at that as we announce for next season's pricing.
That's great. Just on the ingredients business, could you talk through why the season quarter was such a strong performance? Obviously, the growth margin ticks back a little bit, so it suggests a strong volume number. Was there anything kind of one-off in that quarter that you can talk about?
No, there's nothing particularly one-off in there, no. We have continued to see strong demand come through. I think getting early in a good contract position was very helpful for us, and we have also been able to maintain. I think probably what I would say is the price relativity has probably come off a little bit versus last year, but maybe not as much as we thought. We did have a good hedge position there from an underlying perspective, which has given us some additional earnings within the half.
That's great. Just in terms of the earnings range that you've still got, could you just talk about the biggest factors that sort of flex between those points, noting the sort of if you repeated the second half of last year, you'd be towards the top end of your current earnings range?
Yeah. So look, I mean, I think ultimately what we've got there, there's, again, nothing too much from a one-off perspective. If I talk about what's also there, is pretty comfortable in terms of half-to performance, that momentum will continue in terms of what we don't see or what's on the other side. It's just the volatility within the market. There is still we are only halfway through the year. Whilst we're well contracted and well hedged, there still is an underlying volatility, and what we essentially pay for milk now and sale later still offers a range of outcomes in that space. There's nothing particularly in there other than the general underlying volatility within the market.
Okay. Great. We'll check in soon.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Matt Montgomery from Forsyth Barr. Please go ahead.
Hi, guys. Good morning. Well done on a solid set of numbers. Just if we look at your earnings guidance of $0.65 at the midpoint versus $0.50 you set back in September, is it fair to assume that all of this increase in the guidance range has come from ingredients, or have you been pleasantly surprised or otherwise either on the upside or downside in food service and consumer?
I think it's resilience, actually, in all three of the channels. When milk price is heading upwards, obviously, our ability to recover that through price is what puts a little bit of a downward pressure on earnings. We've been able to respond to that very quickly during this period, which has given a bit more resilience in earnings in food service and consumer than we had perhaps thought. And just that underlying space within ingredients and continued that momentum. I would say it's across all three of the channels. Yeah, we'd expect that that's certainly the move that we did and how that will play out in the back half.
Perfect. Thank you. Just on sort of the strategy post-consumer sale, it'd be useful if you could just talk through the rationale and reasoning for the shift in volumes towards ingredients rather than food service. I guess despite the growth of food service over the past five, ten years, sort of reads as if your food service volume growth is going to be relatively negligible and all the volumes will be being allocated back to ingredients.
Yeah. I mean, the first sort of headline point to clarify is that while our consumer business shows as a separate channel at the moment, in a new world, of course, that would show up as an ingredient sale to a new customer of sorts. It is just a transfer, I guess, from what is currently consumer into ingredient sale. The second one as well is that we are starting to reach capacity on some of our key lines, hence the reason we are investing heavily in that new UHT line down at Edendale as well. It is about having the capacity to grow in food service with the demand that is out there.
Yep. No, that's clear. Just on the consumer business, margins were relatively resilient, I'd say, particularly in the second quarter. It'd be useful if you could just expand on how you've been able to, I guess, keep margins in consumer relatively resilient despite the milk price impacts through the half.
Yeah. Certainly, quarter two margins were better than quarter one. That ability for us to make sure that we can continue to set pricing accordingly and recover cost has been important. We've also had some strong volume growth coming through there as well. We actually see, particularly Southeast Asia, also Sri Lanka. We have seen some good volume growth, which has been a nice tailwind in that business as well. Any further questions online?
Thank you. Your next question comes from Andy Thompson from Sport Nation, the Rural Roundup. Please go ahead.
Hi. Good morning, everyone. Just a question for Miles, please. There's recently been a call from certain political parties, politicians, also parts of the ag sector for New Zealand to follow the US and pull out of the Paris Climate Accord. Do you have any thoughts on this?
Clearly, our New Zealand politicians will make their own call. As I referred to earlier, we're starting to get value generated for the way we farm here in New Zealand. We've not long come back with a full board actually from North America. While you may see governments slow down their ambition, it's not been slowed down from a customer's perspective, and that's what is more important to us.
Just to follow up, are you concerned that parts of the ag sector, some of your shareholders are calling for this? If so, do you have any thoughts or any position you're going to go to them to particularly explain the importance of the Paris Climate Accord on our trade agreements?
Of course, we're out visiting farmers next week as part of this half-year results roadshow. We'll be explaining that in a bit more detail to them. As I say, it's driven from customer demand. Clearly, Fonterra has a choice. Do we play with those customers that are prepared to pay the value that they do because of what they demand and how we farm, or do we go to a market or a customer that doesn't? That's clearly a choice. We believe the long term, there is value to be had in following those customers that are growing on the back of their own sustainability credentials.
Thank you.
Thank you. There are no more questions at this time. I'll now hand back to the room for any closing remarks.
Great. Thank you very much, everyone, for your attendance today, and I look forward to follow-up questions as appropriate. Thank you.