Fonterra Shareholders Fund (FSF) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Fonterra Cooperative Group Fiscal Year 2023 Q3 Investor Call. [Operator Instructions] And be advised that today's conference is being recorded. Now it's my pleasure to turn the call over to Miles Hurrell. Please go ahead.

Good morning. Thank you. Joined here this morning, Neil Beaumont, CFO; and Simon Till, Capital Markets, and looking forward to taking you through our Q3 results that we released to the market this morning. If I start quickly on Slide 2. We are pleased to report that the co-op has continued its strong performance that we reported at half year. Profit after tax for the first 9 months of F '23 is $1.326 billion, up $854 million on the prior year and includes -- that does include the gain on sale from Soprole. Excluding the gain on sale of the divestment, $248 million, normalized profit is $1.078 billion, which is equivalent to $0.65 for the 9 months. In terms of full year earnings, we've also lifted our guidance for the full year from $0.55 to $0.75 up to $0.65 to $0.80 per year, mainly on the back of those ongoing favorable price relativities but also the improvements we are seeing through consumer and foodservice. On the milk price, we have both narrowed the range and reduced the midpoint for the current season to $8.20, midpoint from $8.30 per kilogram. And for the season ahead, gone back out to a wide range given the early part of the season, $7.25 to $8.75, with a midpoint of $8. The next slide just provides a bit of an update on how we're going against our strategy. And a couple of comments. Firstly, we did complete the sale of Soprole during the quarter, which was well-documented, and the proposed capital return of $800 million have made the decision to bring that forward into late August of this year, which is pleasing. Of course, we have transitioned to the new flexible shareholding structure, and the on-market buyback has been in place to support liquidity since the end of March. And we have a very small portion of the allocated funds have been used, and the market maker continues to operate. As part of the regular capital management program, we continue to evaluate opportunities for our market buybacks at the same time. We also continue to progress sustainability, both on- and off-farm. We expect to announce a scope 3 on-farm emissions target around the middle of the year. And also pleased to see that the Centre for Climate Action joint venture we have with industry and government is now up and running and has made its first investment. Neil will take us through a couple of the numbers, and then I'll come back towards the end to talk about the...

Thanks, Miles, and good afternoon, everyone. As Miles mentioned, the co-op has delivered a strong result for the first 9 months. Looking at some of our key numbers. Profit after tax of $0.81 per share. Excluding the gain on divestments, our earnings per share reduces to $0.55. And I think, quite importantly, is that underlying earnings per share of $0.65 that our dividend policy is based on. Looking at free cash flow, a key metric for us, just over $1.6 billion, and this is up more than $3 billion from the prior year. Key drivers obviously being the net proceeds from the sale of Soprole, the higher earnings and critically, the selling down of our investment in inventory to more, what I would call, historical levels. Higher earnings remain the key driver to our improved return on capital for the last 12 months, which is tracking at 11.7%, up from 5.7%. You will certainly be familiar with the price relativities graph on Slide 5, and we use this graph a lot to illustrate the relative price movements between reference and the nonreference products, which really directly impact our earnings. The strong pricing in our nonreference product portfolio has lasted longer than we initially anticipated. And these favorable price relativities continue to drive our higher margins, particularly in the ingredients channel and are the key contributors to the earnings that we're reporting today. Looking at our total group performance on Slide 6. Overall, the drivers of our performance are similar to what we reported at the interim results with the key points being sales volumes remained slightly up on last year, reflecting the sell-down of additional '22 year-end inventory. Gross margin, gross profit are up mainly due to the favorable price relativities I just spoke of. And then our operating expenses are also up, reflecting the impairments we recognized in our interim results. And like most businesses, we are certainly experiencing ongoing [ inflation ]. Moving to Slide 7. This presents a matrix view of our business with our business segments across the top and our product channels down the side. I want to highlight a few key points. The favorable price relativities discussed earlier can be seen across the ingredients channel, particularly in our Group Operations segment. Our foodservice channel EBIT increased as we continue to adjust our in-market product prices as well as increases in sales volume. And finally, during the third quarter, input costs within the consumer channel actually started to ease, lifting margins, but the overall channel result remains impacted by the impairments that we spoke about at interim. With that, I'll hand it back to you, Miles.

Great. Thanks, Neil. So Slide 9 just talks about the current Farmgate milk price. And as I mentioned earlier, we have both narrowed the range and also reduced the midpoint to $8.20. And a key rationale really is we didn't quite see GDT prices recover to the levels that we had anticipated. We did see some movement in March and April, but it plateaued a little bit of late that reinforces our need to bring it to $8.20. If I look at our earnings on the following slide, we have lifted our forecast earnings guidance from $0.55 to $0.75 to $0.65 to $0.80. Firstly, the ongoing strong margins ingredients channel, which Neil referred to and also the ongoing improved performance we are seeing in Consumer, Foodservice business, in particular, the Southeast Asian Global Markets businesses are also performing well. Our price relativities have continued longer than anticipated, but we do expect to see them revert in time. And just [ for the shock ] by looking at the year ahead from milk price perspective from the 1st of June, our range will be at $7.25 to $8.75, with a midpoint of $8. That's an expectation that we do -- we will see a gradual increase in demand over the course of the year as the China economy continues to recover post COVID. However, timing is, of course, uncertain, and then there's a little bit of stock to work through in the Chinese market, but we expect to be back to normal levels full on, and this is obviously reflected in the opening price. We recognize that farmers are under pressure and at $8, it may be below the cost of breakeven for some farmers, which is why we've adjusted our advance rate settings for the year ahead, and that's obviously welcome news for our farmers. On that basis, I will then open for questions for the 3 of us to answer. Thank you.

[Operator Instructions] We have a question coming from the line of Arie Dekker with Jarden.

Just 3 questions. Firstly, just, obviously, you called out very strong free cash flow. On a post cap return basis, where do you sort of see gearing ending FY '23 at?

Yes. Just a few comments on that. So I think we sit here today, we probably see gearing running at about 34%, 35% ex capital distribution. And making some assumptions around how we'll continue to work through inventory in the next couple of months, we see numbers tracking sort of high 30s, low 40s, so maybe 40%.

Great. And then obviously, I mean, you've upgraded throughout this year as those favorable stream conditions have continued. And you've got a slide there on sort of the ship basis outlook for Q4, which looks pretty solid also. What's your scope to sort of contract some of this favorable stream gap into FY '24 over from here?

Arie, [ that's the question ]. We'd anticipated things to sort of revert by now. They've held up longer and there's probably more a reflection, I think, of the milk price not pushing ahead to where we saw it, where we expected it to go. So as we see milk price potentially move in the right direction from a farmer perspective next year, we might see some of those relativities close up. But it's the big question. We'll obviously come out with our opening guidance for the new year soon, and that will then give us sort of a view as to where we see that playing out and when that gap may close.

Okay. Yes. So can we expect that opening guidance might actually come before the full year results or...

[ A bit hard ] to confirm. Last year, I think we bought it out a bit early, but not sure how we're going to play the year ahead at this point.

Sure. And then just on that, I guess, just from a practical perspective. Just that like what period are you sort of contracting out to at the moment? Like is that starting to fall into the start of FY '24?

Yes. So we're well into sort of the Q1 as sort of -- it's quite a regular process now into Q1. But of course, with the financial tools available to us that we are going well beyond that now. So we're contracting out a year in advance and setting some limited cases.

Yes. And is that across both reference and nonreference? Like are you starting to lock in some of that stream return into FY '24?

Yes, we are, but it is off a relatively small base. Yes.

That's encouraging. And then just last one and well down on exiting the last of the farms legacy. Are you going to be able to remove Brazil by year-end?

We're working hard on that. That would certainly be a nice thing for us to close out at the end of the year. We're in the lap of the regulatory gods in Brazil at this point. So certainly, our intention to move as fast as we can, but too early to say anything more than that, Arie. Just we're waiting for the wheels in motion to continue in Brazil.

[Operator Instructions] One moment for our next question. It comes from the line of Mark Topy with Select Equities.

Just a question just on your assumption on the China demand picking up across the year, I suppose. Most recently, we've seen slowdown in the China economy. So I'm just wondering your sort of basis for perhaps commenting that you might see some increased demand in China over the course of the year.

Yes. So remember, when we say an increase, it's an increase on last year. We -- that was very sluggish demand based on historic levels, predominantly on the back of the COVID lockdown that we saw in the Chinese market and a strong domestic milk play. So as that milk exits the supply chain in China and demand, even on our lower PDP base, comes through, we expect to sort of recover somewhat from what we expected in the year prior. So we're looking towards the end of this calendar year to see some movement on that and hopefully well into next year to see how that completely plays out.

Right. And just can you comment on how you're seeing the Australian market in terms of perhaps the Farmgate there going forward? And also the milk supply, which continues to be under pressure in Australia, how do you see the Australian business?

Yes, maybe just a couple of comments on the Australian business, and Miles can talk a bit about milk price. I mean, I think, quite frankly, since we made the decision to retain that business, it's actually traveling quite well and in a lot of cases, exceeding what some of our expectations were. So I think we're pleased with that financial performance, both from a -- obviously, a return on capital basis, but just efficiency of capital as well. So I think that's what we would say. If we get Miles to talk a bit about milk price, but they're still recovering a little bit, I think, from some of the other earlier drought conditions.

Yes. Milk price in Australia, there was obviously a strong milk price throughout the last year. And we'd expect the market to come out relatively soon with their opening positions for the year ahead. But they're obviously experiencing a little bit of softness as we have -- in the global market. We're seeing that play out in Australia as well. But in terms of what that opening price looks like, it's not quite there yet.

[Operator Instructions] I don't see any further questions in the queue. I will pass it back to Miles Hurrell for any final thoughts.

Great. Thank you. Thanks for your time today. We do appreciate your support. It's nice again to be here with the decent set of numbers and look forward to catching up with a number of you over the next few weeks. Thank you very much.

And with that, we thank you for your participation, and you may now disconnect.