Fonterra Shareholders Fd

Thank you for standing by, and welcome to Fonterra Cooperative Group's first quarter fiscal year 2023 investor call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the call over to Chief Executive Officer Miles Hurl. Please go ahead.

Thank you. Good morning. Thanks for joining us here this morning. I'm here in the room in Auckland with Chris Rowe, Acting CFO and Simon Till, Director of Capital Markets. And as you know, we did release our first quarter performance update this morning. I'm going to take you through a few slides. First slide, you'll see we have had a strong start to the financial year, delivering a total EBIT of $368 million, which is up $178 million on this time last year. and have upgraded as a result of the strong performance and the outlook, upgraded our four-year earnings forecast to $0.50 to $0.70 a share. Both measures reflect both the strong margins in our ingredients channel in particular. We have lowered and narrowed our forecast farm gate milk price range to $8.50 to $9.50 with a midpoint of $9 per kilogram of milk solids. This is on the back of global current market volatility and softening demand in particular for Hommel. powder out of China the last few months. At the end of the last financial year, we did hold additional inventory, which we had discussed in depth, but as planned, these volumes have now returned to normal levels through the course of the quarter. And in November, we agreed to sell our Chilean business, and as we continue to focus on New Zealand milk, that's progressing well. I'll just go to slide three, just to talk a little bit about the pricing environment, and the graph on the left shows the pricing relativities, both for and how that played out through the end of last year and into quarter one, and using GDT cheddar as a proxy for sort of that non-reference. And we've seen that those price relativities play out this year and, of course, the forecast for the remainder of the year, which goes to underpin the guidance that we've given. Price relativities for other protein products, such as casein and caseinates, have also been favourable, other than just the cheese portfolio, and that's also been a key driver of our performance. If you look out to slide four, it talks about the global milk supply. And most of the global milk supply regions in the northern hemisphere, Europe and North America, have been flat or actually down a bit. And of course, in New Zealand, we've had a cold start to the season, cold spring and nearly part of the season, which has put us down quite significantly from where we were this time last year. We are starting to see some signs of life out of Europe and times, but certainly down from where we were And so if I look to New Zealand Fonterra, we are down 2.9% to the end of November against this time last year. We are expecting an improvement over the remainder of the year to get back to similar levels to last year of 1480 for the full year. Slide 5 just goes into a bit more detail about the demand for protein products, in particular casein, and you can see that in the graph. and significantly higher pricing for that product and reverting back to New Zealand dollars also. Casein is a derivative of caseinate and used in food applications such as medical, nutrition and processed cheese and very much goes to play into our strength of our strategy. In China and Southeast Asia, caseinate is a preferred choice of emulsifying beverages such as milk teas and coconut juice. So again, supporting our business in that market. Conversely, home milk powder has softened. This is driven by a weaker international market in the near term, softer demand from China, and US dollar prices down compared to the previous year. Chris is going to take us through the next couple of slides around the performance and then the outlook before we open up for Q&A. Thanks, Chris.

Thanks, Myles. On slide six, the chart shows how the FY23 quarter one monthly milk prices compared to last season. Illustrated by the blue line, the 23-monthly milk prices started higher due to the stronger US product prices, but they have subsequently reduced with macroeconomic and geopolitical events softening demand. As we convert USD revenue back to New Zealand dollars, the favourable conversion rate between US and New Zealand compared to last season has helped to offset some of the impact of the lower US dollar product prices as the season has progressed. Seven, we have a summary of the profit and loss statement. Our sales volumes are up as we've caught up on the delayed shipping from the FY22 year end. We achieved a gross margin of 16.3% up from 15.1% in the comparable period. As mentioned earlier by Myles, this has been achieved largely through favorable pricing in our protein and cheese portfolios within our ingredients channel. Our food service channel performance has improved on last year, driven by Greater China. However, margins in both food service and consumer are still being impacted due to the cost of milk. We continue to focus on financial discipline, although our operating expenditure is up compared to the prior year. This reflects higher costs to support our increased sales volumes Inflationary pressure and the translation of those costs back to New Zealand dollars is also unfavourable driven by the lower New Zealand dollar. Normalised profit after tax is up 84% to $214 million and our earnings per share $0.13 compared to $0.07 this time last year. On slide 8 we provide an update on our inventory position. At the end of last year, we held 126,000 metric tonne of additional inventory in New Zealand due to decisions on sales planning and the impacts of delayed shipments. As planned, our total inventory volume has returned to the normal seasonal levels with 126,000 additional inventory shipped during the first quarter. Supply chain disruption is still a challenge, but our team continues to do a great job actively managing this. We're turning to slide nine. We've included a summary of progress against our 2030 and we're pleased with the progress that we're making as we work towards those strategic goals. We're looking forward to implementing our flexible shareholding capital structure following the changes to the DERA legislation. And as we focus on our New Zealand milk pool, we've agreed the sale of our Chilean business. We continue to target a significant capital return for our shareholders and unit holders as a result. Sustainability is at the heart of everything we do. We recently released our Sustainable Finance Framework, which aligns our funding strategy with our sustainability ambitions. And last week, we announced that together with Nestlé, we're working on a New Zealand First, the development of a commercially viable net zero carbon dairy farm. Lastly, we signaled at our annual meeting that we're considering setting a target for Scope 3 emissions. Turning to slide 10, the first three months of the year have shaped up. That's how we've covered off in those previous slides. I'll now take a quick look ahead to how we see the rest of the year panning out. As mentioned earlier, we've lowered and narrowed the forecast Farmgate milk price, and we now have a midpoint of $9 with a $0.50 range either side. This reflects global market volatility, which has prompted some softening of demand for whole milk powder, particularly in Greater China. Turning to the earnings outlook on slide 11, we've upgraded our normalized earnings guidance from the previous $0.45 to $0.60 per share to $0.50 to $0.70 per share. The increase in the full year forecast earnings has been driven by strong margins in our ingredient channel, particularly our protein portfolio being sustained for longer than assumed when we prepared the previous forecast range. The forecast does assume that these higher margins return to more normal levels later in the year. If the current conditions continue for longer, then there could be further earnings upgrade. We're happy with our contract levels for the year, and that gives us some certainty around our projections, but the overall heightened market volatility has meant that we've widened our forecast range from 15 cents per share to 20 cents. In summary, We're really proud of how our teams across the business have pulled together in a time of increased global uncertainty. They are working hard to deliver for our farmer owners, unit holders, and customers. That's it in terms of the slides, and we'll hand over for questions. Thanks.