Fonterra Shareholders Fd

Hello and welcome. I'm Myles Hurrell, Chief Executive of Fonterra. And first I'd like to introduce Neil Beaumont, our new Chief Financial Officer. Neil joined us at the start of February and has got straight into understanding a cooperative and how we can accelerate implementation of a 2030 strategy. So welcome, Neil. Today we're going to take you through the performance update for the first six months of F23. But first, I want to acknowledge it's been tough for many of our people right across the business, impacted by severe weather events, including our farmers. As you'll see from the summary slide, we've had a strong first half with a lift in earnings, which has flowed through to an improvement on our return on capital. The cooperative is performing well against the backdrop of ongoing market volatility. Our scale and diversification of channels and markets is enabling us to navigate through disruption and make the most of favourable market conditions. Milk powder prices have softened recently, impacting our forecast farm gate milk price. We have a forecast range for the season of $8.20 to $8.80 per kilogram of milk solids, down from the $8.50 to $9.50 we had previously. In contrast, protein and cheese prices have been strong, and this is reflected in lift in earnings, which we're reporting today. Our profit after tax is up 50%, from $364 million to $546 million. Our earnings per share for the six months is $0.33, up from $0.22 for the prior period. And these earnings are the key driver in our improved return on capital for the last 12 months, which is 8.6% up from 6.1%. This earnings performance and the strength of our balance sheet have enabled us to pay an interim dividend of $0.10, which is positive news for our farmer owners and unit holders. In addition, today we've upgraded our forecast four-year earnings from $0.50 to $0.70 per share to $0.55 to $0.75 per share, reflecting the continued strong prices for protein and cheese products. We've also continued to make progress on our strategy, which we'll talk about in more detail shortly. Over the next couple of slides, I'm going to provide some context on the global dairy industry. Milk supply from the key producing regions is slightly down year on year. However, in recent months, we have seen growth in both the US and Europe due to increased herd sizes. Here in New Zealand, Fonterra collections are down 1.6% as of 31 January. Wet conditions across the North Island, especially early in the season, combined with the reduction in cow numbers have resulted in lower peak than last season. On the demand side, China imports are down. However, imports into Latin America, Middle East and Africa are up. Overall, we expect demand to remain positive in the medium to long term and do not see milk supply growing significantly over the medium to long term. This next slide illustrates how prices have moved over the last few years. Globally, pricing of milk powder, whole milk powder in particular, has softened compared to last year, due mainly to lower demand from China that I already mentioned. Meanwhile, protein prices are higher than last year, particularly for casein and caseinate, driven by constrained manufacturing capacity and ongoing strong demand. The slide here shows how pricing dynamic between powders and proteins had contributed to our earnings over the first half. The graph shows the price relativity between reference products which inform our farm gate milk price and non-reference products which drive our earnings. You can see the price relativity in the first half of F23, which is much wider than the first half of F22, as well as relative to historic levels. In the chart, we use GDT cheddar as a proxy for non-referenced products, and I would note that other non-referenced products, such as KCN and KCNAX products, are even more favourable than what is illustrated here by cheddar cheese. These favourable price relativities have driven our higher margins, particularly in the ingredients channel, and are the key contributor to the earnings we've reported today. We've changed our product mix in response to market conditions. With less milk collected and whole milk powder prices down, we've produced less whole milk powder and moved product into skim and cream products that have a higher return. We've also made the most of the favourable margins in our protein portfolio, notably casein, caseinate and cheese products, by moving the high proportion of current milk season into these products, which has benefited our earnings. Efficient operations are vital to getting our product to customers and our offshore markets. The severe weather events at the start of the year put pressure on an already strained national supply chain network, with roads, rail and ports all impacted. This delayed some of our products in getting onto ships, but we're working with our supply chain partners to reduce inventory and get product to our customers. We continue to make our operations more efficient. An example of this is the automation of our Crawford Street cool store distribution centre, which is now complete. The automation will improve site efficiency, reduce energy consumption, and enhance the integrity of our products. And we continue to make progress on our decarbonisation programme, We're currently converting a coal boiler at our Waitoa site to a wood biomass boiler. This project is expected to be completed in F24. Moving on to our long-term strategy. We are making good progress on a commitment to prioritise New Zealand milk, with the sale of our businesses in Chile and Brazil already agreed. In February, we received approval from the Chilean Competition Authority, a key milestone in the sale of this business. A new flexible shareholding capital structure supports a sustainable milk supply and a stable balance sheet, while protecting farmer ownership and control. The transition to a new capital structure will occur on 28 March this year. We continue to make sustainability improvements both on farm and off farm to ensure we retain our competitive edge. At last year's annual meeting with Signature Farmers, the Co-op was looking to set a target for our on-farm Scope 3 emissions. Having a target will help us secure and retain high-value customers and enable the Co-op and our farmer owners to meet regulatory requirements and access to capital. We're pleased to be providing an update on the proposed capital return to our farmer owners and unit holders. We previously stated the intention to return around a billion dollars to shareholders and unit holders by F24, subject to the outcome of the reviews of our ownership of Fonterra Australia and our Chilean Soprole business. We subsequently made the decision to retain full ownership of Fonterra Australia, which is performing well and you'll see in these results. Following completion of the sale of Soprole, we intend to reduce debt and return around 50 cents a share and unit, which is approximately 800 million New Zealand dollars. We're aiming for a record date of the proposed tax-free capital return late in September 23, with cash to be received by farmer owners and unit holders the following month. Implementation of the capital return will require a scheme of arrangement to be voted on by shareholders and approval by the High Court, a common process for this type of transaction. And more information on the process will be provided to farmer owners and unit holders in due course. I'll now hand over to Neil to talk us through the numbers in more detail.

Thanks, Myles. It's a real pleasure to be part of the Fonterra team, and I look forward to the opportunity to meeting many more of you in the future. Taking a look at some of our more key numbers, first, our sales numbers for the first six months were higher due to the sell-down of the additional inventory we held at year-end. Gross margin and gross profit are up, mainly due to the favorable price relativities that Myles discussed, and these are reflected in the performance of our ingredients channel. Our operating expenses are also up, and there are three main reasons for this. First, there is the impact of impairments. This includes a $92 million impairment of our New Zealand consumer business and a $70 million impairment of our Asian brands, which I will discuss in a bit more detail in a moment. Second, inflation has impacted our business. And finally, the impact of foreign exchange. In terms of the impairments, our domestic consumer business, Fonterra Brands New Zealand, has been under margin pressure for some time, and it is not improving as fast as we had planned. In the case of the performance of our Asian brands, these have been impacted by weakening currency, higher interest rates, and a declining economic environment in some Southeast Asian markets. All in, our normalized profit after tax is up 68% to $611 million. This next slide shows our reportable segments and performance across channels and markets. It is worth noting that we've updated our segments to reflect an organizational change. where Group Operations is shown as a separate segment, and the previous results of AMENA and Asia Pacific segments are now combined into the new Global Markets segment. Group Operations represents the business activities that collect and process New Zealand milk through selling the products to our customer-facing regional business units, global markets, and Greater China. Group operations is up $412 million to $501 million, reflecting the favorable price relativities. The performance of the two regions reflect the in-market value added after purchasing the products from group operations at a market-based transfer price. Looking first at global markets, normalized EBIT was relatively constant at $267 million. Looking at Greater China, normalized EBIT was also relatively constant at $215 million, where we saw the food service channel performing well despite the market disruption from COVID-19. But this was offset by the consumer channel, which included a proportion of the impairment of some of our Asian brands. Our ingredients channel had strong results, given the price relativities already discussed. Our food service channels EBIT increased with the in-market product pricing adjusting for the higher cost of milk. The consumer channel, however, continues to be challenging due to both higher input costs and ongoing pressure on margins. I'm very pleased to report that we have a strong balance sheet, and this is a key priority for us. This has been achieved progressively over recent years through a combination of improved performance and increased financial discipline. Importantly, we continue to be committed to our strong credit rating. The higher working capital we had at the end of last financial year has been sold as planned, and this has flowed through to strong cash flow, which we've experienced over the last six months. Free cash flow is an important metric for us. It's the cash flow available to pay dividends, reduce debt, and invest in growth capital and innovation. For the first six months of our financial year, our free cash flow is typically an outflow reflecting the seasonal nature of the business. This year, however, our free cash flow was only an outflow of $30 million. This is illustrated by the bridge on the slide where the key drivers to our approved free cash flow position are higher earnings, our favorable working capital movements, and these were mainly due to the shipment of additional inventory held at year end. I'll now hand back to Myles to discuss the outlook for the remainder of the year.

Thanks, Neil. We revised the forecast farm gate milk price range down to $8.20 to $8.80 per kilogram of milk solids in February, reflecting reduced demand for homework powder, particularly from Greater China at a time of balanced global milk supply. Demand for New Zealand's high quality sustainable dairy nutrition remains positive and global milk supply is likely to be constrained in the medium to long term. We'll be out in May this year with a forecast opening price for the 23-24 season. Turning to the 23 earnings outlook, strong margins and our ingredients channel have sustained longer than initially assumed, which is why we have upgraded our forecast normalised full year earnings from 50 to 70 cents per share to 55 to 75 cents per share, with a midpoint of 65 cents a share. Our contracted rate is in line with expectations, but we'll continue to watch market volatility across the rest of the year, and this is reflected in the 20 cent range. In summary, I'm really proud of how teams across the business have worked hard to deliver for our farmer owners, unit holders and customers. There's a Q&A conference call at 2.30pm New Zealand time today that you're welcome to dial into. The dial-in details are on the market release to the NZX website. That's all from us. Thank you for joining us today.