Fonterra Shareholders Fd

Good afternoon, everyone. Thank you for joining the call. I'm here with Simon Till, Acting CFO and Selena Robb, Director of Capital Markets and M&A. Hopefully you've had a chance to review the information that we released today as part of our quarter one business update. We will intend to go through the slides if you have them in front of you. Just the first slide, just a quick summary. We have had a good start to the year quarter one profit after tax $346 million up, $214 on the prior year, driven by improved margins across all three of those channels, being consumer, food service, and ingredients. Equates to an earnings per share of $0.20, but includes the performance of discontinued operations and the impact of our selling our DPA Brazil business. The co-op's continuing operations earnings per share is $0.24, which is up from $0.13 in the prior year. The strong start has led us to lift our four-year earnings range to $0.50 to $0.65 from $0.45 to $0.60 prior. We've also lifted our farm gate milk price by $0.25 and also narrowed the range. That is now sitting between $7 and $8 with a midpoint of $7.50. Just slide four talks a little bit about some of those drivers on the milk price. Of course, you can see the significant drop in demand from China between 2021 and 2022. but a slow re-emergence, if you like, of China into 23, which is giving us the confidence to see that milk price increase to the 750. The next slide, slide five, you can see reference commodity prices for the quarter are materially lower than the prior year, down around 23%, and well below price level seen in F22. And the graph shows that the non-reference prices have not declined at the same rate as reference product, which are only down 12%. This has driven increased margins in ingredients in particular, and has also contributed, obviously, to the strong start to the year. I'll ask Simon to take us through a couple of detailed slides before we come back for some questions.

Thanks, Miles, and good afternoon, everyone. I'm on the next slide called key performance drivers. So looking at the middle part there of those key drivers for the continuing operations, You can see there that the main one there is the $229 million from margins. And as Myles mentioned, that's been a contribution across all the channels. So when we look at the key drivers there, we've seen both food service and consumer channels in particular. They've managed to keep good pricing in market, but have obviously also benefited from the lower milk price or input costs. Moving across to the right there, you'll see operating expenses, and they are up a bit. That does reflect a couple of key elements. One was the higher storage and distribution costs that we had to facilitate those higher volumes of sales in food service and consumer. There's also some inflation on the wage workforce has been there, and also in terms of the efficiency initiative, some of the upfront costs there. One more bar to the right there, we've got the finance costs, so benefiting from lower levels of debt or overall borrowings, and also you may be aware we hedged the interest rates over time, so that's had a positive impact in terms of interest costs as well. Then obviously paid more tax, but that reflects the fact of higher profits and earnings. So then the last part is just putting that, as Myles mentioned, between the continuing operations and the total group there. So that is a negative, so it covers DPA Brazil. So that includes the trading result, which was actually positive earnings, but there was a release from the Foreign Currency Translation Reserve reflecting effectively the change in the currency over the life of the asset. So net-net, that was a negative. If we move on to the next slide where we provide that channel perspective, and really just want to make the point there, not just an improvement in the margins across the channels, but also the allocation of milk. So you can see there that we've allocated less to the ingredients and more into the higher margin food service and consumer. So that's been part of the improvement we've seen as well. So Myles, back to you.

Yeah, great. Thanks, Simon. Just in terms of where we're at strategically, of course, in the quarter, we're focusing on the leadership and sustainability. We have introduced our 30% reduction for on-farm emissions, so pleased to have that out in front of farmers and working with them on what we can collectively do to achieve that. Of course, we did pay out the $0.50 capital return in the quarter through the sale of Soprola and, of course, the finally completed divestment of DPA, so really pleased to see those But overall, a great start to the year, good momentum built across the organisation and really pleased with how we are facing into the remaining three quarters of the year. Thank you and open up for questions. Thank you.

Thank you very much. We will now conduct the question and answer session. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again Please stand by as we compile the Q&A roster. First, we have Ari Dekker from Jalden. Please go ahead.

Oh, good afternoon, and thanks for the opportunity. Just firstly, on the earnings range and also sort of, I guess, your commentary around second half margins and expectations for contraction and stream returns. I mean, you've got some contract pricing out there which shows a narrowing of the gap well into second half. What are the factors still, I guess, driving the $0.15 range within the guidance, given you clearly got quite good line of sight into reasonably late into the year?

Yeah, so things move pretty quick. And in fact, only last or not before last on GDT is a simple example, Ari. You know, cheese up 9.7, but it was down a similar amount the event before. So what we have seen is the coming together of reference and non-reference over the last few months and where it was certainly a year ago. And so nothing would suggest that we don't see that contraction continuing out for the remainder of the year. obviously keep close to it, and of course we'll contract as much as we can as the market sits now, but as a spread sits there, you'd certainly expect to see more competition come into play in that space, and that's what we've seen in the last few months.

Yeah, and just with that, contracting as much as you can, you've given a guidance there on the contract shipment prices. Are you able to give a little bit of a guide as to how much volume is still, I guess, exposed to the vagaries and isn't contracted through that second half period?

No, we don't disclose those numbers other than to say it's similar to where we've been previously, so we're comfortable with our contracted position. Our non-reference is slightly ahead of our reference in terms of contracted position, which, again, we are very comfortable with, but we don't disclose that detail, I reckon.

Yeah, sure. I mean, very, very strong earnings in the first quarter, obviously. With regards to the balance sheet, you know, and accepting, and I think you made an adjustment at FY23, the allowance for the capital return already, and clearly you paid a large final dividend as well. So accept the impacts of that on the debt. But just from a cash flow perspective, Anything to call out that would be a reason why the very strong earnings during the quarter didn't flow through to the balance sheet? Working capital all pretty normal?

No. The only positive, if you like, on that, because I think you're looking for a negative there, but on the positive, you would have seen volume up slightly in terms of sales for the quarter. despite being a pretty soft milk collection. So that's a reflection of actually our sales profile in the first quarter has been very strong, so working hard on that. The only one to call out is that we did increase milk price today and also increased the advance rate, but that's short term and obviously washed through throughout. But $0.30 November paid December. which has been very well received for our pharmacy holders, of course.

Yeah, and then the final question, I guess, is the balance sheet's in very, very strong shape. The business is still enjoying very strong earnings, albeit there will be no doubt a normalisation year at some point on the stream returns. But I guess just against what you're earning and that... with FCG shares sort of in the low $2 sort of range and you've got an operative buyback, is there anything you can sort of highlight as to why you're not buying back shares at the moment under that buyback at those sorts of levels and whether we might expect you to sort of fire up the buyback any time soon?

Yeah, Simon here, Ari. So I guess just the first point is, you know, the buyback is an important part of our overall capital management. So, you know, I guess just confirming that. And in terms of the particular program we've got out there, there's obviously a 12-month one. So there will be times when we are in the market and times when we aren't. So there's nothing more specific really to add than that.

Yeah, and you did mention in the release, you know, looking at, you know, the potential for a pretty strong interim dividend. It's not that there's, you know, intent to sort of favour dividend over, you know, necessarily being in the market buying back shares at these levels.

No, that's not the intent. I think it's really just making the point there that the, you know, a quarter and obviously expecting that performance to continue and we obviously look at the full year earnings but as you say that should translate through to a good yield as well.

That's great. Well done. It's great to see such a strong start to the year. Thank you.

Thanks Ari.

Thank you. Next we have Marcus Curley from UBS. Please go ahead.

Good afternoon. I just had a couple of questions if I can. Miles, could you just talk a little bit, or Simon, to the rate of OPEX growth and how you think about that over the course of the year? Yeah, we'd be expecting to see that come back, given some of the drivers that you called out.

Yeah, so we put out, as you recall, for the full year, a couple of new metrics that we're going to start to report on on a biannual basis. And so we'll intend to update you that at the half. Of course, that'll be a bit lumpy as things play out. Of course, the increase in volume in consumer and food service has played a part. Clearly, it's a bit more expensive to manufacture and execute those sales, so that's played a part. But there's nothing in our plans that would indicate that those targets that we put out there that we're going to report on biannually will be front and center of our organization.

Simon mentioned some sort of, I suppose, initial sort of consultancy slash project-related work. Is that continuing or is that broadly a one-off in that quarter?

Oh, I mean, you know, a business on a scale, there's always things that come and go. So I wouldn't, you know, I guess there are some costs that have been incurred in the short term to support some of our plans going forward. So they may not be continuing, but at the same time, of course, we're always looking for new initiatives and new projects that may incur other consulting costs that come in. So I can't say definitively that our consulting fees will be up or down on a long-term basis. They'll just be fit for purpose as and when we look at different projects.

And that includes also, Marcus, things like engineering costs as well or fees, which obviously is linked to some of our CapEx profile, as you know, when we do most of the maintenance as well. So it's inclusive of those and also some of the initiatives around achieving best pricing as well. So it's a combination of things there.

Great. And then just on the ingredients business, as you've seen commodity prices come down for non-reference products, have you been able to re-establish your higher price premiums? Or could you talk a little bit to how that has tracked over the quarter or the last couple of quarters?

Yeah, without going into specifics, because at the quarter we don't go to that level of granularity, our gross margins across all channels are up. So that should be a reflection that despite it being a reference or non-reference, the gross margins we're achieving are up across all our channels.

And I should have probably mentioned in my notes also, just to add to Miles' point, we did note there when we look at the ingredients margins, those quite strong relativities did flow through, but it was obviously some tighter ones in Australia as well. Milk price there, so obviously we're giving the total there, and you'll see obviously a bit more granularity at half year in that area.

Okay, and then just on the consumer food service, any signs of competition-led pressure on prices? I suppose, prima facie, it doesn't feel like the Europeans have sort of, or the producers haven't necessarily benefited to the same degree as yourself from lower milk costs. I'm just interested to you know, to get an update in terms of, you know, the competition and pricing environment and, you know, particularly in Asia.

Yeah, we're not seeing any significant change in the competition position in those markets. That said, you know, it is a pretty good performance across the business and therefore the gross margins that we have been able to achieve, I mean, that attracts competition as a result. So one would expect that we need to be on our toes as we get into quarter two, three and four. So nothing that we're seeing right now, but we've been around long enough to know that these things are cyclical too. And so when you open up to decent gross margins, you start to get a bit of pressure come on. Notwithstanding, similar to what we're seeing in New Zealand context around Yeah, the cost of living crisis and all the commentary here, and that's a consistent theme we hear in a lot of our markets. So there's competition on one hand, but at the same time, there's purchasing power of consumers that is playing out as well. So making sure we maintain a share of wallet of individual consumers is important.

OK, thank you. That's all for me. Thanks, Marcus.

Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. Thank you. I see no further questions at this time. I will now pass back to Myles.

Great, thanks everyone for your attendance and your support. Yeah, we're pleased with how the call has gone and look forward to further updates in due course. Thank you. Thank you.

Thank you. This concludes today's conference call. You may now disconnect.