Fonterra Shareholders' Fund (NS) Analysis

Overview

The Fonterra Shareholders' Fund (FSF) is a registered managed investment scheme under the Financial Markets Conduct Act 2013. The FSF provides investors an opportunity to invest in the performance of Fonterra Co-operative Group Limited (Fonterra). Outside investors who are not allowed to hold shares in Fonterra can invest in units in the FSF which gives them access to economic rights (such as distributions and capital movements), similar to those of a share. The Manager of the FSF is FSF Management Company Limited.

Fonterra is a dairy co-operative, owned and supplied by nearly 9,000 farming families in Aotearoa, New Zealand. Through the spirit of co-operation and a can-do attitude, Fonterra’s farmers, along with 20,000 employees around the world, share the goodness of our milk through innovative consumer, foodservice and ingredient brands. Sustainability is at the heart of everything we do, and we’re committed to leaving things in a better way than we found them. Everyday people working hard to be Good Together in the community.

The FSF has been granted Listing with a 'Non-Standard' ("NS") designation. This designation was granted because of the unique governance arrangements and unit holder restrictions. For further information, please see a copy of the waiver under Documents on FSF's homepage on nzx.com.

Performance

The following information was extracted from Fonterra Shareholders' Fund's half year results, released 21 March 2024:

Continuing operations performance for the first six months of FY24

The Fund, and the Board of FSF Management Company Limited that oversees it, have no direct involvement in Fonterra's operations. However, as a holder of economic rights in Fonterra, the performance of the Fund is tied directly to Fonterra's performance.

Fonterra's continuing operations EBIT for the first six months of the prior financial year of $864 million included $162 million of consumer brands impairments. After adjusting for these impairments, underlying earnings for the first six months of FY24 were $40 million behind the prior year, from $1,026 million to $986 million.

Fonterra's Ingredients channel continuing operations EBIT decreased $383 million, or 45%, to $467 million due to reduced margins on its New Zealand milk, and Fonterra Australia's performance was impacted by a disconnect between global commodity prices and Australian milk prices.

Fonterra's Foodservice channel continuing operations EBIT has improved, up $203 million, or 146%, to $342 million. The improved performance has been due to favourable margins predominately driven by the lower costs of goods sold, as well as benefits from higher in-market pricing particularly in Fonterra's Southeast Asia markets. It is also pleasing to see volume growth mainly driven by UHT cream in Greater China.

Fonterra's Consumer channel continuing operations EBIT increased $302 million to $177 million. The prior period was a loss of $125 million and included $162 million of impairments relating to Fonterra's New Zealand consumer business and its Asia brands Anlene, Anmum and Chesdale. After adjusting for the prior period impairments, the improved performance has been driven by sales volumes growth, mainly driven by demand in Sri Lanka and the Middle East, and improved gross margins from favourable pricing across most regions, and lower cost of milk.

Fonterra’s balance sheet continues to strengthen. Net debt was $1.6 billion lower, from $5.8 billion this time last year to $4.2 billion reflecting the strong underlying performance of the business, a reduction in working capital during the year and the impact of divestments.

The improved earnings are the key driver in Fonterra’s higher return on capital for the last 12 months, up from 8.6% this time last year to 13.4%. It’s important to remember Fonterra reports its return on capital over a 12-month period, and hence the 13.4% includes the strong second half of last year.