Fonterra raises annual earnings forecast as it boosts margins, cuts costs

Monday 16th November 2015

Fonterra Cooperative Group, the world's largest dairy exporter, raised its annual earnings forecast as it cuts costs and boosts margins even as milk volumes decline.

The Auckland-based cooperative raised its forecast earnings per share range for the current financial year to 45-55 cents, from a previous forecast of 40-50 cents, it said in a statement. It kept its forecast payout to farmers unchanged at $4.60 per kilogram of milk solids, which lifted its total available for payout to $5.05-$5.15/kgMS from a previous forecast of $5-$5.10/kgMS. It expects an annual dividend of 35-40 cents per share, which would equate to a total forecast cash payout of $4.95-$5/kgMS, it said.

Fonterra said 'business transformation' initiatives implemented in the first quarter are expected to deliver a recurring cash benefit of $170 million this year, while further initiatives in the second quarter expected to increase the recurring cash benefits to $340 million and contribute to 2016 earnings and the farmgate milk price. In the first quarter ended Oct. 31, margins across the group increased from 14 percent to 23 percent from the year earlier period, while capital expenditure fell 37 percent to $258 million and operating expenses dropped 4 percent to $628 million.

The cooperative continues to forecast a 5 percent drop in its milk volumes this year, equivalent to around 150,000 metric tonnes of whole milk powder. Since August, it has reduced the amount of product it expects to sell on the GlobalDairyTrade platform by 146,000 metric tonnes, and it is selling more products through bilateral customer agreements for a premium price to the GDT.

"We are benefiting from the investment in new plants in New Zealand, which is improving our manufacturing options and reducing peak costs," said chief executive Theo Spierings. "Our strategy is moving greater volumes of milk into higher-returning products to take advantage of improved prices relative to whole milk powder."

Fonterra is also increasing the rate at which farmers will receive its support payments of 50 cents per kilogram of milk solids, with the total amount paid up to December lifting to 25 cents, from 18 cents. The payments will be completed in April, earlier than expected, giving farmers access to more support earlier in a low milk price environment, it said.

The payments, which are interest free until May 31, 2017, don't have to be repaid until the farmgate milk price or advance rate rises above the $6/kgMS mark.

Units in the Fonterra shareholders fund last traded at $5.39 and have slipped 10 percent so far this year.

BusinessDesk.co.nz

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