Friday, March 29, 2024

Fonterra holds milk price, cuts dividend

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Fonterra has held its 2014-15 farmgate milk price at $4.70/kg of milksolids but cut its dividend prediction by five cents to a 20-30c range.
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The co-op’s half-year results were below farmers’ expectations so while the milk price was low the board had cut the dividend, chairman John Wilson said.

Fonterra now faced tough decisions in executing its V3 Strategy and had to accelerate the pace of change, chief executive Theo Spierings said.

However, Fonterra has revised its season milk take figures upwards.

The first half results and continued international price volatility had caused the board to hold the forecast milk price.

“Our half-year results are a snapshot of tough conditions in dairy with variable production, demand and pricing.

“There was also the challenge of generating profit from inventory made in the previous financial year when the cost of milk was higher but sold in the first quarter of the financial year when global dairy prices were falling.

“In New Zealand, milk production got off to an excellent start. A very dry summer in most regions curtailed production in the last three weeks of January with the co-operative reducing its milk volume forecast to slightly below last season’s production.

“Our current milk supply forecast for the 2014-15 season has increased to 1551m kg MS, 2% below the 2013/14 season.

“Oversupply from dairy producing regions around the world in the early months of the financial year saw the trade-weighted GlobalDairyTrade price index hit a five-year low in December.

“Supply outweighed demand and buyers undervalued milk, which was reflected in prices that declined to unsustainable levels.

“Lower commodity prices placed downward pressure on our Farmgate Milk Price in the first half. This was partially offset by currency, with a benefit of approximately 30 cents/kg MS to the forecast Farmgate Milk Price as at 31 January.

“Volatility continues to influence international dairy commodity prices and given this, we recommend caution with regards to onfarm budgets,” Wilson said.

The first half was been subdued for the co-operative because of high volatility and challenging global market conditions, resulting in a 14% decrease in revenue, Spierings said.

“In the first quarter, opportunities to improve ingredients, consumer and foodservice gross margins were restricted until carryover inventory from the previous financial year was cleared.

“There is often a lag between when product is produced and when it is sold. During the first quarter the value of our ingredients inventory was relatively high as it was mostly produced when whole milk powder (WMP) prices were higher, ranging between US$2700 to US$4700 a tonne.

“However, these higher inventory costs were not recovered due to rapidly falling whole milk powder (WMP) prices in the first quarter of this financial year, which dropped to a low of around US$2400 a tonne.

“This gap between the value of inventory and selling prices created a margin squeeze in the first quarter.

“This contrasts with the first quarter last year when the value of inventory was based on a lower milk cost and was sold at a higher price.

“In the second quarter this year earnings for ingredients improved, benefiting from the lower cost of milk.

“Our consumer and foodservice business in Asia and China source all of their milk from NZ and benefited from the lower value of milk, particularly in the second quarter.

“Our Australian and Chilean consumer and foodservice businesses source their milk in market. Their earnings were significantly impacted by higher milk prices within each of these milk pools which squeezed margins.

“In Australia, Chile and Brazil, the prices paid for milk are influenced by in-market dynamics rather than global prices so our businesses in these markets have faced higher input costs.

“Meanwhile, our Sri Lanka business has turned around and improved earnings after rebuilding the market share lost following the temporary suspension of our operations last year.

“Despite some challenges, our consumer and foodservice business overall achieved volume growth and improved pricing, together delivering a $91m increase in our gross margin.

“We are strongly committed to the V3 Strategy we formulated three years ago, which has been a huge change for the Co-op.

“The strategy is creating sustainable returns through the integration of our ingredients multi-hubs and targeted consumer and foodservice positions in our key markets. We remain uniquely placed in the world with our global reach, asset footprint and integrated grass-to-glass supply chain.

“But the change so far has not been easy.

“Capital structure change was a necessity.

“However, the precautionary recall last year and recent contamination threat have been unwelcome distractions.

“These events remind us that the world is constantly changing and we have to be agile and responsive so we can remain ahead. We have the building blocks in place to deliver on our vision and strategy for the long term.

“We have a single-minded focus on delivering results: increasing sales volumes, reducing complexity and taking costs out to maximise returns.

“To accelerate delivery on strategy, my team and I are leading a comprehensive business transformation programme. It will firmly embed the best features of entrepreneurial thinking, such as effectiveness, efficiency and agility.

“This will require some tough decisions. We are committed to improving performance. We have made good progress so far but we need to increase the pace of change,” Spierings said.

The record date for the interim dividend is April 10, and the payment date is April 20.

Results Highlights

Forecast Cash Payout for the 2014-15 Season of $4.90-$5
Forecast Farmgate Milk Price $4.70/kg MS
Estimated full year dividend of 20-30 cents a share
Revenue $9.7 billion, down 14%
Reported EBIT $483 million, up 16%
Normalised EBIT $376 million, down 7%
Net profit after tax (NPAT) $183 million, down 16%
Interim dividend of 10 cents a share
Ingredients normalised EBIT $299 million, up 2%
Consumer and foodservice normalised EBIT $116 million, up 23%
International Farming normalised EBIT ($27) million

 

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