They will be very keen to deliver good news and cashflow assistance to counter the dire effects on their milk-supplying shareholders of the lowest farmgate milk price for a decade, just announced as likely to be $3.90/kg MS.
Some way of assisting sharemilkers would also be welcomed, if it could be found.
Fonterra had already foreshadowed its best financial year earnings, to be expected because of high margins on added-value products sold to consumers and food service customers as a result of very low milk prices.
For the full year to July 31 earnings guidance by the company to the sharemarket was 45-55c, which indicated a net profit about $800 million compared with $506m last financial year.
Chief financial officer Lukas Paravicini said the first quarter trading was very profitable and the second quarter would show the same trend.
Gross margin on ingredients was 15% and on consumer goods and food service products 28%, compared with an average of 17% in 2014-15.
Sharemarket analysts were forecasting full year earnings before interest and tax (EBIT) between $1.35 billion and $1.4b, including record performance in southeast Asian markets and a recovery to profitability in Australia.
Net profit predictions ranged from $784m to $827m and earnings a share about 50c, from which at least 37c, perhaps more, would be paid as dividend.
Numbers on March 23 that were half of those full-year expectations would demonstrate Fonterra was making the most of the favourable earnings environment, analysts said.
Fonterra had also made substantial and controversial operational savings from cutting staff and lengthening of the terms of payments to suppliers.
Those savings could be offered back to farmers as voluntary loans rather than be paid out to all shareholders and unit holders through higher dividends, the directors decided.
However, the March 23 announcements were widely expected to contain both types of distribution, perhaps even extending to a bonus issue.
The Fonterra Shareholders Fund (FSF) unit price and the interlinked tradable supply share price were expected to rise before March 23 in anticipation of the healthy interim dividend.
The full year dividend consensus around 37c would deliver 6% yield on the present share price of $5.80 – an investment return widely expected when FSF listed in 2012 but not yet delivered.
Craigs Investment Partners had a buy recommendation and a target price of $7.05 but other brokers were neutral and had target prices at about $6.
“Low milk prices also represent low cost of inputs for Fonterra’s ingredients and value-added products.”
Mark Lister
Craigs Investment Partners
Craigs’ head of private wealth research Mark Lister said a low payout was bad news for farmers but better news for investors.
“Low milk prices also represent low cost of inputs for Fonterra’s ingredients and value-added products.”
Brokers also expected this year’s much-improved trading results to be the start of consistent annual earnings around $1b, earnings a share over 50c and dividends over 40c.
They based those hopes on growing Asian demand for dairy products and the greater processing options Fonterra had for higher-value products and not just continued low input costs.
Paravicini also said Fonterra’s debt ratio would be back between 40% and 45% by the end of the year.
“It is fast returning to normal levels after our enormous capital expenditure and our investment for the future.”
Fonterra was enforcing payment terms (of 90 days) that already existed to about 10% of its largest suppliers.
It took its leadership role in rural communities very seriously and 16,000 to 17,000 smaller suppliers were not affected by the enforcement.
Chairman John Wilson said the half-year result would show the co-operative’s results from new processing plants that were delivering higher value from milk.
Plea to keep the faith
Fonterra Shareholders’ Council chairman Duncan Coull urged farmers to keep the faith on Fonterra’s strategy.
It was critical that NZ focused on the low-cost, pasture-based dairying model and “have confidence in ourselves, our industry and our co-operative”, he said in an email to all farmers.
Times were tough but if farmers remained positive, channelled their resolve and stayed united, the NZ industry would be in a position to capture the upside when the storm passed.
Coull’s rallying call was in response to criticism about the future of the industry, although he was not specific about what comments or commentators he didn’t like.
“It really frustrates me when I read some of the comments in the media around the current state of play in our industry.
“In my opinion these pieces are often emotively driven with information that is cherry-picked to suit a particular view.”
Several commentators have said the recent European Union milk production growth represented a structural change in world dairying and NZ had unsustainably grown its cow numbers too far and too fast, also endangering the environment.
Wilson also denied the present situation was a structural change that would disrupt the NZ industry.
“It is an extended cyclical downturn and we are very confident that lower milk production will result and that demand will grow and prices will rise again,” he said.
