But its assumption is based on milk prices firming over the rest of the season after the usually quieter first quarter.
That’s on a forecast milk collection still up 3% to 1550 million kilograms.
However, its sales volumes in the quarter were down 6% to 3.6b litres and its gross margin was down $14m to $646m while operating expenses were up 3% to $656m. Capital spending was also up, by $46m to $188m.
It has maintained its dividend range at 25 to 30 cents a share.
Chairman John Monaghan blamed the milk price cut on the global milk supply remaining stronger than demand, which drove a downward trend on the Global Dairy Trade index since May.
“Since our October milk price update, production from Europe has flattened off on the back of dry weather and rising feed costs.
“United States milk volumes are still forecast to be up 1% for the year.
“Here, in New Zealand, we are maintaining our forecast collections at 1550m kilos of milksolids.
“NIWA is saying its likely we will see an abnormal El Nino weather pattern over summer and this could impact our farmers’ milk production.
“Demand from China and Asia remains strong.
“However, we are seeing geopolitical disruption impacting demand from countries that traditionally buy a lot of fat products from us.
“Today’s forecast range assumes dairy prices will firm across the balance of the season. This is consistent with the views of other market commentators.
“There are still a number of unknowns in the global demand and supply picture and we recommend farmers budget with ongoing caution.”
Fonterra’s advance rate has been set off a milk price of $6.15/kg MS.
The co-op’s ingredients business, despite lower sales volumes, performed solidly during Q1 with a gross margin of $273m, up $28m on last year. The consumer business also performed well with a gross margin of $310m, up $10m on last year with volumes up 5%.
Chief executive Miles Hurrell said the co-op generally makes a smaller proportion of its total annual sales in the first quarter because of the seasonal nature of our milk supply.
“This means the results from Q1 do not give much insight into the co-op’s expected earnings performance for the full year.
“It does, however, put the spotlight on where we have challenges that we need to address,” Hurrell said.
“In particular, we are seeing challenges in our Australian ingredients, Greater China food service and Asia food service businesses.
“I want to be clear with our farmers and unit holders about how we are tackling these issues.
“In our Australian ingredients business we have lower milk collections as a result of drought conditions and increased competition for milk supply.
“We are responding by focusing on the performance levers in our control – the main one being reducing our operating expenses to reflect lower milk collections.
“The lower gross margins and sales volumes in Greater China food service and Asia food service in Q1 are mainly due to the high sales volumes of butter and cream cheese at the end of Q4 2018, a slightly slower start to sales of UHT culinary cream and more sales of UHT milk, which has a lower margin relative to our other products.
“We are expecting our sales to lift as we are seeing strong sales from our distributors off the back of demand in China for NZ-made products, particularly our UHT culinary creams. We are also prioritising value and moving away from lower margin contracts,” Hurrell said.
Monaghan said there is a lot of action and progress on the board-led portfolio review but it will take time to flow into financial results.
“We have reached an agreement in principle with Beingmate that will see us return to full ownership of the Darnum plant by December 31 and enter into a multi-year agreement for Beingmate to purchase ingredients from us.
“We are also looking at our ongoing ownership of Tip Top and have appointed First NZ Capital as our external adviser to work with us as we consider a range of options.
“We want to see Tip Top remain a NZ based business and this is being factored into our options.
“While performing well Tip Top is our only ice cream business and has reached maturity as an investment for us.
“To take it to its next phase successfully will require a level of investment beyond what we are willing to make.
“We are still some months off from completing the full portfolio review of assets, investments and partnerships.
“We are moving quickly to meet our commitment to reducing our debt levels by $800m by the end of the financial year.
“This requires both improved performance from last year and the divestment of assets,” Monaghan said.
Hurrell said progress is being made on the three-point plan to lift the co-op’s performance by fixing the businesses that are not performing.
“Fonterra Brands NZ is one of the businesses that is starting to turn around.
“It’s early days but overall our consumer and food service business in Oceania delivered higher sales volumes and margins for Q1 compared the same period last year – a significant contributor of this is the improved operational performance in NZ.
“We have set our capital expenditure limit at $650m.
“While we are ahead on the same time last year this was planned as we completed the final stages of projects from last year. Once these assets are delivered our focus will turn to ensuring they hit their return on capital targets.
“We remain committed to returning our operating expenses to FY17 levels – however, they were up 3% for the first quarter compared to the same period last year.
“The majority of these costs were committed to before we agreed our new OPEX target. They relate to higher advertising and promotion and storage costs in our consumer and food service business, additional costs since taking the management of Anmum back from Beingmate and higher storage and distribution costs for ingredients as we collected and moved more milk than we budgeted for.
“Q1 gross margin percentage was up on last year and we have identified the challenges that need addressing.
“Our earnings forecast for the remainder of the year is based on a milk price within the $6-$6.30/kg MS range and, on this basis, we are confident in our earnings guidance,” Hurrell said.
