It has also pulled back it forecast for this season to $6.30 to $6.40/kg MS despite most commentators expecting a price near the top end of its previously predicted range at about $6.60 to $6.65/kg MS. It has also revised its earnings a share down from 15-25c to 10-15c. The advance rate for next season has been set at $6.75/kg MS.
And it is reviewing the ownership of its Chinese dairy hubs and its joint venture Brazilian business with Nestle and closing the Dennington plant in Australia.
Its numbers show both sales volume and revenue up but margins (profits) down even though its spending was also lower.
Despite the contradictory figures and the exceptionally wide farmgate price range chief executive Miles Hurrell said “I appreciate that our farmers and unit holders want clarity on our new strategy and expect a decent return on their investment".
But the accounts show while sales volumes were up 4% to 16.6 billion litres liquid milk equivalent, revenue was up 1% to $15 billion, operating expenses were down $73million to $1.8b and capital spending was down 28% to $419m its earnings before interest and tax fell 9% to $522m.
Its gross margin was down 3% to $2.2b.
Hurrell said good progress is being made on the strategy review but its benefits will take time to show up in the co-op’s financial performance.
“We’re on-track to share our new strategy in September.
“In the meantime, we’re getting on and making decisions to reduce complexity and simplify our business so we can focus on where we have competitive advantages.
“Farmers and unit holders can expect to see some fluctuation in our earnings over the next couple of years and there will be one-off transactions and adjustments, some positive, some negative, as we reset the business and deliver on our new strategy."
Fonterra is now beginning a strategic review of its two wholly-owned farm-hubs in China, has agreed with partner Nestle to review options for future ownership of the Dairy Partners Americas (DPA) Brazil joint venture, including a potential sale of respective stakes and is closing the Dennington site in Australia.
“These decisions relate to our new strategic direction – in particular, prioritising our New Zealand milk supply and simplifying our global portfolio, which, as we have said previously, requires us to review every part of business to ensure it meets the needs of the co-op today.”
But China remains a key market for Fonterra, he said.
“We have contributed to China’s dairy industry by developing high-quality model farms and showing there is a valuable opportunity for fresh milk in China’s consumer market and this continues to be an attractive prospect.
“However, this does not necessarily mean that we need to continue to have large amounts of capital tied up in farming hubs.
“On DPA Brazil, which is a joint venture distributing chilled dairy products throughout Brazil, the review into future ownership options and whether to sell is expected to be completed by the end of 2019.
“Yesterday, we also started talking to the team at our Dennington factory in Australia about the tough call we’re making to close the site.
“The Australian ingredients business continues to feel the impact of the drought and other significant changes that mean there is excess manufacturing capacity in the Australian dairy industry.
“This is not a one-off for this season.
“It’s the new norm for the Australian dairy industry and we need to adapt.
“We need to get the most value from every drop of our farmers’ milk and with the reduced milk pool in Australia we must put it into our highest returning products and most efficient assets. Dennington is over 100 years old and not viable in a low-milk pool environment.
“We have 98 employees at Dennington and this decision will be incredibly hard for them. Our top priority is to support our people.”
The NZ ingredients business is performing as expected but Australian ingredients continue to face challenges and it is taking longer than planned to lift performance in some parts of the co-op’s consumer and food service business.
“Due to the challenges in Australia ingredients and tightening relative price differences between reference products or those products that inform the farmgate milk price and non-reference products – that’s all our other products – we are reducing the forecast full year normalised earnings before interest and tax for the whole ingredients business to $645-$725m, down from the $750-$850m range we shared at our interim results.
“Consumer and food service improved its performance in the third quarter relative to the first half. Due to our performance in Latin America we have lowered our forecast normalised EBIT from $475-$525m to $400-$430m for this part of the co-op.
“Our China food service recovered as demand for butter bounced back.
“This helped pricing and in-market inventory return to more normal levels.
“There was good demand for Anchor Food Professionals UHT culinary cream and the team at our Waitoa UHT factory has been working hard to get shipments up to our China food service customers.
“Our Oceania consumer and food service business continued to perform well with Australia’s spreads category, including Western Star butter, contributing significantly to gross margin.”
Hurrell said that there are some increased risks in the fourth quarter to the co-op’s previous forecast earnings – in particular, the recovery in key markets is slower than expected and there are tightening price relativities between non-reference and reference products along with the on-going challenges in Australia ingredients.
So the forecast earnings a share have been cut.
Chairman John Monaghan said next season’s opening forecast is realistic.
“We are having to look out more than a year into the future which is difficult but what the information available is continuing to show us is that demand remains strong across key trading partners and this is reflected in GDT prices.
“We are giving farmers a wide range for the opening forecast milk price. It will be narrowed as the season goes on.
“Weather plays a significant role in determining global milk volumes and therefore price.
“We are forecasting our NZ collections to be 1520m kg MS for the new season, which is up slightly on the current season.
“There’s still a lot of water to go under the bridge before we’ll have a clear view of what the season holds for both our co-op’s production and global dairy supply.”
Fonterra has also narrowed the year’s price.
“This reflects favourable foreign exchange movements but slightly weaker than expected pricing for whole milk powder and skim milk powder.”
