It remained on track to deliver a full-year profit of more than $800m and make 40c a share and investment unit dividend distribution, the first 20c to be paid on April 20.
Fonterra reported a steady but unspectacular set of interim results for the six months to January 31.
To the relief of farmers following recent weakening in world dairy prices, Fonterra re-confirmed its $6/kg milksolids farmgate milk price forecast for the full season and had already paid 81% of that money into farmer’s bank accounts.
Should that be the outcome of the full financial year, Fonterra would pay its 10,500 New Zealand supply farms $3 billion more for milk produced this season than it did last season, up 50%.
“That is a huge boost to farmers, their suppliers and the rural economy,” chairman John Wilson said.
“Winter months will be a great deal more comfortable than in the past two years.”
While the higher milk prices had cut into Fonterra’s ingredients earning capability through reduced stream returns, the continually expanding consumer and food service business had recovered most of the deficit.
Although earnings suffered, much lower net finance costs rescued the net profit after tax.
Total net debt had fallen to $6.1 billion, down 11% compared with January 31, 2016, and the gearing ratio was now 46.6%, down from 49.2% a year ago.
Directors did have to revise downwards by 5c their earnings per share guidance range, now 45c to 55c, but indicated they would keep the dividend forecast steady on last year, at 40c.
That meant they intended paying out 80% of the mid-range earnings guidance (50c) versus 73% previously (of 55c) and 78.5% last financial year.
“To be able to maintain the milk price forecast and the forecast cash payout ($6.40) by sending more milk into consumer and food service and strengthening the balance sheet is a good performance by the co-operative and will be welcomed by the shareholders,” Wilson said.
It was also a sign of maturity in the co-operative’s business model by keeping to the volume-to-value strategy and avoiding the worst of the margins squeeze when world dairy prices went higher.
But the outlook was not all positive, Wilson said.
“We see some challenges and opportunities ahead in the second half.
“The impact of more volatility in product stream returns in our ingredients business, some tightening of margins in the coming months and the potential for extra milk in the autumn could result in some pressure on our earnings in the second half.
“The fundamentals of dairy are strong but there will be ongoing volatility in our global markets.
“Our strategy to grow volume and value will continue to underpin our performance in the second half of the financial year,” Wilson said.
Fonterra now expected its full-season NZ milk collection to be down 3% on last season, which would be about 1.515b kg milksolids or 17b litres.
The first half collection was 1.053m kg, down 54m.
Wilson said farmers endured a “once-in-a-generation, remarkably tough spring” but recent widespread rainfall had lifted milk production in February and the graph of daily collection had levelled out.
It was now likely farmers would exceed the fourth quarter (March to May) production of the past two seasons, to maximise the $6 payout.
Total sales volume in the first half was 11.7b litres liquid milk equivalent (LME), down 7% through a slow start to the NZ season and lower opening inventory.
Revenue was up 5% to $9.2b, gross margin down 6% to $1.76b and operating expenses down 6% to $1.23b, continuing a trend over the past four years, chief executive Theo Spierings said.
Global Dairy Trade auctions sold 21% of the 11.7b LME, ingredients sales took 56%, down 11%, food service accounted for 10% and consumer products 12%.
Food service growth of 17% outpaced world growth in that category, which was only 5%, Spierings said.
