Fonterra Cooperative group lowered its forecast payout to its farmer shareholders due to global milk supply remaining strong relative to demand.
It also made some headway into its strategic review, confirming it will take back full ownership of the Darnum plant by the end of the year and saying ownership of Tip Top is under the microscope.
Fonterra expects to pay farmers $6.00-$6.30 per kilogram of milk solids versus a prior range of $6.25-$6.50/kgMS. It continues to expect it will collect 1,550 million kgMS in the current season, three percent more than last season. As a result of the drop in the forecast milk price, the payout will now be between $9 billion and $9.8 billion versus $9.69 billion and $10.08 billion if the old forecast had held.
Chair John Monaghan said the forecast assumes dairy prices will firm across the balance of the season. However, “there are still a number of unknowns in the global demand and supply picture and we recommend farmers budget with ongoing caution,” he said.
The dairy giant also said first-quarter gross margin was $646 million, down $14 million compared to the same period a year earlier, although up slightly on a percentage basis from 16.6 percent to 17 percent. Revenue fell 4 percent to $3.8 billion, and sales volumes were down 6 percent at 3.6 billion liquid milk equivalent.
Chief executive Miles Hurrell said Fonterra generally makes a smaller proportion of its total annual sales in the first quarter due to the seasonal nature of its 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,” he said. It retained its earnings per share forecast of 25-35 cents.
Regarding its portfolio review, Monaghan said there is a lot of action and progress but it will take time to flow through 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 31 December 2018 and enter into a multi-year agreement for Beingmate to purchase ingredients from us,” he said.
The joint venture – 51 percent owned by Beingmate and 49 percent Fonterra – produced infant formula products at the Darnum plant in Australia for Beingmate’s Chinese customers, and was a key component of Fonterra’s plan to expand its reach into China’s second and third-tier cities.
That Beingmate partnership included Fonterra taking a 19 percent stake in the Chinese firm for $750 million. That investment was written down by $405 million in the last financial year after several years of under-performance and has been under review since new leadership took over at Fonterra this year.
“We are also looking at our ongoing ownership of Tip Top and have appointed FNZC as our external advisor to work with us as we consider a range of options. We want to see Tip Top remain a New Zealand based business and this is being factored into our options.”
Units in the Fonterra Shareholders Fund last traded at $4.71 and are down 27 percent so far this year. Fonterra shares, which only farmers can own, last traded at $4.71.