Kiwi dairy giant, Fonterra has lifted its 2018-19 forecast farmgate milk price range to $NZ6.30-$NZ6.60 a kilogram of milk solids (MS) but has suspended its interim dividend as it has announced a “full strategic policy” shift to try and improve profitability and business performance.
Chief executive Miles Hurrell said in a statement yesterday the underlying performance of the business was not where it needed to be, saying the dividend policy would be reviewed.
The dropping of the interim dividend and any change to the full year payment will impact the holders of securities in the Fonterra Shareholders Fund which is listed on the NZX and ASX.
Fonterra paid an interim dividend of 10 NZ cents a share in 2018 (which was the only payment because of a slide in earnings and big write-downs and losses in China). It paid an interim of 20 cents a share and a final of 20 cents in 2017 for a total of 40 NZ cents a share.
The forecast full-year earnings per share has been cut to 15-25 NZ cents a share (from 25 to 35 NZ cents) and no interim dividend will be paid.
The world’s biggest dairy processor now expects to pay $NZ6.30-6.60 a kilogram of milk solids in the current season, up 30 cents a kilo from its December forecast. It paid $NZ6.69/kgMS in the 2018 season.
Fonterra has also scaled back its milk collection forecast by 20 million kg to 1,530 million kgMS, which is still 2% more than last season.
“Since our last milk price update in December, global demand has strengthened,” chair John Monaghan said in a statement. “This is driven predominantly by stronger demand from Asia, including Greater China. The European Union’s intervention stocks of skim milk powder have also now cleared for the season and, as a result, we expect demand for SMP to be strong.”
“Global supply remains above last season’s levels, but growth has slowed due to challenging weather conditions in some of the world’s largest milk producing regions – in particular, Australia’s milk production is forecast to be down 5-7% on last season and the EU’s growth has slowed and is now forecast to be less than 1% up on last year.
Fonterra said it was also advising its farmers and unit holders that its forecast earnings range has been reduced to 15-25 NZ cents per share and that it will not be paying an interim dividend.
A decision on any full-year dividend can only be made at the end of the financial year and will depend on the Co-op’s full-year earnings and balance sheet position.
Mr. Monaghan says that, while the milk price is strong, the Co-op’s earnings performance “is not satisfactory and the Co-op needs to deliver farmers and unit holders a respectable return on their investment.”
“We are taking a close look at our business with our portfolio review, where we can win in the world and the products and markets where we have a real competitive advantage. We need a fundamental change in direction if we are to deliver on our full potential. We will provide an update on the strategy and the progress that has been made on the portfolio review at our interim results on March 20.”
In yesterday’s statement CEO Miles Hurrell says the underlying performance of the business is not where it needs to be.
“The main pressure points on our earnings are the three we highlighted in our Q1 business update – that’s challenges in our Australian Ingredients and our Foodservice businesses in wider Asia. We are making inroads in addressing them but they will not be solved overnight.
“Since our Q1 business update, we have also felt the impact of difficult trading conditions in Latin America, mainly due to geopolitical situations in some countries. In addition, the increase in milk price, which is the primary cost input into our non-milk price products, has put pressure on the margins for those products, and they significantly contribute to our earnings.
“We remain committed to financial discipline. We are making good progress on our portfolio review and asset divestments in order to reduce our debt by $800 million this financial year. We are also on track to meet our targets for capital expenditure and operating expenses,” says Mr Hurrell.
Fonterra is reviewing its entire asset base, including putting its Tip Top ice-cream business up for sale, and wants to cut debt by $NZ800 million this financial year. Its net debt was $NZ6.2 billion at July 31 last year.
There will be a further update with the interim results on March 20.
