Xmas cheer from Fonterra as the bosses at the dairy co-op get back to basics

Dairy   farmers  had  some   Xmas cheer  this   week,  as  dairy  giant  Fonterra told them  the  forecast  payout  would  be the fourth-highest-ever,  at the mid-point of its farmgate milk price range.

The  $7.30kg/ms means   the cash payout  for the season  will  reach $11.2bn, a rise of about $400m from the earlier  forecast.

There  could  even  be  a  clap  from the cowsheds for the  new bosses of   Fonterra  who are  turning around the co-op’s  financial  performance, as they apply  a back-to-basics  approach  to  recovering from last year’s  horrendous  $605m  loss.  The first  quarter of the  new financial  year has  gone  well.

Fonterra’s  recovery is  vital   for   not  just  the rural  communities  it  serves,   but  for the country as  a  whole.

And  dairy  farmers,  facing  the  burden  of  extra costs  in  carrying  the  Labour-led coalition’s determination to  achieve  a world  first  with the imposition of  a charge  for methane  emissions,   will gain  some relief if Fonterra  can sustain, and even improve,  on  its  current  performance.  They  will be  hoping  Fonterra  can still  hit the  top of its payout range,  at  $7.60kg/ms.

It  would  underline once more  how  the  dairy  industry is (in the old, but still  relevant, cliché)  the  “backbone”  of the economy.

Besides   facing   government  demands  on  the industry over  methane emissions,  dairy farmers  are  confronted  with stringent freshwater  regulation  and there’s the prospect that bank managers  will be  hounding  them  as the  Reserve Bank tightens  the capital reserve regime.

Fonterra  CEO   Miles Hurrell  makes no bones   about   the  herculean task  the  co-op  is  engaged in.  He   reports the focus is still on reducing  debt, so it is no more than 3.75 times earnings.

This will require us to achieve a gross margin of $3bn, further reduce operating expenditure, lower capital expenditure by $100m to $500m, and also divest some more assets”.

Hurrell  makes these points:

“So far this year we have:

”  * Improved the underlying financial performance of the business, delivering a gross margin of $740m, up from $646m;

”  * Continued the focus on financial discipline, reducing operating expenditure by $104m and managing capital expenditure carefully;

”  *  Generated a normalised EBIT of $171m, up $145m,    

”  * Improved free cash flow  by $595m compared with last year.”

He does  leaven the  good cheer  with  a  note   of  caution.  The biggest pressure on earnings is going to be the rising milk price.  Stronger-than-forecast performance from the  food-service business has helped offset the higher milk price to date.

Hurrell says  the co-op will need to be very focused around making improvements in other areas too.  And he  sees some markets that have difficult trading conditions, currently among them Chile  and Hong Kong where the ongoing civil unrest is  impacting  sales.

Fonterra’s normalised earnings guidance for the 2020 financial year remains at 15-25c per share.

Fonterra Chairman John Monaghan says the co-op’s  higher  milk price reflects a global dairy market that is tipped slightly in favour of demand.

“Our NZ milk production is forecast to be up 0.5% on last year.  Annual milk production in the other key global supply regions of the US and EU are both growing at less than 1%.On the demand side, Global Dairy Trade prices have increased by about 6% since our previous forecast. WMP prices, a key driver of our milk price, have hit their highest level since December 2016.At this stage of the year, we have contracted a good proportion of our sales book and that gives us the confidence to increase the mid-point of our forecast Farmgate Milk Price range by 25c”.




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