Fonterra nearly halves full-year ebit forecast to $500-600 mln; cuts dividend to 10c; keeps milk price forecast at $8.30

Fonterra nearly halves full-year ebit forecast to $500-600 mln; cuts dividend to 10c; keeps milk price forecast at $8.30

Fonterra's nearly halved its profit forecast for this year and slashed its dividend forecast to just 10c per share, down from 32c.

Fonterra shareholders fund units listed on the NZX plummeted by 61c, or 10%, to $5.49 on the news. That's just below the issue price of last year. However, the price of the units recovered later in the day to $5.80.

ASB estimated the lower dividend would mean lower farmer incomes by around $300 million this season (on a fully shared-up basis).  However, the bank said this must be put in the context of a $4 billion increase in farm income compared to last season.  Moreover, with demand for New Zealand exports firm, the income that New Zealand is receiving from the rest of the world remains high and should stay high into 2014.

Fonterra has also announced an unchanged forecast farmgate milk price for the 2013/14 season of $8.30 per kgMS, contrary to expectation that there would be an increase.

The co-operative explained that this price was 70 cents per kgMS below the theoretical farmgate milk price of $9.00 per kgMS calculated in accordance with the Milk Price Manual.

Forecast ebit (earnings before interest and tax) for the financial year ending July 31, 2014 was currently estimated at $500-$600 million, compared with the just over $1 billion achieved last year.

The decisions of the Fonterra board to hold the forecast farmgate milk price below the Milk Price Panel’s recommendation and lower the dividend to 10c was a "practical" decision given the unusual market conditions Fonterra Shareholders’ Council chairman, Ian Brown said.

"I have had discussions with the [Fonterra chairman] and it has been made clear that there is a significant gulf between the higher price the market is paying for whole milk powder (WMP) and the price paid for Fonterra’s other products such as cheese and casein.

"While the Milk Price Panel recommended a price of $9 per kg/MS this is not the price Fonterra is being paid for its cumulative product mix."

ASB rural economist Nathan Penny said Fonterra "surprised markets" by holding its 2013/14 milk price forecast steady.

"In the lead-up to the scheduled payout update there had been speculation Fonterra would revise the payout up again.

"However, the bigger surprise was the cut to the cash dividend from 32 cents to 10 cents per share.  Previously, Fonterra had stated that it would keep the dividend at 32 cents and meet any profit shortfall from its balance sheet," Penny said.

Caught off guard

"...The announcement caught markets off guard.  If anything milk prices have held at very high levels, when prices had been expected to come further off the boil.  The GlobalDairyTrade price index sits just 7% below its April high and around 50% higher than a year ago.  These elevated prices raised expectations for the milk price forecast to rise. 

"However, it is apparent from today’s announcement that Fonterra has reached a limit in being able to take advantage of strong global milk powder demand.

"Fonterra has effectively run out of milk powder processing capacity.  The growth in milk powder demand has been massive, particularly as the Chinese market has raced ahead.  This is strongly supported milk powder prices, but at the same time opened up a price gap to other dairy products that are not benefiting from such strong demand," Penny said.

Fonterra also today announced board approval for a $235 million investment into a new high-efficiency milk powder plant at its Pahiatua site in the Manawatu. The new drier will enable the dairy co-operative to process an additional 2.4 million litres each day.

'Extraordinary situation'

Chairman John Wilson said Fonterra was in an "extraordinary situation", with milk powders continuing to sell at very high prices because of the strong global demand and limited supply.

"The gap between prices for milk powders compared to cheese and casein is greater than it has ever been before.

"The high powder prices are good for our farmer shareholders, and good for New Zealand.

"The forecast farmgate milk price, which is calculated under the Milk Price Manual, is based on processing and manufacturing milk powders. The calculation is also based on the costs involved in production for an efficient manufacturer of Fonterra’s size and scale.

"However, Fonterra’s actual asset base includes a number of cheese and casein manufacturing plants, which means that we are not able to maximise profits from these plants in the current environment.

'Abnormal circumstances'

"In such abnormal circumstances, the board has the discretion to pay a lower farmgate milk price than that specified under the manual, if it is in the best interests of the co-operative.

“Today’s forecast is our best estimate, but given the current volatility it may change over the course of the season. As a result of this volatility, the board has also lowered the dividend forecast for the 2014 financial year to 10 cents per share,” Wilson said.

Chief executive Theo Spierings said: "Doing nothing, and forecasting a farmgate milk price that is higher than we can afford to pay at this stage in the season, is not an option. 

"We will maintain our financial discipline and not pay the milk price out of borrowings – particularly in a year when we are forecasting a record payout for our farmers."

Fonterra is required to consider its farmgate milk price every quarter as a condition of the Dairy Industry Restructuring Act (DIRA). 

The board has also approved an increase in the Advance Rate schedule of monthly payments to farmer shareholders.  The December payment, paid in January 2014, will be increased by 30 cents to $5.80.

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24 Comments

So, borrowing to pay the dividend was beyond existing debt covenants?

So, last year Fonterra made over $1 billion in EBIT.
 
This year's forecast EBIT is $500-600 million despite underpaying suppliers to the tune of $1 billion.
 
I don't think that this is keeping with the National Party's re-election strategy.

not after borrowing to pay for the advance payment...
 
from earlier in the month...
However, the higher advance rate to farmers forced the co-op to borrow more money….
http://issuu.com/ruralnewsgroup/docs/rn_551_dec_3/7?e=2923568/5837197
 

So why are they increasing it in December (paid January)? Couldn't quite reconcile the words with the actions.

standard step pattern for the advance, pretty much ties in with farm business demand (eg tax, suppliment).   They like to pitch the advance low, then step up through the yeah as payout confidence (and borrowing rates) allow
 

That's just it cowboy, it's not standard. They started at a higher advance and have had to borrow more than normal to pay earlier. $5.50 is pretty damn good for January, I can't see the reasoning  to increase it 30c.

It's happened 5 out of lst 7yrs IIRC,  and used to happen a lot before that.
5.50 of 8 isn't out of line.   just wondering if we'll see an extra low advance next year to tie in with the last of the this seasons payments (averaging out)

I guess the reality of Solid Energy's antics and subsequent legal wrangles rang alarm bells all-round.

....and the numerous other corporates that have gone belly up as a result of running down the balance sheet.

Let's hope the high street farmers' financed ownership of FSF doesn't result in insurmountable margin calls demanding further liquidation.

It is all rather predictable, unfortunately, SH. The Townie investors were well warned in advance of the perils lurking in fontera "shares" - it always was going to be a battle betwixt them and the Co-op  - just wait till next season when the payout is $6 and Cockies are going broke again. Fontera will one day be a NZ Icarus and China may be its Sun.
Regards, Ergophobia
 

Well Well, Omnologo, now what was I saying back in August  their about the coming financials......Fonterra spin rinse repeat, toss it in the hedge.

I wouldn't try to begin to understand the financials, but a strong and confident cooperative shouldn't have to raid the balance sheet to keep shareholders happy, be they supplying or investing....hang on did I say cooperative, oh that's right TAF is an innovative and unique solution.

USD $200 mn is due to pay to Dannon.

Bugger off ZZ. I'm a sharemilker, if the $ drops the payout will go up but not the dividend, that's not how they make their money and they can keep their filthy mits of mine. That was one of the points of TAF and they better stick to it.
Infact it looks to me like the dividend drop may be the result of a bit of a boardroom coup with them being made to stick to the original intent and not borrow to pay it.

Fonterra Brands, purchases it's milk fromthe gDT, and thus pays market rate.  Fonterra is too big to get backroom deals for it's own consumer lines ( quality yes, prices no.)

Thus the higher the payout, the less the company itself makes.
WMP goes up, that's what the current rules peg the farmgate price to, farmgate price goes up, brands and Fonterra profits go down as they must pay more for their milk.

This has been clearly stated from the first day that value-added manufacturing and sales were add to the traditional ingredients commodity lines.  Although looking at the share price, bunch of people didn't understand it....

ZZ, So all NZers should pay more for their fuel, food, hardware etc. etc. in order to subsidise Fontera! That's even more ludicrous than the RB crawling to the interests of leaky new home builders.
EP
 

And expected by some yesterday:
Dekker said Fonterra's plant configuration and lack of surplus capacity meant it is "unable to avoid producing product even if that product is expected to realise a loss."
http://www.nbr.co.nz/article/fonterra-units-cut-sell-craigs-cost-squeeze...
 
Last month, Auckland-based Fonterra took a $157 million provision against inventory of specialised ingredients and branded consumer products produced by its largest NZ Milk Products division because rising input costs had squeezed margins.
NZ Milk's sales of reference commodities such as whole milk powder, used to calculate the farmgate milk price, jumped 62 percent to $5.97 billion in the first three months of the year, while non-reference products including casein and cheese rose 22 percent to $6.93 billion. In some cases product had been sold below cost, it said.
Despite Fonterra's position as the largest producer and exporter of traded dairy commodities, as well as favourable dairy demand, the strength of farmer-owned shares and established global positions in value-added products, "translating that and a compelling growth strategy into real earnings growth remains challenging," Dekker said.
He also noted "the disconnect between investment and demonstrated earnings growth."
 
for mind, having Australia undone is causing effect
Fonterra Co-operative, the world’s largest dairy exporter, has blamed the retail price war between Woolworths and Coles and increased competition from private label brands for a 32 per cent drop in interim earnings from its trans-Tasman dairy foods business.
Intense retail competition has forced the co-op to restructure its $NZ3.5 billion ($2.8 billion) food business in Australia and New Zealand.
It has closed plants, trimmed management and culled products and brands, which include Western Star, Mainland and Bega.
“The intense competition we think is going to continue so we have to pull the levers that are within our control,” Fonterra’s chief financial officer Jonathan Mason told The Australian Financial Review.
“It’s not like we woke up a month ago and said ‘we have a retail price war in Australia’ – this has been an issue for a couple of years but we have been working on it with more urgency and we have additional measures we’re rolling out now,” Mr Mason said.
http://www.afr.com/p/business/companies/fonterra_earnings_turn_sour_in_h...
 
At some stage the finance types will look at the Australian assets and think "WCB zoom zoom"
 

The price of a diversified product base, and the price of producing perishables.

You MUST process when product arrives, you can only process into the product and brands you have.  Which you must then warehouse at your own cost.

Peak SUPPLY, is maximum cost.  (inventory purchasing)
The profit is seen as the inventory goes to customers (after peak incoming inventory), and realisies payment months later.

Nothing new here.

It will be interesting to see how the new Pahiatua drier works out.
The consents process has been stalled by one older houseowner who was objected to the property as he owns a property in which his mother lives near the plant and is objecting in case of noise/traffic and possible dust.    Not a particularily popular bloke at the moment, but IMO if you're going to have property ownership RIGHTS, then people can't just charge over them when they feel like it's justified to them....

Two years ago Pahiatua was going to add cheese processing to its WMP. Instead now more milk powder will come onstream - at a time when cheese may be providing better returms than milk powders. 

You were right about it being interesting. The consents process was short. The claim didn't proceed because the court wanted the objector to put up close to $100,000 to cover costs.

Is Fonterra set to lose $1b this year. Let me get this straight. Our milk is valued at $9 via the milk manual. Fonterra will pay $8.30 for it and $0.10 per share (ignoring there's more of them than kgsMS for convenience). That leaves a difference of $0.60. So is Fonterra robbing Peter to pay Paul, that is, the milk price is propping up the dividend because Fonterra has stuffed up on manufacturing capacity and mix. No wonder the FSFs biggest Aussie holder came out and said they liked what Fonterra had done.
So why are the business media so quiet on this, or does $8.30 simply trump all.