Fonterra has increased its forecast Farmgate Milk Price for the 2017/18 season to NZ$6.55 per kgMS and announced a full year forecast dividend range of 25 - 35 cents per share with an interim dividend of 10 cents per share.

Chairman John Wilson said the ongoing strong global demand for dairy and stable global supply are continuing to support global prices, particularly for the important Whole Milk Powder category.“Farmers will welcome a forecast cash payout of $6.80 - $6.90, which would be the third highest in the last decade. This is also good news for New Zealand as it represents around $10 billion flowing into the country’s economy. However, we are very aware of the challenges many of our farmers are facing this season with difficult weather conditions impacting production.”“While the global supply and demand picture remains positive and we expect prices to stay around current levels, we will be watching for any impact on market sentiment as spring production volumes build in Europe.”Fonterra’s Greater China business continues to perform well overall, the company said, but the Co-operative has re-assessed the value of its Beingmate investment so that it reflects a fair value at this point in time.Commenting on this decision, Wilson said the Board had assessed the carrying value of Beingmate at $244 million and therefore taken an impairment of $405 million.“While we appreciate the substantial opportunity and privilege of our business in China, our shareholders and unitholders will be rightfully disappointed with this outcome. Beingmate’s continued under-performance is unacceptable. The turnaround of the investment is a key priority for our senior management team.”“The opportunity in the Chinese infant formula market remains, as does the potential for our Beingmate partnership – but an immediate business transformation is needed for Beingmate to benefit from the ongoing changes in the market.”In December, Fonterra paid $183 million to Danone following the conclusion of an arbitration that arose from the WPC80 precautionary recall in 2013.Wilson said the Board will decide how the Beingmate impairment and the Danone payment will be treated for final dividend purposes after the end of the financial year when it will have the full picture of Fonterra’s operating performance. Given the possible impact of these decisions, the Board is providing a forecast dividend range for the full-year of 25 – 35 cents per share, rather than just the earnings per share guidance normally given.“based on our dividend policy, this forecast dividend range would allow for the Board to add back the Beingmate impairment at the lower end through to an adjustment for both Beingmate and Danone as one-off events at the higher end. In the circumstances, we have taken a prudent approach in determining the 10 cent interim dividend.”Chief Executive Theo Spierings, who will be standing down, said the operating performance for the first half year was generally as expected.“We knew going into this year we would have to carefully manage low starting inventory levels. This was followed by reduced New Zealand milk collections due to difficult weather conditions, further impacting our volumes available for sale. On top of this, we also had to navigate higher input costs which squeezed our margins. So, at the end of the first half, our total sales volumes are down 11 per cent to 10.5 billion LME, and normalised earnings before interest and tax (EBIT) 25 per cent lower at $458 million compared to $607 million in the same period last year.”“Despite this, overall sales revenue in the business was up six per cent to $9.8 billion compared to the same period last year, mainly due to the improved global prices for dairy. While our reported net profit after tax (NPAT) shows a loss of $348 million, it includes the payment to Danone and the Beingmate impairment. As these are one-off events, our normalised Net Profit After Tax of $248 million is a better reflection of our underlying operating performance for the half year.”Commenting on the Ingredients business, Spierings said the team achieved a strong result with normalised EBIT growth of 9% to $558 million compared to $510 million in the same period last year, despite lower sales volumes of 9.8 billion LME.“The result benefited from higher stream returns in the first half – $90 million compared to $40 million for the same period last year. These additional stream returns were predominantly due to improved margins for non-reference products during this period.”In relation to Fonterra’s Consumer and Foodservice business, Spierings said the higher input costs meant margins were reduced by 15 per cent over the period, with strong competition in the Co-operative’s strategic markets, especially in Foodservice, limiting the short-term options to pass through the higher costs.“Consumer and Foodservice’s volumes were 2% lower compared to the same period last year. Our sales volumes in Asia, Latin America, and Greater China improved but they were offset by lower volumes in Oceania, caused primarily by operational start-up challenges at our new distribution centre in Auckland, which is now operating as we’d expect. Overall, Consumer and Foodservice normalised EBIT was $193 million* compared to an exceptional $313 million in the prior comparable period when input costs were considerably lower.”Spierings said the Co-operative’s China Farms strategy is beginning to bear fruit and the farms’ improved performance is reflected a normalised EBIT loss of $12 million – half the $24 million loss for the same period last year.“This result is helped by the price the Ingredients business pays China Farms for its milk, which is currently higher than the unsustainably low domestic milk price. This approach is producing better results by allowing the China Farms managers to focus on ongoing on-farm efficiencies and the Ingredients managers to focus on getting the best price for our high-quality milk. The potential is strong as Chinese demand for high-quality local fresh milk continues to grow. In February this year, we launched a new premium ‘Daily Fresh’ milk range alongside Alibaba’s Hema Fresh stores in Shanghai and Suzhou. This milk is sourced directly from our farm hub in Hebei province. While early days, the opportunity for scale and reach alongside Alibaba is huge.”Fonterra said it expects its earnings to be weighted to the second half of the year.Despite more favourable weather conditions recently, the Co-operative still expects its New Zealand milk volumes to be down for the year and will be managing its inventory and product mix carefully for the remainder of the season to ensure it maximises the overall value of its farmers’ milk.Spierings said a strong commitment to the V3 strategy of shifting more volume into higher value products at velocity is critical to the business achieving its forecast.“We will continue to put as much milk as possible into higher value products, particularly into our Advanced Ingredients business, and Consumer and Foodservice business wher we are still targeting an additional 400 million litres of volume this year. Our Co-operative remains focused on delivering sustainable value for our farmers – that’s a sustainable Farmgate Milk Price, dividend, and return on their investment in the Co-op as we provide high quality dairy nutrition to consumers around the world.”