Chairman cites balance sheet pressure.
Giant dairy co-op Fonterra has slashed its dividend forecast and cut 5c off its milk price for the 2017/18 season, citing pressure on its balance sheet.
After calling a trading halt on shares in the Fonterra Shareholders Fund yesterday, the co-operative updated the market on its expected earnings this morning.
Fonterra said its forecast farmgate milk price would be $6.70 a kg of milksolids, down 5c on the previous forecast.
The calculation was a departure from the procedure set out in Fonterra’s Milk Price Manual and partially reverses a milk price boost of 20c announced in late May.
Although the earnings per share guidance was held at 25-30c Fonterra said its result would probably be at or below the low end of the range, while its full year dividend was expected to be just the 10c already paid in April, down from a previous indication of 15-20c a share and a 75% drop on the previous year’s 40c dividend.
New chairman John Monaghan said the board had made those decisions in the best long-term interests of its shareholders and unitholders.
“During the process of closing our books for the financial year end, the need for these actions has become clear,” he said.
“Our forecast performance is not where we expected it would be. While the numbers are not finalised, our margins were less than we forecasted right across our global Ingredients and Consumer and Foodservice businesses.”
Mr Monaghan said it was important for Fonterra to have a strong balance sheet.
“The higher milk price, which is good for our farmers, has put pressure on Fonterra’s earnings, and therefore our balance sheet in a year which was already challenging due to the payment to Danone and the impairment of the co-operative’s Beingmate investment.
“You never want to have to reduce the Milk Price at the season’s end, but it is the right thing to do and $6.70 remains a strong milk price.
“Maintaining a strong balance sheet has helped us to support farmers during tough seasons through our Co-operative Support Loan and being able to bring forward the Advance Rate Schedule and get money to farmers earlier in the season.
“We need to do everything within our control to keep these options on the table for when farmers need them. This means keeping our balance sheet strong.”
Fonterra lifted the trading halt after the announcement. Its full year results will be announced on September 13.
The latest guidance follows a previous earnings downgrade on May 23 when then-chairman John Wilson said earnings per share would be revised down to 25-30c from December’s forecast 35-45c because of the high milk price (which had been increased 20c to $6.75) and the hit from the Danone payout and Beingmate impairment.
Fonterra’s half year result in March included a payment of $183 million to French dairy company Danone in relation to its litigation over the whey protein concentrate recall in 2013.
The co-op also took a $405m impairment on the value of its 18% stake in Chinese dairy company Beingmate.
Units in the Fonterra Shareholders Fund, which track the Fonterra co-op share price, last traded at $5.11, down 18% over the past 12 months.
