Fonterra redundancies rise to 835, forecast earnings per share up 5c

Fonterra Cooperative Group [NZX: FCG], the world's largest dairy exporter, has confirmed it has laid off 835 staff through its major restructuring this year, up from 750 announced in August.

The Auckland-based cooperative has raised its forecast available payout range for this season by 5c as it cuts costs and boosts margins to record levels, even as milk volumes in New Zealand decline by 5%.

Fonterra has indicated the forecast dividend may be in the 35-40c per share range up from 25c last year, which disappointed many farmers who expected to gain more from the value-added side of the business when dairy input prices were down. The revision would mean a likely total payout to farmers of $4.95 to $5 per kilogram of milk solids after retentions, compared with $4.65 last season.

Chief executive Theo Spierings confirmed the total number of staff laid off in two waves of restructuring this year had risen to 835 but said "there will be no wave three."

The predicted boost in operational performance comes as the cooperative lifts its cheese production and the value-add side of the business and means Fonterra can increase the rate at which farmers are paid support of 50c per kgMS under an interest-free loan scheme instituted to help farmers through the current season. The total amount paid up to December is rising from 18c to 25c. Chairman John Wilson said conditions were incredibly tough for farmers given the continuing volatility and decline in global dairy prices.

The co-support loan remains interest free until May 2017 and Mr Wilson said a decision would be made in December on how long that support would be offered for. To date, 75% of eligible farmer shareholders have signed up for it.

The cooperative is not expecting global dairy prices to lift significantly until the middle of next year and has said whole milk powder prices on the GlobalDairyTrade auction need to hit $US3000 a tonne for it to meet the current $4.60 farmgate milk price payout, before dividends are added.

Fonterra said 'business transformation' initiatives implemented in the first quarter are expected to deliver a recurring cash benefit of $170 million this year, while further initiatives in the second quarter are expected to increase recurring cash benefits to $340 million a year and contribute to 2016 earnings and the farmgate milk price. Mr Spierings said the restructuring had only contributed around 8 to 10 percent of those benefits.

One example of the more than 2000 initiatives being implemented across the business in the next two years include the global ingredients arm introducing tighter synchronisation of rail, road and marine transport in partnership with customers, which has already delivered a $5 million annual saving.

First quarter initiatives are expected to generate a one-off cash benefit of $110 million this financial year, increasing to $440 million, based on initiatives being introduced in the second quarter, which Mr Spierings said had already been identified.

In the first quarter ended October 31, margins across the group increased from 14% to 23% from the year earlier period, while capital expenditure fell 37% to $258 million and operating expenses dropped 4% to $628 million.

Concerns have been expressed about Fonterra's current high debt gearing of 49.7 percent after capital expenditure of more than $2 billion in the past three years, when the cooperative had to boost its capacity and efficiency to deal with previously higher milk volumes coming off the farm. Spierings said Fonterra expects to return its gearing ratio to the "historically low" 40 to 45 percent range by the end of the current financial year.

Units in the Fonterra Shareholders Fund rose 1.7% to $5.48, having slipped 10% so far this year.

(BusinessDesk)