Fonterra narrows milk price forecast, closes Aussie factory and signals more asset sales

Fonterra has narrowed its farm gate milk price forecast, cut its earnings guidance and announced further asset restructuring, including the closure of its Dennington factory in Australia resulting in 98 redundancies.

The dairy giant has also commenced a strategic review of its two wholly-owned farm-hubs in China and is considering selling its stake in the Dairy Partners Americas (DPA) Brazil joint venture with Nestle.

Fonterra now expects to pay $6.30-6.40 per kilogram of milk solids in the current season - which ends on May 31 - versus its February forecast of $6.30-6.60/kgMS.

This reflects slightly weaker than expected pricing for whole milk powder and skim milk powder, offset by a lower kiwi dollar, it said.

Fonterra's opening forecast for the season beginning June 1 is $6.25-7.25/kgMS.

"This is a realistic opening forecast. We are having to look out more than a year into the future which is difficult, but what the information available is continuing to show us is that demand remains strong across key trading partners and this is reflected in GDT prices," said chairman John Monaghan.

The world's biggest dairy exporter is strengthening its balance sheet as part of its wider strategic review. That's included the divestment of a range of assets no longer deemed central to the cooperative's future, the most recent being the $380 million sale of the Tip Top ice-cream business.

Chief executive Miles Hurrell said the China and Brazil decisions relate to a new strategic direction for the firm.

"In particular, prioritising our New Zealand milk supply and simplifying our global portfolio, which, as we have said previously, requires us to review every part of business to ensure it meets the needs of the co-op today".

Workers milking cows at the Hua Xia diary farm near Beijing, China. Photo / Mark Mitchell.

Hurrell said China remains a key market for Fonterra.

"We have contributed to China's dairy industry by developing high-quality model farms and showing there is a valuable opportunity for fresh milk in China's consumer market, and this continues to be an attractive prospect.

"However, this does not necessarily mean that we need to continue to have large amounts of capital tied up in farming hubs," he said.

"On DPA Brazil, which is a joint venture distributing chilled dairy products throughout Brazil, the review into future ownership options and whether to sell is expected to be completed by the end of 2019," Hurrell said.

The Dennington factory in Victoria has 98 employees.

"The Australian Ingredients business continues to feel the impact of the drought and other significant changes that mean there is excess manufacturing capacity in the Australian dairy industry," Hurrell said.

"This is not a one-off for this season, it's the new norm for the Australian dairy industry and we need to adapt. We need to get the most value from every drop of our farmers' milk and, with the reduced milk pool in Australia, we must put it into our highest returning products and most efficient assets. Dennington is over 100 years old and not viable in a low-milk pool environment," he said.

Fonterra's revenue for the nine months to April 30 was $15 billion, up 1 per cent on the same period last year, while sales volumes were 16.6 billion litres on a liquid milk equivalent basis, up 4 per cent. However, normalised earnings before interest and tax fell 9 per cent to $522 million.

Hurrell said the New Zealand Ingredients business performed as expected but Australia still faces challenges. Some parts of the cooperative's consumer and foodservice business are also taking longer than planned to improve their performance.

Hurrell said that there are some heightened risks in the fourth quarter to Fonterra's previous forecast normalised earnings and it lowered guidance to 10-15 cents per share from 15-25 cents. That implies a forecast range of $161.2-241.8 million, compared to $241.8-403 million.

For the consumer and food service division, it lowered its forecast normalised ebit to $400-430 million from its prior forecast of $475-525 million. For its ingredients business, Fonterra lowered the forecast to $645-725 million from the previous $750-850 million range.