Announcement

MKTUPDTE: FSF: Fonterra provides strategy, milk price and earnings updates 08:30am 
FSF
23/05/2019 08:30
MKTUPDTE
PRICE SENSITIVE
REL: 0830 HRS Fonterra Shareholders' Fund (NS)

MKTUPDTE: FSF: Fonterra provides strategy, milk price and earnings updates

23 MAY 2019

Fonterra provides strategy, milk price and earnings updates

o Key third-quarter financial performance numbers:
o Sales volumes: 16.6 billion LME, up 4%
o Revenue: $15 billion, up 1%
o Gross margin: $2.2 billion, down 3%
o Normalised operating expenses: $1.8 billion, down $73 million
o Normalised EBIT: $522 million, down 9%
o Capital expenditure: $419 million, down 28%
o Revised forecast earnings per share range: 10-15 cents from 15-25 cents per
share
o 2018/19 forecast Farmgate Milk Price range: $6.30 - $6.40 per kgMS
o Opening 2019/20 forecast Farmgate Milk Price range: $6.25 - $7.25 per kgMS
o 2019/20 Advance Rate Schedule has been set off $6.75 per kgMS

Fonterra Co-operative Group Limited today gave an update on its strategy
review and shared timeframes for turning around the Co-op's performance. At
the same time, it announced its third-quarter business update, revised
forecast earnings range, narrowed the range for its 2018/19 forecast Farmgate
Milk Price, and gave an opening forecast Farmgate Milk Price range for the
2019/20 season.

Fonterra Chief Executive Miles Hurrell said that good progress is being made
on the strategy review and reiterated that the benefits from those changes
will take time to flow through into the Co-op's financial performance.

"I appreciate that our farmers and unit holders want clarity on our new
strategy and expect a decent return on their investment.

"We're on-track to share our new strategy in September. In the meantime,
we're getting on and making decisions to reduce complexity and simplify our
business so we can focus on where we have competitive advantages.

"Farmers and unit holders can expect to see some fluctuation in our earnings
over the next couple of years and there will be one-off transactions and
adjustments (some positive, some negative) as we reset the business and
deliver on our new strategy.

"We are committed to keeping people updated as we make progress. Today's
update is:

o We are commencing a strategic review of our two wholly-owned farm-hubs in
China
o We have agreed with our partner Nestle to review options for the future
ownership of our Dairy Partners Americas (DPA) Brazil joint venture,
including a potential sale of respective stakes
o We are closing our Dennington site in Australia.

"These decisions relate to our new strategic direction - 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."

Commenting on the strategic review of its China farms, Mr 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.

"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," said Mr Hurrell.

"Yesterday, we also started talking to the team at our Dennington factory in
Australia about the tough call we're making to close the site. 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.

"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.

"We have 98 employees at Dennington and this decision will be incredibly hard
for them. Our top priority is to support our people."

Business performance and revised earnings guidance

Fonterra's revenue for the nine months to 30 April 2019 was $15 billion, up
1% on the same period last year, and sales volumes were 16.6 billion liquid
milk equivalent (LME), up 4%. However, normalised EBIT was down 9% to $522
million.

In Ingredients, sales volumes for the first nine months were up 10% to 16.3
billion LME, gross margin was down to 8.6% from 9.6% and EBIT was down $64
million to $602 million.

In Consumer and Foodservice sales volumes were down 1% to 3.8 billion LME,
gross margin was down to 22.8% from 23.6% and normalised EBIT was down $62
million to $266 million.

Fonterra Chief Executive Miles Hurrell said the New Zealand Ingredients
business is performing as expected but Australia Ingredients continues to
face challenges and it is taking longer than planned to lift performance in
some parts of the Co-op's Consumer and Foodservice business.

"Due to the challenges in Australia Ingredients and tightening relative price
differences between reference products, or those products that inform the
Farmgate Milk Price, and non-reference products - that's all our other
products, we are reducing the forecast full year normalised EBIT for the
whole Ingredients business to $645 - $725 million, down from the $750 - $850
million range we shared at our Interim Results.

"Consumer and Foodservice improved its performance in the third quarter
relative to the first half. Due to our performance in Latin America we have
lowered our forecast normalised EBIT from $475 - $525 million to $400 - $430
million for this part of the Co-op.

"Our China Foodservice recovered as demand for butter bounced back. This
helped pricing and in-market inventory return to more normal levels. There
was good demand for Anchor Food Professionals UHT culinary cream and the team
at our Waitoa UHT factory have been working hard to get shipments up to our
China foodservice customers.

"Our Oceania Consumer and Foodservice business continued to perform well with
Australia's spreads category, including Western Star butter, contributing
significantly to gross margin."

Mr Hurrell said that there are some increased risks in the fourth quarter to
the Co-op's previous forecast earnings - in particular, the recovery in key
markets is slower than expected and there are tightening price relativities
between non-reference and reference products along with the on-going
challenges in Australia Ingredients.

As a result, Fonterra is revising its earnings guidance range from 15 - 25
cents per share to 10 - 15 cents per share.

2019/20 opening season forecast Farmgate Milk Price and updated 2018/19
forecast Farmgate Milk Price range.

Chairman John Monaghan said, as farmers get ready to start the new season on
1 June, the forecast 2019/20 Farmgate Milk Price range will be $6.25 - $7.25
per 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.

"We are giving farmers a wide range for the opening forecast milk price. It
will be narrowed as the season goes on. The 2019/20 Advance Rate Schedule has
been set off $6.75 per kgMS.

"Weather plays a significant role in determining global milk volumes, and
therefore price. We are forecasting our New Zealand collections to be 1,520
million kgMS for the new season, which is up slightly on the current season.
There's still a lot of water to go under the bridge before we'll have a clear
view of what the season holds for both our Co-op's production and global
dairy supply."

Fonterra has also narrowed its 2018/19 forecast Farmgate Milk Price range
from $6.30 - $6.60 per kgMS range by 20 cents to $6.30 - $6.40per kgMS.

This reflects favourable foreign exchange movements but slightly weaker than
expected pricing for whole milk powder and skim milk powder.

The Co-op has now contracted the majority of its farmers' milk for the
current season and has greater certainty on the likely closing Farmgate Milk
Price. This is also reflected in the tighter forecast range.

-ENDS-

Simon Till
Director Capital Markets

For further information contact:

Fonterra Communications
24-hour media line
Phone: +64 21 507 072
End CA:00334901 For:FSF Type:MKTUPDTE Time:2019-05-23 08:30:57

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