Exceptional growth in price for its consumer and food service products is among the reasons Fonterra are increasing their forecast earnings per share range for the current financial year to 45-55 cents.

'We are delivering continuing growth in consumer and foodservice sales volumes and value, particularly in Greater China, Asia and Latin America,” says chief executive Theo Spierings.

Fonterra are increasing their forecast earnings per share. Photo: File.

'Our first quarter ingredients performance reflects improved product stream returns and margins are tracking well. With less milk this season, and additional capacity, we have taken the opportunity to optimise our product mix.”

That performance is among the reasons for a forecast Farmgate Milk Price of $4.60, which lifts the total available for pay-out to $5.05-5.15 per kgMS and would currently equate to a total forecast cash pay-out of $4.95-5.00 per kgMS after retentions.

Fonterra is also increasing the rate at which farmers are paid the co-operative support of 50 cents per kgMS, with the total amount paid up to December going from 18 to 25 cents.

However, Fonterra is warning that markets are still volatile and, to date, it has not factored in the possible impacts of an El Nino drought this summer.

Chairman John Wilson says performance in the period August 1 to October 31, 2015 built on the strong second-half of the 2015 financial year.

'While it is tough on farm due to low global milk prices, farmers will welcome the ongoing improvement in Fonterra's performance delivering increased returns,” says John.

'Performance is well ahead of last year and we are hitting our targets on gross margins and operating and capital expenses.

'At the same time, the acceleration of business transformation initiatives is generating significant cash savings. We are on track, and therefore able to lift our forecast earnings per share range.”

At this stage of the season, based on the dividend policy, management will recommend at the end of the financial year an annual dividend of 35-40 cents per share, which would then be subject to board approval.

This would equate to a total forecast cash pay-out of $4.95 -5.00 per kgMS.

'The performance and business transformation savings mean we are also able to increase the December Co-operative Support payment, and payments will now be completed by April which means that farmers have access to more of that support earlier,” says John.

He also states that 75 to 80 per cent of Fonterra farmers have applied for the support payment and a decision will be made next month.

Up to 835 employees will be made redundant as part of the company's business transformation aimed at 'achieving a significant and lasting performance improvement through new ways of working across the co-operative's global network”.

Theo says the co-operative is continuing to forecast a reduction in milk collections in New Zealand for the current season of at least five per cent, which is equivalent to around 150,000 MT of whole milk powder.

Theo says contrary to speculation, Fonterra is not stock-piling milk powder, but is instead re-directing 146,000 MT away from the GlobalDairyTrade platform.

'We have no more inventory than at a similar time last year,” says Theo.

'In addition, an increased portion of product is being sold through bilateral customer agreements for a premium on prices achieved on GDT. Ingredients inventory levels for the first quarter are in line with the same period last year.

'We are benefiting from the investment in new plants in New Zealand, which is improving our manufacturing options and reducing peak costs.

'Our strategy is moving greater volumes of milk into higher-returning products to take advantage of improved prices relative to Whole Milk Powder.”

Performance in the first quarter of 2015 has built on the strong finish to the year, with margins increasing across the group from 14 per cent to 23 per cent compared to the same period last year.

Capital expenditure of $258 million is down 37 per cent, in line with the target. Operating expenses are also down by 4 per cent to $628 million, reflecting the continuing focus on cost control.

Fonterra has solid credit ratings which demonstrate the co-operative's fundamental financial strength.

'Following the completion of our accelerated investment cycle, and with our ongoing financial discipline, we are on track to reduce our leverage, with the gearing ratio expected to return to the 40-45 per cent range at the end of the current financial year.”

Fonterra's business transformation is aimed at achieving a significant and lasting performance improvement through new ways of working across the co-operative's global network.

'The initiatives generating recurring benefits implemented in the first quarter are expected to deliver a cash benefit of $170 million in the current financial year.

'Further initiatives in the second quarter are expected to increase recurring cash benefits to $340 million and contribute to both earnings before interest and tax (EBIT), and the Farmgate Milk Price in the current financial year.

'In addition, first quarter initiatives are expected to generate a one-time cash benefit of $110 million this financial year increasing to $440 million based on initiatives being introduced in the second quarter, and will contribute to working capital and our balance sheet.”

Fonterra will provide an update on the business transformation and on the earnings range forecast at the completion of the first-half of the financial year.