In a statement to the ASX today, Fonterra announced it would increase its forecast earnings per share to 40-45 cents with a farmgate milk price of $4.60, lifting the total forecast cash payout to $4.95-5 a kg/MS after retentions.

Fonterra stated capital expenditure of $258 million was down 37 per cent, in line with its target, and running costs were down 4 per cent to $628 million.

Chief executive Theo Spierings said the group wanted to expand its co-operative’s global network with first-quarter initiatives expected to generate a one-time cash benefit of $110 million.

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

“Further initiatives in the second quarter are expected to increase recurring cash benefits of $340 million and contribute to both earnings before interest and tax, 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 base on initiatives being introduced in the second quarter and will contribute to working capital and our balance sheet,” Spierings said.

Chairman John Wilson said strong performances between August and October were responsible for the good second half.

“While it is tough on farm[s] due to low global milk prices, farmers will welcome the ongoing improvement in Fonterra’s performance delivering increased returns.

Wilson said business performance is well ahead of last year and it was achieving targets on gross margins 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.”

Based on dividend policy, Wilson said, this season management would recommend an annual dividend of 35-40 cents per share, subject to board approval.

Spierings said the beginning of 2016 would benefit from a strong 2015 finish with margins across the group increasing from 14 per cent to 23 per cent compared to the same time.

“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.

“We are delivering continued growth in consumer and food service sales volumes and value, particularly in Greater China, Asia and Latin America.”

The co-operative continued to forecast a 5 per cent reduction in milk collections in New Zealand, equivalent to about 150,000MT of whole milk powder.

Spierings added since August Fonterra had reduced the amount of produce it expected to offer on the Global Dairy Trade over the year by 146,000 MT.

“In addition, an increased portion of product is being sold through bilateral customer agreements for a premium on prices achieved on GDT,” Spierings said.

“Ingredients inventory levels for the first quarter are in line with the same period last year.

“We are benefitting 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 high-returning products to take advantage of improved prices relative to whole milk powder.”