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Current as of 21/10/16 11:39AM NZST
Jamie Gray is a business reporter for the NZ Herald

Fonterra remains sound, says CFO

Fonterra CFO Lukas Paravicini. Photo / Jason Oxenham
Fonterra CFO Lukas Paravicini. Photo / Jason Oxenham

Fonterra says it remains financially sound, despite high debt levels, and hinted that it may be able to provide a lifeline to farmers facing heavy losses from low milk prices.

The co-operative yesterday cut its forecast farmgate milk price to $3.90 per kg of milksolids from $4.15 per kg - well short of the estimated break-even point for farmers of $5.25 per kg.

The company's debt levels blew out last year based on higher capital expenditure as it pushed ahead with a major expansion of its New Zealand manufacturing operations and after the acquisition of an 18 per cent stake in China's Beingmate.

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Fonterra's gearing ratio went to 49.7 per cent at the end of its last financial year from 42.3 per cent a year earlier -- higher than the company was comfortable with at the time.

Herald columnist Brian Gaynor and other commentators have raised the issue of Fonterra's borrowings, and ratings agency Standard and Poor's - citing higher capex and the Beingmate acquisition - last year lowered its credit rating on the company to "A minus" from "A".

The co-operative's chief financial officer, Lukas Paravicini, told a conference call yesterday the co-operative was "absolutely sound".

Fonterra came under attack this week from National MP Chester Borrows over its treatment of suppliers.

"Let me be absolutely clear - Fonterra is absolutely sound," Paravicini said.

"We have invested in the future to create more capacity in the home base in New Zealand last year. Since then we have committed to not increasing our debt," Paravicini said.

Let me be absolutely clear - Fonterra is absolutely sound.
Fonterra chief financial officer, Lukas Paravicini.

Fonterra is expected to update the market on its debt position, and to make an announcement on possible farmer support measures, when it releases its first half result on March 23. The co-op has said it intends to have its gearing ratio reduced to 40 to 45 per cent by the end of this year.

Farmer support could take the form of another "soft" loan scheme similar to the one offered last year, when the forecast went as low as $3.85, or paying out a greater proportion of the company's dividend.

Paravicini, in response to Borrow's attack, said: "We are conscious of the role that we play in the community beyond our farmers."

He said moves to extend payment terms with suppliers by two months would only affect the larger of its suppliers - around 2000 of the 18,000 to 20,000 globally that it has on its books.

Chairman John Wilson said the co-op was in a strong position and that it would use that strength to support farmers "where we can".

The reduced farmgate milk price will mean a $400 million reduction in total dairy farmer revenues compared with the previous forecast of $4.15. Wilson said it would not take much to change this market but that the co-op was not expecting to see a change over the next six to 12 months.

Low milk prices represent a lower input cost for Fonterra, and Paravicini said he was confident the company would record a strong performance in the current financial year. Fonterra's dividend guidance is unchanged, implying a cash payment to fully share-backed farmers of $4.25-4.30 this season.

Dairy prices rose in the latest auction but are likely to be too late to support the payout for this season.

- NZ Herald

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