Asset sales aid Fonterra profit

By LIAM DANN primary industries editor

Dairy farmers have grudgingly acknowledged Fonterra's improved performance this year but still say their final payout is not good enough.

Fonterra, New Zealand's largest company, yesterday announced a profit of $257 million on revenue of $12.47 billion.

It will pay farmers $3.63/kg of milk solid - 3c more than it forecast in May.

The turnaround from last year's $50 million loss was driven by asset sales in Latin America which netted the company $318 million.

Had the profit been returned directly to farmers the payout could have been boosted by a further 25c/kg.

The company estimated a payout of $3.80/kg next year.

Fonterra chairman Henry van der Heyden said the retained profit was needed for further investment in the company's American joint venture with Nestle.

It had been well flagged that cash from asset sales would be reinvested, he said.



Van der Heyden emphasised that a rising currency and a slump in commodity prices were the key reasons for the low payout.

The average price for products in the ingredients business, which includes milk powder, fell from more than $4300/tonne in June 2001 to a low of $2800/tonne in November last year.

Currency losses directly cost $850 million - equivalent to 74c/kg milk solids. That was only partially offset by hedging gains of $640 million or 56c/kg.

"Everything else pales into insignificance," van der Heyden said.

Fonterra achieved record production volumes and record sales volumes in the past year, said acting chief executive Jay Waldvogel.

"We sold more than 500,000 tonnes more product this year than last year," he said. "Every single month during the season was a record month."

Other operational highlights included cost reductions of $634 million and annualised merger benefits of $206 million - $31 million ahead of target, Waldvogel said.

The company has also reduced its interest-bearing debt by $330 million.

Dairy Farmers of New Zealand chairman Kevin Wooding acknowledged there had been a big improvement in Fonterra's internal performance. But the payout was still unsatisfactory and would leave many farmers struggling this year, Wooding said.

"Farmers do accept that the two biggest factors affecting the payout [currency and commodity prices] are beyond their control."

But ultimately they wanted to see Fonterra matching the Tatua payout, he said.

On Tuesday tiny independent dairy company Tatua announced it would pay its farmers $5.60/kg of milk solids.

"An equivalent payout for Fonterra suppliers would add $160,000 to the bottom line of an average dairy farmer," Wooding said.

Waldvogel said the huge size difference in the companies made that unrealistic. He argued that Fonterra was already matching Tatua in its comparable businesses.

The Pharmaceutical Lactose and Health and Nutritional Solutions businesses within Fonterra had doubled their revenue in the past two years, he said.

The ebit (earnings before interest and tax) from the two businesses was nearly $50 million, Waldvogel said.

"That means Tatua could have paid $10 if they had these. It means we added 4c to our payout," he said. "There are 10 Tatua's living inside of Fonterra. We just don't always get to see them."

Shareholders council chairman Tony O'Boyle said the low payout overshadowed what appeared to be a strong internal performance.

The council, a watchdog group representing farmers, will review the result and release its verdict mid-August.

Alan Robb, a senior lecturer in accountancy at Canterbury University, said the final revenue figure of $12.47 billion had been unrealistically inflated by the inclusion of the asset sales.

The asset sale figure should have been listed as an unusual item, he said. That would have given a clearer picture of Fonterra's actual operating profit.

Fonterra chief financial officer Graham Stuart said the decision not to list non-recurring items as unusual was in line with modern accounting practices.

There were other non-recurring items that partially offset that asset sale, he said.