Fonterra has a rollercoaster ride

Henry van der Heyden. Photo / Kenny Rodger

Fonterra's wild ride on the international dairy markets in the past year lent a rollercoaster effect to its annual results, with New Zealand's biggest firm posting some sharp rises but also some dips that could disappoint.

Against a backdrop of world recession, plunging commodity prices and a volatile exchange rate, the farmer-owned co-operative posted an 8 per cent fall in revenues to $16 billion for the year to July 31 - but a 38.4 per cent increase in operating profit to $922 million from $498 million.

Farmer payout for 2008-09, confirmed at $5.20/kg of milksolids, was 38 per cent down on the 2007-08 season's record $7.59.

But a rise in distributable profit pushed the value-added return part of the payout to $603 million or 49c/kg (of which 1c was retained). In the previous period, distributable profit for 14 months was $364 million, equal to 31c/kg (of which 21c was retained.)

Fonterra also strengthened its balance sheet through debt reduction and a $260 million increase in share capital at the end of the 2008-09 season. The gearing ratio decreased to 52.7 per cent, from 61.5 per cent at the January 31 interim result.

But research analyst James Smalley, of Hamilton Hindin Greene, said the gearing level was still "relatively high". Fonterra chairman Sir Henry van der Heyden, unveiling proposals for a capital restructure last week, said the co-operative was carrying too much debt.

Yesterday, however, he said the balance sheet strengthening was the highlight of the results. At July 31, the weighted average length of debt was 5.5 years, well up on the previous period's 3.3 years.

Chief financial officer Jonathan Mason said Fonterra's ideal gearing ratio was in the 45 to 50 per cent range. For chief executive Andrew Ferrier, a highlight was a 20 per cent lift in underlying earnings before interest and tax (ebit) to $890 million from $647 million in the 12 months to July 31 last year, and $743 million for the 14 months to the end of July 2008. (Fonterra changed its balance date last year from May 31 to July 31.)

In the past six years, Fonterra had posted a 12 per increase in annual compound profit growth, he said. Another highlight was returns from value-add operations now accounted for more than half the business. Combined ebit for commodity and ingredients rose 27 per cent. Interest rate costs hurt the balance sheet, rising to $448 million from $367 million last year. Operating expenses for the 12 months were $2 billion, compared with $2.2 billion for the previous 14-month period.

Fonterra's three consumer or brand businesses - Australasia, Asia/Middle East and Latin America - collectively showed ebit growth of 21 per cent to $470 million, though Chilean business Soprole had shown a profit decrease from a record performance in 2008.

The spectre of the failure of Fonterra's $200 million investment in Chinese company San Lu continued to haunt the balance sheet, with a $62 million first half year charge to write off the remainder of the venture.

On the positive side of the ledger, inventory, which through volume management had built to above normal levels in first half year market turbulence, had been reduced through strong sales by $2.4 billion since the January 31 interim result, to $2.7 billion by year end.

Looking to the year ahead, van der Heyden cautioned that this week's surprise 55c lift in Fonterra's forecast payout for the new season meant a "sigh of relief" for farmers rather than a cause for new confidence. The end of the season was still a long way off, he said.

Fonterra expected its New Zealand milk production to rise by around 2.5 per cent a year in the next five to 10 years, van der Heyden said. Fonterra had been encouraging 3-4 per cent annual milk growth.

But van der Heyden said Fonterra was still investing in New Zealand milk growth, revealing it spent just over $200 million building the world's biggest powder drier at Edendale in the South Island.