Fonterra confirms it is on track for record payout

Fonterra chief executive Andrew Ferrier and chairman Sir Henry van der Heyden. File photo

Dairy giant Fonterra says strong international markets mean this season is shaping up as one of the best ever for returns to its farmer owners.

The co-operative today affirmed its forecast payout for the 2010/11 season of $7.90-$8 per kilogram of milksolids before retentions - potentially a record result.

The previous highest payout of $7.90 before retentions was in 2007/08, with an average of $5.11 over the past eight years.

The country's biggest company also posted a net profit of $293 million of the six months ended January 31.

Chairman Sir Henry van der Heyden said dairy prices appeared to reflect a change in supply and demand for food internationally.

"We are benefiting from a combination of demand growth from China and other Asian markets, and tighter international supply due to adverse weather conditions in many parts of the world," van der Heyden said.

"To date, these higher prices have more than offset the negative effects of a stronger New Zealand dollar against the US dollar, in which most international dairy sales are denominated."

Fonterra said milk production was expected to be broadly in line or slightly ahead of last season - meaning an $8 payout could be worth about $10.3 billion.

During 2009/10, Fonterra collected 14.7 billion litres of raw milk from 4.5 million cows, about 89 per cent of national milk production.

The forecast payout would be welcomed by farmers, many of which were under pressure after several challenging years and a current season marked by some difficult weather conditions, he said.

"It is also good news for the New Zealand economy in the post-earthquake environment, underlining the importance of dairying to New Zealand's economic wellbeing."

Global prices for many commodities, including dairy, were approaching all-time highs.

"We must be mindful of the impact that dairy prices can have on demand in some markets, as well as on supply growth around the world," van der Heyden said.

"As prices continue to climb, the possibility of a downward correction can increase and farmers should always need to be prepared for a potential global price drop."

The average price for a basket of products in Fonterra's bi-monthly online auction fell 8.2 per cent last week, breaking a rise since the start of December which had seen prices hit the highest level since the auction was launched in 2008.

Fonterra said the earthquakes in Christchurch and Japan would be reflected in the second half of the financial year.

The company was quantifying the impact, which would be primarily in the area of inventory losses, with to some extent losses covered by insurance.

Chief executive Andrew Ferrier said the rising milk price was putting some pressure on Fonterra's operating earnings, which were primarily driven by the ability to make and sell a range of dairy products at a margin above the cost of milk collected from farmers.

"This margin squeeze is particularly significant in our ingredients businesses where the cost of raw milk represents a substantial proportion of total operating costs." Ferrier said.

"Thanks to our strategy of building leading brand positions in key categories, our consumer businesses are better placed to withstand price increases - but they are not immune."

The forecast payout incorporated a milk price of $7.50 per kg of milksolids and a distributable profit of $550-$690 million, which equated to 40-50c, of which Fonterra was expecting to pay a dividend of 25-30 cents a share.

Half Year Fonterra Financial Highlights

Revenue of $9.4 billion, 21 per cent higher than the corresponding period in FY 2010, primarily reflecting the impact of higher international dairy prices which were partly offset by a slight decline in sales volumes.

Net Profit After Tax of $293 million, of which 21 cents per share is attributable to shareholders. This is the first time Fonterra has reported a half year profit.

Interim Dividend of 8 cents per share will be paid to shareholders on 20 April 2011, out of a full year target dividend of 25-30 cents per share. The interim dividend in FY10 was also 8 cents per share.

Gearing ratio (economic debt to debt plus equity, which takes account of the carrying value of debt hedges) was 48.5 per cent at 31 January 2011, a substantial improvement from 54.3 per cent a year earlier. The key contributors to this were increased equity contributions from shareholders, increased retentions as a result of adoption of the Group's dividend policy, and recording an interim profit for the first time. Although the gearing ratio at 31 July 2010 was lower at 44.9 per cent, the seasonal nature of Fonterra's business means the more meaningful comparison is with the position at the previous half year.

Milksolids production in New Zealand for the season to 31 January 2011 was marginally ahead of the same period last season, reflecting difficult climatic conditions across much of the country. Assuming normal rainfall in the March-May period, overall production across the entire 2010/11 season is expected to be broadly in line with, or slightly ahead of, last season.

Commodities & Ingredients segment revenue for the half year was 24 per cent higher at $6.3 billion, with higher selling prices for dairy products, partly offset by a 2.6 per cent decrease in sales volumes. Normalised segment earnings before net finance costs and tax were $194 million. As in the previous year, a rising Milk Price placed pressure on Fonterra's ability to make and sell a range of dairy products at a satisfactory margin above the cost of milk collected from farmers.

Australia/New Zealand revenue was up 18 per cent to $1.8 billion, mainly because higher commodity prices flowed through to consumer pricing and partly from the effect of a higher Australian dollar against the New Zealand dollar. Normalised segment earnings before net finance costs and tax were $153 million. ANZ's businesses continued to perform well despite sustained competition across many categories.

Asia/Africa, Middle East revenue increased 13 per cent to $832 million. This was almost entirely due to price increases across all categories, with volumes year to date in line with the previous half year. Normalised segment earnings before net finance costs and tax were $93 million. Asia/AME's continued focus on higher value brands and a strong nutritional focus in South East Asia has given its brand portfolio greater resilience despite the impact of near-record milk prices.

Latin America revenue, which reflects our Soprole business in Chile, increased 14 per cent to $403 million. While more than half this increase was price related, overall volumes increased slightly due to growth in the yoghurts, desserts, milk, cheese and butter categories. Normalised segment earnings before net finance costs and tax, which includes Fonterra's share of its DPA joint venture earnings, were $64 million.