Reduced margins cut into Fonterra's year net profit

Reduced margins helped drive Fonterra's net profit for the July 31 financial year down by 11 per cent to $745 million, the dairy giant says.

The co-operative announced a cash payout of $6.52 for the 2016/7 season, comprising a farmgate milk price of $6.12/kg milksolids and a dividend of 40 cents per share.

The profit equates to earnings per share of 46c, down from 51c last year, and compared with an earlier forecast range of 45c to 55c.

Analysts had expected to see a weaker annual result as higher farmgate milk prices, the key input cost for Fonterra, made their presence felt on Fonterra's margins.

Milk prices improved sharply as the financial year progressed, with Fonterra's forecast starting 2016/7 at $4.25 and finishing at $6.12, after slumping to well below $5/kg in the 2014/5 and 2015/6 years.

Revenue increased by 12 per cent to $19.2 billion, with rising prices offsetting a 3 per cent decline in volumes at 22.9 billion litres of liquid milk equivalent (LME).

Normalised earnings before interest and tax of $1.2b was down 15 per cent as a result of reduced margins across the business, which also the influenced 11 per cent fall in net profit, Fonterra said.

Chairman John Wilson said the co-operative's ability to maintain its forecast dividend despite the milk price increasing by 57 per cent over the year and the impact of negative stream returns was an "excellent" result.

"We will always need to manage variability across our co-operative - both in global markets and in our local farming conditions," he said.

"We've demonstrated our ability to deal with those conditions and deliver on our strategy again this year."

Over recent seasons, Fonterra's farmers had made "significant personal sacrifices" to reduce costs through a sustained low milk price period.

"As part of our continued business transformation, the co-operative has also made a fundamental shift in the way it operates, continuing the strong focus on increased efficiency and developing new revenue streams," he said.

Despite lower milk volumes due to poor weather in parts of the season, the business delivered a good result by prioritising higher value Advanced Ingredients and growing our sales of these in-demand and specialised products by 473 million LME this year, he said.

Fonterra's consumer and foodservice business continues its strong performance, selling more than 5.5 billion LMEs, up 576 million LME on last year.

This volume growth across these two portfolios has delivered normalised EBIT of $614m, up 6 per cent on last year.

Commenting on the ingredients business, chief executive Theo Spierings said the higher value advanced ingredients segment achieved a 9 per cent increase in sales volumes.

This included sales of products such as functional proteins, high-specification whole milk powder and extra-stretch cheese.

Advanced ingredients made up 19 per cent of Fonterra's total external sales volumes over the year.

Looking ahead, Fonterra said its forecast total available for payout to farmers in the 2017/18 season was $7.20 − $7.30 per kg, made up of forecast farmgate milk price of $6.75 per kg.

"We are well positioned to deliver higher volumes and new product formats in our Consumer, Foodservice, and Advanced Ingredients portfolios, and are confident in our forecast earnings per share range of 45-55 cents," Wilson said.

Last year's annual net profit for the year to July 31 came to $834 million, up 65 per cent on the year before that.