Watchdog approves of Fonterra stock sell-down

By PHILIPPA STEVENSON AGRICULTURE EDITOR

The Fonterra watchdog Shareholders Council says the company's overdue move to reduce stock should lower costs and bring better returns.

In a review of Fonterra's six months to November, the council said the global commodity price slump hit the company's ingredients sales hard and, despite being written down last year, opening inventories still had to be sold at a loss.

"It should be stressed that this aggressive stock sell-down was necessary in order to remove overhanging stocks from the market and encourage a price recovery. That recovery is becoming apparent - at least in the case of some products."

Stocks at November 30 were $481 million less than at the end of the previous season.

The council agreed with Fonterra that a tide of falling international prices and a strengthening exchange rate were running against the company.

"Efficiency gains were made but overshadowed by external factors," council chairman Tony O'Boyle told shareholders in the report this week.

The performance of the consumer division, NZ Milk, was ahead of budget, reflecting the lower costs of ingredients and a reduced advertising spend. Net profit after tax was 45 per cent above budget.

NZ Milk's organic growth, as opposed to growth by mergers and acquisitions, was between 3 and 4 per cent against a target of 8 per cent.

Net working capital at 22.1 per cent of sales was too high compared to the target ratio, the council said.

The group's equity ratios were only slightly down on budget.

Net controllable profit was in line with budget, and the net working capital ratio was a pleasing 22 per cent, lower than the 27.5 per cent ceiling laid down in Fonterra's statement of intentions, the council said.

It welcomed progress on capturing merger benefits, estimated by Deloitte Touche Tohmatsu to be $118 million to November.

Meanwhile, Fonterra has disputed critical analysis of its half-year result by Canterbury accounting lecturer Alan Robb.

Robb said because of falling commodity prices and the appreciating New Zealand dollar Fonterra's operating cash inflows in its first six months had fallen faster than savings in operating cash outflows.

If the company incurred a similar negative operating cash flow of more than $500 million, as it had in its second half last year, the forecast payout of $3.60 a kilogram of milksolids could be under threat.

Fonterra chief operating officer Graham Stuart said the company expected second-half revenues and cashflows to be higher in contrast to last season, when prices fell dramatically.

"We contract sales several months in advance, so we have confidence in saying this."

Robb said yesterday that he stood by his comments.