Fonterra chairman upbeat despite 7.6pc revenue drop

Henry van der Heyden. Photo / Paul Estcourt

Lower international dairy prices have slashed revenue at exporter Fonterra but chairman Henry van der Heyden says he is pleased with the company's interim result, given the environment.

Revenue for the six months ended January 31 was $8 billion, which when adjusted for different reporting periods and including exchange hedging was down 7.6 per cent on last year.

"It's a good result, it's a solid result when you look at the environment and the conditions that we're actually facing," van der Heyden said.

The ANZ Commodity Price Index for dairy products in February was down 58.4 per down from a peak in 2007 but had stabilised during the second half of the month.

Meanwhile, the average price for whole milk powder in Fonterra's online auction this month jumped 16.6 per cent, having previously fallen by 58 per cent since July.

Fonterra has cut its forecast payout this season from a opening expectation of $7 to $5.10 per kg of milksolids.

"We've made it very clear to our farmers we've got a very high degree of confidence, subject to fundamental change in the market, that we are sticking with our $5.10 per kg milksolids forecast," van der Heyden said.

Full-year milk production was tracking 4.5 per cent to 5 per cent ahead of last season's 1.19 billion kg.

Farmers were required to bring their shareholdings into line with this season's milk production in a move expected to generate about $400 million of additional equity by the end of the financial year and offset forecast share redemptions.

"I'm not taking [payout] retentions off the table but assume those assumptions are right around redemptions and capital coming in. If that all plays out then our farmers will get paid $5.10," van der Heyden said.

Shareholders' Council chairman Blue Read said the confidence about the payout was pleasing.

"One would not have wanted to see the payout being prophesied to go down any more. There's more than enough pressure on farmers now without that happening," Read said.

Federated Farmers dairy chairman Lachlan McKenzie said the result was good news. "We have to give congratulation where congratulation is due."

Meanwhile, van der Heyden said the capital structure of Fonterra was high on the agenda, although there was no timetable for any proposal to farmers.

"What I've said consistently is that we will come out once there's agreement between the board and the Shareholders' Council," he said.

Fonterra's debt gearing was 61.5 per cent as at January 31, compared with 57.4 per cent at July 31, which, the co-operative said, reflected the cost of carrying higher stocks during the peak of the season, devaluation of the dollar causing foreign currency debt to rise when converted into New Zealand dollars and a higher-than-normal advance rate percentage to farmers.

An offsetting hedge on foreign debt was recognised as an asset in the accounts and not a reduction in debt.

Debt was expected to fall to more normal levels by the end of the year with a freeze on non-essential capital expenditure and the need for working capital easing with the seasonal cycle, the company said.

Chief executive Andrew Ferrier said there was a focus of reducing debt and the company was comfortable with its position.

Milk supply globally was falling back because of lower prices, while demand was expected to start to pick up during the next six months, he said.

"We're seeing the market appears to be close to the bottom ... it seems to be bouncing around in a bit of a trough right now that's factoring into our thinking and it gives us confidence in our numbers," said Ferrier.

GOING DOWN

Six months ended January 31:
* $8 billion in revenue, including $5 billion from commodities and ingredients.
* Revenue down 7.6 per cent on last year when adjusted for new reporting period.
* Forecast payout to farmers stays at $5.10 per kg of milksolids.