Fonterra sets 08/09 payout at NZ$5.20/kg; retains 1 cent to repay debt (Update 1)

Fonterra has announced its financial result for the just completed year to July 31 and set a payout for the year NZ$5.20/kg of milk solid, including a milk price of NZ$4.72/kg and a 'value added return' or profit payment of 48 cents. This is unchanged from its most recent forecast in April, but down from the NZ$7 initially forecast last year before the global economy and wholesale milk prices slumped. (Adds detail on debt gearing and full statement). Fonterra yesterday increased its forecast for the current 2009/10 season to NZ$5.10/kg from NZ$4.55/kg. The New Zealand dollar rose on the news to hit 73 USc earlier today, boosted by news showing the economy exited recession in the June quarter. Fonterra said it had decided to retain 1 cent of the profit to help improve its debt to debt plus equity to 52.7% from 61.5% at the end of January. This brings the gearing back into the 50-55% range that Fonterra has targeted in the past, but is not as low as the below 50% now targeted by Fonterra. Here is the full statement below on the result from Fonterra.

Fonterra Co-operative Group Limited today announced its annual result for 2008/09 with a Payout (excluding supplier premiums) to Fonterra's farmer-shareholders of $5.20 per kilogram of milksolids (kgMS). A total of $5.21 per kgMS was Available For Payout, with the Board of Directors resolving to retain 1 cent per kgMS from the Distributable Profit within the Co-operative.  The Board had earlier signalled the likelihood of retentions should the total amount Available For Payout exceed $5.20. The Payout, which is line with recent forecasts, comprises a Milk Price of $4.72 and a Value Return payment of 48 cents. Although the Milk Price is down on the 2007/08 season's record $7.59, reflecting significantly lower global commodity dairy prices, Fonterra posted a strong rise in Distributable Profit which has meant a higher Value Return payment to farmers.  Distributable Profit was $603 million, equating to 49 cents per kgMS (of which 1 cent is being retained).  In 2007/08, the Distributable Profit for the 14 months was $364 million, equating to 31 cents per kgMS (of which 24 cents was retained). Fonterra has also strengthened its balance sheet.  The gearing ratio (net interest-bearing debt to net interest-bearing debt plus equity) decreased to 52.7 per cent at 31 July 2009, from 57.4 per cent a year earlier and 61.5 per cent at the 31 January 2009 interim result. Chairman Sir Henry van der Heyden said the business challenges and market volatility faced by Fonterra during 2008/09 were probably unique in the lifetimes of anyone involved in dairying today.  Commodity prices dropped from record highs, the exchange rate experienced roller coaster-like movements "“ much of the world plunged into a deep recession "“ and the global financial meltdown rewrote the rules about how companies obtained finance.  On top of this, the market turmoil occurred as many farmers were emerging from the worst drought in more than a century during the previous 2007/08 season. Sir Henry said Fonterra's improved profitability meant the Value Return payment had increased as a proportion of total farmer Payout.  "The increased Value Return component of Payout is welcomed as it helps to keep the Payout higher than it would otherwise be. "This demonstrates how Fonterra's strategy "“ combining a broad business footprint, a powerful sales network, strong customer relationships and valued brands "“ is delivering more profit to New Zealand farmers." CEO Andrew Ferrier said the improved profit reflected continued solid contributions from the consumer businesses as well as stronger profits from Fonterra's commodity and value added ingredients activities. During the first six months of the financial year, general economic uncertainty together with a steep fall in commodity prices prompted dairy ingredients customers to restrict their buying as they ran down their own inventories. During this period, Fonterra's global sales team had to strike a balance between managing volumes and achieving appropriate pricing given market conditions. As a consequence, Fonterra's inventory levels increased above normal levels.  This strategy put Fonterra in a better position to optimise sales opportunities in a recovering market during the second half of the year. In addition, the very strong relationships Fonterra had built up over many years with the world's leading food companies proved vital in providing a degree of stability during such a volatile year, Mr Ferrier said. A strong second half sales performance meant Fonterra recovered well from a slow first half, with New Zealand-sourced sales volumes for the year growing 5 per cent.  As a result, total inventories were reduced to $2.7 billion by year end, $2.4 billion lower than as at 31 January 2009 and $0.6 billion lower than as at 31 July 2008. Mr Ferrier said the strong growth in profits was helped by solid performance in the consumer brands businesses. Both Australia/New Zealand (ANZ) and Asia/Africa, Middle East (Asia/AME) reporting segments showed good growth compared with 2007/08. In Latin America (Latam), very good performance within the Dairy Partners Americas joint ventures helped soften a profit decrease from Fonterra's Chilean business, Soprole, which had achieved a record performance in the previous period. Mr Ferrier said Fonterra continued to make good progress in the added value ingredients space.  It increased sales of infant formula to global customers, held margins to some degree above falling commodity prices for ingredients products in the large developed markets, and achieved some early success with the commercialisation of products developed by Fonterra researchers.  These included specialised proteins for sports bars, beverages and medical nutrition, special yoghurt texturisers, and unique processed cheeses for the foodservices sector. During the 2008/09 season, Fonterra collected a total of 1,281 million kgMS (including contract and tactical milk supply of 54 million kgMS) "“ a new volume record for the Co-operative.  This was a 7 per cent increase over the 2007/08 season, primarily reflecting a return to more normal weather conditions following the previous season's drought. Sir Henry said total share equity increased by a net $260 million, as new share issues exceeded payments to shareholders redeeming shares or leaving the Co-operative.  While the increase in equity was positive, the Co-operative had still only partly recovered the ground lost in 2007/08, when equity fell by a net $600 million after redemptions linked to that season's severe drought and some shareholders taking the opportunity to surrender excess shares at a higher price than they were then able to buy back at. "Redemption risk affects the long-term health and success of the Co-operative and must be addressed as shareholders consider changes to our capital structure," Sir Henry commented. DETAILED RESULTS DISCUSSION · INCOME STATEMENT Group revenue for the year totalled $16 billion, compared with $19.5 billion in the previous 14 months.  This decrease primarily reflected the impact of lower commodity prices, as well as two months less trading in the latest 12 month period following last year's change in balance date from 31 May to 31 July.  The consumer businesses continued to perform well, with all three regional reporting segments "“ ANZ, Asia/AME, and Latam "“ posting revenue increases on a 12 month versus 12 month basis. The cost of goods sold was $3.6 billion lower, which mostly reflects the impact of the lower Milk Price (partly offset by an increase in milksolids supplied).  Fonterra also had lower purchases of globally sourced product and a lower milk cost for its Australian operations. Operating expenses for the 12 month period totalled $2.0 billion, compared with $2.2 billion for the previous 14 month period.  The lower operating costs primarily reflect a shorter reporting period.  On a constant currency and a 12 month versus 12 month basis, operating expenses were 2 per cent lower, as a tight rein was maintained on cost structures.  Administration costs were lower while advertising and promotional expenditure was higher as we significantly stepped up investment in our brands. Fonterra's underlying EBIT was up 20 per cent ($890 million compared to $743 million previously on a 12 month versus 14 month basis).  Underlying EBIT is calculated as operating profit before net finance costs, equity accounted income and tax, adjusted to remove the impact of non-recurring items. Net finance costs were $448 million, up from $367 million.  Although central bank benchmark interest rates fell significantly over the year, the global credit crunch meant corporate borrowers such as Fonterra had to pay higher margins over these benchmark rates.  As a result, the average borrowing cost was 7.03 per cent, slightly higher than the previous period's 6.88 per cent. Equity accounted investments earned $129 million, down from $158 million. The decrease came from Fonterra's pharmaceutical lactose joint venture, which was coming off an exceptionally strong year in 2008. All other major equity accounted investments showed growth in profits.  As disclosed at the half year, Fonterra has written off the remainder of its investment in the Chinese company San Lu, taking an impairment charge of $62 million against the value of equity accounted investments.  This charge has flowed through into the full year result. Profit before tax was $542 million, compared with $247 million in 2007/08.   Profit after tax was $433 million, up 47 per cent on the previous period.  The profit available for distribution to shareholders was $603 million ($364 million in 2007/08), from which $12 million ($277 million) was retained.  This means that $591 million ($87 million) will be paid out to shareholders via the Value Return payment. · BALANCE SHEET As at 31 July 2009, Fonterra's total assets were $14.1 billion, compared with $14.4 billion as at 31 July 2008.  A lower value of inventories due to the drop in commodity prices was the main driver of this reduction.  Total inventories were $2.7 billion, $0.6 billion lower than a year earlier. Property, plant and equipment assets increased by $0.1 billion to $4.4 billion.  During the year Fonterra spent almost $0.6 billion on capital expenditure projects, the majority of them in New Zealand.  The largest project by far was Drier 4 at Edendale, Southland, which alone accounted for a quarter of total capital spending. The carrying value of brands increased $0.1 billion to almost $1.6 billion, mostly due to the acquisition of the Australian Ski dairy foods business. Fonterra's brands are performing well, delivering good value, and there was no impairment in their carrying value. At 31 July 2009, total net interest bearing debt was $5.2 billion, down $0.7 billion from a year earlier and $2.2 billion lower than as at 31 January 2009.   Fonterra has lengthened the maturity of its debt by paying off short term borrowings and replacing them with longer term money "“ providing greater certainty to the borrowing position during these volatile times.  As at 31 July 2009, the weighted average length of debt was 5.5 years, well up from 3.3 years at 31 July 2008. The debt reduction, coupled with a net $260 million increase in share capital at the end of the 2008/09 season, drove an improved gearing ratio of 52.7 per cent as at 31 July 2009.  This was within the target range of 45-55 per cent set by the Board for 2008/09.  For 2009/10, the Board's gearing ratio target is less than or equal to 50 per cent. · SEGMENT OVERVIEW Commodities & Ingredients Although the turmoil in commodity markets has impacted farmers through a lower Milk Price, the power of Fonterra's global sales network and strong customer relationships created opportunities for enhanced profitability from commodity and premium ingredients sales.  As a result, segment earnings before net finance costs and tax, including equity accounted earnings, were $584 million, up 72 per cent on the previous 14 months.  Underlying earnings of $548 million were 27 per cent higher on a 12 month versus 12 month basis. Segment profitability was enhanced in part because prices for cheese and related products remained robust (relative to milk powder prices) for much of the year. As the Milk Price is based primarily on powder prices, any returns above the Milk Price benchmark are accounted as profits.  Earnings were also helped as some long-term customer contracts, which had cost profits in the previous year when contract pricing lagged behind the market, came back more into Fonterra's favour as market prices declined. External revenue was down 24 per cent to $10.5 billion, reflecting lower commodity prices as well as lower volumes of non-New Zealand sourced milk.  External sales volumes on a 12 month versus 12 month basis increased 8 per cent, primarily due to New Zealand production returning to pre-drought levels.  Sales volumes were well down during the first half of the year during the worst of the global credit crunch, but picked up strongly during the second six months, with record sales in the last quarter. In addition, globalDairyTrade is now widely recognised as a barometer of prevailing market conditions while being an effective and increasingly significant sales channel.  The world's largest powder plant, Drier 4, at our Edendale site is now processing milk.  Good progress has been made with investments in dairy ingredients and solutions with shortened maturation cheese plants now bedded down.  Earlier investments in infant formula plants are delivering strong results while new technology yoghurt texturiser and clear beverage proteins, among other added value ingredients, have been commercialised. Australia/New Zealand Australia/New Zealand grew market share in all key consumer dairy categories in Australia and New Zealand despite difficult economic conditions.  This growth, combined with a continued strong performance by the ingredients and foodservices businesses, helped deliver earnings before net finance costs and tax of $240 million, up 9 per cent on the previous 14 months. Underlying earnings of $248 million were 36 per cent higher on a 12 month versus 12 month basis. External revenues were $3.1 billion, down 6 per cent on the previous reporting period but up 8 per cent on a 12 month versus 12 month basis.  During the year, the Australian business strengthened its position in yoghurts and dairy desserts, acquiring Nestlé's business in these categories and the licence for the Ski yoghurt brand. Asia/Africa, Middle East A tight focus on building brands in high margin dairy categories helped the Asia/Africa, Middle East business increase earnings before net finance costs and tax, including equity accounted earnings, by 21 per cent to $125 million. Underlying earnings of $120 million were 19 per cent higher on a 12 month versus 12 month basis.  This increase came at a time of significant additional investment in advertising and promotion of Fonterra's power brands in key Asian markets.  Earnings growth was before accounting for impairment charges relating to the investment in the Chinese company San Lu.  In the first half of 2008/09, a charge of $62 million was taken to write off the remainder of the investment in San Lu resulting in a segment profit before finance costs and tax of $63 million. External revenue of $1.7 billion was up 7 per cent on the previous reporting period, and 22 per cent ahead on a 12 month versus 12 month basis.  In constant currency terms, revenue was flat reflecting declining commodity prices and the challenging economic environment. Latam Buoyed by strong performances across the consumer businesses, the Latam segment had another solid year. Earnings before net finance costs and tax, including equity accounted earnings, were $106 million, compared with $129 million previously. Underlying earnings of $106 million were 3 per cent lower on a 12 month versus 12 month basis. External revenue (which primarily relates to Soprole) was $749 million, down 5 per cent on the previous reporting period, but up 10 per cent on a 12 month versus 12 month basis.  Soprole's consumer brands showed good volume and margin growth, however the overall Soprole profit was down due to a lower contribution from its export business. The Dairy Partners Americas (DPA) joint venture, which cover consumer and/or manufacturing businesses in Brazil, Ecuador, Venezuela, Argentina and Colombia, had a year of strong growth, partially offsetting the drop in profit at Soprole.