Fonterra payout stays at NZ$5.10; debt rises (Update 3)

Fonterra announced its payout forecast would remain at NZ$5.10 per kilogram of milk solids after a "solid half year financial result" for the six months to the end of January. However, debt at the end of January was up from July, partly due to NZ$700 million in extra payments to farmers above the normal payment schedule, Fonterra said. (Update 3 to include half year result.) "Despite this climate, our payout is still forecast to be NZ$5.10, and our result shows Fonterra to be in reasonable shape given the turmoil in the world economy - it's a tough time for everyone and Fonterra is no exception," Fonterra Chairman Henry van der Heyden said. "We have taken, and will continue to take, the tough decisions to manage the business prudently in the current climate and get our farmers the highest payout," he said. Fonterra said its debt gearing had risen to 61.5% at the end of January compared to 57.4% at the end of July. It said the increase was primarily due to:

• "The cost of carrying higher inventories over the season's peak"
• "The devaluation of the New Zealand dollar which resulted in foreign currency debt increasing when converted to NZD."
• "And the higher-than-usual advance rate percentage Fonterra has been paying farmer-shareholders this season, which resulted in more than NZ$700 million extra in payments to farmers over and above the normal payment schedule."

"Debt gearing is expected to reduce to more normal levels by year-end as working capital requirements ease due to the normal seasonal cycle and with other initiatives such as a freeze on non-essential capital expenditure," Fonterra said. "Additionally, the requirement announced last October that farmers must bring their shareholdings fully in line with this season's milk production is expected to bring in around NZ$400 million of additional equity by the end of the financial year offsetting forecast share redemptions." "By paying back short term loans and taking out longer term borrowings, average debt maturity has increased, putting the Co-operative in a stronger position to face uncertain times in financial markets. As at January 31, the weighted average length of borrowings was 4.1 years - up from 3.3 years at July 31, 2008. As at March 31, Fonterra's successful retail bond issue in New Zealand has extended the company's average maturity to 4.7 years." Fonterra raised NZ$800 million in a retail bond issue that closed in February. The six-year issue was offered at a rate of 7.75% and was taken up by 9,025 investors. Fonterra's half year result showed revenue was up 9.6% to NZ$8 billion. However, the co-operative said this result was distorted because of a change to its annual balance date. The latest result included December and January, two high production months, and so comparisons with the half year June 2007-November 2007 would be out of line. "Adjusting for timing factors and including exchange hedging, total revenues would have been down by 7.6%, reflecting the lower international dairy commodity prices," Fonterra said.