Fonterra cash payout for 2010/11 set at NZ$7.90/kg, up 24% from year ago, but forecast to fall to around NZ$7.05/kg in 2011/12 year

By Bernard Hickey

Fonterra has set its final cash payout for the just completed NZ$2010/11 season at a record high NZ$7.90 per kg of milk solids or a total of NZ$10.6 billion, which is up 24% or NZ$2.4 billion from a year ago.

But Fonterra has retained its forecast for a cash payout in the current 2011/12 season of around NZ$7.05/kg, which implies an 11% or NZ$1.2 billion drop in cash payouts this year because of a drop in commodity prices from peaks early in 2011 and a firm New Zealand dollar.

Fonterra released its financial results for the year to June 30 showing a 13% rise in its net profit to NZ$771 million, with a 19% rise in revenues to NZ$19.9 billion.

Fonterra's total non-cash payout for the 2010/11 year before retentions was NZ$8.25, but Fonterra retained 35 cents/kg to build up its capital reserves and reinvest in growth.

That includes a milk price of NZ$7.60/kg and distributable profit of 65 cents per share. Fonterra paid out a dividend of 30/cents per kg to full shareholders, which represented a distribution to unadjusted profit ratio of 46%.

Fonterra's CFO Jonathan Mason said Fonterra's hedging policy saw it realise an average exchange rate for the year of 72 USc when the actual average was 77 USc, which meant Fonterra booked hedging gains for the year of NZ$863 million or around 70 cents of payout/kg of milk solids.

Fonterra usually targets a dividend payout ratio of 65-75%, but said the policy is for dividends after adjusting for one-off items and other factors. It said its adjusted payout ratio was 69%.

The previous record high cash payout of NZ$7.66/kg was in 2007/08 near the peak of prices after a drought, when less than 1.2 billion kgs were produced.

Fonterra said its balance sheet was in its strongest shape ever, with an economic gearing ratio of 41.8 per cent, compared with 44.9 per cent a year earlier.

Fonterra said it collected a record 1.346 billion kg of raw milk in the 2011 season, up 5% from the previous year. It said dairy exports for the year was a record 2.1 million tonnes and reflected an improved performance by Fonterra’s ingredients businesses that export to more than 100 markets, as well as by overseas consumer businesses, especially across Asia and the Middle East.

However, it said consumer business profits in New Zealand and Australia were down in a tough market environment.

Chairman Henry van der Heyden said Fonterra’s hedging policy shielded farmers from the full brunt of a stronger New Zealand dollar, especially over the latter stages of the year.

“We also benefited from record milk production, as some of the best autumn conditions in recent years offset poor weather in many regions earlier in the season," he said.

Fonterra's retiring Chief Executive Andrew Ferrier said higher dairy ingredient prices had been a factor, but underlying profitability showed solid growth because of improvements in Fonterra's ingredients business and consumer brands.

Normalised earnings from Fonterra’s Standard & Premium Ingredients segment rose 36%

"Earnings growth reflected improved efficiencies in the manufacturing and supply chain, refinements to the product mix and growth in the higher-margin premium ingredients business," Fonterra said.

Revenue from the consumer businesses hit a new record NZ$6.1 billion.

Africa, Middle East earnings strong; Australasia, Latin America soft

Ferrier said the standout consumer business segment was Asia/Africa, Middle East, with normalised earnings rising 12%.

“We continue to focus on high quality nutritional and foodservice solutions that leverage our trio of power brands, Anchor, Anlene and Anmum," he said.

Normalised earnings from Fonterra's Australia/New Zealand segment fell 17%. Ferrier said margins were compressed as a fiercely competitive market environment made it harder to reflect fully higher commodity prices in consumer pricing.

Fonterra's Latam segment, comprising Soprole in Chile and the Dairy Partners Americas joint ventures with Nestle across key Latin American markets, generated flat underlying earnings.

Fonterra confirmed its previously announced forecasts for the current 2012 season of a forecast Farmgate Milk Price of NZ$6.75 per kgMS and a  Distributable Profit range of 40-50 cents per share.

Given a dividend payout range of 65-75%, that implies a cash payout of around NZ$7.05/kg.

"The lower forecast Farmgate Milk Price relative to 2011 reflects a softening of global commodity prices since early 2011," it said.

Fonterra's new CEO Theo Spierings takes office on Monday 26 September 2011, succeeding Ferrier who announced in March he was stepping down after eight years as CEO.

Tax credit and Trade Among Farmers delay

Van der Heyden later told a news conference the Dairy Industry paid its fair share of tax because Fonterra's owners paid tax on their farm income. Fonterra received total tax credits for the year of NZ$149 million from governments around the world.

He also acknowledged some farmer concern about Fonterra's plan to create a facility for trading of shares among farmers and the creation of an arms-length fund for outside investors to earn dividends from Fonterra and benefit from its share price rise, but not necessarily own Fonterra shares.

He said some farmers had become concerned that 100% control might be watered down, but he said: "Unless the board is guaranteed or 100% certain of 100% control then there's not going to be trade among farmers."

Farmers voted for the overall idea of Trade Among Farners in June 2010, but delays in getting legislation changed had created a vacuum into which farmers were revisiting the debate.

Van der Heyden said legislative change was now not likely until well after the November 26 election and various milk price reviews. He said he did not expect Trade Among Farmers to therefore start until late 2012.

He reiterated there remained a need to reduce the redemption risk Fonterra faces in lean years when farmers can withdraw capital if their production falls. Fonterra saw an exodus of NZ$700 million of equity in 2008 after a drought, just as the Global Financial Crisis put immense pressure on Fonterra's balance sheet.

(Updated with detail, exit interview video with Andrew Ferrier, comments on tax and share trading, charts)