By Bernard Hickey
New Zealand's largest company and its largest exporter, Fonterra, has released its annual result and finalised its payout for the just completed 2009/10 season.
Fonterra set the 2009/10 payout at NZ$6.70/kg, including a milk price of NZ$6.10/kg and a dividend of 27 cents, plus retained earnings of 33 cents per share. The payout of NZ$6.37/kg is 23% above the previous year's NZ$5.10/kg.
Fonterra also tightened up its forecast payout for the current 2010/11 season at NZ$7.00-NZ$7.10/kg, up slightly from its previous forecast on August 20 of NZ$6.90-NZ$7.10/kg.
Fonterra said it made an after-tax profit of NZ$685 million in the year to July 31, up 12% on the previous year, although the rise included NZ$174 million of non-recurring gains, mostly from sales of non-strategic assets. See the full results announcement here. See the full media presentation pack here.
The Distributable Profit of 60 cents per Co-operative share was higher than the 40-50 cents forecast for the year. The board retained the 'extra' 10 cents in the form of retentions of 33 cents per share.
Fonterra said its balance sheet was in its strongest shape in its history with a gearing ratio of 44.9%, down from 53.0% a year earlier.
"This reflected an increase of NZ$862 million in equity, primarily as a result of farmer-shareholders investing NZ$459 million in additional shares, as well as a higher level of retentions," it said.
Fonterra said its economic net interest bearing debt was NZ$4.5 billion at 31 July, NZ$727 million lower than a year earlier.
Lower borrowing needs, combined with lower floating interest rates, reduced financing costs by $135NZ million.
Chairman Henry van der Heyden said Fonterra has come through the recession well.
“Despite drought conditions in the North Island, Fonterra collected a record 1,286 million kgMS and set a new export record of 2.1 million tonnes of New Zealand dairy products," he said.
Given a NZ$6.37 payout, this meant Fonterra will pay NZ$8.2 billion to farmers this season.
Van der Heyden said the 33 cent retention reflected the board’s decision to retain all earnings from non-recurring items, as well as its previously stated intention to increase the use of retentions to fund ongoing investment in New Zealand factories and offshore.
Chief Executive Andrew Ferrier said the 2009/10 profit reflected a year of mixed underlying earnings, with a very strong performance by Fonterra’s consumer businesses but a reduced contribution from the ingredients businesses, largely due to volatility in international dairy markets.
The combined earnings of the consumer businesses rose 19%.
“The consumer businesses in Australia-New Zealand, Asia/Africa, Middle East and Latin America each posted higher normalised earnings compared with the prior year," Ferrier said.
Earnings from Fonterra’s ingredients businesses were pressured because market volatility meant prices for some products, such as cheese and casein, lagged international powder prices that were the main drivers of the Milk Price.
“With the strong rise in powder prices, the pricing of some of Fonterra’s customer contracts lagged the rapid increase in spot market prices and the rise in Fonterra’s own Milk Price. This also placed pressure on profit margins in the ingredients businesses. Contract lags and the effect of different returns from the various streams of base commodities impact Fonterra’s profits," he said.
Fonterra was moving to reduce the pain of this volatility, Ferrier said.
"We are trading more products on our globalDairyTrade platform and negotiating shorter duration contracts, while investment in new plant will give us greater flexibility to adjust our product mix and lower our production costs to capture the best margins," he said.
Ferrier said there were signs international dairy supply and demand were moving more in balance at prevailing prices, although there was still considerable volatility.
The tightened payout forecast for the 2010/11 season NZ$7.00-7.10 before retentions included an unchanged milk price forecast of NZ$6.60 per kg.
Fonterra was narrowing the forecast distributable profit range from 30-50 cents per share to 40-50 cents per share.
Fonterra was targeting a dividend range for 2010/11 of 25-35 cents per share, consistent with its stated policy of paying 65-75 per cent of adjusted Distributable Profit as an annual dividend.