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Fonterra increases payout forecast around 30c to NZ$6.12/kg after strong profit, higher milk powder prices

Fonterra increases payout forecast around 30c to NZ$6.12/kg after strong profit, higher milk powder prices

By Bernard Hickey

Fonterra has announced an increase in its milk payout forecast for the current 2012/13 season to around NZ$6.12/kg for a fully shared up farmer.

This is up from a forecast payout range of NZ$5.90 to NZ$6.00/kg, including dividends, in late February and follows a strong first half profit result and a surge in milk powder prices after a drought. 

The new forecast is based on a higher forecast Farmgate Milk Price of $5.80/kg (up from NZ$5.50) and a forecast dividend of 32 cents per share. Fonterra also narrowed its earnings per share guidance to 45-50 cents per share from 40 to 50 cents. The correct comparison of dividend plus milk price shows a 30 cent increase in Fonterra's payout forecast, not 15 cents as previously reported.

The previous year's total payout was NZ$6.40/kg, including a milk price of NZ$6.08 and 32c of dividends.

Fonterra's net first half profit rose 33% to NZ$459 million, "following a particularly robust performance by NZ Milk Products and significant lifts in sales volumes in Fonterra’s Asian and Latin American brands.  These achievements were partly offset by continuing challenges affecting the performance of the Australian business."

Fonterra Chairman John Wilson said the new forecast reflected a recovery in global dairy commodity prices over the past two months, pointing to a 27% rise in milk powder prices since February.

“World dairy trade growth is being led by powders (combined whole milk and skim), reflecting strong demand at a time when global supply is constrained," Wilson said.

Flat production and early payout

He said an excellent spring and early summer had produced record milk volumes in the first half of the year, being up 6% from the same half a year earlier.

“However, the dry conditions in the North Island since January have created real challenges for our farmers, with many turning to supplementary feeds and shifting to once a day milking to maintain the condition of their herds," he said.

“The drought in the third quarter has been more severe and lasted longer than anyone might have predicted, and means we are currently forecasting total milk collection volumes for the full season to finish in line with last season."

Fonterra collected 1.476 million kgs in the last season. 

Wilson said Fonterra's strong balance sheet and cash flows had allowed it to increase the advance rate paid to farmers, which would mean average farmer shareholders would receive NZ$100,000 earlier in the season.

“This is particularly important to our farmers.  It means we are getting cash to them faster, as they begin to dry off their herds for the winter earlier because of the drought and no longer have milk flowing.”

Fonterra said it would increase the interim dividend to 16 cents/share from 12 cents, which was up 33% from the previous year and the maximum allowed under Fonterra's dividend policy.

Earnings Before Interest and Tax (EBIT) rose 26% to of NZ$693 million, but revenue fell 7% to NZ$9.3 billion, which Fonterra said reflected lower dairy commodity prices and the strength of the New Zealand dollar against the US dollar.

First half milk volumes rose 6% from the same period a year earlier, while external sales volumes rose 8% to 2.1 million tonnes.

Fonterra's debt to equity ratio improved to 40% from 47% a year earlier, while earnings per share rose 21%.

Australian problems

CEO Theo Spierings said NZ Milk Products performance had been good with EBIT riseing 65% to NZ$422 million despite a 16% fall in US dollar denominated commodity prices.

"While our consumer business performance in New Zealand was slightly better than last year,  Australia’s consumer business had to contend with a very competitive retail environment," Spierings said.

"Meanwhile, the ingredients business experienced a significant margin squeeze as the competition for milk supply in Australia intensified.  This was compounded by an adverse product mix due to lower demand in the export sales of value-added nutritional powders, and more milk being channelled into lower value milk powder sales," he said.

“A recovery plan is now in place, with the planned closure of our Cororooke site, continuing rationalisation of the brands portfolio, and cost reductions following a recent restructure of the business."

Spierings said volumes in Asia and the Middle East had risen 13% to 186,000 tonnes

Latin American earnings rose 5% with solid earnings growth from Soprole in Chile, which was offset by a weaker result from Dairy Partners America.


Spierings said Fonterra’s strong first half earnings were unlikely to be repeated in the second half.

“For the full year, we expect to see total milk volumes for the current season to be in line with last season. The ongoing volatility in commodity markets could have a negative impact on product mix profitability. In many of our consumer markets, we are expecting intensified competition in the second half – particularly in Australia – and in Asia we are seeing signs of demand slowing,” he said.

(Updated with full statement, details, chart, corrects change in payout to adjust for dividend plus milk price)

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Updated to reflect correct comparison of milk price + dividend being up 30 cents from the last forecast, not the 15 cents originally reported. I missed the difference between milk price alone and milk price plus dividend.

Banks will be relieved ;-)

Yeah money will probably go straight to the OD payoff, some farmers by now probably have no access to their accounts.......not the regrassing and contractors or consultants being paid etc, that will all go on credit to pgg farmlands etc and maybe unfortunately agricultural contractors/ consultants etc, so problems may hit Aug/Sept when these payments are 6 months overdue

Great timing for Synlait Farms first day of trading on Unlisted market today.  Looking at their presentation on 5.4kgMS production a 30c increase in payout ( assuming Synlait Milk matches Fonterra increase ) drops an additional $1,620,000 straight to the bottom line for this season. 

With respect to SF, they are yet to tell what trading results and balance sheet for this year will be.
However 5.4m kg at $5.80 (and the earlier $5.40 was 10c less than the F $5.50) = $31,320,000
FWE from the 2011 that produced 5.37m kg was $21,400,000 (lets assume stock sales the same and than no grain has been fed to kick up per ha production).
Less FWE $21,400,000
Equals EBITDA $9,920,000
Liabilities are $143m, but we are not sure if they are all interest bearing (so lets take debt $128m plus derivatives $6m as that usually costs something). Remember assets shown as $204m.
For a figure of debt to be serviced as $134,000,000.
Q: we do not know the SF interest rate. Lets say 7.5% (given the high lvr - most banks tell the RBNZ they lend 50% lvr for farms)
134,000,000 " 7.5% = $10,050,000 interest cost.
Well SF probably have a lower interest rate?
Capex seems about $1m., taking this off before paying interest means the interest on the $134m is 6.6%
Depn seems about $3m which should mean no tax to pay this year.
May be we should all have their bankers... they seem brilliant...

No doubt the balance sheet is a little stretched but strong cashflows from the milk payout over the last few years has allowed them to reduce debt.  They just bought Mitsui's shares back in the company on favourable terms to all remaining shareholders , Mitsui keeping their Synlait Milk exposure.  This has pushed the debt number back up about $8m from what I can gather.  They put a new banking syndicate together about 18 months ago , very strong relationship now and the management are held in high regard by their bankers.
Not too many ways to get exposure to dairy farming in NZ despite it being our biggest industry.  Synlait Farms is a pretty pure play on ever increasing demand for protein around the world and especially in Asia.

Ex the presentation and we understamd its proforma amd summary and that 2013 audited accounts should describe banking facilities...:
1. Are not total assets $203m
2, Are not liabilities $143m
debt-to-capital (D/C) D/C = total liabilities / total capital = debt / (debt + equity) = 143/2030 = 70%
Debt to equity ratio = Total Liabilities ÷ Owners' Equity = 143/60 = 2.383'
A ratio of more than 1:1 means that:

debt is higher than owners' equity
the business is negatively geared
the external lenders are bearing more risk than the owners
external lenders have a stronger financial interest in the business than the owner

Several farm syndicators are actively looking for investors.
Refer Trademe Property / Rural / All Regions / All Districts / Dairy = choice
To supply Fonterra they would need $38m to $40m worth of shares.

Shares in Synlait for sale on the Unlisted exchange at $1.15.
Is this a good price or not?

The company presentation on the Unlisted site states that their N.A.V is $1.45/share .  Listed dairy farming companies in the past traded at discounts to the value of the cows and farmland.  That was quite a few years ago when there was no competition for milk .... NZ Dairy Group , Kiwi , Westland were all co-operatives.  Now you have a competitive milk market ( kind of ) and there is a Global Dairy Trade auction every fortnight to give you trends in final product prices of Whole Milk Powder , Skim , AMF , Butter etc so the industry is certainly alot more "open" than it was ... does that mean that the farming businesses should trade at smaller discounts than they used to? Don't know but there certainly seems a reasonable argument to be made that they should.

Just herd the NZX summary on the news.  Fonterra up 6%  on the back of a increase to $5.80 in the milk price. WTF. The return to investors in Fonterra shares is related to the milk price, in a negative way. Do people actually know what they're investing in?

I doubt they do redcows.  Will be interesting to see how many farmers sell up to 25% of their 'wet' shares now that they will be able to, and what effect that will have on share price.

Enjoy your moment in the sun
Fonterra loses 30% in Australia
Woolies to negotiate direct with farmers and bypass processors
If successful will come to new zealand

Yes the supers appear to have the upper hand.
On Oz. The problems mentioned as we suspected across brands, now to milk processing (and this before Woolies start their Farmers Brand) and the Oz ingredients business as well.
Strategically it should be treated as a home market, and it is considering the raw milk volume...
A concern we have is on slide 26, the critical enabler being Deliver on food service potential, and the comment: Significant Investment Required to Deliver? Do they mean cash$ needed? anyone?

stop press. the link is worth a look..
Meanwhile the results delivered on Wednesday by one of the big dairy processors, the New Zealand-based Fonterra, demonstrated just how badly this part of the industry is faring.
Fonterra's Australian business ''had to contend with a very competitive retail environment'', which was in part responsible for the division's profit falling a massive 32 per cent.
The company said the supermarket push into private labels was increasing competition and rationalisation of shelf space had been a feature in Australian supermarkets.
As a result, Fonterra said, there were winners and losers among its various butter, cheese and yoghurt brands.
The message is that Fonterra is now in the process of rationalising its Australian manufacturing to reduce the number of brands it offers.

Read more:

The ACCC has given approval to the Manning Valley - Woolworths scheme - on TV News Tonight.
The coles (lower case) version is branded "Ocean Road" - a play on the name of the main road to Warrnambool .. so it's a Warrnambool Cheese product .. have tried it once and it is CRAP (upper case) it's worse than skim milk but still marketed as "Full Cream Milk"
The two supers have got the ACCC totally befuddled .. I was hoping if the Woolworths - Manning Valley would simply be a processing - heat treatment - bottling arrangement and we might start getting some "full cream milk" for once

Its a shame we have to rattle the web in Oz to find news.
"The intense competition we think is going to continue so we have to pull the levers that are within our control," Fonterra's chief financial officer Jonathan Mason told The Australian Financial Review.
"It's not like we woke up a month ago and said 'we have a retail price war in Australia' – this has been an issue for a couple of years but we have been working on it with more urgency and we have additional measures we're rolling out now," Mr Mason said.0
Coles dropped Fonterra's Mainland cheese brand after the processor declined to supply a private label product.
Fonterra announced 90 job cuts last August and more will go during another round of restructuring.
As part of a merger of the Australia, NZ, Asia and Middle East units, Fonterra's Australia-NZ managing director John Doumani, former chairman of the Australian Food and Grocery Council, is leaving and his senior managers have been forced to re-apply for their jobs.
Mark Wilson, who runs the Asia-Middle East unit, will oversee the merged group.

Somehow I think the medium/ long-term of the competitive retail environment in Australia has no relevance. If there is short supply and strong demand coming from overseas, Fonterra Australia will simply withdraw from domestic market and export.......
Australia consumers will have to pay market world rates and supermarkets lose control in order to source milk etc. Australia dairy industry to too reliant on domestic market that why they had disaster in recent years 

You are right thinking long term.
The right now problem is that Fonterra has a lot of money tied up their in assets across all milk production types and the supermarkets are not getting nicer. So this has impact on brands business and leads to this:
Bowley said that overall, his first experience of a Fonterra result had him "scared more than excited".
Lister said many people "still don't get Fonterra". There was a popular belief that if milk payout was increased it was positive for other factors like dividend.
But payout was a cost of production. "This company is a processor," he said.
"They buy milk off farmers, that is a cost. It is a great business and it is leveraged to a strong dairy sector but it's not like owning a dairy farm."
Back to Oz, to rearrange the production outputs to export mkts will take a good lick of capital, $ if spent by Fonterra would need come from somewhere..
The other point is with milk pools strategy, we are looking to take more the particular local/domestic milk price rather than export price. And what we see in Australia, you can have great consumer market (ppl with $), great products/brands (mainland), consumers asking for that brand,  but some local supermarket will refuse to let your product be sold to consumers... threrfore we have no sales, no $.

Its tuff to find one number. We aim compare to the Lincoln farms, but then we need make allowance for comparing grain based production, milking blocks off part leased land, operater/sharemilker,manager etc. etc. and look for a $ number too.
Water makes all the difference.
Take a look here.
and look round webwise when they do the annual comparison with 3 others.

agreed , investing in the current Fonterra structure is a bit counter-intuitive as higher milk prices hurt the margins on their consumer products business ( they have to pay more for the raw ingredient )  Synlait Farms is a pure bet on higher commodity prices over the medium term ( and better production / lower costs , ie cheaper water, lower electricity costs from better use of water resources etc ) ... but no two ways about it you can tinker with the input costs but 90% of the sensitivity of the P&L line will come from the milk payout ...  2 GDT auctions on the row with double digit gains will certainly help the 2013/14 payout and yesterdays news about Fonterra raising the milk price by 30c this late in the season ( alot of farmers up north have thrown in the towel and dried off ) on the back of those 2 results shows how much leverage there is to higher powder prices.  High $6's payout next year unless the kiwi$ blasts thru 85c.

Two-way market in Synlait Farms now .  The bid / offer spread is wide enough to drive a big red London bus through but we have a market.  Bid $.65 ( 20,000 ) Offer $1.15 ( 175,000 )
65c is an 80c discount to disclosed NAV , or put in percentages a 55% discount.  Optimistic ?

65 cents across 41m shares  equals to an equity value of say $26m all up. Plus the debt of $143m values the assets at $169m, rather than $204m, being a 17% discount. or reduction......
Many ppl would be surprised at $26m equity value for SF after all the activity over the 10 years or so.
$26m equity  v $143m debt is getting up there, say lvr 85%.
from yesterday lost on another thread:

by Henry_Tull | 27 Mar 13, 12:40pm


Vote up!

Window dressing aside (and refer to the Unlisted market rules)
Well lets say the assets are worth $204m * 80% $163m (could be $153m at 75%), take off the debt $143m (all liabilities $128m + 6m + 9m) . So left with $10m to $20m
across $41m shares.
is 0.24 to 0.49.
Thats 24 cents to 49 cents per share from your calculation. Then there would be the spread for someone to cross.
The point you make about the listed assets values is this:
1. Comparative Sales: Land agents will say the market is driven by comparable sales - this is easy for smaller owner operator units.
2. Productive or cash return values: This being the property is worth what I can earn off it.
So in this case take 2013 cash income (not cashflow) with debt at segregation from dairy factor) and decide what multiple you will pay.
Proviso. Ask your self when can I expect a dividend to be paid to me.... (refer lvr)

Many ppl would be surprised at $26m equity value for SF after all the activity over the 10 years or so.
$26m equity  v $143m debt is getting up there, say lvr 85%.

The loss making potential for all concerned is outstanding. - what can banks/RBNZ do other than plan to raid the opposite side of the debtors ledger?

Henry, I spent yesterday with a rural bank manager, there is still growth in the dairy industry and some big players looking to set up large scale dairy.  They are lending %50 LVR ,but he was touchy about livestock finance.
 Here is an article on USA Dairy growth
  Over all, he was not optimistic about where dairy prices are going, they have had some large Chinese investors looking, they can get $ 50,000 out of China each, but there appears to be a problem when they try and take 19mill out.
 Cattle prices are good and most ranchers are happy, land prices are holding up, Chevron are buying some land at 8k an acre, but they think it could have 16k of gas under it, so they will frack it and sell it back.
 Family Ranches are doing fine, so long as they have low debt levels, feedlots are pushing weights up at least %20 to make up for the shortfall in cattle numbers.
  Drought is still affecting a fairly large area. I have a friend who is a large dairy herd Vet in Wisconsin, I will have another chat, he tells me production is going from strength to strength.
   I don't know what to make of the cattle market, one moment a major shortage then you read this

Thanks, makes a good read, esp. the Team USA rara...
Gets us thinking that the round $3,500/ton export, and round $6 farm payout really is the cap or top of the revenue envelope....

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