Fonterra to pay interim dividend of 20c; forecasts 40c dividend for full year and plans to pay this earlier than usual to assist farmers; total payout of $4.30 seen

By David Hargreaves

Fonterra's paying an interim dividend of 20c a share and is forecasting a full-year dividend of 40c, which it's planning to pay out sooner than usual to assist farmers in a difficult season.

The 20c dividend will be paid next month and the current plan is to pay two more 10c stages of dividend in May and August - compared with the usual policy of paying the second half dividend in October.

The forecast means that, with the current forecast milk price of $3.90 per kilogram of milk solids, farmers will get a total payout of $4.30 this year. See here for the full dairy payout history.

Despite the slumping global dairy prices, Fonterra lifted its after tax profit for the half year by 123% to $409 million - as a result of putting more available milk into higher value products.

Chairman John Wilson said the Fonterra board had considered an extension to the support loan provided early in the season which will total $383 million by April 2016, "but based on the solid performance of the co-operative in the first half it felt paying the final dividend earlier was the better option".

There has been some concern in the market about Fonterra's debt levels, particularly after introduction of the loan scheme. But the company was playing down concerns today, with chief executive Theo Spierings saying that the company's gearing ratio was 49% at the end of January compared with 51% at the same time year ago. Net debt is $6.9 billion "and we are expecting this to reduce significantly in the second half of the year. We are on track to reduce gearing to 40%-45% by the end of the current [July] financial year.”

Wilson said the timing of the dividend payments would help farmers’ cash flows at the time of the season that they need it most and is a specific response to the very challenging financial conditions our farmers are facing.

“The months May through to August are typically the most difficult financially for farmers, with lower forecast milk payments in these months.  We looked carefully at the available support options to us and bringing forward payment of the total forecast dividend is the best way we can support our farmers while continuing to retain the financial strength of Fonterra.”

The two dividends in May and August are subject to the board's’s approval at the time and Fonterra’s financial performance continuing to support its forecast earnings per share of not less than the current 45c to 55c  forecast range per share.

"The payments do not signal any intention to move away from Fonterra’s normal practice of twice-yearly dividends paid in April and October. They are also consistent with Fonterra’s dividend policy," Wilson said.

“We are firmly on track to achieve our forecast earnings of 45-55 cents per share, ahead of the 40-50 cents per share we indicated at the beginning of the season.  We are backing ourselves to support our farmers and confirmation of the first payment will be made in May,” said Mr Wilson.

Fonterra would also continue to support farmers with on-farm costs through competitive pricing through its Farm Source stores and through discounts secured on necessities such as fuel and power, Wilson said.

The body representing Fonterra's farmers - which a year ago expressed disappointment at a then interim dividend of just 10c a share - said today's announcement was "in line" with its expectations.

Fonterra Shareholders’ Council Chairman Duncan Coull said the decision to pay out an interim dividend of 20 cents per share, and to accelerate the final dividend payments, would be "very well-received" by farmer shareholders and go some way to alleviating immediate on-farm cash-flow pressures.

“With the forecast milk price remaining at $3.90 per kg/MS, farmer shareholders’ expectations are that the value-add side of their business will provide them the much talked about counter-cyclical benefits," Coull said.

“The results in this regard are encouraging in that the business, on the back of weaker global demand, has moved volume into higher value which has contributed to the lift in interim profit.

“A clear focus on driving cash into the business is also evident in terms of free cash flow and a reduction in gearing ratio.

“It is important that the board continues to drive the business forward as the performance of some business units, such as Australia, Venezuela and China Farms are having a negative effect on the business.

“However, the council looks forward to the current positive momentum continuing and translating into more cash for our farmers.”

This is the statement released by Fonterra:

Results Highlights

- 2016 financial year forecast
- Forecast Farmgate Milk Price $3.90 per kgMS
- Forecast available for payout $4.35 - $4.45 per kgMS
- Forecast earnings per share range of 45-55 cents
- Total forecast dividend of 40 cents per share
- Forecast cash payout $4.30 per kgMS
- Interim dividend of 20 cents per share – to be paid in April
- Intention to pay the final dividend earlier
- Normalised EBIT $665 million, up 77 per cent
- Net profit after tax (NPAT) $409 million, up 123 per cent
- Ingredients normalised EBIT $617 million, up 27 per cent
- Consumer and foodservice normalised EBIT $241 million, up 108 per cent
- Moved an additional 235 million litres of milk higher up the value chain into consumer and foodservice products

Forecast Cash Payout

Fonterra Co-operative Group Limited today announced a good performance in the first half of the current financial year, with normalised earnings before interest and tax (EBIT) of $665 million up 77 per cent on the comparable period, and net profit after tax of $409 million up 123 per cent.

Chairman John Wilson said that the supply and demand imbalance in the globally traded dairy market has brought prices down to unsustainable levels for farmers around the world, and particularly in New Zealand. The strong New Zealand dollar has also had a negative impact on the Milk Price.

“The low prices have placed a great deal of pressure on incomes, farm budgets, and our farming families.

“Our priority is to generate more value out of every drop of our farmers’ milk by focusing on the areas within our control. We aim to efficiently convert as much milk as possible into the highest-returning products.

“Our management is aware of the need for strong performance to ensure that we get every possible cent back into farmers’ hands during a very tough year.

“We have lifted profitability from last season to this season, resulting in higher earnings per share to help offset low global dairy prices. As a result, we have delivered an interim dividend of 20 cents per share, up from an interim dividend for last year of 10 cents per share.

“Our forecast Farmgate Milk Price of $3.90 per kgMS reflects low global dairy prices, with Whole Milk Powder decreasing around 17 per cent this season to date. Forecast total available for payout of $4.35-$4.45 per kgMS currently equates to a forecast cash payout of $4.30 per kgMS after retentions for a fully shared up farmer.

“Our forecast total dividend for the current financial year is 40 cents per share. The Board has today declared a 20 cent dividend which will be paid in April. We intend declaring the remaining 20 cents per share in two dividends of 10 cents in May and 10 cents in August to help support farmers at a time when cash flows are extremely tight,” said Mr Wilson.

These two dividends in May and August are subject to the Board’s approval at the time and Fonterra’s financial performance continuing to support its forecast earnings per share of not less than the current 45 to 55 cents forecast range per share.

The timing of these payments is a specific response to the current, very challenging, financial conditions farmers are facing and does not signal any intention to move away from Fonterra’s normal practice of twice-yearly dividends paid in April and October.

Business Performance

Chief Executive Theo Spierings said the Co-operative’s strong performance reflected a sustained effort in three main areas.

“We focused on the efficiency of our ingredients business and capturing demand for ingredients in a wide range of markets.

“We aimed to make the most of global consumption growth by building demand for higher-value products in our consumer and foodservice markets.

“Our working capital has improved significantly, and our inventory levels are lower than in recent periods for this time of year – down 9 per cent in volume terms due to strong sales.”

Free cash flow for the six months to 31 January 2016 was $2.1 billion higher than the first half last year, with gearing at 49 per cent, down from 51 per cent in the previous year.

“Finally, we maintained strict financial discipline to keep lifting our return on capital and our strong cash flow has enabled us to strengthen the Co-operative and reduce gearing,” said Mr Spierings.

“Ingredients achieved normalised EBIT of $617 million, up 27 per cent compared to the first half last year. This resulted from improved product mix returns, and the increased production and cost efficiencies coming from our investments in plant capacity in New Zealand.

“In consumer and foodservice we have delivered very good growth, with normalised EBIT increasing 108 per cent to $241 million. We remain focused on growing demand, especially in the eight markets where we currently hold or want to gain leadership or a very strong position: New Zealand, Australia, Sri Lanka, Malaysia, Chile, China, Indonesia and Brazil. These are well established markets for Fonterra, so we are working off a strong base.

“The additional 235 million litres of milk we converted into higher-returning consumer and foodservice products in this six month period built on the additional 600 million litres last year.

“Our farms in China are a key part of our integrated dairy business. We are achieving operational efficiencies on the farms which are helping offset the current low domestic milk price in China.”

Outlook

Current global economic conditions remain challenging and are impacting dairy demand and prices, said Mr Spierings.

“The balance between available dairy exports and imports has been unfavourable for 18 months following European production increasing more than expected and lower imports into China and Russia. This imbalance is likely to continue in the short term, with prices expected to lift later this calendar year.

“The long term fundamentals for global dairy are positive with demand expected to increase by two to three per cent a year due to the growing world population, increasing middle classes in Asia, urbanisation and favourable demographics.”

Mr Wilson said the Co-operative’s solid performance was set to continue.

“The business will continue to work on capturing demand and margins in the second half of the year, just as it did in the first half, by focusing on our consumer and foodservice volumes and those of specialty ingredients.

“We remain firmly on track to achieve our forecast earnings of 45-55 cents per share, ahead of the 40-50 cents per share we indicated at the commencement of the season.

“Our net debt is $6.9 billion and we are expecting this to reduce significantly in the second half of the year. We are on track to reduce gearing to 40-45 per cent by the end of the current financial year.”

The record date for the interim dividend is 8 April, and the payment date is 20 April. The Co-operative will continue to offer a dividend reinvestment plan, at a discount of 2.5 per cent to the strike price. Eligible shareholders who want to participate for the interim dividend need to submit a notice of participation by 11 April 2016.