Fonterra announces final 2009/10 payout of $6.70 before retentions

Fonterra Co-operative Group Limited announced today its second-highest payout of $6.70 (before retentions) for 2009/10, up from $5.21 last year.

The payout comprises a Milk Price of $6.10 per kilogram of milksolids (kgMS) and an annual dividend of 27 cents per share, with retentions of 33 cents per share. This means an average farmer who has 100% share-backed supply for 2009/10 will receive a cash payout of $6.37 for every kgMS supplied during the season, compared with last year’s $5.20 (net of a 1 cent retention).

The payout news came as Fonterra announced an after tax profit of $685 million for the year ended 31 July 2010, 12 per cent higher than the prior year. The profit includes $174 million of non-recurring gains, primarily arising from sales of non-strategic assets.

The Distributable Profit of 60 cents per Co-operative share is higher than the 40-50 cents per share range forecast for 2009/10, announced earlier by the Fonterra Board.

Fonterra’s balance sheet is in its strongest shape in the Co-operative’s history, with the gearing ratio reduced to 44.9 per cent, down from 53.0 per cent a year earlier.*

This reflected an increase of $862 million in equity, primarily as a result of farmer-shareholders investing $459 million in additional shares, as well as a higher level of retentions.

At 31 July 2010, Fonterra’s economic net interest bearing debt was $4.5 billion, $727 million lower than a year earlier. Reduced borrowing requirements, combined with lower floating interest rates, meant net finance costs were reduced by $135 million.

Fonterra Chairman Sir Henry van der Heyden said the 2009/10 Milk Price of $6.10 per kgMS was Fonterra’s second-highest to date and 29 per cent ahead of last year’s Milk Price of $4.72.

“Fonterra has come through the recession well. Although business conditions remained volatile, customer demand returned and international dairy prices rose sharply.

“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.”

The Board has declared a final dividend of 19 cents per share resulting in a total annual dividend of 27 cents per share - within the previous guidance range for 2009/10 of 20-30 cents per share. This means that 33 cents per share of the Distributable Profit will be retained within the business.

Sir Henry said the proposed level of retentions 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 manufacturing and offshore.

Fonterra CEO 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.

“Fonterra’s consumer businesses had strong earnings performances despite the significant adverse impact of exchange rate movements,” said Mr Ferrier. “On a normalised basis, the combined earnings of the consumer businesses were up 19 per cent – their fifth consecutive year of growth.

“The consumer businesses in Australia-New Zealand, Asia/Africa, Middle East and Latin America each posted higher normalised earnings compared with the prior year.”

Mr Ferrier said earnings within parts of Fonterra’s ingredients businesses were put under pressure as market volatility meant that the 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. Although negative in 2010, these can be either positive or negative, depending on the direction and speed of global commodity price movements. Prior to the 2008 enhancements to Fonterra’s Milk Price, these factors changed the Milk Price rather than profits.

“While volatility is an ongoing reality of international dairy markets, Fonterra is taking a number of steps to reduce its negative impact. We are trading more products on our globalDairyTradeTM 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.

“We welcome the introduction of the new dairy futures exchange by the NZX which will introduce new options, over time, to hedge risk from international dairy price volatility for Fonterra, for our farmers, and for our customers.”

Looking ahead, Mr Ferrier said there were signs that international dairy supply and demand were moving more in balance at prevailing prices, although there was still considerable volatility in international markets.

After considering these factors, the Board has firmed up the forecast payout for the 2010/11 season to $7.00-7.10 (before retentions). This includes an unchanged forecast Milk Price of $6.60 per kgMS.

Mr Ferrier said that management had greater certainty around the forecast profit for next season so was narrowing the forecast Distributable Profit range from 30-50 cents per share to 40-50 cents per share.

As announced, the Fonterra Board is 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.

* Gearing is measured in terms of economic net interest bearing debt to economic net interest bearing debt plus equity (reflecting the effect of debt hedging in place at balance date).