Fonterra forecast payouts for 2010/11 and 2011/12

· Fonterra increases 2010/11 forecast Payout range before retentions by 10 cents to $8.00-$8.10
· 2011/12 opening forecast Payout range before retentions of $7.15 - $7.25
· Fonterra Fair Value Share price for 2011/12 held at $4.52

Fonterra today announced a 10 cents per share increase in its forecast profitability for the 2011 financial year, leading to a similar improvement in its forecast Payout. There is no change to Fonterra’s forecast Milk Price. The updated forecast Payout range before retentions is $8.00-$8.10, which would be a new record for the Co-operative.

At the same time, Fonterra announced a lower opening forecast Payout for the 2011/12 season commencing 1 June 2011, reflecting an outlook for a higher average exchange rate and potentially moderating commodity prices. The opening forecast Payout range before retentions is $7.15-$7.25, including an opening forecast Milk Price of $6.75 per kilogram of milksolids (kgMS) and forecast Distributable Profit range of 40-50 cents per share.

The Co-operative has also set the Fair Value Share (FVS) price for the 2011/12 season at $4.52, the same level as in the current season.

2010/11 forecast Payout range

The updated forecast Payout range for this year combines an unchanged forecast Milk Price of $7.50 per kgMS and a forecast Distributable Profit range of $690-$830 million, equating to 50-60 cents per share – 10 cents higher than the previous forecast in February 2011. The target range for the Dividend (to be paid out of Distributable Profit) is unchanged at 25-30 cents per share.

As a consequence, Fonterra forecasts that a 100 per cent share-backed farmer will earn on average in the range $8.00-$8.10 before retentions (up 10 cents on the previous forecast), and $7.75-$7.80 on a cash basis (unchanged from the previous forecast).

The final Payout will be confirmed when Fonterra announces its annual financial results in late September. If confirmed within the forecast range, it would represent a new record for Fonterra – exceeding the $7.90 (before retentions) and $7.66 (cash basis) achieved in 2007/08.

CEO Andrew Ferrier said the Distributable Profit forecast of $690-$830 million for the 2011 financial year compared with a Distributable Profit of $800 million for 2010.

“When we issued our previous forecast in February, we highlighted how the margin squeeze due to higher milk costs was affecting operating earnings especially within our ingredients businesses. We also signalled that higher commodity prices were also starting to have a negative impact across the consumer businesses.

“Since February, our ingredients businesses have recovered some lost ground in terms of operating earnings, as commodity prices have levelled off and our ability to make profits above raw milk costs for other dairy product streams has improved. On the downside, our consumer business in Australia and New Zealand has faced earnings pressure as we predicted earlier. This business is partially absorbing higher dairy ingredients costs due to intense market competition and because of initiatives such as our decision to freeze the price of liquid milk sold to retailers in New Zealand.”

Mr Ferrier said in spite of the very strong global commodity prices, operating earnings within the Commodities & Ingredients businesses and the Consumer Brands businesses in total were expected to be marginally ahead of 2010. The updated profit forecast also now recognised expected tax benefits associated with projected dividend payments, retentions and one-off items.

Chairman Sir Henry van der Heyden said the forecast range for the 2011 Dividend is unchanged at 25-30 cents per share.

“In our February forecast announcement, we signalled that - as with last year’s result - this year’s Distributable Profit would be substantially boosted by some one-off profit benefits. The Board’s policy is to adjust for such one-off items before determining how much of Distributable Profit should be paid as Dividend to shareholders. Taking these adjustments into account, we believe it’s appropriate to hold to the previously-announced Dividend forecast range despite a higher Distributable Profit outlook.”

2011/12 Opening Forecast Payout

For the new 2011/12 season and financial year, Fonterra is forecasting a Milk Price of $6.75 per kgMS plus a forecast Distributable Profit range of 40-50 cents per share. This means Fonterra is forecasting that a 100 per cent share-backed farmer will earn on average in the range $7.15-$7.25 before retentions.

Sir Henry said the opening forecast for 2011/12 reflected a realistic outlook by the Board towards global dairy markets over the coming season.

“In the current season, farmers have benefited from sharply higher commodity prices due to improved world demand for dairy products. Commodity prices have been close to record levels.

“Although current market prices and exchange rates would still yield a Milk Price similar to this season’s, recent months have been characterised by a softening in commodity prices and continued strength in the New Zealand dollar. As commodities are mostly sold in US dollars, a higher exchange rate hits the Milk Price. We must also be aware of the potential effect that current high commodity prices may have on dairy market dynamics, as high prices tend to encourage more supply into global markets from a number of countries.”

Despite the 2011/12 forecast Milk Price of $6.75 per kgMS being 10 per cent lower than this season’s current $7.50 forecast, it still represents Fonterra’s highest opening forecast to date, Sir Henry commented.

Mr Ferrier said that although budgets for the 2012 financial year will not be finalised until July, the Distributable Profit range for the 2012 financial year is currently forecast to be in the range of $570-$710 million, equating to 40-50 cents per share. The forecast 2012 Distributable Profit reflects a slight increase in expected underlying business profitability compared with 2011.

Although the Board has yet to forecast a Dividend range for 2012, Mr Ferrier said dividend payments are expected to be made in accordance with the Fonterra dividend policy to pay out 65-75% of underlying profit (adjusted for one-off items and other factors).

Fair Value Share Price

Fonterra has set the Fair Value Share price for the 2011/12 season at $4.52, the same as the current season’s price.

The Independent Valuer, Grant Samuel, assessed a Restricted Market Value range with a mid-point of $4.18. As this is below the current Base Price of $4.52 that applies during the transition to Restricted Market Value, the Fair Value Share price has been set at $4.52.

Grant Samuel’s latest valuation is 2 per cent lower than its 2010/11 assessment (mid-point $4.27) and 6 per cent lower than its interim estimate for 2011/12 ($4.45 mid-point) published in December 2010.

Mr Ferrier said the change in valuation since May 2010 was mostly due to a slight reduction in the valuation of the Commodities & Ingredients business segment, driven by the impact of higher commodity prices on segment earnings. The aggregate value of the consumer businesses had increased slightly over the past year, led by a rise in valuation for the Asia, Africa/Middle East businesses, partially offset by a slight decline in value for Australia/New Zealand reflecting a lower rate of earnings growth due to tougher trading conditions.

Under Fonterra’s Constitution, the Valuer is required to assess two valuation ranges: a Fair Value range for the fundamental value of the Co-operative, and a discounted Restricted Market Value range reflecting that Fonterra shares can only be held by supplying farmers. As in previous valuations, the Valuer has applied a 25 per cent discount to the Fair Value range to assess the Restricted Market Value range.

Note: currency is New Zealand dollars unless otherwise stated.