Fonterra Reports 3.7 pct Down in Half-Year Revenue

Revenue was down 3.7% from $8.0 billion to $7.7 billion. Lower average selling prices cut more than $1.6 billion from Fonterra’s revenue but this was partly offset by $1.0 billion of additional revenue.

24 Mar 2010 --- Fonterra Co-operative Group Limited announced its financial results for the six months to 31 January 2010, reporting higher sales volumes which helped to maintain revenues during a period of recovering dairy ingredient prices globally.

CEO Andrew Ferrier said Fonterra faced continued volatility in both international prices and exchange rates during the half year, with revenue down 3.7% to $7.7 billion. However, lower average selling prices were largely offset by growth in product volumes sold and positive net foreign exchange impacts (including hedging gains).

Mr Ferrier said demand from customers increased through the half year as consumer confidence continued to improve in key markets around the world.

“This led to an increase in product sales, meaning our inventory levels were also at more normal levels compared with the unusual highs of a year earlier, during the worst of the financial crisis.”

He said the lower inventory value, combined with equity inflows from capital structure initiatives, contributed to a significant improvement in Fonterra’s interim balance sheet position, with debt gearing at 53.3% compared with 61.5% at 31 January 2009.

Fonterra Chairman, Sir Henry van der Heyden, said the strong recovery in global dairy prices underpinned the improved Milk Price performance by the Co-operative in the six months to 31 January 2010. The recovery prompted the Board in November last year to increase the 2009/10 forecast Milk Price to $5.70 per kgMS (kilogram of milksolids) – from the season’s opening forecast of $4.10 per kgMS.

Mr Ferrier said that while there was still some volatility in global dairy markets, there were recent signs of stability returning. Over the past five months to March 2010, for instance, average selling prices for Whole Milk Powder on the globalDairyTrade platform have stayed within a fairly narrow band of around US$3,250 to US$3,600.

“Although there is an element of uncertainty as to how supply and demand factors will influence prices, the recent stability means the outlook is positive for the balance of this year and into 2010/11.”

Key financial highlights (for the six months to 31 January 2010:
• Revenue was down 3.7% from $8.0 billion to $7.7 billion. Lower average selling prices cut more than $1.6 billion from Fonterra’s revenue but this was partly offset by $1.0 billion of additional revenue as a result of higher sales volumes, and positive net foreign exchange impacts of $0.3 billion (including hedging gains.
• The forecast Milk Price for the 2009/10 season remains at $5.70 per kilogram of milksolids (kgMS), as announced in December 2009. This compares with an opening forecast of $4.10 per kgMS.
• An interim dividend of 8.0 cents per share will be paid to shareholders on 20 April 2010. As previously announced, the full-year target dividend range remains at 20–30 cents per share.
• Debt gearing as at 31 January 2010 was 53.3%, compared with 61.5% a year earlier and broadly in line with the year end position of 52.7% at 31 July 2009.
• Operating expenses increased by 5.8%, primarily due to an increase in investment in advertising and promotion to grow and defend market share in Fonterra’s regional consumer brands businesses. Excluding this, operating expenses were largely flat (as while overseas expenses were lower when translated to New Zealand dollars, some one-off benefits in 2009 were not repeated in 2010).

• Net finance costs of $172 million were substantially lower than the prior period’s $368 million. About $60 million of the reduction was due to lower debt levels and the cost of borrowing, and about $160 million reflected changes in the fair values of interest rate hedges that adversely affected Fonterra in the first half of the 2008/09 period.

• Fonterra’s portfolio of overseas assets was refined through further investments in the Co-operative’s pharmaceutical lactose joint venture and Middle East consumer business. Fonterra also divested non-strategic assets, such as its stake in the Arla joint venture in the UK.

Mr Ferrier said the strengthening of Fonterra’s balance sheet through the half year was helped by lower inventory volumes. The value of inventories at 31 January 2010 was $4.2 billion compared with $5.1 billion a year earlier.

The balance sheet also benefited from a net equity inflow of $263 million during January’s transition share issue, which followed changes to the Co-operative’s capital structure approved by shareholders in November 2009.

Mr Ferrier said further reductions in the Co-operative’s debt gearing were expected in the second half of the year due to seasonal reduction of inventories and as peak production volumes were sold: “We remain focused on a gearing ratio target for the end of the 2009/10 year of less than or equal to 50%,” he said.

Mr Ferrier said there were some welcome signs of stability returning to global dairy markets, as reflected in the current forecast Milk Price for the full year. However, the rapid rise in prices was starting to put pressure on profits across Fonterra’s core dairy ingredients businesses.

“A key profit driver is the gap between prices achieved for higher-value non-powder streams such as casein and cheese, compared with the range of milk powder streams that flow into the Milk Price. A stronger recovery in powder prices versus non-powder streams has narrowed the gap and is squeezing those profit margins.

“On the other hand, our consumer businesses and ingredients joint ventures have continued their recent solid performances, and are on track to perform better than last year,” Mr Ferrier said.

Sir Henry said Fonterra was currently on track in 2009/10 to achieve the second-highest cash returns to farmers.

“Our Milk Price remains forecast at $5.70 per kgMS and our target dividend range is 20-30 cents per share (as announced previously). Returns at these levels would mean that the most recent three seasons rank among the top four in terms of total cash returns (Milk Price plus Value Return/Dividend) paid to farmers since Fonterra’s formation, in spite of the significant challenges we have encountered during this period.”

As announced in February, the Board is forecasting a Distributable Profit range for the current financial year of 40-50 cents per share, of which 20-30 cents is forecast to be paid as a dividend. This indicates 10-30 cents per share of Distributable Profit would be retained within the Co-operative.

Sir Henry said the Board had signalled to farmer shareholders last year that retentions would be used more as a way of strengthening the Co-operative’s balance sheet.

“During the half year, we’ve also seen our farmers vote in favour of two important steps to strengthen the Co-operative’s capital structure. Discussions are ongoing with the Shareholders’ Council on a proposed third step of capital structure change that would involve farmers trading shares among themselves – rather than through the Co-operative – to address redemption risk and stop money washing in and out of our Co-op’s balance sheet,” Sir Henry said.