Fonterra Cooperative Group is promising a record payout to its farmers next year, while keeping dividends unchanged, underlining the competing needs of its suppliers and the investors in its exchange-traded units.
Fonterra Shareholders’ Fund units ended the day up 0.4 percent to $7.10, having initially sold off after the world’s biggest dairy exporter posted its full-year results. Normalised earnings before interest and tax fell 3 percent to $1 billion, meeting the guidance it gave in July and missing its prospectus forecast.
Sales fell 6 percent to $18.6 billion in the 12 months ended July 31 and net profit rose 18 percent to $736 million, or 44 cents a share. The company paid a dividend of 32 cents a share, the same as it is forecasting for next year and as it paid in 2012.
The results show the impact of drought in the second half for its largest business, NZ Milk Products, which was forced to pay more for its raw materials as global prices soared, while the ANZ division
posted a 37 percent slump in earnings on restructuring costs and the impact of intense competition in Australia.
The first half of the current year would be challenging, Auckland-based Fonterra said, because of higher input costs, with the price of milk powder outpacing gains in cheese and casein. As a result, first half earnings will be “significantly lower” than a year earlier. Extreme price volatility on its product mix was likely to be a short-term impact though it was difficult to say when it would reverse.
“The payout is a cost to production – that’s great for Fonterra’s suppliers,” said Mark Lister, head of private wealth research at Craigs Investment Partners. “It looks too expensive and its outlook isn’t as bright as the share price would have you believe.”
Along with short-term headwinds, Fonterra has to rebuild its reputation following the recall of whey protein concentrate last month and possibly faces compensation claims for losses from its customers, Lister said.
Units of the fund were something of an enigma, perhaps held up by offshore investors who see them as a proxy for New Zealand Inc and the agriculture story, or those that don’t understand the mechanics of the fund versus the company, he said.
Days after the end of Fonterra’s financial year, the dairy company announced a recall of whey protein concentrate after initial tests suggested it was contaminated with potentially deadly bacteria. While follow up tests showed the bacterium was a harmless strain, the commentary for today’s results included assurances from both chief executive Theo Spierings and chairman John Wilson that lessons had been learned.
“The precautionary recall challenged the cooperative but has also provided an opportunity to make a profound change for the better,” Spierings said. “The actions we took were the right ones based on the information we had at the time.
Fonterra has already flagged restructuring in Australia, including the rationalisation of brands and plant closures to cut costs and said today its Australian brands margins were “impacted by competitive pressure from retailers” while “strong competition for milk impacted Australian ingredients margins.”
The company’s Asia/Africa/Middle East division, which includes its largest market of China, posted a 15 percent increase in EBIT to $209 million and sales rose 3 percent to $2 billion. Earnings in China climbed 20 percent.
Latin America delivered a 4 percent gain in earnings to $137 million as sales volumes climbed 6 percent and revenue rose 12 percent to $1.1 billion.
Fonterra’s 2013 cash payout fell 4 percent to $6.16, reflecting a farmgate milk price of $5.84 per kilogram of milk solids and a dividend of 32 cents. Yesterday, the company raised its forecast 2014 payout to $8.62, made up of a farmgate milk price of $8.30 and an unchanged dividend of 32 cents.