Fonterra maintains dividend as earnings fall

Fonterra [NZX: FCG] may need to draw on its balance sheet to support its estimated dividend of 32c a share for 2014 after reporting a 28% drop in operating cash flow in 2031.

The co-operative posted a net profit of $736 million for the year to July 31, up 18% on last year and 6.25% ahead of forecast.

At an operating level, normalised earnings before interest and tax fell 3% to $1 billion due to the impact of the drought last autumn.

Revenue fell 6% to $18.6 billion.

“The extremely dry conditions meant a drop in New Zealand milk production of 9% in the last six months of the season,” Fonterra chairman John Wilson says.

“Our strong balance sheet, with a debt to debt plus equity ratio of 39.6%, and operating cash flows meant we were able to support farmers through the drought’s immediate impact by raising the Advance Rate paid to farmers for their milk. 

“This change, however, contributed to a 28% drop in operating cash flows compared with the previous year.”

Fonterra has announced a cash payout of $6.16 for the 2013 year for a 100% share-backed farmer, comprising a farmgate milk price of $5.84 per kgMS and a dividend of 32c per share.

Fonterra has an improved capital structure following the launch of the Fonterra Shareholders’ Market and the Fonterra Shareholders’ Fund. 

At September 23,  2013, the unaudited net asset value of the Fund was $756 million and the Unit price was $7.18.

Fonterra says its estimated dividend of 32c per share for 2014 remains unchanged.

“Fonterra can draw upon its balance sheet and cash flow performance to support the estimated dividend.”

Fonterra chief executive Theo Spierings says the drought and market conditions frustrated efforts to achieve higher earnings.

“The extreme drought caused unprecedented volatility – reflected in a 64 per cent spike in whole milk powder prices from January 2 to April 16.  This, in turn, had a significant impact on the cost of milk purchased by NZ Milk Products, and meant the high returns achieved in the first half as a result of price premiums, product mix, cost savings and productivity gains were eroded in the second half.”

Mr Wilson says a precautionary recall of some whey protein concentrate was a challenge for the co-operative.

“The subsequent all clear following further tests was a relief, but did not alter our view that the recall was the correct course of action at the time.  Fonterra cannot, and will not, take risks with food safety and the health of consumers.”

dbridgeman@nbr.co.nz