Fonterra $6.52 payout up 44%

Some Kaikoura dairy farmers might not have their milk collected because of road closures. Photo...
While dairy farmers will delight in the increased payout, Fonterra profits have been trimmed to accommodate the boost; pictured, calves at a trough. Photo: ODT files
Fonterra has announced a cash payout of $6.52 for its 2016-17 season, 44% up on its starting price, reflecting global price gains made towards the end of the season.

Ultimately, the boost to its farmer payout, which is 52% up on last season, comes at a cost to Fonterra's profit.

In announcing its full-year result, Fonterra left unchanged its forecast 2017-18 season payout yesterday, at $6.75, plus a dividend range of 45c-55c per share totalling $7.20-$7.30.

However, because of reduced profit margins, Fonterra booked a 14.9% decline in earnings before interest and tax (ebit) and after-tax profit declined 10.7% to $745million.

Revenue for the season rose 11.8% from $17.1billion to $19.2billion.

Fonterra's debt levels remain at the top end of its 40%-45% target at 44.3%, or $5.4billion.

With Fonterra's current farm gate milk price forecast at $6.75, Synlait's is at present $6.50 and Westland Milk Products is in a range of $6.40-$6.80.

Fonterra chairman John Wilson said rising prices offset a 3% decline in volumes at 22.9 billion liquid-milk-equivalents (LMEs) and the 15% ebit decline was because of reduced margins across the business, which also influenced the 10.7% decline in after-tax profit.

However, Mr Wilson said Fonterra's ability to maintain its forecast dividend despite the milk price increasing by 57% during the year, and the impact of negative stream returns, ``was an excellent result''.

``Over recent seasons, our farmers have made significant personal sacrifices to reduce costs through a sustained low milk-price period,'' Mr Wilson said.

Fonterra had to manage the variability across both the global market and domestic weather conditions and had shown it could deal with such conditions, he said

Forsyth Barr broker Damian Foster said the 15% ebit decline was ``slightly below'' consensus expectations and while reported earnings per share were at the bottom end of recent guidance of 45c-55c, they were ``well below'' the 50c-60c guidance given a year ago.

``Reported earnings per share of 46c per share was weak as the carrying value of Fonterra's Beingmate holdings was written down by $35million,'' he said.

Fonterra's divisional performance was ``mixed''.

At the ebit level, the ingredients division was down 22% at $943million, consumed and foodservice was up 6% at $614million and international farming moved into positive territory, from down $59million a year ago to $1million.

Craigs Investment Partners broker Peter McIntyre said the $35million Beingmate impairment was on top of Beingmate's share of losses of $41million.

``In total that was a $76million drag on ebit performance, or 7% of reported ebit,'' he said.

ASB senior rural economist Nathan Penny said while Fonterra had ``made financial par'' for the 2016-17 season, profit was a ``notch down'' on the previous year and towards the bottom end of guidance.

``Farmer shareholders will be largely happy with the result. They've been paid considerably more for their milk while only seeing a modest fall in the profits of the company they also own.

``Not surprisingly, the lift in the milk prices over 2016-17 put the squeeze on its profits,'' he said.

Fonterra chief executive Theo Spierings said the solid earnings came from two sources.

Fonterra had stuck to a strategy to leverage more efficiencies from its scale and prioritise value and higher-margin products; and staff had come up with innovative ways to generate higher returns.

Within Fonterra's ingredients business, its higher-value advanced ingredients segment achieved a 9% increase in sales volumes, making up 19% of total external sales volumes this year, Mr Spierings said.

``This includes sales of products such as functional proteins, high-spec whole milk powder and extra-stretch cheese,'' he said.

For the season ahead Fonterra said it was well positioned to deliver higher volumes and new product formats.

``To remain successful, we need to be agile in every facet of our co-operative - on farm, across our manufacturing and distribution footprint, right through to the food we produce and how we produce it,'' Mr Spierings said.

For the first time, Fonterra released Mr Spierings' remuneration package, showing he was paid $8.32million in 2017, up by 78.5% from a year ago.

He was paid a base salary of $2.46million, benefits of $170,036, short-term incentive pay of $1.83million and long-term incentive pay of $3.85million, the New Zealand Herald reported.

Westland Milk is scheduled to report its full-year result later this week.


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