Yesterday we had the good news of a higher – and record – forecast milk payout for this season and today a higher than forecast payout for last season.
Fonterra Co-operative Group announced today a Cash Payout of $6.16 for the 2013 year for a 100 percent share-backed farmer, comprising a Farmgate Milk Price of $5.84 per kgMS and a dividend of 32 cents per share.
Chairman John Wilson said that while the Payout was higher than forecast at the beginning of the season, it was 4 per cent down on the previous year.
“2013 was a year that tested our resilience. After a superb first six months for both production and performance, our farmer shareholders endured a drought which in some regions was the worst in nearly 70 years.
“The extremely dry conditions meant a drop in New Zealand milk production of 9 per cent in the last six months of the season. Overall, New Zealand milk production declined 2 per cent to 1,463 million kgMS for the season to 31 May 2013, which hit our farmers and the business financially.
“Our strong balance sheet, with a debt to debt plus equity ratio of 39.6 per cent, 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 per cent drop in operating cash flows compared with the previous year.
“We now have a much stronger capital structure which came into its own this year, following the launch of the Fonterra Shareholders’ Market and the Fonterra Shareholders’ Fund.
“The Fonterra Shareholders’ Market brought in greater flexibility, with farmers able to buy and sell shares throughout the year at the prevailing price.
“Meanwhile, the response to the Fund from both institutions and smaller investors was a genuine expression of confidence in the Co-operative and our performance,” said Mr Wilson.
Farmers are still questioning whether TAF (Trading Among Farmers) was the right move but fears it would impact on the milk payout haven’t been realised.
Fonterra Chief Executive Theo Spierings said Fonterra had made good progress with its strategy during the year, particularly in foodservice, everyday nutrition and advanced nutrition. Climatic and market conditions, however, frustrated efforts to achieve higher earnings.
“The combined impact of the drought and the reshaping of Fonterra’s Australian business, saw the Co-operative’s normalised EBIT of $1 billion for the 2013 year fall 3 per cent short of last year.
“The business achieved strong EBIT growth in Asia, Africa, the Middle East and in our Soprole business in Chile. However, this was offset by a weaker second half from NZ Milk Products and a 37 per cent decline in normalised EBIT in Australia and New Zealand (ANZ) as we make changes to our Australian business.
“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.
“Although the New Zealand consumer business grew its earnings in a tough trading environment, Australia faced heightened competition for lower milk volumes, and continuing margin squeeze for consumer brands. We expect the significant reshaping of our Australian operations, which is going to plan, will turn performance around. The business has already achieved a 7 per cent reduction in operating expenses of $49 million (after excluding the impact of the closure of the Cororooke site and Brand impairments),” said Mr Spierings.
Net finance costs were $41 million lower than last year, mainly due to the benefit of an increase in gains from fixed interest rate hedging and the lower cost of funding. Earnings also benefitted from a tax credit of $68 million which was primarily due to the revaluation of deferred tax balances and recognition of New Zealand tax losses.
Earnings per share were up 7 per cent to 44 cents after taking into account the bonus issue, and on a normalised basis were up 9 per cent to 47 cents per share.
Precautionary Recall, Reviews and Rebuilding Reputation
Just as farms and farmer confidence started to recover from the drought, Fonterra initiated a precautionary recall of some whey protein concentrate, as a result of test results received on the last day of the Co-operative’s financial year.
“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,” said Mr Wilson.
“The thorough internal Operational Review instigated by CEO Theo Spierings has been completed. The Board is also undertaking its own independent inquiry and we are fully co-operating with the New Zealand Government’s Joint Ministerial Inquiry which is taking place over a longer timeframe,” said Mr Wilson.
The precautionary recall challenged the Co-operative, but has also provided the opportunity to make a profound change for the better, said Mr Spierings.
“Within days of locating and quarantining product, we began an operational review to find out what happened, why, and what we must do to prevent this from happening again – and we are now implementing the recommendations of the review.
“Additional resources have also been deployed to ensure we manage change and rebuild our reputation, while at the same time we continue to run the business efficiently. The creation of a new role of Group Director of Food Safety & Quality, reporting directly to me, sends a clear message about the sharper focus we are giving to continuously improving food safety and quality.
The way this was handled, and in particular the way the issue was communicated, let the co-operative, its suppliers, shareholders, customers and New Zealand’s reputation down.
The changes made must result in far better systems and communication.
“In the past year, we have invested $925 million in building production, manufacturing and supply chain capability to process our New Zealand milk, developing our China farms, as well as beginning construction of a $144 million new cheese and dairy ingredients plant in partnership with A-ware Food Group in the Netherlands.
“We have also made a number of key senior appointments to our management team. In addition to the appointment of Judith Swales as Managing Director Australia, we have hired Lukas Paravicini as our new Chief Financial Officer, and Jacqueline Chow as Managing Director of Global Brands and Nutrition.
“They join an already strong, dedicated management team which will drive the business forward in the coming year,” said Mr Spierings. . . .
The full annual results are here.