Fonterra stages second-half recovery, cuts debt, inventories

Fonterra staged a second-half recovery after what chairman Henry van der Heyden called business challenges and market volatility that were "probably unique in the lifetimes of anyone involved in dairying today."

The world's largest exporter of dairy products reported distributable profit climbed to $603 million in the 12 months ended July 31, from $364 million in the preceding 14 month period.

The cooperative changed its balance date. Revenue tumbled 18 per cent to $16 billion.

Fonterra confirmed its 2009 payment to farmers at $5.20 per kilogram of milk solids, holding back 1 cent a kilogram as retained earnings, it said in a statement today.

The nation's biggest enterprise yesterday lifted its forecast payment for 2010 by 55 cents to $5.10, reflecting a revival in global prices for milk. The increase came after prices surged 55 per cent in Fonterra's last two monthly online milk powder auctions. The prospect of improved payments may bolster the prospects for Fonterra's plan to allow farmers to hold shares up to 120 per cent of production, allowing the cooperative to raise equity while eventually exiting the redemption risk it faces under its current share plan.

Prices of dairy products tumbled in the first six months of the year, in the face of global recession, prompting Fonterra to build up inventory as customers opted to empty their own warehouses as demand fell.

Chief executive Andrew Ferrier said this allowed the dairy company to "optimise sales opportunities" when the market recovered in the second half of the year.

Total inventories almost halved to $2.7 billion at year end from $5.1 billion as at January 31, Fonterra said today.

The annual results show the company is managing to strengthen its balance sheet. The gearing ratio fell back to 52.7 per cent at July 31 from 61.5 per cent at the end of the first half.

Total shareholder equity increased by a net $260 million as issues of new shares exceeded redemptions. Equity tumbled by a net $600 million in the previous year as the drought slashed milk production and more farmers sought to trim their holdings.

In the latest year, Fonterra collected a record 1,281 million kilograms of milk solids, up 7.5 per cent from a year earlier, when the drought was in full swing.Ferrier yesterday warned that Fonterra remains in "a period of extreme price volatility, which makes forecasting challenging, to say the least."

-BUSINESSWIRE