Bright spots and low points in Fonterra results
Fonterra’s 2015 financial results and associated announcements proved bittersweet for its farmer-owners, with a disappointing final payout leavened by a 75c lift in the current milk price forecast and a victory in getting the unpopular guaranteed milk price scheme axed dampened by disclosure the chief executive got a $800,000 salary boost in a lean year.
Contrasts abounded with Fonterra posting a 183 per cent lift in net profit after tax to $506 million in a year of diving world prices but delivering a dividend at the lower end of farmer expectations at 25c a share.
And while the Fonterra Shareholders Council took issue with the disappointing dividend in a low milk price year, the sharemarket said it came in higher than expected, with the result the share price jumped 23c to $5.48.
Farmers cautiously welcomed the message that the milk price outlook is improving but were surprised at chief executive Theo Spierings’ salary package lift to $4.9 million from $4.1m the previous year.
Cambridge farmer Dave Robertson said the forecast lift was ‘‘a step in the right direction’’.
It would provide reason for optimism in ‘‘a spring from hell’’, he said.
Robertson said Spierings’ pay rise was ‘‘ridiculous’’. ‘‘Everyone else gets hit on the head and they get a bonus? It’s a farmer-owned company, they can’t justify that.’’
Federated Farmers dairy chairman Andrew Hoggard, in Europe for the World Dairy Summit, said the improved forecast was positive, ‘‘I just hope it’s certain’’.
The improvement in Fonterra’s second half performance was positive, as was the introduction of return on capital investment data in the 2015 annual report.
Hoggard said Spierings’ pay rise was ‘‘not a good look’’. ‘‘It was not a stellar year. ‘‘There were all sorts of communication blunders and from what I pick up, morale (in Fonterra) is not good. I wouldn’t say the performance has been exemplary.’’
A Fonterra spokesman said Spierings salary was based on independent, international benchmarking and approved by the co-op’s People, Culture and Safety committee.
‘‘The figure listed in the 2015 annual report is the value of the total remuneration package. It includes performance incentive payments from FY14 when Fonterra delivered farmers a record $8.50 payout. Fonterra’s CEO salary is in the top band of New Zealand CEO salaries, which is to be expected when you consider Fonterra is New Zealand’s largest and only truly global company with a $18.8 billion turnover in that reporting year.’’
Shareholders council chairman Duncan Coull declined to comment on Spierings’ new salary package, saying it was a matter for the board of directors. The council would be commenting on Fonterra’s 2015 performance in its annual report, due out in the next six weeks.
Coull said farmers would be encouraged by positive milk price signals.
‘‘But as the All Blacks are well aware, winning one game doesn’t win the tournament. We are very early in the season and there’s a long way to go yet.’’
The new $4.60 milk price forecast for this season was ‘‘still far below where some farmers require the milk price to be to get any sense of profitability in their business.
‘‘A positive is that the business is passing a good deal of that on in the advance rate so farmers will see some relief next month.’’
The 2015 financial statements show Fonterra’s total borrowings at July 31 were $7.5 billion, up 2.6 billion on the 2014 year.
Bank loans were $1.7b compared to $437m the previous year. The company’s gearing ratio was 49.7 per cent, compared to 42.3 per cent in 2014.
Chairman John Wilson said a good performance in 2015 was not reflected in the 25c final dividend, due to higher funding costs incurred by a $900m investment in new milk processing capacity, a $364m investment in completing farm development in China and the $750m cost of entering a partnership with China’s Beingmate infant formula company.
Coull said the council would keep a watching brief on the gearing ratio.
‘‘There is no real concern there in terms of unexplained increases in debt – the increase in debt relates to investment which was well signalled and is in line with those signals.’’
Agriculture consultant Will Wilson, a past critic of Fonterra’s debt levels and profit performance, said the after tax profit of $506m was ‘‘a bloody good outcome’’.
‘‘But we still need to look at the return to farmers. Farmers are looking at what they receive for the milk they supply. It’s still bloody tough.’’
Fonterra delivered a ‘‘very solid’’ second half result, a turnaround broadly in line with market expectations, said Craigs Investment Partners head of private wealth research Mark Lister.
However an expected sizeable inventory write-down didn’t happen and he would have liked to see stronger operating cash flows.
Net cash flows from operating activities were $668m compared to $1.3b in 2014.
‘‘That was the only weak spot...and net debt levels are tracking higher than we would have liked. Overall it’s a good result.’’
The market noted Fonterra had lowered its milk collection forecast with production now expected to be down by more than 5 per cent, but ‘‘that might turn into 8 or 9 per cent’’, said Lister.
The dividend of 25c was higher than expected, he said.
‘‘The outlook is reasonably solid with (earnings) guidance for 2016 of 40-50c per share unchanged..that’s a little more upbeat than the market pricing (40c) which is probably part of the reason for the share price reaction. Mid-dividend guidance puts you at about 32c and the market is expecting about 27c, so that’s not so bad.’’
Fonterra emailed its farmers on 2015 year results day announcing the guaranteed milk price scheme (GMP)would end this season. Offered as a pilot in the 2013/14 season, the scheme did not have widespread farmer support, the company said.
It was recognised some farmers would still want price management tools and Fonterra noted the NZX was preparing to launch a risk management tool for the milk price. This would allow market participants such as brokers and banks to assist farmers with the ability to hedge their milk price in advance. Farmers would be kept informed about the NZX offering.
Meanwhile, applications for the last GMP would open in December for production to the end of this season.