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Fonterra Fund slides 3.7 percent as dairy exporter's 2013 earnings lag forecasts

Thursday 25th July 2013

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Fonterra Cooperative Group, the world's largest exporter of dairy products, said this year's earnings will miss forecast by about 7.3 percent, spurring a sell-off in the company's listed fund.

Units in the Fonterra Shareholders' Fund are the second-worst performer on New Zealand's benchmark index today, dropping 3.7 percent to $7.20, crimping their gain so far this year to 6.3 percent.

Fonterra's earnings before interest, tax and one-time items would be about $1 billion in the year ending July 31, down from the $1.079 billion forecast in its Shareholders' Fund Prospectus last year, the Auckland-based company said in a statement. Earnings per share were likely to be at the lower end of the 45 cent to 50 cent per share forecast range, the company said.

Last summer New Zealand experienced the worst drought in the North Island for almost seven decades which the dairy company said today had caused "unprecedented" volatility on its second-half earnings. The company is reshaping its Australian business, which handles its consumer brands, in the face of weak consumer spending and aggressive competition.

"At the end of the day, input prices are up more than output prices," said Matthew Goodson, who holds Fonterra units among the $650 million he helps manage at Salt Funds Management. "It is disappointing to miss prospectus."

Under rules that applied prior to June 1, Fonterra had to supply other processors with milk based on an average price over the whole season even as the drought pushed up its own milk costs, hurting margins, Goodson said.

The drought contributed to a 64 percent rise in whole milk powder prices on Fonterra's GlobalDairyTrade auction since early 2013, which had a "temporary but significant negative impact" on margins at its New Zealand Milk Products ingredients business, said chief executive Theo Spierings.

Meanwhile, the company's Australian business "remains under pressure," Spierings said.

Fonterra is in the early stages of reshaping its Australian unit, which has resulted in a number of additional write offs, Spierings said, without providing details.

In March, the company said it would cut back its consumer brands in Australia from 21 to a maximum of five as part of a plan to restore profitability. At the time, Spierings said it was too soon to say which plants or job losses may result.

"It's not an easy business, supplying products to the supermarket sector downunder," said Salt's Goodson. "Supermarkets exert extreme pressure on the prices that suppliers receive."

Fonterra's forecast annual dividend per share of 32 cents remains unchanged, as does its forecast cash payout to farmer shareholders this financial year of $6.12. That means the forecast farmgate price remains at $5.80 per kilogram of milksolids.

Salt's Goodson noted Fonterra was maintaining high farmer payouts while missing prospectus forecasts as the company balanced satisfying farmer suppliers, farmer shareholders and non-farmer shareholders.

"There will always be a degree of tension there," Goodson said. "It will be interesting to see how that develops."

Fonterra expects to update its forecast cash payout expectations for the 2014 financial year following its board meeting next week.

The company expects to release its full earnings on Sept. 25. It said its latest forecast is subject to continued volatility in dairy prices, foreign exchange and other market uncertainties that may occur in the final month of the financial year.

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