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Fonterra's forecast share dividend too low, unitholder tells annual meeting

Friday 14th November 2014

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The Fonterra Shareholders' Fund, which holds 7.5 percent of the world’s largest dairy exporter, should be able to raise its 2015 dividend forecast given it expects to pay farmers less for their milk, reducing its input costs, a unitholder told the fund's annual meeting in Auckland.

Fonterra Cooperative Group has forecast a farmgate milk price of $5.30 per kilogram of milk solids and a dividend in the range of 25-35 cents per share. Last season’s dividend fell significantly to just 10cps on the back of reduced earnings by the group and the high $8.40/kgMS farmgate milk payout.

Higher milk prices mean a better return for farmer shareholders but the external investors’ fortunes mirror that of the company which last year faced higher input costs for its milk, crimping margins. There was no talk at today’s Fonterra Shareholders Fund annual meeting as there was at Wednesday’s annual meeting of the cooperative in Palmerston North, of maximising the best returns for farmers.

Unitholder James Morrison said while he accepted last year’s reduced dividend, looking ahead at a potential $5/kgMS  payout, which is what some bank economists are suggesting it could fall to, should mean a dividend of at least 44cps if not 75cps.

Chief executive Theo Spierings said the forecast for both the milk payout and dividend would be revised early next month but the cooperative had a strong focus on earnings, to grow volumes and keep prices up. “We’re going to focus on costs and cashflow and are going to drive very hard for earnings,” he said.

Chairman John Shewan said the 25cps to 35cps dividend was “getting back up to the levels we want it to get”. “Although all unitholders want it to go higher, this is a long term game.”

He said he had fielded a lot of questions from unitholders about why last season’s dividend was so low when global milk prices were so high, but the opposite was true. The real question unitholders should be asking was whether they had confidence in Fonterra’s strategy and the New Zealand dairy industry to deliver on that, he said.

The shareholders fund has 121 million units on issue which ranged in price from $5.63 to $6.70 during the year and had a forecast yield as at Nov.10 of 4.9 percent. Its liquidity ranking is seventh on the NZX.

When the Trading Among Farmers structure was set up it included a unilateral termination clause that Fonterra’s board could invoke within two years which would have liquidated the fund within 12 months. Shewan confirmed the clause would lapse on Nov. 30. “This was new territory and there was a level of nervousness among some parties that it would produce some weird results so Fonterra was given the ability to blow the whistle. The opposite has happened and it’s working well,” he said.

Another unitholder criticised the length of time it would take Fonterra to reach what Spierings called super world class compliance. He said following the botulism scare the cooperative had a four year programme to improve its food safety standards to a level ahead of its global competitors. The cooperative was investing particularly in improving traceability which proved one of the big problems in the WPC80 scare.

Currently with the most difficult example, lactose which is used by some 900 key customers around the world, it would take 48 hours to trace back to the source, he said, and the aim is to have that reduced to just three hours by 2017.

“We need to be able to go into their systems and connect them back to ours in order to trace back within three hours. It is very complicated and requires investment in systems capability and people and reporting systems behind it," Spierings said.

When independent director Pip Dunphy stood for re-election, one unitholder questioned the need for five directors on what was essentially a passive investor with just one investment. Shewan said it was felt there was a need for three independent directors in order to have a majority over the two Fonterra appointed ones. Apart from representing unitholders’ interests to the Fonterra board, the fund management directors also had legal obligations and documentation they were required to process on behalf of unitholders in times of things like a bonus issue, he said.

The directors are paid by Fonterra, rather than by the fund.

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