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Fonterra doubles interim dividend, lifts first-half profit by 123% as sales fall

Wednesday 23rd March 2016

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Fonterra Cooperative Group, the world's largest dairy exporter, doubled its interim dividend after shifting more production to higher-margin products in the face of weak milk powder prices and reporting a 123 percent jump in first-half profit.

Profit was $409 million in the six months ended Jan. 31, from $183 million a year earlier, the Auckland-based company said in a statement. Revenue fell 9.3 percent to $8.8 billion even as volumes rose 8 percent, while the gross margin widened to 21 percent from 16 percent.

Fonterra reiterated its forecast 2015-16 milk payout of $3.90 per kilogram of milk solids, while lifting its first-half dividend to 20 cents a share. The company has been considering ways to help support its farmer shareholders after offering interest-free loans in a package that cost the company $390 million. That had stretched the balance sheet after Fonterra also took on debt to take a cornerstone stake in China's Beingmate Baby & Child Food Co.

Along with the improved interim dividend, Fonterra said it will pay its final dividend earlier than usual - 20 cents paid in two 10 cent increments in May and August. With dividends for the full-year forecast at 40 cents a share, the cash payout will be $4.30/kgMS, while the total available for payout, or farmgate milk price plus forecast earnings per share, is projected at $4.35-$4.45/kgMS.

“The low prices have placed a great deal of pressure on incomes, farm budgets, and our farming families," said chairman John Wilson. "Our priority is to generate more value out of every drop of our farmers’ milk by focusing on the areas within our control. We aim to efficiently convert as much milk as possible into the highest-returning products."

The timing of this year's dividends was "a specific response to the current, very challenging, financial conditions farmers are facing" and didn't signal a permanent change away from twice yearly payments, he said.

Units in the Fonterra Shareholders' Fund, which are entitled to dividend payments from the underlying shares, last traded at $5.93 and have declined 1.2 percent in the past 12 months, while the S&P/NZX 50 Index gained 13 percent.

The biggest improvement in the first half came from Fonterra's consumer and food service business, which lifted volumes by 10 percent and improved its gross margin to 28 percent, resulting in a 108 percent jump in normalised earnings before interest and tax of $241 million. Ingredients recorded a 6 percent lift in volume and gross margin of 15 percent, increasing normalised ebit by 27 percent to $617 million. 

By contrast, international farming's gross margin slipped to 21 percent even as volumes rose 54 percent and it reported an ebit loss of $29 million.

Fonterra said it expects a revival in the price of whole milk powder through 2016 as dairy output from the European Union reverts "to normal growth of 1 percent per annum" after last year's spike. Imports of WMP by China are seen growing a steady 4-5 percent a year.

The company's gearing fell to 49.2 percent at Jan. 31 from 50.7 percent a year earlier.

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