Fonterra has today (23 September) announced its results for financial year 2010 ending 31 July. The results are strong on all counts.
The final payout to farmers of $6.10 as a milk price, plus 27 cents of distributable profits, is very much in line with what farmers were expecting. The really good news – although also no big surprise – is that the balance sheet is looking a lot more healthy.
The financial team at Head Office will be feeling particularly proud that they managed a hedged exchange rate of 66.7 cents compared to an average spot price of 70.8cents. This will have lifted payout by about 40 cents from what it otherwise would have been.
Fonterra calculates its gearing ratio as being 44.9%, down from about 53% a year ago. This is a good result although Fonterra confirms with me that it would have been about 46% if it were not for a change in accounting methods. Fonterra calculates this gearing ratio as the amount of interest bearing debt relative to the interest bearing debt plus equity. Most commentators and farmers do not understand that this excludes some very large liabilities – such as payments of some billions to suppliers of goods together with payments due to farmers.
I have argued for a long time that a better ratio that is more readily understood is the ratio of total liabilities to total capital. In Fonterra’s case, this is now 60%, down from about 66% a year ago, and as high as 79% in the dark days of the 2008/9 recession.
Looked at another way, equity is now at about 40% of total capital, whereas it was only just over 20% back in January 2009. This is a huge improvement but still not high enough to allow a lot more debt to be taken on.
There are two major reasons why Fonterra’s balance sheet has improved. One of these is the dry shares that some farmers have purchased. Once these are tradable then this will be a source of permanent capital.
The second source of improvement in the balance sheet is from retained profits (‘retentions’) of 33c per share. Until recently, the lack of retentions was a serious policy flaw at Fonterra, and it contributed greatly to the parlous state of the balance sheet back in January 2009. Fonterra has indicated that it will continue the retentions policy in the coming year and this will further strengthen the balance sheet.
There are many interesting statistics in the financial statements. These include that Fonterra’s shareholders are now down to 10,463. This is a reduction of 70 in the last year, and a reduction of 823 over the last 4 years. Fonterra reports that it now collects 89% of New Zealand’s milk, which is down from about 95% at the time of Fonterra’s formation in 2001. Fonterra collected almost exactly the same amount of milk in 2010 as the preceding year, and about 5% more than in 2006.