Some 40% of that yawning gap came from lower operating earnings. The rest was the cost of the settlement with Danone and a substantial write-down of its Beingmate investment in China.
At the root of the earnings meltdown was the relatively high farmgate milk price of $6.69/kg milksolids, which made raw materials for Fonterra’s added-value products more expensive.
While it increased the volume of milk that went into higher value products, gross margins fell when Fonterra was not able to hike wholesale prices in strongly competitive world markets.
The proportion that went into higher value went up from 42% to 45%, an increase of 465m litres in total processing of 22.2b litres.
Farmers will receive a milk price 10% higher than the year before as a result of high world prices for milk fat commodities and buoyant prices for whole milk powder.
New Zealand farmers now get farmgate prices as good or better than those overseas, chairman John Monaghan said.
Fonterra took the Danone and Beingmate hits in the first half of the financial year but was confident of mitigating the losses in the second half.
That did not eventuate, which chief executive Miles Hurrell put down to over-optimistic forecasting based on very good second-quarter results.
“Secondly, butter prices didn’t come down as we anticipated, which impacted our sales volumes and margin.
“Thirdly, the increase in the milk price late in the season, while good for farmers, put pressure on our margins.
“And fourth, operating expenses were up in some parts of the business and while this was planned it was also based on delivering higher earnings than we achieved.”
Only 10c a share dividend was paid, the interim payment in April, and it was effectively funded by trimming 10c off the milk price calculated by Fonterra’s own Milk Price Model.
Normalised earnings, before the extraordinary impacts, were $382m or 24c a share, slightly below the guidance range revised in May.
Operating expenditure increased by 7% to $2.5b after two reductions of similar magnitude when costs were driven down to reflect low milk payouts.
The increases were across the ingredients businesses, from expansion in Australia, in modernising information technology and putting more into research and development.
These items are what Hurrell refers to as planned expenditure.
Chief financial officer Marc Rivers said the return on capital is not satisfactory at 6.3%, down from 8.3%, and that is a measure now including goodwill, brands and equity accounted investments.
Capital expenditure was largely steady on $861m but net debt rose by 11% to $6.2b.
The gearing ratio therefore rose by 4% to 48.4% and Rivers said 3% of that can be attributed to the Danone and Beingmate one-offs.
To bring the gearing ratio down to the acceptable range of 40% to 45%, $800m of debt would have to be repaid.
Retained earnings were 14c a share and added up to $225m and the gearing ratio would have been close to 50% without them.
Among the positive highlights, revenue was up 6% to $20.4b and farmers received half of that, $10.2b.
Monaghan said that is good for farmers, rural suppliers and the regional economies because farmers spend half of their milk income in the local community on essential inputs.
The contribution to the NZ economy every year is around $8b, Fonterra’s annual report said.
