Fonterra accounting changes 'short-changing shareholders'

Duncan Bridgeman

Friday 30th January 2004

Fonterra shareholders have been short- changed by a lack of information in the co-operative's interim result, University of Canterbury accounting lecturer Alan Robb claimed yesterday.

The country's biggest company this week reported a 5.7% drop in operating revenue to $5.63 billion for the six months to November 30.

Chairman Henry van der Heyden described the first half as a "solid operating performance" but Robb accused the company of withholding significant information, including the volume of milk processed to November 30 each year and the operating cashflows during the period.

"It's strange that two significant and readily available pieces of information have not been disclosed ... it would certainly make me question the claim that Fonterra has delivered solid performance in the first half."

Robb also noted that part of the improvement in Fonterra's selling costs, which were down $330 million to $4.6 billion, came from an accounting change.

Fonterra said cost savings of about $100 million resulted from continuing merger benefits and lower manufacturing costs, while the rest was attributed to lower sales volumes, the stronger dollar and the "deconsolidation of businesses when we established our Dairy Partners Americas partnership."

Robb said he was wary of improvements arising from changes in accounting, especially when they were not quantified.

"I am sure that suppliers will be pleased to learn that the amount available for payout is up by $810 million compared with November 2002. But they should note that van der Heyden also says that the first half year's accounts are not necessarily an indicator of Fonterra's likely full year performance."

Fonterra chief executive Andrew Ferrier yesterday countered Robb's claims saying that Fonterra, as a co-operative, used different evaluation methods.

For example, the joint venture nature of its relationship with Dairy Partners meant assets showed up as reduced on Fonterra's balance sheet.

The reduction was "more or less" offset by a reverse situation with Bonlac in Australia, after Fonterra increased its stake last year.

However, there were no figures for the changes disclosed in the interim report. "I don't believe that we disclose to that degree."

Ferrier said Fonterra's operating cashflow was basically the payout available to shareholders $2.2 billion as at November 30.

"But that is a combination of what we are paying our shareholders, both of the value added businesses and for their core milk. You can't split them apart in the middle of the year. Our books don't work that way as a co-operative."

Ferrier said milk production volume was down on a six-month period, "but it doesn't mean a hell of a lot. The underlying story is that by destocking last year we took some of the overhang off the world market."

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