Annual report suggests weaker financial position for Fonterra

Friday 16th August 2002

CRAIG NORGATE: Currency effects

Fonterra Co-operative Group's financial position deteriorated in the last six months of its financial year, to May 31, Lincoln University agribusiness professor Keith Woodford said yesterday.

"We know that international dairy prices were declining rapidly during this period, and we also know that the rise in the New Zealand dollar will have lowered the value of overseas assets, but it is not clear why assets should have declined by so much," he said after the release this week of Fonterra's first full annual report.

During the second half of the financial year, total assets declined by $818 million from $12.618 billion to $11.8 billion. Equity declined from $5.118 billion to $4.485 billion and borrowings increased from $3.855 billion to $4.555 billion.

The cash balance declined from $497 million to $37 million. The cash operating surplus was $855 million for the first six months but minus $501 million for the second six months.

Intangibles (mainly the value of brands) declined from $1.859 billion to $1.587 billion.

Fonterra chief executive Craig Norgate said the first of what would become expert annual valuations of brands by Interbrand did not produce the same numbers as those in the half-year report and that currency movements played a part.

Nonetheless, the first official valuation of the Fonterra brands disclosed just over $1 billion increase in intangible assets, when compared with those of the founding entities.

University of Canterbury senior accountancy lecturer Alan Robb said he did not like to see such large levels of brand valuations on a balance sheet. Fonterra was strong enough to write off its intangibles, having now acknowledged their contribution to the formation of the co-operative.

"There is nothing objective about either their valuations or amortisations," he said.

Professor Woodford said the $400 million decline in dairy-product inventory levels at balance date was a good sign.

"But in the main it will be due to the declining value per unit of inventory. On a volume basis it looks like being an increase, but of unknown extent."

"In the current environment of very low prices it must be tempting for Fonterra to try and not be a 'weak seller'."

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