FILE PHOTO: The Fonterra Te Rapa dairy factory is seen outside Hamilton March 30, 2016. REUTERS/Henning Gloystein/File Photo

(Reuters) -New Zealand's Fonterra posted a 4.3% drop in full-year profit on Thursday, hit by a higher tax expense after changing how it treats farmer shareholder distributions, while also forecasting lower earnings for fiscal 2026.

The higher tax expense in fiscal 2025 followed Fonterra's decision to stop deducting distributions to farmer shareholders from taxable income, opting instead to attach imputation credits, a mechanism used to avoid double taxation of the company's profits, to dividends.

Fonterra said it expects normalised earnings per share in fiscal 2026 to a range between 45 and 65 New Zealand cents, down from 71 NZ cents reported for the current year.

The Co-operative revised its forecast milk collections for the 2025-26 season to 1,525 million kilograms of milk solids (kgMS), up from the previous estimate of 1,490 million kgMS.

It reported collections of 1,509 million kgMS for the year ended July 31.

"Favourable weather conditions experienced during the previous season are forecast to continue through spring, supporting pasture growth," CEO Miles Hurrell said.

The world's largest dairy exporter reported profit after tax of NZ$1.08 billion ($627.80 million) for the year ended July 31, compared with NZ$1.13 billion reported a year earlier.

The Auckland-based company declared a final dividend of 35 New Zealand cents apiece, up from 25 NZ cents paid last year.

It reported a final 2024-25 farmgate milk price of NZ$10.16 per kgMS.

($1 = 1.7203 New Zealand dollars)

(Reporting by Roshan Thomas and Jasmeen Ara Shaikh in Bengaluru; Editing by Krishna Chandra Eluri)