Fonterra Announces Final Payout

FONTERRA ANNOUNCES 2007/08 FINAL PAYOUT AND REVISED 08/09 PAYOUT FORECAST

Fonterra Co-operative Group has announced a final payout of $7.90 per kilogram of milksolids (kgMS) for the 2007/08 season, comprising a milk price of $7.59 per kgMS and a value return of 31 cents per kgMS.

The actual final cash distribution to shareholders will be $7.66 per kgMS after the Board decided to retain within the Co-operative 24 cents from the value return component of payout. Retentions were signalled by the Board in May to strengthen further Fonterra’s balance sheet in the light of instability in financial markets.

Eligible shareholders and suppliers have already received a premium of an average 3 cents per kgMS, which relates to specialty and winter milk supplied to the Co-operative.

In total Fonterra will distribute $9.1 billion from the amount available for payout of $9.3 billion. This is a 65 per cent lift on the prior season’s distribution of $5.5 billion.

2008/09 Revised Payout Forecast

The Fonterra Board has also lowered the payout forecast for the current 2008/09 season to $6.60 per kgMS from the $7.00 per kgMS forecast in May. The $6.60 forecast comprises a milk price of $6.25 and a value return component of 35 cents. The value return remains unchanged from the May forecast and will be reviewed again in December.

Fonterra Chairman, Henry van der Heyden, said the co-operative had advised shareholders when making the May forecast that the 2008/09 season payout forecast had an equal chance of going up or down, given volatile market conditions.

“Since then we have seen prices fall away from last year’s record highs. High prices have dampened global consumer demand and, at the same time, have encouraged production increases in exporting regions around the world. With buyers playing a waiting game, there is the possibility of further softening of prices before supply and demand come back into balance. Although the New Zealand dollar has been moving in our favour this season, we can’t be confident that a lower currency will fully offset price movements – indeed, there’s still a chance of currency upside or downside.”

San Lu Tragedy

The tragic events surrounding San Lu in China also had an impact on Fonterra’s financial results for 2007/08, he said.

As a direct consequence of the criminal contamination of milk in China, Fonterra has recognised an impairment charge of $139 million against the carrying value of its investment in San Lu. This reflects the cost of the product recall and Fonterra’s anticipated loss of San Lu brand value. Following this impairment charge, Fonterra’s best estimate at this point in time, of the book value of its investment in San Lu is approximately $62 million.

“We have recognised this charge as we are required to by accounting standards, but we are certainly not putting the financial consequences ahead of our primary priority of consumer safety. We are focusing all our efforts on what Fonterra can best do to work with the Chinese authorities and help get safe dairy products to Chinese consumers,” Mr van der Heyden said.

At yesterday’s Board meeting, the Directors discussed the San Lu tragedy in depth and were fully supportive of the approach taken to date by Fonterra management and staff.

“Throughout this crisis, Fonterra’s paramount concern has been for the health and safety of Chinese consumers and recalling contaminated product as quickly and effectively as possible in the Chinese environment. The scale of this tragedy has been truly shocking and our heartfelt sympathies go out to all the affected children and their families.”

“The latest revelations that an official Chinese Government investigation has revealed San Lu management was investigating complaints of sick infants as early as eight months before the San Lu Board and Fonterra were first informed on August 2 is deeply concerning. That Fonterra was not informed earlier is frankly appalling,” he said.

Mr van der Heyden said the Board had reaffirmed its long term, strategic commitment to the China market, believing that Fonterra was well placed to supply safe and healthy dairy products to Chinese customers and consumers and contribute towards helping improve the Chinese dairy supply chain.

2007/08 Results Overview

Mr van der Heyden said the 2007/08 result followed one of the most volatile and challenging years in global markets in recent memory, compounded by the drought which affected production in New Zealand.

Fonterra achieved revenues of $19.5 billion from the sale of goods in the 14 months to July 31 2008.

A 63 per cent increase in weighted US$ average sales prices offset an average exchange rate seven cents higher for the season at 74 cents resulting in the record result.

Commodities and Ingredients sales revenues, excluding intersegment sales, were $13.5 billion, while Australia/New Zealand’s were $3.3 billion. Asia/Middle East’s sales revenues were $1.9 billion and Latam’s $789 million.

Fonterra collected 1,192 million kilograms of milksolids, including contract milk, a 4.3 per cent decrease on the prior season due to drought conditions across much of New Zealand.

Mr van der Heyden said the level of volatility during the year had been unprecedented.

“We have seen a global liquidity crisis, drought, the New Zealand dollar hit new highs and increases in the cost of everything from fuel to interest rates in the past season. It is hard to imagine a more unpredictable operating environment.”

Mr van der Heyden said the Board decision to make a retention from payout had been signalled last May, and was prudent in the current unstable global financial environment.

“It is a consequence of the high levels of instability in both trading and financial markets and the need for Fonterra to strengthen further our balance sheet in such uncertain conditions. The balance sheet is not under pressure, but we need to ensure it remains that way given the impact of current market conditions on our cost of capital.”

Fonterra CEO, Andrew Ferrier, said the record result for the 2007/08 financial year was not solely related to record commodity prices.

“They certainly played a big part, but they also presented a real challenge for our consumer operations, which had to overcome the record prices to return improved earnings and profitability, despite lower volumes in some markets. Higher prices also impacted negatively on our Fonterra Ingredients business.”

Fonterra’s share of profits from international businesses and joint ventures, excluding royalties, were $158 million for the 14 months to July 31 2008 compared with $73 million in the 12 months to May 31 2007.

Australia and New Zealand returned a profit before depreciation, amortisation and non-recurring items of $266 million, Fonterra Asia/AME $96 million and Latam $119 million for the 14 months.

The Commodities and Ingredients segment returned an operating profit of $824 million before depreciation, amortisation and non-recurring items and excluding contributions from equity accounted businesses. This compared to $1.3 billion in the year May 31, 2007. Higher milk costs and reduced margins in Fonterra Ingredients as a result of high commodity prices were contributing factors.

With a record milk price, high global prices pushing up the cost of product sourced outside New Zealand, higher fuel and energy costs and additional two months of trading, Fonterra’s cost of goods sold increased by 55 per cent over the 14 months to July 31, 2008 to $16.8 billion. Mr Ferrier said the higher milk price accounted for the majority of this increase.

Operating expenses were $2.2 billion for the 14 months to July 31, 2008, against $1.7 billion for the 12 months to May 31, 2007 with the extended financial year the main contributor.

Fonterra retained a profit of $235 million, including minority interests, for the 14 months to July 31, 2008.

Where previously, performance has primarily been discussed in terms of commodity and consumer goods sales, the group now has four reportable segments defined by product type and geographic area, reflecting how the business is managed.

These are: -

• Commodities & Ingredients – which includes New Zealand Milk Supply, New Zealand Manufacturing, Sales and Operations Planning, Fonterra GlobalTrade, Global Supply Chain, Fonterra Ingredients’ operations in North Asia, North America and Europe, Corporate and the equity accounted investments including DairiConcepts, Arla Fonterra Foods and DMV Fonterra Excipients.
• ANZ – operations in New Zealand (other than those included in Commodities and Ingredients) and Australia, including Australian milk supply and manufacturing.
• Asia/AME – operations in Asia, Africa and the Middle East and the equity accounted investments including San Lu.
• Latam – Soprole (Chile) and our equity accounted joint ventures with Dairy Partners of America in Latin America.