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Record Payout Confirmed, But Warnings Continue

Friday 31 May 2002

Record Payout Confirmed, But Warnings Continue For 2002/3

The Board of Fonterra Co-operative Group Ltd has declared a final payout to supplying shareholders for 2001/2 of NZ$5.33 per kilogram of milksolids, less 3c for industry good activities, but is continuing to warn of a significantly lower payout for 2002/3.

The 2001/2 final payout is subject to adoption of the financial statements and completion of the auditor’s report for the season, which will be after 1 July 2002, but would put NZ$5.7 billion into provincial New Zealand, up from NZ$5.25 billion in 2000/1 when the payout was NZ$5.00.

“We have benefited from very high commodity prices and a low New Zealand dollar, and we can also be pleased with how well the company has successfully maintained business-as-usual disciplines through the critical first months of its integration process – the danger period for any merger,” Chairman John Roadley said.

But the company is continuing to warn that its best estimate of the most likely final payout for 2002/3 is NZ$4.00 per kilogram of milksolids, less 3c for industry good activities, which John Roadley says has as much downside as upside. The $4.00 forecast is predicated on a recovery in commodity prices and a New Zealand dollar with an average value through the season of US$0.45.

The company has also released financial information based on its “new economics” that allows its performance to be analysed more transparently than under the industry’s old arrangements.

Of the NZ$5.33 final payout, NZ$5.08 has been calculated as the Actual Milk Return (AMR). Returns from value added activities were worth 49c, less 21c from foreign exchange hedging and 3c from Fair Value adjustments arising from merger accounting requirements.

For 2002/3, the AMR is forecast to be NZ$3.19 while 66c would be the return from value-added activities, plus 7c from foreign exchange hedging and 8c from Fair Value adjustments.

Another key measure is based on the Commodity Milk Price (CMP) which is a theoretical measure of what an efficient commodity producer could pay for milk and still make an adequate return on capital. A model developed by Fonterra’s valuer, Standard & Poor’s, has been used to calculate the CMP.

For 2001/2, the CMP is NZ$5.48, a 40c gap below Fonterra’s AMR. Factors which have driven this gap are Fonterra’s product mix differing from Standard & Poor’s optimal mix, slightly higher than optimal manufacturing, and slightly poorer than optimal capital utilisation and the tax implications of that.

For 2002/3, Standard & Poor’s has calculated a forecast CMP of NZ$4.17. When preparing its budget, however, Fonterra has used more conservative assumptions about market prices and exchange rates than Standard & Poor’s. Applying these assumptions delivers a CMP of NZ$3.52 is forecast, suggesting a decrease in the gap between the CMP and AMR to 33c.

The company has also determined its Fair Value Share (FVS) price as at 1 June 2002 to be NZ$3.85 per share, with supplying shareholders having to own one share for every kilogram of milksolids they produce.

The valuation is based on advice on 15 May from Standard & Poor’s which recommended a price in the range of $3.65 to $4.25. Since then, the New Zealand dollar has appreciated prompting the Board to seek further advice from Standard & Poor’s which has led to a price determination 10c below the initial midpoint.

The FVS price is based on estimates of the company’s future earning potential and changes over seasons ahead will be a key measure of performance.

Fonterra shareholders are receiving advice of this financial data by letter and through the secure shareholders’ section in www.fencepost.com


END

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