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Shareholder Council Annual Report To Shareholders

23 August 2002

Fonterra Receives Shareholder Council Annual Report To Shareholders

The Chairman of Fonterra Co-operative Group, John Roadley, has today acknowledged receipt of the Shareholder Council’s Annual Report to Shareholders.

“The Chairman of the Council, Tony O’Boyle, handed me the full report earlier today and we were able to have a very good discussion around some of the key issues raised,” said Mr Roadley.

“While it is clear that the Council has a number of concerns they have acknowledged the significance of successfully completing one of the most complex of mergers, the excellent performance of New Zealand Milk, the company’s value-added consumer goods business, and the Council’s continued support for the New Economics.

“The New Economics has provided unprecedented levels of transparency for the industry and the Council has rightly noted that NZMP’s performance against the theoretical ‘most efficient competitor’ does have room for improvement. Critics of the ‘one-company’ model should take comfort from the fact that, despite significant gains from the merger, Fonterra has a benchmark that ensures a never-ending drive for improvement.

“The CMP is a stretch target and Fonterra’s aim is to consistently close the gap as the CMP benchmark continues to shift. As we noted in the Annual Report, closing this gap is a continuing area of focus.”

Mr Roadley also commented on the Council’s concerns around working capital.

“Clearly working capital was higher than budgeted. This reflects the requirement to fund higher than expected inventories in the latter part of the year – this is a problem being experienced by the dairy industry globally. What is more important is that as we sit here today our inventory levels are below this time last year thus helping create the conditions necessary for a lift in world market prices.

“I would also acknowledge that it is unacceptable that information provided to the Council was late or subject to change. While some of this was due to incompatibility of legacy company systems we accept responsibility for needing to work through these issues quickly.”

Mr Roadley expressed disappointment that the Council had not put sufficient emphasis on the fact that at the heart of many of the performance issues highlighted is the position Fonterra inherited with the merger.

“High levels of fixed and working capital, systems that were not integrated and the balance sheet of the business are not issues that reflect on the past year but more on the industry structure we have left behind. They were a key reason for the merger.

“Despite that, the business has returned its cost of capital. This is a result that puts it ahead of many major New Zealand companies.”

On behalf of the Board Mr Roadley welcomed the scrutiny provided by the council on the Co-Operatives performance.

“The Report demonstrates the room for improvement we all know exists within the business. We have made excellent progress in the year just gone – but we still have much to do.”

Finally Mr Roadley noted that he expected the Council’s Report would be generally discussed as part of the upcoming Accounts Meetings and more fully at the Annual General Meeting.

Ends

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