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Extra Two Cents Lifts Fonterra Payout To $4.25

Extra Two Cents Lifts Fonterra Payout To $4.25

Fonterra's shareholders are to get a two cent top-up to payout, with the co-operative announcing today a final payout for the 2003/04 season of $4.25 per kilogram of milk solids, compared to last month's $4.23 forecast.

Fonterra's $4.25 payout is 17% up on last season's payout of $3.63. It amounts to a distribution of $5.1 billion to shareholders, up $969 million on the 02/03 season, and includes a $576 million contribution from value-add activities, up 7%. For an average farm producing 98,000 kilograms of milk solids this season, the payout amounts to $416,500, almost $2000 of which comes from the two-cent increase.

After payout, Fonterra was able to retain a $16 million net surplus for the 03/04 season, versus a retention last year of $284 million. Last year's retention resulted from the decision to retain gains on sales of businesses.

Fonterra Chairman, Henry van der Heyden, said that while the co-operative's total revenues were down 5.2% to $11.8 billion, the total payout distribution was up as a result of higher commodity prices, tight control of costs and Fonterra's ability to rapidly convert the strong milk volumes in New Zealand into the products our customers are demanding.

"The final boost to farmers' incomes was made possible by a strong finish to the financial year in which our co-operative collected a record 1,201 million kilograms of milk solids in New Zealand, sold a record 2.4 million tonnes of dairy ingredients, lifted total value-add earnings and closely controlled costs. A highlight was delivering the full annualised merger benefits of $310 million five months ahead of the October 2004 schedule.

"This season demonstrated what we are increasingly capable of in terms of supply chain efficiencies and control over costs and has seen real progress made in value add. We managed record milk flows and record sales volumes and closed the year with inventories in balance, delivering an improved return to our shareholders. It confirmed our ability to grow the business as our shareholders grow supply.

"As Fonterra approaches its third anniversary, its full potential is starting to show through. Most parts of the business are beginning to perform to expectations and now we have to focus on getting all of the business up to the same level. Farmers can have increased confidence that Fonterra is on a solid growth track," said Mr van der Heyden.

Fonterra's balance sheet also strengthened considerably during the season, with tight working capital management and close control of capital expenditure reducing debt levels from $4.4 billion last season to $4.0 billion as at May 31, 2004. The co-operative achieved strong cashflows from operations of $779 million, up $245 million on the prior season.

CEO Andrew Ferrier said the 17% improvement in payout this season reflected the co-operative's total commitment to achieving the best returns for shareholders.

Despite higher milk costs, reflecting increased volumes of milk solids and the higher commodity milk price paid to suppliers, Fonterra reduced its total cost of goods sold by $142 million to $9.7 billion in the season. Operating expenses were down by $246 million to $1.8 billion with close control of costs a contributing factor.

"Our cost of goods sold reflects the lower costs coming through in our manufacturing and supply chain," said Mr Ferrier. "Operating expenses benefited from reductions in distribution and storage costs, lower management costs, cost reductions in New Zealand Milk, and the impact of a higher New Zealand dollar on international operating costs."

Mr Ferrier said the reduction in revenues primarily related to the divestment by New Zealand Milk of businesses in the UK and Latin America. Last year's financial statements included $404 million of operating revenues from businesses since divested and $315 million of surplus on these sales, which was recorded as revenue last year, in accordance with Generally Accepted Accounting Principles. The divestments included businesses moved into joint ventures with Arla and Nestle, from which Fonterra now reports returns on an equity accounting basis.

The stronger New Zealand dollar also had a negative impact on Fonterra's revenues compared to the previous year, amounting to $540 million.

"Our revenues were converted in the season at an average rate of US52 cents compared with US48 cents in 2003. This impact was equivalent to 45 cents per kilogram of milk solids and could only be partially offset by higher commodity prices."

Mr Ferrier said average commodity prices in US dollar terms increased by 30% over the season.

"The increase benefited our Ingredients business, which increased revenues on the back of record sales."

Total Ingredients sales volumes were 2.4 million MT, including 2.0 million MT produced in New Zealand. Third party sales and sales resulting from Fonterra's management of Bonlac Foods in Australia accounted for the remainder.

Ingredients revenue has increased by $0.5 billion to $9.5 billion in the current year. Increased volumes resulting from strong growth in New Zealand milk supply and the Bonlac Foods alliance, as well as increases in commodity prices, have contributed to this growth in revenues. The net adverse impact on revenues was $300 million after taking into account the strength of the New Zealand dollar and Fonterra's hedging positions.

"Excluding the price paid to suppliers for milk, costs of goods sold were reduced by $420 million as a result of improved manufacturing and supply chain costs, and improved inventory management. The net effect was that Ingredients' total cost of goods sold increased by $478 million to $8.2 billion. Gross margins in Ingredients were $63 million higher at $1.3 billion," said Mr Ferrier.

Despite processing 4.6% more milk, and increased energy prices, operating expenses in Ingredients were reduced by $15 million, primarily as a result of lower distribution, storage and management costs and the positive impact of New Zealand currency on international overheads.

"Throughout the year, the Ingredients business benefited from its clear view of demand, its ability to manage inventories to meet that demand and a much greater ability to match production to market need. All the work that has been done to better align Ingredients to customer needs and achieve operational excellence in manufacturing and in the supply chain is beginning to pay off and we can expect to see more benefits coming through in the current season. We have also seen real progress with the value-add side of the Ingredients business where we expect to achieve continued growth," said Mr Ferrier.

However, the higher commodity prices, which boosted earnings in Ingredients, meant higher input costs for the Ingredients Growth Business group comprising Health and Nutrition, Fresh Dairy, DairiConcepts and Pharmaceutical Lactose. The group generated revenues of approximately $500 million and is achieving targeted growth rates of 12% together with superior margins, confirming their ability to add long-term value in the Ingredients business.

"These specialty Ingredients businesses benefited from being separated into a Growth Business unit ahead of the season's start," said Mr Ferrier. "That enabled a greater focus on their revenue growth, performance targets and costs.

"Each of these businesses is achieving superior margins and they demonstrate how we can add value to core commodities," said Mr Ferrier.

In the consumer business, New Zealand Milk revenues declined by $945 million to $3.8 billion. However, Mr Ferrier said comparisons with the prior year were not an accurate indicator of performance because of the UK and Latin American divestments, the net effect of which was a reduction of $719 million in revenues.

"On a "like for like" basis, taking into account the reduction in revenues from divested businesses, New Zealand Milk's revenues at $3.8 billion were $225 million down, primarily as a result of currency movements. Actual volume of products sold increased 4%.

"New Zealand Milk experienced a difficult year in many of its key markets, as margins came under pressure from the sharp increase in commodity costs, not all of which could be recovered in the short term through higher pricing in the more competitive markets," said Mr Ferrier.

"The segment operating result for New Zealand Milk was down 28% on the past year. This reflects the increase in commodity prices, as well as a one-off decision to impair certain assets." In New Zealand Milk, cost of goods sold reduced by $554 million to $2.6 billion primarily as a result of divestments and the impact of the stronger New Zealand dollar on New Zealand Milk's international costs, partially negated by increased commodity prices.

Operating expenses fell by $279 million to $866 million, not only as a result of the divestments, but also through tight controls in the business, which helped offset the impact of higher commodity prices.

Good performances in the Philippines, Saudi Arabia and Chile only partially offset the lower-than-expected performances by the Dairy Partners Americas (DPA) joint venture businesses in Venezuela, Brazil and Argentina and New Zealand Milk's operations in Mexico.

"We are forecasting a recovery in performance with DPA as the economic outlook improves in Brazil and Argentina. However, our Mexico business has not lived up to expectations and a new management team is addressing this performance."

In Australasia, the retail environment was very competitive with supermarket chains putting pressure on their dairy consumer goods suppliers to provide discounts on pricing. Returns in higher-margin categories, such as cheeses and ice cream, tended to be offset by discounting in beverages and yoghurts, affecting Australasian revenues. However, the overall gross margins achieved by New Zealand Milk (Australasia) remained solid.

New Zealand Milk's global foodservice business increased both volumes and revenues in the 2004 year, with good performances recorded in Australasia, Asia and the Middle East.

Mr Ferrier said New Zealand Milk had come through a difficult year and while performance was flat overall, the business had considerable potential.

"The business absorbed substantial commodity price increases in the past year. Recovering all those increases quickly in a competitive market place is difficult.

"We are budgeting for an improved operating performance in the current season and we are addressing the areas that have dragged down performance. Growth targets are in place and performance will be closely managed.

"Shareholders can expect its contribution to value-add earnings to improve. New Zealand Milk is already benefiting from its move to Auckland, not only in terms of management focus but also in terms of its cost structures. I expect to announce its new leadership shortly," he said. Mr Ferrier said Fonterra's achievement in lifting payout from the forecast $3.80 at the season's start to the end result of $4.25 reflected a concerted effort in the business to deliver the best result to shareholders.

"We made a real commitment to performance and the result shows us delivering on that promise."

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