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Fonterra Lifts Final Payout To $4.59

19 July 2005

Fonterra Lifts Final Payout To $4.59

Fonterra Co-operative Group today announced a final payout of $4.59 per kilogram of milk solids, an increase of nine cents on its forecast for the 04/05 season. The result is 34 cents up on last season's payout of $4.25 and represents a $5.3 billion distribution to shareholders, which is an increase of $225 million on the previous year.

Chairman Henry van der Heyden said the payout reflected Fonterra's strong performance and is the second highest payout since the co-operative's inception - achieved in spite of a high exchange rate. It reflected a season where commodity prices continued to firm and customer demand was met despite lower New Zealand milk supply reducing production in the Fonterra Ingredients business. It was also a season where the consumer business, Fonterra Brands, increased revenues and margins and met its earnings targets, despite significantly higher commodity input costs.

"We're very pleased to end the season on such a positive note. It hasn't been an easy year for some farmers with a cold, wet start and then a long summer, both of which hit production, so the increase will be welcomed by farmers."

Mr van der Heyden said the higher payout, representing returns for farmers from the 04/05 season, was complemented by the increased value of farmers' long-term investment in Fonterra, measured by the Fair Value Share. Fonterra's share value increased by 75 cents from $4.69 in the 04/05 season to $5.44 for 05/06. Total Shareholder Return for the 04/05 season was 17.2% compared with 11.0% last year.

Firm demand and higher commodity prices meant Fonterra's total revenue for the year was up by $493 million at $12.3 billion. The major contributors were Fonterra Ingredients' revenue of $8.6 billion (excluding $1.4 billion in intercompany sales) and Fonterra Brands' revenue of $3.8 billion (also excluding intercompany sales of $59 million). The New Zealand dollar was stronger during the 04/05 season compared with the prior year. However the negative impact on revenue was more than offset by gains from the application of Fonterra's hedging policy, higher commodity prices and non-New Zealand sourced products.

CEO Andrew Ferrier said some tough farming conditions during the year resulted in Fonterra collecting 1,160 million kilograms of milk solids compared to the record 1,201 million of the 2003/04 year.

"With on-farm production down 3.5%, our New Zealand manufacturing production was also down by 90,000 MT at 2.0 million MT. However, Fonterra Ingredients still turned in total sales volumes of 2.4 million MT, on a par with last year.

"That result shows the effectiveness of our sourcing strategy. It ensures we consistently provide our customers with reliable secure supply with New Zealand production complemented by product sourced outside New Zealand."

Fonterra's total operating expenses fell by $131 million to $1.7 billion, reflecting lower offshore operating costs largely as a result of the stronger New Zealand dollar. The total cost of goods sold rose by $403 million to $10.2 billion, mainly as a result of the higher commodity milk price and higher product costs related to increased volumes of non-New Zealand sourced products. Fonterra delivered a $90 million increase in gross margin to $2.2 billion, even with the increased milk price paid to shareholders.

Fonterra reports segment operating results for the Group, for Fonterra Ingredients and for Fonterra Brands.

Fonterra Ingredients achieved total revenues, including intercompany sales, of $9.9 billion compared to $9.5 billion last year. Higher milk costs in New Zealand and the higher cost of increased volumes of products sourced outside New Zealand increased Fonterra Ingredients' total cost of goods sold by $415 million to $8.5 billion. Those higher costs decreased gross margin by $30 million at $1.4 billion. Fonterra Ingredients achieved a segment operating result, excluding non-recurring items, of $601 million. While this was above the prior year's result of $563 million, it was below our target due to the high commodity milk price.

This result was achieved as the Ingredients business had substantially completed an extensive change programme designed to improve efficiencies and customer service and take cost out of the business. The project has involved hundreds of Fonterra staff and staff from partner companies, who have worked for over three years to ensure the Ingredients business delivers the right level of service to customers.

"The programme has driven efficiencies throughout the entire supply chain by changing the way we work with our customers, the way we develop and manufacture products, plan sales and operations and handle all financial, human resource and information services procedures," said Mr Ferrier. "Its most visible shop front can be seen in Fonterra's Customer Service Centre, a 24-hour, seven-day-a-week operation in the Fonterra Centre servicing our customers globally from Auckland."

Fonterra Brands increased its total revenue, including intercompany sales, by $66 million to $3.8 billion. This includes $195 million revenue from the sale of the National Foods' investment which was in turn offset by the negative impact of the stronger New Zealand dollar. Fonterra Brands' costs of goods sold declined by $66 million, partially reflecting the sale of New Zealand Milk Mexico during the year.

Operating expenses in the business were reduced by $111 million to $832 million, and while the strong New Zealand dollar had a positive influence on costs, tight cost controls also contributed. The business achieved a segment operating result, excluding non-recurring items, of $265 million compared to $280 million in the prior year.

"The result represents good progress with the business meeting its earning targets despite the real challenge of record high commodity prices," said Mr Ferrier, "and they were achieved as the business developed its Winning Through Brands strategies to lift the performance of its top-earnings brands, increase innovation and achieve supply chain efficiencies in the coming years."

He said Foodservice, which supplies the restaurant, fast food and catering market, showed promising performance, exceeding its earnings targets through favourable margins and lower costs.

Mr Ferrier said that while Fonterra had delivered a good result, the prospect of higher exchange rates in the year ahead would be challenging and there would need to be continued focus on costs and efficiency gains.

"We can never take our eye off the costs ball and we continue to target lower operating expenses. In our manufacturing sites in particular, we are very focused on programmes to increase efficiencies, maximise production runs and improve first-time-grading of product."

As a co-operative, Fonterra distributes its surplus to shareholders by way of payout. Profits from divestments are retained in the business in line with policy. This season the payout distribution is $5.3 billion and a net surplus of $191 million has been retained. This includes the gains on the sales of Fonterra's Wrightson and National Foods' investments totalling $208 million, less net brand impairment of $17 million.


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