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Fonterra Reports Higher Revenues

24 January 2006

Fonterra Reports Higher Revenues, Offset By Higher Dollar

With commodity prices holding at historically high levels and higher sales volumes achieved, Fonterra Co-operative Group recorded $6 billion in operating revenues for the six months to November 30, 2005 compared with the $5.7 billion achieved in the same period in 2004.

The result includes a one-off gain on the sale of a portion of Fonterra Brands' Mainland business to New Zealand Dairy Foods. However, the consistent strength of the New Zealand dollar has offset gains achieved in sales volumes and prices, with the result that the amount available for payout is down at $2.2 billion compared with $2.4 billion at the same time last year.

For the first half of the season Fonterra converted its earnings at an average rate of 64 cents to the US dollar compared to the 61 cent average conversion rate which applied for the previous full season. For the full current season Fonterra is forecasting an average conversion rate of 67 cents.

Fonterra Chairman Henry van der Heyden said today the impact of currency on an otherwise strong result had been clearly signalled to shareholders since last season.

"We have said all along it will be a tougher year for us. While commodity prices have remained firm, the strength of the New Zealand dollar has also held and that is having a real impact when we convert our US dollar earnings back to New Zealand dollars."

Fonterra Ingredients achieved sales volumes 4.8 percent ahead of those in the same period last season, when volumes were affected by lower milksolids production. Mr van der Heyden said the improvement was due to a combination of better local production and increased sales of product sourced from third parties internationally.

"This is the second consecutive season where we've had a slow start with cold weather affecting production and peak flows. Conditions then improved and good production, particularly from the Central and Lower South Island regions and the Lower North Island helped make up the deficit. Once again, our ability to move third party product through our supply chain to meet customer commitments has supplemented local production and contributed to our higher sales volumes and revenues."

Mr van der Heyden said total milksolids production at 566 million kilograms was 3.7 percent ahead of that achieved in the same period last season, however it was still below budget and it was likely full year production would only modestly exceed that of last season's weather-affected result.

Fonterra's total cost of goods sold in the six months, including payout to suppliers, increased by $243 million to $4.9 billion. This was caused by the higher average prices paid for the greater volumes of third party purchases and increased freight and manufacturing costs relating to higher milk solids production. Also contributing was Fonterra Brands' higher costs of sales linked to increased sales volumes and the higher prices it paid for commodity dairy products.

Fonterra Chief Executive Andrew Ferrier said both the Fonterra Ingredients and Fonterra Brands businesses had recorded revenue increases, with Fonterra Ingredients benefiting from higher commodity prices and higher volumes and Fonterra Brands also increasing sales volumes and prices.

"The brands business always faces tough operating conditions when commodity prices are high and has traditionally found it difficult to offset higher costs by increasing prices. However, Fonterra Brands' increasing focus on fewer, stronger brands is enabling the business to lead prices up without undermining sales volumes, helping it to recover some of its higher input costs."

Mr Ferrier said Fonterra Ingredients' performance had also benefited from its global supply chain through which increasing volumes of non New Zealand sourced products were being sold.

Fonterra's debt to debt plus equity ratio as at November 30, 2005 was 49.9%, compared to 46.4% at November 30, 2004 and 46.9% at May 31, 2005. This ratio remains within the target parameters set by the Board. Total net interest bearing debt has increased as a result of the issue of unsecured capital notes by Bonlac Foods Limited ("BFL"), funding of ongoing capital projects, and, to a lesser extent, funding of working capital. BFL, in support of Fonterra's Australian strategy, issued unsecured capital notes for the buy-back of its shares from Bonlac Supply Company, giving Fonterra 100 percent ownership and effectively converting the minority equity interest into debt.

The proceeds from the sale of Fonterra's National Foods investment for AUD 361 million, received in June, were used to fund the purchase of New Zealand Dairy Foods' assets, as well as other capital projects. Fonterra's total assets have increased from $11.8 billion as at May 31, 2005 to $12.3 billion as at November 30, 2005.

"We are maintaining a conservative debt position while expanding our asset base to position Fonterra for growth," said Mr van der Heyden.

He said the current forecast payout, at $4 per kilogram of milksolids, took into account the good performance in the first half of the season as well as the impact of the strong New Zealand dollar.

"As we indicated in December when we affirmed the payout forecast, we do not see any upside in commodity prices. Management is working hard to reduce costs and improve productivity throughout the business. We're realising some of the benefits of the business reorganisation that's been taking place over the past year, as well as bringing forward as many programmes as we can to capture their gains in the current year."

Footnote: Fonterra's half year accounts show a surplus of $2 million, being the minority interests' share of profits. As a co-operative Fonterra prepares its accounts on the basis that all of the net surplus earned in the six months to November 30 will be paid out to suppliers. Directors will make a final decision on payout at the end of the season. Dairy farming is a seasonal business, so Fonterra's half year results do not necessarily indicate what its full year performance will be.


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