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Fonterra Delivers $4.10 Payout After Record Sales

Media Release
24 July 2006

Fonterra Delivers $4.10 Payout After Record Sales and Production Volumes

- Revenue $13 billion, up 6%
- Value add earnings of $578 million (48c kg/MS) up 7%
- Record production 1,210 million kg/MS, up 4%
- Record sales volumes 2.5 million MT, up 9%
- Final payout of $4.10 kg/MS

Fonterra Co-operative Group has announced a final payout of $4.10 per kilogram of milk solids, a 25 cent increase on its season-start forecast and three cents higher than its last forecast. The result was driven by higher operating returns from Fonterra’s value added activities, cost efficiencies, record sales volumes and higher than forecast commodity prices.

In addition to the $4.10 payout, Fonterra’s shareholders at the end of the season have, on average, received a benefit equal to 14 cents per kg/MS. This 14 cent benefit arose as a result of changes to Fonterra’s capital structure and the amount of benefit varied amongst shareholders.

The $4.10 payout equates to a total payment for milk of $5 billion and was achieved despite the co-operative’s highest ever average exchange rate of 66 cents to the US dollar. Despite the currency softening late in the season, over the full year, the strong dollar reduced the gains achieved in volumes and pricing.

As a co-operative, Fonterra’s payout (excluding capital retentions or repayments) includes payment for milk, plus the returns on Fonterra’s value add activities (essentially, net profit) earned over and above the price of milk. The $5 billion milk payment includes returns from Fonterra’s value added activities of $578 million, or 48c kg/MS, an increase of almost seven per cent from the previous year.

Fonterra’s revenues, at $13 billion, were $678 million up on the previous season, driven by Ingredients sales volumes for the season of 2.5 million MT, an increase of over 200,000 MT or nine per cent up on the 2004/05 season.

Chairman Henry van der Heyden said in the final quarter Fonterra strongly increased sales, enabling the payout to be increased over the previous forecast.

“We really demonstrated the strength and flexibility of our supply chain and how we can now respond a lot quicker to changes in supply and market conditions. We shifted nearly 100,000 MT more in the last quarter than we did in the same period last season. That includes the first ever sale of over 300,000 MT in a calendar month, achieved in May.”

Fonterra farmers achieved record production of 1,210 million kg/MS, 4.3 per cent higher than the previous season and nearly one per cent up on the previous production record of 1,201 million kg/MS set in 2003/04.

Mr van der Heyden said that while prices of some products had decreased from historical highs, average US dollar selling prices across the full range of products were 2.4 per cent higher than the prior season, driven mainly by protein and milk powders.

Higher sales volumes and US dollar prices were somewhat offset by the increase in Fonterra’s average foreign exchange rate for the season to 66 cents to the US dollar from the prior season’s 61 cents.

Sales by Fonterra’s Global Trade and Ingredients businesses (formerly collectively referred to as Fonterra Ingredients) were $663 million up at $9.2 billion, reflecting the higher volumes.

Total contribution from the Ingredients’ operating surplus (essentially its EBIT) was $725 million, up $124 million or 21 per cent from last year, driven by the increase in sales volumes and reflecting the cost saving initiatives during the year.

Fonterra Brands’ operating revenue, excluding intersegment sales, gains on the sale of investments and other one-off items, was $192 million ahead of last season at $3.7 billion, due to increased sales, improved selling prices and benefits of brand acquisitions such as Anchor and Fresh ‘n Fruity in New Zealand. It also achieved net growth of 15% in Fonterra Foodservices sales.

Fonterra Brands’ operating surplus (essentially its EBIT) was $288 million, up $23 million or nine per cent from last year, reflecting the increased revenue and higher returns from our premium brands.

“That’s a good result with Brands exceeding their sales and profit targets at the same time as paying their highest prices for commodities in five years,” said Mr van der Heyden.

Fonterra CEO Andrew Ferrier said the late season surge in milk supply and sales, following a slower-than-usual sales programme mid-season, resulted in higher working capital demands which were reflected in Fonterra’s operating cash flows. Fonterra recorded an outflow of $232 million compared to an inflow of $228 million in the prior season.

“The late season sales, particularly in April and May means we’ve paid for the milk, made the product, sold it and shipped it, but payment will not be received until the next season. This is reflected in our trade receivables which are $575 million higher at year end than the prior season. We are confident operating cash flows will turn positive as the cash from sales comes in the door and we sell our carry over inventory prior to our new season production really cranking up.”

Mr Ferrier said Fonterra’s overall result reflected good performance across the business, close attention to costs, growth both organically and through acquisitions and benefits flowing through from projects completed in prior seasons.

“What we are seeing is the results of a great deal of work, not only in the 05/06 season, but in prior seasons where the effort made to streamline our supply chain, strengthen our customer relationships, reduce our costs, simplify our structure and rationalise our brand portfolio is now coming through in our performance.

“All this effort is coming together in a stronger, leaner integrated business which is well positioned for growth. The focus on Power Brands in Fonterra Brands is beginning to deliver results, with the business exceeding its financial targets, despite the consistently high commodity prices during the season.”

Significant acquisitions during the year included the Anchor and Fresh ‘n Fruity transaction in New Zealand, the acquisition of Kapiti Fine Foods, and moving to 100% ownership of Bonlac in Australia. The $386 million proceeds from Fonterra’s sale of its National Foods shareholding helped fund the cost of these acquisitions.

Fonterra’s investment to acquire 43% of Shijiazhuang San Lu in China was also negotiated in the financial year, with the acquisition completed post balance date on June 15 2006.

“We capped off a busy year with the RD1/Landmark agreement and entering into a joint venture with Campina to create DMV Fonterra Excipients. This business is now the largest provider of dairy based excipients to the world market by a significant margin with plants in New Zealand, Germany and in Holland. We have great opportunities to grow this business which is now a truly global supplier to the pharmaceutical industry around the world.”

In the season, Fonterra has achieved cost savings of more than $130 million, mainly in manufacturing, IT, procurement and freight. Additional savings are forecast for the new season following a Fonterra wide business improvement review.

“We continue to drive for efficiencies so that we remain lean and effective and much better placed to create value for our shareholders.”

Record volumes, including 116,000 MT higher third party volumes and higher fuel costs, are reflected in Fonterra’s higher total cost of goods sold of $10.8 billion compared to the previous season’s $10.2 billion. Other operating expenses, including interest costs, increased to $2.1 billion compared to $1.9 billion. These included restructuring costs of $57 million, higher advertising and innovation spending by Fonterra Brands, $26 million relating to the premium on redemption of Fonterra capital notes and increases in storage and distribution costs relating to higher inventory levels.

Fonterra’s total net interest bearing debt at the end of the year was $5.6 billion compared to $4.3 billion last year as a result of business combinations, investments in new property, plant and equipment, higher trade receivables and the impact of a depreciating New Zealand currency on foreign denominated debt. This, along with the general increase in interest rates, contributed to higher interest costs in the year of $364 million compared to $269 million in the 04/05 year.


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