Fonterra Lifts Final Payout

Media Release
25 July 2007

Fonterra Lifts Final Payout

Fonterra Co-operative has announced a final payout for the year ended May 31, 2007 of $4.46 per kilogram of milk solids (kg/MS).

The result is an 11 cent improvement on the last payout forecast announced in May. It comprises a milk price component of $3.87 per kg/MS, up three cents, and a value component of 59 cents per kg/MS, up eight cents. When a further $52 million in premium payments for autumn milk, organics, Stolle, Colostrum, and winter milk is taken into account, Fonterra’s total kg/MS payout to shareholders is an average $4.50 per kg/MS.

Fonterra’s chairman, Mr Henry van der Heyden said, “The final payout result was positive given the high exchange rate and the fact that commodity prices did not surge until the final quarter of the year.

“While we had record prices at the end of the season this was not the case for the full year.”

Fonterra’s total payout represents $5.6 billion of payments to shareholders. The 59 cent value component of $728 million is $428 million up on the $300 million in the previous season. It was the result of a substantial increase in sales volumes by Fonterra Ingredients, improved performance by Fonterra Brands, and lower overall costs.

With commodity prices now significantly higher, margins are now beginning to come under pressure in Fonterra Brands and in particular, Fonterra Ingredients, and this was reflected in the lower forecast for the value component in the current season.

“Our result is a good one but we cannot afford to rest on our laurels. Regardless of the current strong commodity market and higher payout forecast, we will continue to drive hard on growing the global competitiveness of Fonterra. We can’t stand still. We need to keep moving and ensure the next generation of farmers can also enjoy good returns.

“To do this we need to successfully implement our strategy, which means an on-going focus on the strength of the New Zealand supply chain, coupled with substantial growth in other countries.”

Mr van der Heyden said that despite the highest ever average conversion rate of 67 cents for the season, revenues increased $881 million to $13.9 billion as a result of record sales and record production.

Milk production, including contract milk, was 1.246 billion kg/MS, three per cent above the previous record of 1.210 billion kg/MS set in 2005/06.

Fonterra’s total cost of goods sold (excluding payout to suppliers) was $6.1 billion - an increase of $259 million. This was primarily driven by the increase in volumes sold.

External sales by Fonterra Global Trade and Fonterra Ingredients (formerly collectively referred to as Fonterra Ingredients) increased by 7.3 per cent to $9.9 billion reflecting higher sales volumes. Its operating surplus before non-recurring items (essentially EBIT) was $896 million, up $449 million on the prior year.

External sales volumes were 2.5 million tonnes, 344,000 MT higher than the previous year.

Fonterra Brands’ operating revenue increased 5.4 per cent to $4 billion, as a result of higher sales volumes and changes in product mix and pricing. Its operating surplus before non-recurring items, (essentially EBIT), rose by $36 million to $324 million.

Fonterra CEO Andrew Ferrier said that the good year-end results in Fonterra’s value component of payout reflect the benefits of on-going business improvements, implemented over the past several years.

“The result reflects the benefits of better focus on customers and consumers, a stronger focus on our Brands, and the investments we have made in our supply chain and projects to increase manufacturing efficiency and reduce energy consumption.

“We continue to place emphasis in the business on cost reductions and lower working capital. Our total operating expenses including interest reduced by $25 million from the previous season in spite of inflation running at around three per cent and interest rates continuing to rise.”

Mr Ferrier said Fonterra Brands had performed well as its margins came under pressure towards the end of the season with higher commodity prices. At the same time, Fonterra’s share of associate earnings, including new investments in San Lu and DMV Fonterra Excipients, increased from $28 million to $61 million.

Fonterra’s total net interest bearing debt at May 31, 2007 was $582 million lower at $5.0 billion. Positive operating cash flows of $1.3 billion underpinned the reduction, achieved in a year in which significant investments were made, and $255 million remained with shareholders as a result of the transition to the new share standard. Our debt to debt-plus-equity ratio at May 31 2007 was 50 per cent compared to 52.1 per cent at May 31, 2006.

Mr van der Heyden said that at this stage the Board was holding with its forecast of $5.53 for the 07/08 season.

“It is still very early in the season and there are still a lot of unknowns as we witnessed yesterday with the New Zealand dollar.

“The Fonterra Board reviews the forecast payout quarterly, so it’s due in September. However we are planning to bring it forward a month and take a look at it in August and if there are any changes we will advise our farmers at this point,” he said.

ENDS

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