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Fonterra cuts forecast 2018 per-share earnings on Danone

Fonterra cuts forecast 2018 per-share earnings on Danone damages, sees limited scope to appeal

Fonterra Cooperative Group has cut its forecast for 2018 earnings per share after an arbitration tribunal in Singapore ruled it must pay 105 million euros ($183 million) to Danone in the wake of 2013's whey protein recall.

The award for recall costs suffered by Danone comes after the French company launched arbitration proceedings in Singapore and a legal suit in the New Zealand High Court, estimating the cost of recalling the whey protein concentrate to be about 350 million euros. At the time, Fonterra said it expected any court action would show it wasn't liable under the contract. The recall was recognised as a $14 million contingent liability in its accounts.

In 2013, Fonterra quarantined several batches of whey protein concentrate amid fears it was contaminated with a potentially dangerous form of the clostridium bacteria. The whey protein was ultimately cleared as a false alarm. Fonterra cut deals with seven of the eight customers affected.

"We are disappointed that the arbitration tribunal did not fully recognise the terms of our supply agreement with Danone, including the agreed limitations of liability, which was the basis on which we had agreed to do business," Fonterra chief executive Theo Spierings said in a statement. Fonterra was "reviewing the tribunal’s findings closely, but recognised that there was likely to be limited options for challenging the decision of an international arbitration."

Fonterra had assessed the potential financial implications of the decision and made "a prudent decision to revise its forecast earnings per share range for the 2017/18 financial year to 35 to 45 cents, down from 45 to 55 cents," the company said. The decision wouldn't impact the company's forecast farmgate milk price, currently at $6.75 per kilogram of milk solids.

“Fonterra is in a strong financial position and is able to meet the recall costs,” Spierings said. As at July 31, Fonterra had $3.8 billion in undrawn lines of credit and $393 million of cash.

Earlier today, Danone said it "welcomes this arbitration decision as a guarantee that the lessons from the crisis will not be forgotten." The arbitration "underscores the merit of its legal actions against Fonterra, including to champion the highest standards of food safety across the industry," it said. Food companies and their suppliers "can only work together through a solid relationship based on trust, transparency, and accountability. Danone will continue to build that relationship with its suppliers across the world." Danone's New Zealand subsidiary Danone Nutricia ceased doing business with Fonterra in the wake of the dispute.

Fonterra had its shareholders' fund units and listed bonds halted from trading today ahead of a media conference at 3pm in Auckland.

"While there was never any risk to the public, we have learned from this experience and as a result have made improvements to our escalation, product traceability and recall processes, and incident management systems," Spierings said. "We operate in a fast-changing and complex industry, and will always prioritise food safety and quality in our commitment to be the world’s most trusted source of dairy nutrition."

Since Danone ended its supply contract with Fonterra, it's sourced product from Synlait Milk and other manufacturers and bought two Kiwi dairy processing companies, Sutton Group and Gardians, with the latter providing access to milk supply from 18 farms owned by Grant Paterson of Dunedin.

(BusinessDesk)

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