Fonterra Announces Revised Payout Forecast

Fonterra Announces Revised Payout Forecast

Fonterra Co-operative Group Ltd today revised down its forecast payout to suppliers for the year to May 31, 2003.

The new payout forecast is $3.60 per kilogram of milksolids, down three per cent from the $3.70 set in July last year. Both figures are before the deduction of three cents for industry good costs.

The announcement was made today in conjunction with the release of Fonterra’s half year accounts.

Chairman Henry van der Heyden said Fonterra’s payout forecast was under continual review. The finalisation of the half year accounts and the completion of eight months trading had provided the company with a clearer picture than it had when the forecast was first set.

“At this time $3.60 is our best estimate,” Mr van der Heyden said. “I want to make it quite clear that achieving this figure will be dependent on our continuing to make inroads on costs and no dramatic deterioration in international market conditions.” Mr van der Heyden said Fonterra had made good progress on the operational front in the first half of the year, continuing to drive down manufacturing and overhead costs, while processing record volumes.

A recent independent report by Deloitte Touche Tohmatsu verified Fonterra’s findings that it had achieved more than $116 million in annualised merger benefits at November 30, 2002. This confirmed that the Co-operative was on track to capture total merger benefits of $310 million within three years of its October 2001 formation.

Mr van der Heyden said the difficult international trading conditions reinforced the need for the merger and it was encouraging that the merger savings had been independently verified.

Nevertheless, Fonterra was an international business and difficult trading conditions in the first half had eroded much of the company’s operational gains.

“Over the last few weeks, we have received a large number of inquiries from shareholders asking what impact the rising kiwi dollar will have on our business,” Mr van der Heyden said.

“While international commodity prices have rallied, it is now clear that this will not be sufficient to offset the impact of the poor prices we received in the first half.”

Despite cashflows being substantially hedged, the rise in the value of the currency would also affect closing inventory values and impact payout accordingly.

The New Zealand dollar was this week trading at US55 cents, a rise of more than 15 per cent on its US47 cent level at the start of the season.

Although Fonterra has hedged 95 per cent of this season’s foreign currency earnings, it began the season with half its earnings hedged and was vulnerable to the rising New Zealand dollar. Even with 95 per cent of its earnings hedged, the higher New Zealand dollar will have a negative impact on unhedged earnings and inventory values. “International commodity prices have been at their lowest levels for more than a decade and the New Zealand dollar has been stronger than we have seen for almost four years.”

Mr van der Heyden said he understood that the reduced payout forecast would be a blow to Fonterra’s supplier-shareholders.

“Although no-one will like this news, the reality is Fonterra is an international business, operating in an extremely difficult climate.”

However, Fonterra was committed to ensuring shareholders received timely and accurate information on payout so they could plan accordingly.

In this spirit, and particularly given the impact of the rising New Zealand dollar, Fonterra has decided to give farmers an early indication of the likely payout for next season.

Mr van der Heyden said the best available information at this time indicated that a payout in the range of $3.70 to $3.90 was realistic for the 2003/04 season.

This projection assumes that the New Zealand dollar remains at its current level and that commodity prices hold at the higher levels expected for the fourth quarter of this season.

“We want to provide as much transparency as possible to farmers but such projections must come with a rider that any unforeseen changes in international conditions will impact on returns.”

Mr van der Heyden cautioned that potential conflict in the Middle East represented an as-yet unquantified risk to Fonterra’s business and was therefore not reflected in the payout projection for next season.

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