Firm Pricing Boosts Fonterra Revenues In First Hal

27 January 2005

Firm Pricing Boosts Fonterra Revenues In First Half

Strong international demand for dairy commodities and continued firming in prices saw Fonterra Co-operative Group achieve operating revenues of $5.7 billion in the six months to November 30, 2004, a two per cent increase on the same period in 2003.

Commodity prices reaching historically high levels helped offset a stronger New Zealand dollar and lower production volumes in New Zealand caused by unfavourable weather conditions. As a result, Fonterra ended the first half of the season with $2.4 billion available for payout, an increase of $140 million on the comparable period last season.

Fonterra Chairman Henry van der Heyden said while poor weather had affected milk flows across the country, the higher forecast payout of $4.30 per kilogram of milk solids for the 2004/05 season would mean farmers' incomes would, on average, be broadly in line with those of last season.

"Essentially, we're paying more for less with the forecast payout up five cents on last season and that will go some way to offsetting the impact of lower production on farmers' incomes." Mr van der Heyden said production for the first half of the year was below expectations and while it was gradually improving, Fonterra expected a shortfall for the full year with ingredient production down by around 75,000 tonnes.

Sales volumes for the six months to November 30, 2004 were below those in the comparable period last season, consistent with the reduction in milk supply.

Mr van der Heyden said that while local production was down, Fonterra would be able to meet customer commitments for the remainder of the season due to Fonterra's global sourcing strategy.

Lower volumes meant Fonterra's total cost of goods sold, excluding payment to suppliers, decreased in the period by $60 million to $2.3 billion. Operating expenses increased by $56 million to $897 million, largely due to prior year non-recurring items. Mr van der Heyden said Fonterra's debt position remained stable in the first half of the financial year with a debt to debt plus equity ratio as at November 30, 2004 of 46.4% compared to 45.6% at November 30, 2003 and 45.7% at May 31, 2004. Total net interest bearing debt was essentially unchanged at $4 billion, while total assets at November 30, 2004 had increased to $11.5 billion compared to $11.1 billion at November 30, 2003.

Fonterra Chief Executive Officer, Andrew Ferrier, said Fonterra's good financial performance was matched by sustained progress in all areas underpinning the business, including value-add, operational excellence, and capturing growth opportunities.

However, the first half result highlighted again how Fonterra's overall performance was subject to a mix of commodity prices, exchange rates and, this season, climatic conditions.

"These dominant factors are the ones we have least control over. That is why we continue to be unrelenting in our efforts to drive the most efficient, low cost structures across the business."

Mr Ferrier said Fonterra's global milk diversification strategy was also paying off, helping to offset the poor New Zealand production season.

"The real worth of our global milk sourcing strategy is showing through, with our international dairy ingredient supply partnerships balancing the shortfall from New Zealand. This strategy is paying dividends, particularly in terms of managing supply risks for our customers, who place considerable importance on security of supply, particularly in today's tight market. With demand remaining firm, we expect prices to hold through the remainder of the season."

Also paying dividends was Fonterra active foreign exchange hedging policy which was helping to offset the impact of a weakening US dollar on revenues.

Footnote: The half year accounts show a surplus of $15 million. However, 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, 2004 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.

ENDS

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