Media Release
24 September 2008
Fonterra Announces 2007/08 Final Payout And Revised 08/09 Payout Forecast
Fonterra Co-operative Group has announced a final payout of $7.90 per kilogram of milksolids (kgMS) for the 2007/08
season, comprising a milk price of $7.59 per kgMS and a value return of 31 cents per kgMS.
The actual final cash distribution to shareholders will be $7.66 per kgMS after the Board decided to retain within the
Co-operative 24 cents from the value return component of payout. Retentions were signalled by the Board in May to
strengthen further Fonterra’s balance sheet in the light of instability in financial markets.
Eligible shareholders and suppliers have already received a premium of an average 3 cents per kgMS, which relates to
specialty and winter milk supplied to the Co-operative.
In total Fonterra will distribute $9.1 billion from the amount available for payout of $9.3 billion. This is a 65 per
cent lift on the prior season’s distribution of $5.5 billion.
2008/09 Revised Payout Forecast
The Fonterra Board has also lowered the payout forecast for the current 2008/09 season to $6.60 per kgMS from the $7.00
per kgMS forecast in May. The $6.60 forecast comprises a milk price of $6.25 and a value return component of 35 cents.
The value return remains unchanged from the May forecast and will be reviewed again in December.
Fonterra Chairman, Henry van der Heyden, said the co-operative had advised shareholders when making the May forecast
that the 2008/09 season payout forecast had an equal chance of going up or down, given volatile market conditions.
“Since then we have seen prices fall away from last year’s record highs. High prices have dampened global consumer
demand and, at the same time, have encouraged production increases in exporting regions around the world. With buyers
playing a waiting game, there is the possibility of further softening of prices before supply and demand come back into
balance. Although the New Zealand dollar has been moving in our favour this season, we can’t be confident that a lower
currency will fully offset price movements – indeed, there’s still a chance of currency upside or downside.”
San Lu Tragedy
The tragic events surrounding San Lu in China also had an impact on Fonterra’s financial results for 2007/08, he said.
As a direct consequence of the criminal contamination of milk in China, Fonterra has recognised an impairment charge of
$139 million against the carrying value of its investment in San Lu. This reflects the cost of the product recall and
Fonterra’s anticipated loss of San Lu brand value. Following this impairment charge, Fonterra’s best estimate at this
point in time, of the book value of its investment in San Lu is approximately $62 million.
“We have recognised this charge as we are required to by accounting standards, but we are certainly not putting the
financial consequences ahead of our primary priority of consumer safety. We are focusing all our efforts on what
Fonterra can best do to work with the Chinese authorities and help get safe dairy products to Chinese consumers,” Mr van
der Heyden said.
At yesterday’s Board meeting, the Directors discussed the San Lu tragedy in depth and were fully supportive of the
approach taken to date by Fonterra management and staff.
“Throughout this crisis, Fonterra’s paramount concern has been for the health and safety of Chinese consumers and
recalling contaminated product as quickly and effectively as possible in the Chinese environment. The scale of this
tragedy has been truly shocking and our heartfelt sympathies go out to all the affected children and their families.”
“The latest revelations that an official Chinese Government investigation has revealed San Lu management was
investigating complaints of sick infants as early as eight months before the San Lu Board and Fonterra were first
informed on August 2 is deeply concerning. That Fonterra was not informed earlier is frankly appalling,” he said.
Mr van der Heyden said the Board had reaffirmed its long term, strategic commitment to the China market, believing that
Fonterra was well placed to supply safe and healthy dairy products to Chinese customers and consumers and contribute
towards helping improve the Chinese dairy supply chain.
2007/08 Results Overview
Mr van der Heyden said the 2007/08 result followed one of the most volatile and challenging years in global markets in
recent memory, compounded by the drought which affected production in New Zealand.
Fonterra achieved revenues of $19.5 billion from the sale of goods in the 14 months to July 31 2008.[1]
A 63 per cent increase in weighted US$ average sales prices offset an average exchange rate seven cents higher for the
season at 74 cents resulting in the record result.
Commodities and Ingredients sales revenues, excluding intersegment sales, were $13.5 billion, while Australia/New
Zealand’s were $3.3 billion. Asia/Middle East’s sales revenues were $1.9 billion and Latam’s $789 million.
Fonterra collected 1,192 million kilograms of milksolids, including contract milk, a 4.3 per cent decrease on the prior
season due to drought conditions across much of New Zealand.
Mr van der Heyden said the level of volatility during the year had been unprecedented.
“We have seen a global liquidity crisis, drought, the New Zealand dollar hit new highs and increases in the cost of
everything from fuel to interest rates in the past season. It is hard to imagine a more unpredictable operating
environment.”
Mr van der Heyden said the Board decision to make a retention from payout had been signalled last May, and was prudent
in the current unstable global financial environment.
“It is a consequence of the high levels of instability in both trading and financial markets and the need for Fonterra
to strengthen further our balance sheet in such uncertain conditions. The balance sheet is not under pressure, but we
need to ensure it remains that way given the impact of current market conditions on our cost of capital.”
Fonterra CEO, Andrew Ferrier, said the record result for the 2007/08 financial year was not solely related to record
commodity prices.
“They certainly played a big part, but they also presented a real challenge for our consumer operations, which had to
overcome the record prices to return improved earnings and profitability, despite lower volumes in some markets. Higher
prices also impacted negatively on our Fonterra Ingredients business.”
Fonterra’s share of profits from international businesses and joint ventures, excluding royalties, were $158 million for
the 14 months to July 31 2008 compared with $73 million in the 12 months to May 31 2007.
Australia and New Zealand returned a profit before depreciation, amortisation and non-recurring items of $266 million,
Fonterra Asia/AME $96 million and Latam $119 million for the 14 months.
The Commodities and Ingredients segment returned an operating profit of $824 million before depreciation, amortisation
and non-recurring items and excluding contributions from equity accounted businesses. This compared to $1.3 billion in
the year May 31, 2007. Higher milk costs and reduced margins in Fonterra Ingredients as a result of high commodity
prices were contributing factors.
With a record milk price, high global prices pushing up the cost of product sourced outside New Zealand, higher fuel and
energy costs and additional two months of trading, Fonterra’s cost of goods sold increased by 55 per cent over the 14
months to July 31, 2008 to $16.8 billion. Mr Ferrier said the higher milk price accounted for the majority of this
increase.
Operating expenses were $2.2 billion for the 14 months to July 31, 2008, against $1.7 billion for the 12 months to May
31, 2007 with the extended financial year the main contributor.
Fonterra retained a profit of $235 million, including minority interests, for the 14 months to July 31, 2008.
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