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)