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Fonterra Announces Final 2002/03 Payout of $3.63 and $284M Surplus

Fonterra Co-operative Group has announced a final payout of $3.63 per kilogram milksolids ($3.60 net) and a net surplus for 2002/03 of $284 million. The payout, a lift of three cents over the $3.60 forecast in February, will result in a distribution of $4.1 billion to Fonterra's 13,000 shareholders and 5,000 sharemilkers.

In a year that saw record milk volumes and record production, Fonterra also achieved record sales internationally despite difficult market conditions and a steadily rising New Zealand dollar.

This performance contributed to gains across each of the co-operative's measures of shareholder value, including Total Shareholder Returns[1], its Fair Value Share price and the gap between the Commodity Milk Price and estimated Actual Milk Return.

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Chairman Henry van der Heyden said the improvements across all of Fonterra's major performance measures, reflected a huge effort across the company to tightly control costs and secure sales in a difficult market where commodity prices were on average 24 per cent lower and where the New Zealand dollar appreciated by 10 cents against the US dollar. The currency's appreciation had a direct impact on revenues, eroding them by $850 million or 74 cents per kg/MS. This was partially offset by hedging gains of $640 million or 56 cents per kg/MS.

"The lift in final payout, while modest, should be welcomed by our shareholders, as will the improvements achieved across all our performance measures" he said. The final payout includes the three-cent industry good levy.

"The Board appreciates the final payout this year is much lower than last year's record $5.33 per kg/MS. However it is important to note that this year's distribution is funded entirely from revenues and we have also recorded a surplus of $284 million. We have ended a very difficult year in the markets in a very stable position."

The surplus of $284 million, arising predominantly from sales of Latin American assets, would not be distributed to shareholders, reflecting the Board's view that generally, profits from asset sales should be retained and used to fund new investments. Fonterra's net-of-cash borrowing was $330 million lower at $4.4 billion at the close of the 2002/03 season. It is considered stable and at 48 per cent is within Fonterra's target debt-to-debt-plus-equity range of 45-50 per cent.

Fonterra has recorded good progress across its major measures of performance for shareholders. It exceeded its goal of annual Total Shareholder Returns of 13-15 per cent, delivering a hedged TSR of 16.7 per cent for the year (10.2 per cent excluding hedges), after company tax but before personal tax. Fonterra's Fair Value Share price also increased, by 53 cents to $4.38 for the 2003/04 season.

The Co-operative has also reduced the gap between the Commodity Milk Price (CMP) and estimated Actual Milk Return (AMR), bringing it down to 25 cents per kilogram milksolids. The gap, while significantly lower this year, is not, however, all attributable to improved performance because of changes in the methodology for calculating estimated Actual Milk Return (AMR).

Mr van der Heyden said the improvement in these key performance measures showed solid progress by Fonterra in managing the areas it could control, including the cost of production and sales, the management of inventory and the continued delivery of merger benefits.

"The areas we cannot control, including world demand, commodity prices and the impact of currency movements on our competitiveness internationally, will always be a challenge and are directly reflected in our payout this year."

Acting Chief Executive Officer, Jay Waldvogel, said Fonterra's revenues, at $12.5 billion, were down by $1.4 billion for the season as a result of global commodity prices that were, on average, 24 per cent lower than the previous season. The New Zealand dollar, which began the season at 48c to the US dollar and closed the season at around 58c to the US dollar, also impacted on revenues.

Total ingredients sales volumes, excluding sales to New Zealand Milk, were 2.01 million MT, a 31 per cent increase over the previous year. They included total production for the season, up 11 per cent at 1.94 million MT, and the inventory surplus that resulted from strong end-of-season production in the past two years. With New Zealand Milk and DairiConcepts included, ingredients sales totalled 2.39 million MT. Fonterra collected a record 1,148 million kilograms of milksolids from its shareholders - an increase of 3 per cent.

"Our sales volumes represent a good result given our leading market position where we already account for more than 30 per cent of net dairy trade," said Mr Waldvogel.

"We were able to sell record amounts in a difficult market, and we still were able to lead prices up significantly in the second half. At the same time we took every opportunity to bring down costs, deliver on merger benefits and lift our value-added results. What shouldn't be overlooked is that this result reinforces that Fonterra has put the merger well behind us and has the structure in place to drive good performance across the business."

Fonterra was $31 million ahead of target this year in delivering annualised merger benefits, achieving $206 million of the total $310 million in benefits due to be captured by October 2004.

Fonterra also continued to make inroads into operating costs and expenses, which reduced in total by $634 million. The appreciation of the Kiwi dollar contributed to this decline.

New Zealand Milk, Fonterra's fast moving consumer goods business, accounted for 37 per cent of total annual revenue this season, delivering EBIT of $387 million, 28 per cent higher than last year. This performance reflects the strength of New Zealand Milk's brand portfolio that includes the global ANCHOR, ANLENE, ANMUM and CHESDALE brands and the regional MAINLAND, TIP TOP, PETERS, BROWNES, BEGA and MEADOW FRESH brands. Higher sales were also attributable to the company's product development drive that saw an average of two new products released each week into global markets.

Mr van der Heyden said Fonterra continued to adopt $3.80 as its best estimate of payout for the 2003/04 season. As in every season, global commodity prices and currenc

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