Ann: HALFYR: FCG: STRONG HALF YEAR FOR FONTERRA

• Release Date: 29/03/12 10:59
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FCG
29/03/2012 08:59
HALFYR

REL: 0859 HRS Fonterra Co-operative Group Limited

HALFYR: FCG: STRONG HALF YEAR FOR FONTERRA

Reporting Period Six months ended 31 January 2012
Previous Reporting Period Six months ended 31 January 2011

 31 January 2012
(NZD million) 31 January 2011
(NZD million) Percentage
Change
Revenue from sale of goods 10,026 9,356 7.2%
Net profit attributable to Shareholders of the company(1) 339 286 18.5%
Non-controlling interests 7 7 -
Net profit for the period 346 293 18.1%
(1) Net profit attributable to shareholders of the company is equivalent to
profit from ordinary activities after tax attributable to shareholders of the
company (as required to be disclosed pursuant to Clause 1.2 of Appendix 1 of
the NZSX and NZDX Listing Rules).
Interim Dividend Amount per Security
(NZ cents) Imputed Amount per Security
(NZ cents)
Interim 12.0 nil

Record Date Interim: 31 March 2012
Dividend Payment Date Interim: 20 April 2012

Comments On 27 March 2012, the Board of Directors declared an interim
dividend of 12.0 cents per share payable on 20 April 2012 to Shareholders on
the share register at 31 March 2012.

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STRONG HALF YEAR FOR FONTERRA

$346 MILLION HALF YEAR PROFIT REPORTED
Fonterra Co-operative Limited today announced an 18 per cent increase in its
half year net profit after tax of $346 million, boosted by higher volumes and
an improved performance by its Standard & Premium Ingredients business.

Other highlights compared to the same period last year include:

o Total sales volume growth of 5[1] per cent;
o Revenue up 7 per cent;
o Record milk collections, up 10 per cent for season to date;
o Net profit after tax up 18 per cent;
o Normalised earnings[2] before interest and tax up 8 per cent;
o Earnings per share up 14 per cent;
o An interim dividend of 12 cents per share, up from 8 cents per share in the
same period in 2011.
Announcing the Co-operative's financial results for the half year to 31
January 2012, Fonterra confirmed its current forecast Payout range (before
retentions) for the 2011/12 season of $6.75 - $6.85 for a fully shared up
farmer.

The 2011/12 forecast Payout range (before retentions) is based on a forecast
Farmgate Milk Price of $6.35 per kgMS and an unchanged net profit after tax
range of $570-$720 million, equating to 40-50 cents per share.

Fonterra Chairman Sir Henry van der Heyden said the Co-operative had
performed well particularly given the turmoil in global markets.

"Good spring and early summer growing conditions across most of the country
(with the notable exception of the lower South Island) led to strong growth
in New Zealand dairy production and record volumes.  Fonterra's milk
collections for the season to date were up 10 per cent on the same period in
2011. These record milk collections flowed into record production, with a new
export volume record achieved in December 2011.

"International dairy prices softened after the highs of last year but
remained relatively stable throughout the first half of the year.  These
prices were supported by strong demand for quality dairy ingredients in
emerging markets across a number of Asian economies, as well as Brazil and
China, offsetting economic uncertainty in Europe," said Sir Henry.

CEO Theo Spierings said Fonterra's Standard & Premium Ingredients businesses
had a strong first half, with a 10 per cent lift in revenue to $8 billion,
achieved from higher sales volumes, and a 10 per cent increase in average USD
sales prices.

"The Standard & Premium Ingredients businesses' normalised EBIT[2] was 44 per
cent higher than the same period last year.

"We are now seeing the benefits of our focus on managing volatility in the
business, with more favourable contract agreements, a closer pricing
alignment between our sales book and the spot market, and targeting sales of
products that deliver greater value," Mr Spierings said.

Performance in the consumer businesses was mixed, with a strong New Zealand
dollar impacting the Asia/Africa and the Middle East, and Latin America
businesses.  The Australia-New Zealand consumer business felt the impact of
pricing pressure which reduced earnings.

Sir Henry said an interim dividend of 12 cents will be paid on 20 April 2012.

"The Board has approved a change to the Co-operative's dividend policy so
that a greater proportion of dividends can be paid out at the half year," Sir
Henry said.

Previously, Fonterra's dividend policy allowed for the Co-operative to pay
out 30 per cent of the forecast full year dividend at the half year, with the
remainder paid out at the end of the financial year in October.

The change enables a payment of an interim dividend of 40-50 per cent of the
forecast full year dividend.

Looking ahead, Fonterra CEO Theo Spierings said Fonterra would build enduring
value for shareholders through a Group strategy refresh that sets the course
for Fonterra's next decade.

"The strategy refresh builds on our considerable strengths: access to
efficiently produced, high quality milk; an integrated business model; strong
global reach; established customer relationships; and strong consumer brand
positions in selected markets.

"We have sharpened our focus and made choices around the geographies and
product portfolios that will deliver the best growth opportunities,
particularly those in the emerging markets of China, Asia and Latin America
where we can leverage our strengths from milk sourcing through to branded
sales," said Mr Spierings.

Half Year Financial Highlights

Revenue of $10 billion, 7 per cent higher than the corresponding period in FY
2011, primarily reflecting the impact of higher volumes and commodity prices.
 Total sales volume grew 5[1] per cent, reflecting growing global demand for
dairy ingredients and branded consumer products.

Net Profit After Tax of $346 million, 18 per cent higher than the
corresponding period in FY 2011 driven primarily by growth and improved
margins in the Standard & Premium Ingredients business.  This improvement led
to earnings per share for the first half increasing to 24 cents per share, 3
cents per share higher than the same period last year.

Gearing ratio[3] was 47 per cent at 31 January 2012, an improvement of 160
basis points from 31 January 2011.

Milksolids collection in New Zealand for the season to 31 January 2012 was 10
per cent ahead of the same period last season, reflecting good spring and
early summer growing conditions across most of the country.

Standard & Premium Ingredients is Fonterra's largest operation, which
collects, processes, sells and distributes a range of ingredients made from
milk. Standard & Premium Ingredients' revenue for the half year was 10 per
cent higher at $8 billion, reflecting a stronger sales volume of 1.2[4]
million metric tonnes, up 7 per cent, and a 10 per cent increase in average
USD prices achieved across all dairy categories. Higher average price
achievement helped improve gross margin and made a significant contribution
to the growth in earnings.  Normalised EBIT[2] was up 44 per cent to $273
million, compared to $189 million in the previous period.

Australia/New Zealand revenue was down 4 per cent to $2 billion from $2.1
billion in the same period last year, reflecting a challenging retail
environment, and an ongoing pricing battle that has resulted in pressure on
major suppliers' margins.  Normalised EBIT[2] was $124 million, 19 per cent
down on the six months to 31 January 2011. (Excluding the results of the
Western Australia business sold in March 2011, sales revenue was up 2 per
cent, sales volumes up 44 per cent and normalised EBIT[2] 16 per cent lower).

Asia/Africa, Middle East (Asia/AME) achieved strong growth in revenue up 7
per cent to $947 million, and sales volume which was 44 per cent more than
the same period last year. These results reflected steady consumer demand,
and margins maintained despite higher input costs. Normalised EBIT[2] was $84
million which was 13 per cent lower than the previous period.  The decline
reflected the negative impact of the depreciating Asian basket of currencies
against the New Zealand dollar (on a constant currency basis normalised
EBIT[2] would have fallen only 5 per cent); higher advertising and
promotional investment to build market share and invest in growth markets;
and the disruptive impact of extreme weather events on Asia/AME's supply
chain.

Latin America revenue declined 5 per cent to $385 million.  On a constant
currency basis, however, the performance was strong, driven largely by
Soprole in Chile, with Soprole's revenue up 3 per cent and normalised EBIT[2]
up 15 per cent on the previous period. Fonterra's share of profits from
Dairy Partners of America (DPA) was $17 million, compared to $19 million last
year.  DPA's performance reflects the impact of tough trading conditions in
its largest market Brazil.  Normalised EBIT[2] was $62 million, down 3 per
cent from the same period last year, reflecting resilience in a tough
environment.

1 Excluding the sales volume of the Western Australia dairy business which
was sold in March 2011.
2 Normalised earnings before interest and tax, adjusted for non-recurring
items.
3. Gearing is measured as economic net interest bearing debt over net
interest bearing debt plus equity (reflecting the effect of debt hedging in
place at reporting date). Equity excludes the cash flow hedge reserve.
4.External sales volumes.

-----------------

FONTERRA OUTLINES PLAN TO EXTEND LEADERSHIP IN DAIRY NUTRITION

Fonterra Co-operative Limited today outlined details of its Group Strategy
Refresh which aims to grow volumes and value by focusing more tightly on
emerging markets and products that meet growing consumer demand for dairy
nutrition.

Fonterra Chief Executive Theo Spierings said the Strategy Refresh was built
on an in-depth look at the Co-op's strengths, social and economic trends as
well as underlying projections for a marked increase in global demand for
milk.

"Strong economic and population growth in emerging markets is driving a
situation where global demand for milk is forecast to grow by more than 100
billion litres by 2020, with New Zealand expected to contribute only 5
billion litres of additional supply by that date," Mr Spierings said.

Mr Spierings said the strategy refresh contained elements to grow volumes,
target high-value areas of nutritional need and execute these plans at speed:
 "We call it the Three Vs - volume, value and velocity.

"With overall demand growing, we need to grow volumes to protect our position
as the world's leading dairy exporter. In addition, nutritional needs,
particularly among the young and the elderly are getting more urgent and
specific, which is where we have the capability to add significant value," Mr
Spierings said.

The full strategic refresh amounts to over 100 discrete projects - many
already underway - to focus Fonterra's efforts going forward.  It includes:

o A strong push on the fast-growing emerging markets of China, ASEAN and
Latin America where Fonterra already has a strong presence.
o Optimising the New Zealand milk business to drive cash and improve return
on capital.
o Building integrated milk pools (secure, high-quality sources of milk
integrated with Fonterra's business) offshore to bring higher returns back to
New Zealand.
o Growing volumes of higher value consumer branded and out-of-home nutrition.

o A tighter focus on meeting the advanced nutrition needs of mothers and
babies, as well as ageing populations.

Emerging markets
Mr Spierings said Fonterra would continue to focus on the fast growing
markets in China, ASEAN and Latin America, as well as Middle East and Africa.

Fonterra already has established businesses in these regions, so it is a case
of really building on these and driving growth with greater intensity.

"With limited milk supply, we can't do it all. We see much lower growth of
dairy exports from New Zealand to the mature markets of Europe and North
America so will need to refocus our operations there, with a greater emphasis
on  working with local partners, local added-value processing, and exports
through the network.

"Although there is lower growth in our home market of Australia and New
Zealand, these are great businesses generating good cash flows that we will
defend at all costs."

Optimise New Zealand milk
New Zealand milk would always be #1 for Fonterra:  "Our farmer shareholders
receive most of their income from their milk cheques so we need to continue
to drive the business that collects New Zealand farmers' milk, processes it,
then sells and ships it overseas.

"We already have big projects underway to improve the way we use our
manufacturing plant in New Zealand, drive efficiencies and add value for
customers so we can beat base commodity prices," he said.

Integrated milk pools
 "When we looked at the unique strengths of the Co-op the first obvious thing
is that we know how to produce safe, high-quality and relatively low cost
milk.  That's a strength we've honed in New Zealand for well over a hundred
years, and are now doing in Australia and Latin America," Mr Spierings said.

"Going forward we see the potential to significantly grow milk volumes
outside of New Zealand by developing a high quality local milk supply and
integrating it more closely with our business in China.

"Our pilot dairy farms in China are now producing some of the highest quality
milk in the country and we are looking to accelerate the development of a
quality milk supply in China and integrate that with our local business by
manufacturing products for Chinese customers.

"This approach means we bring back higher returns to our shareholders in New
Zealand and demonstrate our long term commitment  to the development of the
China dairy industry.

"We don't have to fully own the farms or factories - we can achieve the same
result through partnerships and supply agreements, which is how we run our
integrated businesses in Australia and Latin America."

Growing volume in higher value nutrition
Mr Spierings said Fonterra would continue to move higher up the value chain,
selling more consumer branded and out-of-home nutrition.

"We currently have some great high margin consumer products and there is an
opportunity to grow sales further by pushing into new markets and with new
products.

"Also, we see the opportunity to develop more base nutrition and grow sales
volumes in emerging economies - particularly in China and ASEAN."

Mr Spierings said Fonterra's foodservice business had enormous potential:
"This is already a billion dollar a year business for us. With the worldwide
trend to eating out and on-the-go we want to really invest in growing this
business in China, ASEAN and Middle East-North Africa, while exploring
options for a similar business in Chile and Brazil."

Advanced Nutrition
"A big part of this Strategy Refresh has been about making choices - we can't
do it all.  We want to make fewer bets and really focus our resources where
we know we can win," said Mr Spierings.

"In the area of advanced nutrition, we will focus on the nutritional needs of
mothers and babies and healthy ageing."

Paediatric nutrition was the fastest-growing dairy category in the world and
Fonterra already had a substantial business manufacturing high standard
ingredients for multinational infant nutrition companies.

"There is an opportunity for us to build on this and also manufacture for
leading Chinese nutrition companies, using New Zealand milk and our local
assets."

On the branded consumer side, Fonterra would continue to extend its Anmum(TM)
maternal nutrition brand to also provide trusted nutrition for mothers and
babies across Asia.

It would also support the recent strong growth of its Anlene(TM) bone health
brand by pushing into new markets and extending the brand to include joint
and muscle health.  "With rapidly ageing populations in the west and in
China, Anlene(TM) is a true power brand for us with the scope to stand for
total mobility not just bone health."

Mr Spierings said this tighter focus would allow Fonterra to also focus its
innovation on the three priorities - mother and child nutrition, healthy
ageing and out-of-home nutrition.  The innovation effort would continue to
develop science led ingredients and products for both customers and
Fonterra's own brands.
Mr Spierings said the Strategy Refresh underlined the need to introduce
Fonterra's new farmer-only share trading market, Trading Among Farmers: "We
simply can't deliver on this strategy unless we have access to secure,
permanent capital.

"The world is moving fast, which demands speed of execution - and that is why
velocity is so important.  Fonterra is a strong Co-op with great people - but
it is velocity that will move us forward."

Fonterra Chairman Sir Henry van der Heyden said the Strategy Refresh was
timely as the Co-op embarks on its second decade of operations.

"This is an exciting time for Fonterra. For well over 100 years, New Zealand
dairy farmers have gone out in the world to seek markets for our safe, high
quality dairy products. Equipped with this strategy we are now taking
decisive steps to understand and meet nutritional needs in some of the
world's most exciting growth markets to fulfil Fonterra's unique vision to be
the natural source of dairy nutrition for everyone, everywhere, every day,"
Sir Henry said.
End CA:00221298 For:FCG    Type:HALFYR     Time:2012-03-29 08:59:42