Ann: FLLYR: FCG: Fonterra Annual Results 2014

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					FCG
24/09/2014 08:30
FLLYR

REL: 0830 HRS Fonterra Co-operative Group Limited

FLLYR: FCG: Fonterra Annual Results 2014

24 September 2014

FONTERRA ANNOUNCES 2014 FINANCIAL RESULTS

Highlights

- Cash Payout $8.50, up 38%
 - Farmgate Milk Price $8.40 per kgMS
 - Dividend of 10 cents per share
- Revenue $22.3 billion, up 19%
- Normalised EBIT $503 million, down 50%
- Net profit after tax $179 million, down 76%
- Earnings per share 10c, down 77%
- Total sales volumes stable at 4 million metric tonnes

Annual results

Fonterra Co-operative Group announced today a final Cash Payout of $8.50 for
the 2014 year for a 100 per cent share-backed farmer, comprising a Farmgate
Milk Price of $8.40 per kgMS and a dividend of 10 cents per sharei.

Chairman John Wilson said that the Cash Payout to the Co-operative's 10,500
farmer shareholders was the highest ever made since Fonterra's formation in
2001.

"The Farmgate Milk Price on its own represents an injection of more than
$13.3 billion to the New Zealand economy for the season.

"It is a strong result, reflecting the determination of our farmer
shareholders to lift on-farm performance, matched within the business by a
focus on driving revenue.

"Our farmers took advantage of good conditions to produce 1,584 million kgMS,
eight per cent more than last season, to make the most of the good prevailing
prices early in the season.

"North Island volumes were up nine per cent at 969 million kgMS, while the
South Island delivered a seven per cent rise in volumes to 615 million kgMS.

"A very good spring saw our farmer shareholders achieve record milk
production through an extended peak, stretching our production capacity for
powders. This led to early impacts on stream returns from the less valuable
products we were forced to make."

Fonterra CEO Theo Spierings said the Co-operative had come through a very
demanding year.

"We have continued to stay on track with our strategy, focusing on securing
the best returns to our farmer shareholders.

"We achieved record revenue of $22.3 billion for the year, a direct result of
the focus on achieving the highest possible revenue line that is good for the
Farmgate Milk Price.

"Constrained margins in our foodservice and consumer businesses and on
non-milk powder products were the knock-on effect, contributing to a 27 per
cent rise to $19.8 billion in the cost of goods sold. However, we maintained
our focus on efficiency and achieved a two per cent reduction of $46 million
in our operating costs.

"Our higher cost of goods sold, along with higher interest and taxation, saw
our net profit after tax decline by 76 per cent to $179 million."

Strategy in action

Mr Spierings said 2014 was a tough but defining year and Fonterra had held to
its strategy. High commodity prices, while good for farmers, had put margins
under pressure in Fonterra's consumer and foodservice businesses.

"We focused on building volumes and value in our key markets, especially Asia
and Latin America," Mr Spierings said. "In Asia, we saw volume growth of 12
per cent, primarily driven by excellent performance in China. In Latin
America, our Soprole business' focus on new product development and
innovation contributed to the region's three per cent volume growth.

"However, our New Zealand and Australian businesses had a challenging year
due to much higher input costs and competitive pressure that constrained our
ability to pass these on. These businesses are now on a firmer footing to
lift their performance in the current financial year.

"Very strong milk flows and an extended peak season stretched our powders
capacity and forced us to make lower-returning products. We fast-tracked
investments to expand our New Zealand capacity and undertook immediate
projects to maximise output from existing plant."

In addition to the $235 million expansion at Pahiatua, the Fonterra Board in
August approved $555 million of investment in a new high-efficiency drier at
Lichfield and three additional plants at Edendale.

At the same time, Fonterra is supporting the growth of its foodservice and
consumer businesses by investing $126 million in a UHT plant at Waitoa, $72
million in expanding its mozzarella capacity at Clandeboye, and a $32 million
expansion at Eltham.

Mr Spierings said Fonterra had made positive steps forward this year in
complementing New Zealand milk supply with milk pools offshore, protecting
the Co-operative's scale in order to remain truly globally relevant.

"Our global partnership with leading infant food manufacturer Beingmate in
China puts our high-quality dairy ingredients in a strong position to
capitalise on the opportunity in China's rapidly growing infant formula
market with a respected local partner."

Good progress was being made in securing the necessary regulatory approvals
and proceeding with the partial tender offer as part of the Beingmate
transaction, Mr Spierings said.

Global outlook

The revised forecast Cash Payout for 2014/15 is $5.55-$5.65:
- Forecast Farmgate Milk Price of $5.30 per kgMS
- Targeted dividend range of 25 to 35 cents per share.

While the fundamentals for dairy remained strong, the revised forecast
reflected current high levels of volatility, said Mr Wilson.

"The forecast reflects an uncertain outlook for the global economic
environment and an expectation of continued volatility for dairy prices
driven by geopolitical events and the supply/demand imbalance.

"The Board will continue to keep farmers informed as we move through the
year."

Consumer and foodservice margins are expected to recover from the second
quarter of this financial year. Stream returns are currently making a
positive earnings contribution but it is still very early in the financial
year.

Forecast capital expenditure of $1.6 billion for 2015 financial year,
signalled in earlier announcements, remains unchanged.

A further update will be provided at Fonterra's Annual Meeting in November.

Click here to view Annual Results presentation, the Annual Review and the
Financial Statements & Statutory Information.

NB: All dollars quoted are New Zealand dollars.
- ENDS -

For further information contact:
Mike Burgess
Fonterra Communications
Phone: 027 502 8830

24-hour media line
Phone: +64 21 507 072

About Fonterra
Fonterra is a global leader in dairy nutrition - the preferred supplier of
dairy ingredients to many of the world's leading food companies. Fonterra is
also a market leader with our own consumer dairy brands in Australia/New
Zealand, Asia/Africa, Middle East and Latin America.

The farmer-owned New Zealand co-operative is the largest processor of milk in
the world, producing more than two million tonnes of dairy ingredients, value
added dairy ingredients, specialty ingredients and consumer products every
year. Drawing on generations of dairy expertise, Fonterra is one of the
largest investors in dairy based research and innovation in the world. Our
more than 16,000 staff work across the dairy spectrum from advising farmers
on sustainable farming and milk production, to ensuring we live up to
exacting quality standards and delivering every day on our customer promise
in more than 100 markets around the world.
Business units

Global Ingredients and Global Operations (formerly NZ Milk Products)
Global Ingredients and Global Operations had a solid year, with a mild winter
and spring ensuring that the season started well. The North Island faced dry
conditions through summer but returned to more favourable conditions in
autumn, leading to robust growth in New Zealand dairy production. Milk
collection across New Zealand reached 1,584 million kgMS, 8% higher than last
season. However, record milk volumes did not fully translate into increased
sales volume, as the year began with low inventory levels as a result of the
previous season's drought. Total sales volume was up 1% and revenue increased
30% from $13.9 billion to $18 billion.

The relative increase in the price of Reference Commodity Products (RCPs)
compared to the increase in the price of Non-Reference Commodity Products
(Non-RCPs), was significant for most of the year and this had a substantial
impact on stream returns. The extent of these differences was unprecedented
and our asset footprint limited our ability to fully respond by switching
production to higher-returning milk powders. This was exacerbated by the fact
that the relative stream returns strongly favoured RCPs during our peak milk
collection period in October and November, when we have limited product mix
flexibility. As a result, our ability to switch production from Non-RCPs to
RCPs was substantially constrained.

This resulted in significant margin pressure for Non-RCP products, with milk
input costs rising disproportionately against the sales price and selling
prices being below the input cost in some product streams. In the second half
of the year, the divergence in prices between RCPs and Non-RCPs decreased and
then reversed. However, the timing of the decrease in commodity prices and
the weighting of milk purchasing to the first half of the year, were
insufficient to offset the impact on earnings.

In December last year, the Board decided to maintain the Forecast Farmgate
Milk Price at $8.30 per kgMS, $0.70 per kgMS lower than that calculated under
the Farmgate Milk Price Manual, due to asset inefficiency issues that created
considerable margin pressure. In May 2014, the Board reduced that 70 cent gap
by 17 cents to 53 cents, resulting in a Forecast Farmgate Milk Price of $8.40
per kgMS. The Milk Price adjustment partially offset the impact of the
significantly lower stream returns, and contributed to a Normalised EBIT of
$269 million, 46% lower than last year.

Oceania
The integrated Australia and New Zealand business experienced another
challenging year, with higher input costs that were difficult to recover in
very competitive environments. Total sales volumes of 832,000 MT for
Australia and New Zealand were 6% lower than last year, in part due to the
sale of the Norco liquid distribution business in 2013, decreased nutritional
volumes from the Australian ingredients business and reduced yoghurt volumes
in Australia. The New Zealand business held volumes despite challenging
market conditions. Oceania's Normalised EBIT declined 78% to $31 million and
revenue declined 4% to $3.6 billion.

Significant progress has been made in the transformation of the Australian
business through lowering operating costs and streamlining the brands
portfolio. Normalised EBIT fell $37 million in Australia and $75 million in
New Zealand as a result of a margin squeeze in the consumer brands business,
with significantly higher input costs and competitive pressure that
constrained the ability to pass these on.

Asia
The focus in 2014 was to increase volume across our key leadership and
strategic markets in Asia, given the earnings challenges presented by global
dairy pricing dynamics. Volume growth of 12% was primarily driven by
excellent performance in China. In Indonesia, volumes were up 20%, driven by
growth in foodservice and the Anlene and Anmum premium brands.

However, volumes were down 20% in Sri Lanka, partly due to the temporary
suspension of our operations, which resulted in a large short-term decline in
volumes and a temporary loss of the market leadership position. Market share
has now returned to previous levels, and excluding Sri Lanka, volumes across
Asia have increased by 18%.

Normalised EBIT dropped 56% to $91 million, due to significantly higher input
costs as a result of high dairy commodity prices and the challenging market
conditions in Sri Lanka. Price increases were taken in line with individual
market conditions, while ensuring that the Co-operative was positioned for
future earnings growth. This allowed Fonterra to largely maintain or improve
its strong market share position in all key markets.

The China business experienced continued growth in a number of strategically
important areas. Normalised EBIT in China grew 38%, driven by our farming
business and foodservice. Supply shortages in China benefited Fonterra's
local farming operations, with increased volumes and higher price per litre.

Latin America
Latin America grew volumes by 3% to 387,000MT, driven by the Soprole business
in Chile. Consumer volumes were up 2% in Soprole driven by growth in liquid
milk, mature cheese and powdered milk. Soprole continues to grow volume
through new product development, particularly in cheese, and innovation in
serving size and packaging, to expand beyond traditional products and help
grow the category.

Normalised EBIT for Latin America decreased by 19% to $111 million, driven by
Soprole, where earnings fell 40% or 31% in constant currency terms. The
priority this year was to grow market share and volumes to position the
business for long-term success, which resulted in a lower margin, as
increased input costs were not fully passed on to customers. Soprole has
positioned the business for the more challenging economic environment ahead
with the review and realignment of its structure.

Normalised EBIT in Dairy Partners Americas (DPA) increased for the DPA
Venezuela liquid and chilled joint venture. This was partly due to some
one-off actions, including a hyperinflationary accounting gain and a land
sale. Although this remains a challenging market, underlying business
performance was stronger than the previous year, driven by changes in product
mix into more profitable categories.

i This comprises an interim dividend of $0.05 and a final dividend of $0.05.
Record date of final dividend is 9 October 2014, with a final dividend
payment date of 20 October 2014.
End CA:00255604 For:FCG    Type:FLLYR      Time:2014-09-24 08:30:22