Fonterra budgets $11m for Danone suit

TIM HUNTER
Last updated 11:57 26/03/2014
John Wilson and Theo Spierings
PHIL REID/Fairfax NZ
Fonterra bosses John Wilson and Theo Spierings.

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A lawsuit brought against Fonterra by French food giant Danone could cost the New Zealand co-operative $11 million, it said today.

The projected figure is well short of the losses claimed by Danone.

In its half-year financial statements, Fonterra said it had provided for that sum as "the maximum contractual liability to Danone" after a botulism scare last year caused it to recall whey protein concentrate it supplied top customers.

The $11m provision follows a $14m provision made in Fonterra's full-year accounts for "costs associated with the replacement of recalled products".

In Danone's full year results statement last month, it said it had lost €370m (NZ$597m) of sales because of the WPC80 scare, while the cash impact was €291m.

Danone's chief financial officer Pierre-Andre Terisse said the cash impact was made up from €200m of non-recurring costs and a 30 per cent margin on the lost sales.

"And now of course we are completely turning to the reconstruction of the elements of this business which needs to be reconstructed," he said.

Fonterra's statement today said it was working through the detail of Danone's claims.

"Based on current information available and the claims made to date, Fonterra will vigorously defend its position," the co-operative said.

"Uncertainty exists regarding the outcome of the proceedings."

Fonterra's half-year net profit plunged 53 per cent as a record-high payout to farmers led to soaring costs, despite healthy sales gains.

The net profit for the six months to January 31 was $217 million, down from $459m a year earlier.

Fonterra's milk costs are tied to global commodity prices, whose high levels boosted interim revenue by 21 per cent to $11.3 billion.

"The past six months has been a period of mixed fortunes for the co-operative," Fonterra chief executive Theo Spierings said.

The dairy giant collected a record supply of milk from its farmer shareholders in the peak October-November period, while overall supplies for the seasons were up 4 per cent.

"We processed as much of this milk into the higher-returning milk powder product streams (reference commodity products) as we could," Spierings said.

"However, our current asset footprint meant that around 25 per cent had to be processed into cheese, casein and other non-reference commodity products which earned negative returns over the period." Fonterra chairman John Wilson confirmed the forecast farmer payout for the year of $8.65 a kilogram of milk solids, up from $5.84 last year.

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The interim dividend would be cut from 16 cents a share to 5c payable on April 17, as previously signalled.

The co-operative said it would fast-track its capital investment plans to improve its production capacity and flexibility, helping its future profitability when milk powder prices were high.

"This will result in additional capital expenditure of $400m to $500m over the next three to four years," Spierings said.

TROUBLED TIMES

Last August Fonterra sparked a worldwide product recall and global food-safety scare, when it admitted there could be a bacteria in one of its products which could cause botulism, a severe form of food poisoning.

The product suspected of containing the bacteria was commonly used in infant formula.

Several countries blocked dairy products from New Zealand in the wake of the scare, which turned out to be a false alarm.

Prime Minister John Key and Wilson went to China last week on a trip aimed at winning back the media and mothers in New Zealand's largest trading partner.

Earlier this month, Fonterra indicated it would plead guilty to charges laid by the Ministry for Primary Industries over the food-safety scare.

The charges include failing to meet export standards and failing to alert the regulator that exported product was unfit for purpose.

- Fairfax Media

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