Fonterra’s Spierings says Danone commercial solution may not be possible, sees no liability

Fonterra Cooperative Group chief executive Theo Spierings says months of talks with Danone over losses from the whey protein concentrate recall have failed to reach a commercial solution, suggesting the issue may end up in the courts.

Danone put the cost of the Fonterra WPC 80 recall at 350 million euros when it announced its third-quarter results last month. Spierings was questioned today at the Fonterra Shareholders' Fund annual meeting in Auckland about whether a $14 million contingent liability in Fonterra's accounts would be sufficient.

"I have heard the numbers, seen other numbers in letters to us," Spierings said. "We've worked on a commercial solution very, very hard for months" such as agreeing to security of supply. "That appears to be a route that is not working out."

Still, should Fonterra's contract with Danone be tested in the courts, it will show "we have no liability in the contract."

Last month Danone, the world's largest yoghurt maker, cut its sales and profitability targets for 2013, citing the recall. Sales of baby food fell 8.6 percent in the third quarter as a result of the recall, Reuters reported the French company as saying.

Of eight customers affected by the recall, Fonterra has agreed a commercial outcome with all of them except Danone, including extending supply contracts for the next 10 years and agreeing to volume increases.

"We have one customer to close out but that could take time if it goes the legal route," he said.

Spierings and chief financial officer Lukas Paravicini fronted up to the Shareholders' Fund AGM alongside the fund's chairman John Shewan.

They were quizzed by unitholders over what was seen as a conflict between paying a high milk price to farmers and trying to lift earnings, with one investor observing Fonterra had a five-year trend of very little real increase in earnings before interest and tax.

Spierings said last summer's drought sabotaged the company's target for earnings growth and that the key was to shift volumes of product into high-value categories.

Another unitholder railed against the environmental practices of some farmers, including those that still allow dairy effluent to reach waterways, and quizzed Spierings about a case where a dairy farm worker was convicted for breaking the tails of cows, saying that sort of news would damage New Zealand's reputation in Europe.

Spierings said Fonterra had "some work ahead of us on sustainability and animal welfare" though this should be tackled through the terms of its supply agreement with farmers and that such issues should first be discussed within the Fonterra "family" rather than through punitive measures that the unitholder suggested such as refusing to pick up milk.

Another unitholder linked the price paid to farmers to the lacklustre performance of the units on the NZX, which last traded at $6.48 from as high as $8.09 in late May.

Shewan said three key influences on the unit price in recent months had been the effect of the drought, the impact of high milk prices and the WPC 80 recall. A higher than average number of new floats on the NZX had also had a general effect on the market, he said.

Spierings said the high milk price was a reflection of "huge demand" for whole milk powder and other products used to calculate the milk price, while non-milk price products such as cheese and casein had lagged behind, widening the gap between Fonterra's raw material costs and returns from its value-added products.

That had resulted in "temporary pressure on the P+L and that translates into the share price," he said.


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