UPDATED: Fonterra will slash 10c a share from in its earnings per share for the 2017/18 financial year following an arbitration decision against the co-operative.
An international arbitration tribunal has ordered Fonterra pay $183 million in damages from claims arising out of its WPC80 precautionary recall of whey protein in August 2013 to French food company Danone.
As a result, Fonterra has revised its forecast earnings per share range, out of which it pays a dividend to its farmer shareholders, for the 2017/18 financial year to 35-45c, down from 45-55c. However, it says the decision has no impact on the forecast Farmgate Milk Price, currently at $6.75 per kilogram of milk solids and due to be revised this month.
In a press release, Fonterra chief executive says, “We are disappointed that the arbitration tribunal did not fully recognise the terms of our supply agreement with Danone, including the agreed limitations of liability, which was the basis on which we had agreed to do business.
“The decision to invoke a precautionary recall was based on technical information obtained from a third party, which later turned out to be incorrect.
“While there was never any risk to the public, we have learned from this experience and as a result have made improvements to our escalation, product traceability and recall processes and incident management systems,” says Mr Spierings.
“We operate in a fast-changing and complex industry, and will always prioritise food safety and quality in our commitment to be the world’s most trusted source of dairy nutrition. Fonterra is in a strong financial position and is able to meet the recall costs.” As at July 31, Fonterra had $3.8 billion in undrawn lines of credit and $393 million of cash.
The release also says a follow-up review by the independent inquiry commissioned by the Fonterra board of directors confirmed the co-operative’s management “acted in the best interests of its consumers and the cooperative at all times.”
However, the dairy giant’s own operational review says managers at Fonterra Cooperative Group waited days before escalating a clostridium bacteria contamination that led to a global recall up to chief executive level.
In May 2012, a contamination occurred when a piece of plastic fell into a drier at the Hautapu plant in the Waikato. But rather than downgrade the whey protein product it was decided to reprocess the powder.
Mr Spierings in 2013 wasn’t immediately advised when the risk of clostridium botulinum was first identified by Fonterra’s own research centre or when it was tested again by Crown Research Institute’s AgResearch.
He said the issue should have been escalated when AgResearch was first engaged. “The red flag should have gone up faster.”
Fonterra is reviewing the tribunal’s findings closely but says there was likely to be limited options for challenging the decision of an international arbitration.
Earlier: In a statement, Danone said it “welcomes this arbitration decision as a guarantee that the lessons from the crisis will not be forgotten.”
The French food giant sued Fonterra, seeking damages of up to €630 million, over the whey protein contamination in 2013. Fonterra had its shareholders’ fund units and listed bonds halted from trading and has planned a media conference for 3pm in Auckland.
Danone said the arbitration “underscores the merit of its legal actions against Fonterra, including to champion the highest standards of food safety across the industry. In April 2014, Fonterra had already been fined by judgment of the Wellington District Court for having breached several provisions of the New Zealand food safety regulations.”
It said food companies and their suppliers “can only work together through a solid relationship based on trust, transparency, and accountability. Danone will continue to build that relationship with its suppliers across the world.” Danone ceased doing business with Fonterra in the wake of the dispute.
Danone launched arbitration proceedings in Singapore and a law suit in the New Zealand High Court, estimating the cost of recalling the whey protein concentrate to be about €350 million. At the time, Fonterra said it expected any court action would show the Kiwi firm didn’t have any liability in the contract, and it recognised a contingent liability of just $14 million over the recall.
In 2014, New Zealand’s Court of Appeal upheld an earlier decision that the Singapore arbitration proceedings should be the first avenue, as provided for in the contract, but refused to permanently stay the law suit.
In 2013, Fonterra quarantined several batches of whey protein concentrate amid fears it was contaminated with a potentially dangerous form of the clostridium bacteria. The whey protein was ultimately cleared as a false alarm. Fonterra cut deals with seven of the eight customers affected.
Danone’s New Zealand subsidiary, Danone Nutricia, ended its supply contract with Fonterra after the botulism scare. Since then, it has sourced product from Synlait Milk and other manufacturers and bought two Kiwi dairy processing companies, Sutton Group and Gardians, with the latter providing access to milk supply from 18 farms owned by Grant Paterson of Dunedin.
(Additional reporting BusinessDesk)