FONTERRA INTERIM RESULTS 2014 - AgriHQ | Home · PDF fileAnlene business Develop leading positions in paed & maternal nutrition Optimise NZ milk 1 Align our business and organisation

FONTERRA UPDATE

Confidential to Fonterra Co-operative Group

July 2014

Page 2 © Fonterra Co-operative Group Ltd.

Fonterra overview

FY13 revenue (NZ$) 18.6 billion

FY13 normalised EBIT

(NZ$) 1.0 billion

Shareholders ~10,500

Market cap (NZ$) 9.4 billion

Credit rating:

Standard & Poor’s

Fitch

A+ stable

AA- stable

• World’s largest processor of dairy

products

• Consumer and Foodservice operations

in China, Asia, Middle East, Latin

America, Oceania

• International Farming Ventures – China

• Access to global milk pools

– Collects ~88% of New Zealand’s milk

– Processes approximately 22 billion

litres of milk per year


Foodservice and branded consumer

businesses

ASEAN/MENA

LATAM

Greater China


Fonterra global ingredients

21.6

17.1

15.0 14.9

12.0 12.0

10.1

8.2 7.8 6.9

Fo

nte

rra

Dair

y F

arm

ers

o

f A

me

rica

La

cta

lis

Ne

stlé

De

an

Fo

do

s

Arl

a F

oo

ds

Fre

isla

nd

C

am

pin

a

Dan

on

e

Kra

ft F

oo

ds

DM

K

Mil

k In

tak

e (

mil

lio

n t

on

ne

s)¹

21%

46%

28%

51%

To

tal M

ark

et

Sh

are

Wh

ole

milk

po

wd

er

Skim

milk

po

wd

er

Bu

tte

r

% o

f G

lob

al D

air

y E

xp

ort

s

The world’s largest milk processor Fonterra’s share of global dairy exports²

Note: These figures are sourced from the TAF prospectus, issued in October 2012

1. Milk intake figures above are measured in millions of tons (not billions of litres) and represent milk volume collected and commodity purchases for the company and

its subsidiaries. 50% of Dairy Partners America milk intake has been allocated to each of Fonterra and Nestle. Source: IFCN Dairy Network. Analysis is based on

the IFCN Dairy Report 2012. Data represents in most cases the year 2011 (Nestlé data represents the year 2010).

2. Figures are for the 2011 / 2012 Season. Global Dairy Exports means the market for the cross-border trade of dairy products but excludes trade among countries

within the European Union. Source: Fonterra, Global Trade Information Services.


MENA

2%

4%

10%

India²

7%

7%

China

4%

2%

LATAM

2% 2%

ANZ

1%

Nth America

1%

Europe

<1%

ASEAN

2-3%

4%

1% <1%

The outlook for global trade in dairy

products: a view to 2020

Source: Fonterra estimate

1. Current volumes are represented by the area of the circles displayed. Growth rates represent forecast compound annual growth rates.

2. Although strong growth in demand is expected in India, the ability to supply is likely to remain limited. In the 12 months to May 2012, Fonterra exported 22,300 MT

of product to India and total imports represented approximately 0.2% of consumption.

Outlook to 2020¹

Demand growth Supply growth Demand volume Supply volume


…Our strategic response

Margin squeeze in

consumer

Negative stream

returns

Precautionary recall

STAY ON STRATEGY

Turning the Wheel

STRATEGIC REVIEW

• Optionality

• Portfolio optimisation

• Multi hubs

RENEWED FOCUS ON FOOD SAFETY

AND QUALITY

A challenging year…


Improve

Value Drivers

Drive Return on

Capital (ROC)

Maximise

Shareholder Wealth

Strong focus on value creation

Earnings per Share

Milk Price

Share Price

Improve ROC

Economic Value Add

Volume Growth

EBIT Growth

Working Capital

Page 8 Confidential to Fonterra Co-operative Group Page 8 Confidential to Fonterra Co-operative Group

Strategic overview


Our journey to becoming a globally relevant

Co-op



A strong Co-operative … getting stronger

From

The world’s largest

exporter of dairy

To

A Co-op that makes a difference in the

lives of 2 billion people by 2025


Growth in

Consumer and

Foodservice volumes

Value creation by ‘Turning the Wheel’

Drive price achievement

in Ingredients

Return on Capital (ROC) >

WACC

DIRA

GDT

GDT Surge

Spot

LTSA

Foodservice

Consumer


Strategic priorities

Deliver on

Foodservice

potential

Selectively invest

in milk pools

Grow our

Anlene business

Develop leading

positions in paed &

maternal nutrition

Optimise

NZ milk

1

Align our business

and organisation

Build and grow

beyond our current

consumer positions

3

2

4

5

6

7

Redefine milk supply model

Invest in optionality to achieve higher less volatile returns

Investment in global multi-hubs

Organisational changes to support strategy

Food safety and quality

Focus on strategic and leadership markets

Focus on 5 global brands


Investing in optionality to achieve

less volatile returns

DEEPER FINANCIAL (FUTURES) MARKETS

MIX OPTIMISATION

ASSET OPTIONALITY

Expand

capacity

Plant

productivity Advance investment

Review

constraints

Centralised

management

Asset-backed

trading

Develop WMP

futures market

B

C

A F15 F16 F17 F18 F19+

Maintain

flexibility

Physical

trading

Grow

WMP futures

volumes


Optimising our asset footprint to support

premium growth platforms

Neutral Invest if returns significantly exceed

cost of capital over time

Accelerate Investment

Reduce Immediately

Grow with Market

Supports Earnings Stability / Growth High Low

Su

pp

ort

s V

3 S

trate

gy

High

Low

Nutritionals

UHT Mozzarella

Cream Cheese

Butter / AMF

WMP / SMP

Natural

Cheese

Casein



Deliver on

Foodservice

potential

Selectively invest

in milk pools

Grow our

Anlene business

Develop leading

positions in paed &

maternal nutrition

Optimise

NZ milk

1

Align our business

and organisation

Build and grow

beyond our current

consumer positions

3

2

4

5

6

7









93 consumer markets 8 leadership and strategic markets

Top 3 in attractive scale segments

<15% ROC consumer & foodservice >20% ROC consumer & foodservice

60+ brands, different positioning 5 global brands, consistent

proposition

Silos, limited synergies Pan-Fonterra integrated approach,

repeatable models


From To


Focusing on 5 global brands, with clear links

to our strategy

Deliver

on Foodservice potential

Grow

our Anlene™ business

Develop

leading positions in paed.

and maternal nutrition

Optimise

New Zealand milk

1

Build and grow

beyond our current

consumer positions

3

2

4

5


Our nutritional benefit platforms

address key developing trends…

Natural energy

Growth and

development

Mobility

Cognition

Un

co

mp

rom

isin

g t

aste

,

textu

re a

nd

sta

bil

ity

Nutrient deficiencies

Consumer trends

Fonterra strengths

Benefit platforms



Deliver on

Foodservice

potential

Selectively invest

in milk pools

Grow our

Anlene business

Develop leading

positions in paed &

maternal nutrition

Optimise

NZ milk

1

Align our business

and organisation

Build and grow

beyond our current

consumer positions

3

2

4

5

6

7









Multi-hub strategy will match demand

growth to our best source of supply


NZ

Milk Powder

preference

EU

Cheese/Whey/

Nutritionals

preference

AU

Cheese

preference

Global Demand

Fonterra Group US

SMP

preference

Single-hub

Focus

Latam

Mostly

Inter-region

Global multi-hubs to support global growth

platforms

From Single Hub To Multi-Hub

Global Demand

NZ

AU EU US China Latam


Our group structure supports our

strategic priorities

Group Functions

Global Ingredients

APMEA

Latin America

Greater China

Strategic Regions Inter-national Farming

Global Operations


A new approach to food safety and quality

supports our purpose

Think, Act and

Live Quality

Right First Time

Every Time

Deliver on

our Promises


Example of Strategy in Action –

Fonterra in China


Significant growth ambitions in China

1. Liquid Milk Equivalents

2014

4bn Litres¹

2020

8bn Litres¹

China Ingredients

Sales – NZ origin

China Food Service

Global Accounts & QSR

China Brands

Taiwan & Hong Kong Farms

China Food

Service

Global

Accounts

& QSR

China

Brands

Taiwan &

Hong Kong

Farms

China

Ingredients

Sales – NZ

origin

China Ingredients

Sales – non-NZ


15%

FY12 FY13 FY14

31%

19%

Total volume sales (k MT) % of Fonterra NZ milk (LME) imported into

China FY12

FY14

Strong growth in ingredient sales to China

FY13

China ingredients Others

+31%


Foodservice and consumer roll-out on target

• Launched Anchor™ UHT

• Launched Anmum™ infant

formula

• Expansion of Anlene™ in

mainland China

• Continued success in

Foodservices expansion


Investing in China milk pool

• Investing in farms that will integrate

with downstream positions

• Strong platform to launch from –

pipeline of livestock, sites, capability

• Adopting a hub approach, starting with

Yutian, supplying Beijing

– Hub: 4-5 farms in one region

– Allows flexibility in developing

downstream partnerships

• Further expansion, pursued through

partnership

Growing to one billion litres by 2020

Our focus is to roll out a new farming hub every 12-18 months


Supplementary Slides


Global supply and demand overview

• China and Russia are the two top importers of dairy by a significant margin

– China imports 1.5 MT of dairy products, or 13.4% of global imports

– Russia imports 1.4 MT of dairy products, or 12.5% of global imports

Source: Fonterra; China Dairy Association, China Customs, Rabobank estimates and forecasts 2014.

Global dairy importers Chinese dairy consumption – by product origin

13.4%

12.5%

China

Russia

Mexico

Japan

Indonesia

Saudi Arabia

Iraq

Philippines

Algeria

Venezuela 0%

20%

40%

60%

80%

100%

0

10

20

30

40

50

2000 2003 2006 2009 2012

Mark

et S

hare

Billio

n L

itre

s M

ilk E

qu

ivale

nt

Domestic Production

Net Imports

Import Market Share


Commodity

price volatility

Nutrition for

the young

Food safety

and quality

Consistent consumer trends influencing our

business

Route to Market

Rise of emerging

markets

Nutrition for

the old

http://www.mckinseyonmarketingandsales.com/mobile-must-migrate-digital-as-an-imperative-not-an-option


Interim 2014 performance summary

• Strong ingredients demand – driven by higher sales to China

• Record first half Group revenue of $11.3 billion

• Challenges in Ingredients and Consumer/Foodservice margins

– NZMP normalised EBIT percentage down to 3% from 6% last year

– Consumer and Foodservice normalised EBIT percentage down to 4% from 7%

last year

1. Prior year excludes Norco volumes, as business was sold in November 2012.

Total sales

volume¹

2m MT -3%

Total Group

revenue

$11.3bn +21%

Normalised

EBIT

$403m -41%

Net profit

after tax

$217m -53%

EPS

13cps -54%


Protecting the Co-operative and staying on

strategy

683

519

(560) (75)

(64) (79)

(82) 0

61 403

0

200

400

600

800

1,000

1,200

1,400

H1 2013 Milk Price

Adjustment

NZMP Product Gross Margin

Liquid Milk

Sales

Peak Production and Other

Costs

Oceania Asia Latin America

Other H1 2014

Normalised EBIT (NZD million)

Protect the Co-operative Stay on Strategy Peak

Constraints


1. Bank Facility Restructure implemented on 7 February 2014. WATM increased to 3.1 years.

Balance sheet strength

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

NZ

D m

illi

on

Bank Facilities - Total Limits

Debt Capital Markets

Strong fundamentals Diversified funding sources

Debt maturity profile (Year ending January)

Strong liquidity

Credit Rating

S&P A+

(stable outlook)

Fitch AA-

(stable outlook)

Weighted

Average Term

to Maturity

As at 31 January 2014

(Drawn debt) 2.7 years¹

Offshore DCM

32%

NZ DCM 20%

Bank Facilities

48%

Undrawn Facilities

and Cash

$3.2bn

65%

Drawn Facilities

$1.7bn

35%


Overview of capital structure

• Can trade Units

• Units can be converted into Co-op shares

by farmers

• No Voting Rights in Co-op

• Institutional and Retail investors

• Listed on NZX and ASX

• Can trade Co-op shares

• Voting Rights

• Restricted to dairy farmers

• Market maker operates

• Operated by NZX

Fonterra Farmers Investors

Key features

Fonterra

Co-operative

Group

Co-op Shares Units

Fonterra Shareholders’

Market

Fonterra Shareholders’

Fund

Key features

Exchangeable by Permitted Persons

Documents

FONTERRA INTERIM RESULTS 2014 - AgriHQ | Home · PDF fileAnlene business Develop leading positions in paed & maternal nutrition Optimise NZ milk 1 Align our business and organisation