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FONTERRAINTERIM RESULTS 2014Market Briefing
© FONTERRA CO-OPERATIVE GROUP LIMITED
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Overview
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OverviewJohn Wilson – Chairman
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On-track for record forecast Cash Payout
0.27
0.30
0.320.32
0.10
6.37
7.90
6.40 6.16
8.75
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3
6.10 7.60 6.08 5.84 8.65
2010 2011 2012 2013 2014F
Farmgate Milk Price Dividend
1. Dividend: cents per share.
2. Farmgate Milk Price: $ per kgMS.
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Key highlights
Forecast Farmgate Milk Price Forecast Full Year Dividend Forecast Final Cash Payout
$8.65kgMS 10cps $8.75
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Milk Production Revenue Interim Earnings per Share
13cps1.1bn kgMS $11.3bn
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Strong rebound in milk collection in New Zealand
50
60
70
80
90
(m l
itre
s/d
ay)
2013/14
2012/13
2011/12
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5
0
10
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40
Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May
Vo
lum
e (
m l
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s/d
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Source: Fonterra Co-operative Group Limited
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Prudent approach to dealing with extreme volatility
1. Full confidence in underlying basis of Farmgate Milk Price Manual
2. Manual enables a high level of transparency
Prudent ApproachExtreme Volatility
Product Mix
$800m Negative impact
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3. Decision in the best interest of the Co-operative
4. Prudent not to pay a Milk Price higher than what we can afford and fund via debt
5. Ensures we stay on strategy
Milk Price Adjustment
Peak Production
70 cents per kgMSAdjustment
Record Milk Flows
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t.Co-operative priorities –How we can grow profitably and sustainably
• Profitable, resilient farmers
• Sustainable
• Profitable, resilient farmers
• Sustainable
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• Sustainable natural resources
• Enhanced community value
• Sustainable natural resources
• Enhanced community value
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Performance Summary
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Performance SummaryTheo Spierings – CEO
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Interim 2014 performance summary
Total salesvolume¹
2m MT-3%
Total Grouprevenue
$11.3bn+21%
NormalisedEBIT
$403m-41%
Net profit after tax
$217m-53%
EPS
13cps-54%
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• 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.
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Regional performance
NZ Milk ProductsGlobal Ingredients sales
NZ Manufacturing footprint
Group Functions
NZMP$9.1bn
Oceania$1.8bn
Asia$1.1bn
Total Group Revenue²
OceaniaAustralia/NZ Consumer & Foodservice
Australia manufacturing footprint
RD1
Latin America$570m
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1. DPA is equity accounted.
2. Total revenue for all business units.
3. This excludes eliminations.
AsiaConsumer and Foodservice in Asia, Middle East and China
China Farming Hub
Latin AmericaConsumer in Chile (Soprole)
DPA JV¹
Caribbean consumer operations
Southern Cone Ingredients
NZMP$236m
Latin America
$71m
Oceania$46m
Asia$32m
Total Group Normalised EBIT³
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683
(176)(52) 4 12 403
400
500
600
700
800
NZ
D m
illi
on
Normalised EBIT by segmentsConsumer and Foodservices
Businesses $(116) millionIngredients
$(176) million
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11
(68)
4
0
100
200
300
400
H1 2013¹ NZMP Oceania Asia Latin America Other H1 2014
NZ
D m
illi
on
1. Normalised EBIT for the six months ended 31 January 2013 has been restated from NZD 693 million to NZD 683 million. The NZD 10 million normalisation adjustment relates to net foreign exchange gains.
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4,500
5,000
5,500
US
D (
MT
)
Cheese
WMP
Whole Milk Powder and cheese prices
Weighted average USD GDT cheese prices vs. WMP prices
H1 2014
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2,500
3,000
3,500
4,000
Aug-2011 Jan-2012 Jun-2012 Oct-2012 Apr-2013 Aug-2013 Jan-2014
US
D (
MT
)
Source: GlobalDairyTrade
H1 2014
H2 2013
H1 2013
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Staying on Strategy
1. Optimise our global ingredients sales and operations footprint
2. Grow significantly in everyday nutrition
3. Continue our foodservice growth momentum
4. Capture high margins in advanced
Five Priorities Turning the Wheel
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4. Capture high margins in advanced nutrition
5. Enable growth by expanding beyond New Zealand to selectively invest in milk pools, matching demand with the best market opportunities
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Financial Review
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Financial ReviewLukas Paravicini – CFO
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683
519
800
1,000
1,200
1,400
Protecting the Co-operative and staying on strategy
Normalised EBIT (NZD million)
Protect the Co-operative Stay on StrategyPeak Constraints
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683
(560)(75)
(64)(79)
(82)0
61 403
0
200
400
600
800
H1 2013 MilkPrice
Adjustment
NZMPProductGrossMargin
Liquid Milk
Sales
Peak Production and Other
Costs
Oceania Asia Latin America
Other H1 2014
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NZ Milk Products review
1.4m MT
-2%
• 4% growth in NZ milk collection
• Sales volume in first quarter impacted by low start of season stock due to drought last year
• Record volumes shipped in second quarter
SALES VOLUME
$236m
NORMALISED EBIT
• EBIT impacted by:
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1. Capital invested.
$236m
-43%
• Darfield drier Two came on stream in August 2013
• Waitoa UHT plant to be operational in March
• Whey and lactose plant investment in Europe
• Announced new drier at Pahiatua
BUSINESS UPDATE
$252m¹
• EBIT impacted by:
– Product mix down $116 million
– Peak production costs of $76 million
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NZMP – key performance drivers
Normalised EBIT (NZD million)
(560)
519
(75)
Product Gross Margin
Milk Price Adjustment
Liquid Milk800
1,000
1,200
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1. Normalised EBIT for the six months ended 31 January 2013 has been restated from NZD 422 million to NZD 412 million. The NZD 10 million normalisation adjustment relates to net foreign exchange gains.
412
(116) (76) (5)
21 236
0
200
400
600
H1 2013¹ Product Mix
Peak Production Costs
Price Premiums
Other H1 2014
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Oceania review
411,000 MT
-9%¹
• Australia impacted by lower exports, nutritionals and yoghurt volumes
• NZ volumes up 4%
SALES VOLUME
$46m
NORMALISED EBIT
• EBIT impacted by:
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1. Prior year excludes Norco volumes, as business was sold in November 2012.
2. Capital invested.
$46m
-53%
• Tamar Valley acquisition
• Bega investment
BUSINESS UPDATE
$56m²
• EBIT impacted by:
– Australia brands – high input costs and lower export sales
– Australia ingredients – lower volumes
– NZ – higher input costs and temporary supply chain disruption
• RD1 performed well
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9828
80
100
120
Oceania – key performance drivers
Normalised EBIT (NZD million)
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19
(34)
(42)(4)
46
0
20
40
60
H1 2013 Australia Brands
Australia Ingredients
NZ Other H1 2014
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Reshaping our Australian business
Stage 3
Stage 4
Transform the Business
����
IN PROGRESS
IN PROGRESS
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Stage 1
Stage 2 Improve the Portfolio
Review
• Reduce brands/ complexity
• Cost to serve
����
• Strengthen retail relationships
• Grow foodservice
• Leverage exports
• Strategic partnerships & investments
• Grow milk hubStabilise the
Business
• Strategic choices
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Asia review
192,000 MT
+3%
• Asia volume growth impacted by Sri Lanka
• Excluding Sri Lanka volume growth was up 10%
• Increase in Foodservice, Anlene™ and China Farms
SALES VOLUME
$32m
NORMALISED EBIT
• EBIT impacted by:
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$32m
-68%
• China farm hub one complete and hub two underway
• Anchor™ UHT launched in China
• Anmum™ infant formula launched in China
BUSINESS UPDATE
$91m¹
– High dairy commodity input costs
– Sri Lanka sales down 33%
• Market share maintained in key markets
• Growth in China – farms and foodservice
1. Capital invested.
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100
30 2
(17)
90
120
150
Asia – key performance drivers
Normalised EBIT (NZD million)
Gross Margin (excluding China) $(63) million
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22
(63)
(15)
2
(7)
32
0
30
60
H1 2013 PriceIncreases
Volume/Mix excl. Sri Lanka
Volume/Mix
Sri Lanka
Input Cost Increases and Mix Impact
FX Other China H1 2014
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Latin America review
188,000 MT
+1%
• Volume growth driven by Soprole in Chile
– Significant growth in retail cheese category
– Higher milk powder sales to Government Health programme
SALES VOLUME
$71m
NORMALISED EBIT
• Performance improved due to higher contribution from
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1. Capital invested.
$71m
+6%
• New distribution centre in Chile
• $45 million new DPA warehouse in Brazil
BUSINESS UPDATE
$18m¹
• Performance improved due to higher contribution from Venezuela
• Soprole earnings lower due to higher input costs, but strong brand reduced impact
• Higher commodity costs in Caribbean impacted demand
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Latin America – key performance drivers
Normalised EBIT (NZD million)
67
(9)
95
(1)
71
50
60
70
80
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0
10
20
30
40
H1 2013 Soprole DPA Southern Cone Other H1 2014
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104
103
104
Working capital and cash flow
Working capital days¹ Free cash flow (NZD million)
603 54
(400)
(200)
0
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25
97 97
H1 2010 H1 2011 H1 2012 H1 2013 H1 2014
1. Excluding supplier payables.
(861)
(253)
(84)(541)
(1,200)
(1,000)
(800)
(600)
H1 2013
EBIT Working Capital
Capex Other H1 2014
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Financing
48.5% 46.9%40.0%2 44.6%
• $5.4 billion net debt position after hedging
• Higher gearing levels due to:
– Lower earnings this period
– Return of capital through Supply Offer
– Bega investment
Debt to Debt plus Equity¹
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H1 2011 H1 2012 H1 2013 H1 2014
Strong Fundamentals
1. Gearing is measured in terms of economic net interest bearing debt over economic net interest bearing debt plus equity (reflecting the effect of debt hedging in place at balance date) and equity excludes the cashflow reserve.
2. H1 2013 gearing benefited from a temporary injection of $493 million (includes transaction costs) capital from seeding Fonterra Shareholders’ Fund for the launch of Trading Among Farmers.
3. Bank facility restructure implemented on 7 February 2014. WATM increased to 3.1 years.
Temporary capital held from issue of shares to the Fonterra Shareholders’ Fund
Credit Rating
S&PA+ (stable outlook)
FitchAA-(stable outlook)
WeightedAverage Term
to Maturity
As at 31 January 2014(Drawn debt)
2.7 years³
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Strategy Update
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Strategy UpdateTheo Spierings – CEO
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Strategic Review
“100,000 foot view” “10,000 foot view” “1,000 foot view”
Approximate timing
Dec-Jan Feb Mar-Jun
Approach Strategic Analysis Strategic Choices Strategic Implications
• Supply • Milk Pools • Structure
Re
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we
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Re
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Activities
• Supply
• Demand
• Trends
• Milk Pools
• Milk Pools
• Assets
• Portfolio
• Optionality
• Multi-hubs
• Structure
• Capital
• Resources
Re
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Re
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Demand growth is driven by China and Russia
• 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
13.4%
12.5%
China
Russia
Mexico
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Source: Fonterra
Mexico
Japan
Indonesia
Saudi Arabia
Iraq
Philippines
Algeria
Venezuela
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China supply gap widens
60%
70%
80%
90%
100%
30
35
40
45
50
Ma
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t Sh
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Bil
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n L
itre
s M
ilk
Eq
uiv
ale
nt
Domestic Production
Net Imports
Import Market Share
Chinese dairy consumption – by product origin
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0%
10%
20%
30%
40%
50%
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013F 2014F
Ma
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t Sh
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Bil
lio
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itre
s M
ilk
Eq
uiv
ale
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Source: China Dairy Association, China Customs, Rabobank estimates and forecasts, 2014
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Global structure for global growth platforms
Strategic Analysis
Strategic Choices
1. Greater Optionality
2. Portfolio
Global Opportunities
Consumer
Ingredients
Global Ingredients
• Asset Optionality
• Mix Optimisation
• Financial markets
Brands and Foodservice
Deliver on foodservice potential
Build and grow beyond our current consumer positions
Optimise NZ milk1
2
3
EVERYDAY NUTRITION
OUT-OF-HOME
Strong Demand
China Growth
13.4%
12.5%
China
Russia
Mexico
Japan
Indonesia
Saudi Arabia
Iraq
Philippines
Algeria
Venezuela
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2. Portfolio
3. Multi-hubs
Brands and Foodservice
• Align product portfolio to support Brands and Foodservice expansion
Hubs
Strategic Markets
• Build integrated model in key strategic markets
• Match demand growth with most attractive milk pools
Selectively invest in milk pools
Alignment of business and organisation
6
7
Develop selected leading position in paediatrics and maternal
Grow our position in Anlene™4
5
ENABLERS
ADVANCED NUTRITION
Volatility
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Outlook
• In the short-term earnings will continue to be impacted by:
– Higher input costs which make it harder to drive value growth in brands and foodservice
– Negative impact on product mix margins which is unlikely to be recovered in the second half
– Second half result is likely to be lower than first half 2014
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• Volatility in commodity prices is expected to continue – plans in place to manage an benefit from the volatility over time
• Programme to enhance operational flexibility means fast-tracking some investments alongside an additional $400-500 million additional capital over the next three years
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Supplementary Information
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Information
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Annual results summary
NZD million6 months ended 31 January 2014
6 months ended 31 January 2013 Change
Total volume (billion MT) 1.99 2.07 (4)%
Revenue 11,292 9,334 21%
Normalised EBIT¹ 403 683 (41)%
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Net profit after tax 217 459 (53)%
Earnings per share (cents)² 13 28 (54)%
Dividend per share (cents) 5 16 (69)%
1. Normalised EBIT for the six months ended 31 January 2013 has been restated from NZD 693 million to NZD 683 million. The NZD 10 million normalisation adjustment relates to net foreign exchange gains.
2. Earnings per share for the six months ended 31 January 2013 has been restated for the impact of the non-cash Bonus issue of Shares, issue date 24 April 2013.
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Normalisation adjustments
NZD million6 months ended31 January 2014
6 months ended31 January 2013
Time value of options (13) (10)
Costs associated with closure of Cororookeplant in Australia
– 24
Total normalisation adjustments (13) 14
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NZ Milk Products
NZD million6 months ended 31 January 2014
6 months ended 31 January 2013 Change
Total volume¹ (‘000 MT) 1,441 1,474 (2)%
Revenue 9,117 6,762 35%
Gross margin 617 797 (23)%
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Gross margin percentage 6.8% 11.8%
Operating expenses (480) (442) 9%
Other 99 57 74%
Normalised EBIT² 236 412 (43)%
Normalised EBIT percentage 2.6% 6.1%
1. Total volume includes intercompany volumes.
2. Normalised EBIT for the six months ended 31 January 2013 has been restated from NZD 422 million to NZD 412 million. The NZD 10 million normalisation adjustment relates to net foreign exchange gains.
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NZMP contribution margin
NZD million6 months ended 31 January 2014
6 months ended 31 January 2013
Sales volume (‘000 MT) 1,441 1,474
Gross margin 617 797
Selling, marketing and distribution expenses (137) (137)
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Contribution margin 480 660
Contribution margin per MT 333 448
Growth (26)%
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Oceania
NZD million6 months ended 31 January 2014
6 months ended 31 January 2013 Change
Total volume¹ (‘000 MT) 429 471 (13)%
Revenue 1,825 2,018 (10)%
Gross margin 344 423 (19)%
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Gross margin percentage 18.8% 21.0%
Operating expenses (311) (357) (13)%
Normalised EBIT 46 98 (53)%
Normalised EBIT percentage 2.5% 4.9%
1. Total volume includes intercompany volumes.
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Asia
NZD million6 months ended 31 January 2014
6 months ended 31 January 2013 Change
Total volume¹ (‘000 MT) 192 186 3%
Revenue 1,054 1,049
Gross margin 280 362 (23)%
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Gross margin percentage 26.6% 34.5%
Operating expenses (281) (280)
Normalised EBIT 32 100 (68)%
Normalised EBIT percentage 3.0% 9.5%
1. Total volume includes intercompany volumes.
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Latin America
NZD million6 months ended 31 January 2014
6 months ended 31 January 2013 Change
Total volume¹ (‘000 MT) 188 187 1%
Revenue 570 559 2%
Gross margin 148 148
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Gross margin percentage 26.0% 26.5%
Operating expenses (101) (94) 7%
Normalised EBIT 71 67 6%
Normalised EBIT percentage 12.5% 12.0%
1. Total volume includes intercompany volumes.
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Balance sheet strength
Strong Fundamentals Diversified Funding Sources
Credit Rating
S&PA+ (stable outlook)
FitchAA-(stable outlook)
WeightedAverage Term
to Maturity
As at 31 January 2014(Drawn debt)
2.7 years¹
Offshore DCM32%
NZ DCM 20%
Bank Facilities48%
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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
illio
n
Bank Facilities - Total Limits
Debt Capital Markets
Debt Maturity Profile(Year Ending January)
Strong Liquidity
1. Bank Facility Restructure implemented on 7 February 2014. WATM increased to 3.1 years.
20%
Undrawn Facilities and Cash
$3.2bn65%
Drawn Facilities $1.7bn35%
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Capital expenditure
NZD million
91
56622
21
91
10
24
13 18
282
328
427 417
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209 201
302252
57 816
H1 2011 H1 2012 H1 2013 H1 2014
NZMP Oceania Asia Latin America
