fonterra update

FONTERRA UPDATE

Confidential to Fonterra Co-operative Group

August 2014

New Zealand Cold Storage Association

© Fonterra Co-operative Group Ltd.

Background – Industry Growth

NZ’s pastoral based dairy sector has grown strongly as a result of increasing hectares under dairy, average cows per hectare, and average production per cow.

Source: NZ Dairy Statistics

600

800

1,000

1,200

1,400

1,600

1,800

220

240

260

280

300

320

340

360

380

Milk solid processed (million kgs)

Milk solids processed Milk solid production per cow

Milk

s

olid

s p

ro

ce

ss

ed

(m

illio

n k

gs

)

Milk

s

olid

p

ro

du

ctio

n p

er c

ow

Column Regular

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1.00

1.10

1.20

1.30

1.40

1.50

1.60

1.70

1.80

2.20

2.30

2.40

2.50

2.60

2.70

2.80

2.90

Total effective hectares and cows per hectare

Total Effective Hectares Average cows per hectare

He

cta

re

s (m

illio

ns

)

Av

era

ge

c

ow

s p

er h

ec

ta

re

Column Regular

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Column Regular

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Production has more than doubled

1994 2012 CAGR

1 United States of America 69,673 90,865 1.5%

2 India 26,122 54,000 4.1%

3 China 5,578 37,768 11.2%

4 Brazil 16,273 32,304 3.9%

5 Russian Federation 41,951 31,576 (1.6%)

6 Germany 27,866 30,507 0.5%

7 France 25,322 23,983 (0.3%)

8 New Zealand 9,812 20,053 4.1%

9 Turkey 9,129 15,978 3.2%

10 United Kingdom 14,991 13,884 (0.4%)

11 Pakistan 4,073 13,393 6.8%

12 Poland 12,222 12,668 0.2%

13 Argentina 8,018 11,815 2.2%

14 Netherlands 10,873 11,675 0.4%

15 Ukraine 17,935 11,260 (2.6%)

16 Mexico 7,320 10,881 2.2%

17 Italy 10,674 10,580 (0.0%)

18 Australia 8,327 9,480 0.7%

19 Canada 7,750 8,450 0.5%

20 Japan 8,389 7,630 (0.5%)

Other 118,918 161,611 1.7%

Total 461,216 620,362 1.7%

Top Milk Producing Counties(000s tonnes)


Background - Global supply and demand overview

– 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

China

Russia

Mexico

Japan

Indonesia

Saudi Arabia

Iraq

Philippines

Algeria

Venezuela

13.4%

12.5%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013F

2014F

0

5

10

15

20

25

30

35

40

45

50

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%Domestic ProductionNet ImportsImport Market Share

Billio

n L

itre

s M

ilk

Eq

ui-

va

len

t

Ma

rke

t Sh

are


Background - 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+ stableAA- 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


Background - Fonterra global ingredientsF

on

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iry

Fa

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f Am

eri

ca

La

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a F

oo

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isla

nd

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...

Da

no

ne

Kra

ft F

oo

ds

DM

K

21.6

17.1

15.0 14.9

12.0 12.010.1

8.2 7.86.9

Milk

Inta

ke

(m

illio

n t

on

ne

s)¹

To

tal M

ark

et .

..

Wh

ole

milk

p...

Ski

m m

ilk p

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Bu

tter

21%

46%

28%

51%

% 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 20121. 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.


…Our strategic response

Margin squeeze in consumer

Negative stream returns

Precautionary recall

STAY ON STRATEGYTurning the Wheel

STRATEGIC REVIEW

• Optionality

• Portfolio optimisation

• Multi hubs

RENEWED FOCUS ON FOOD SAFETY AND QUALITY

A challenging year…

Background – The year that was

Confidential to Fonterra Co-operative Group Page 7Confidential to Fonterra Co-operative Group

Strategic overview


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


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 estimate1. 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 growthDemand volume Supply volume


Our journey to becoming a globally relevant Co-op


Growth in Consumer and

Foodservice volumes

Value creation by ‘Turning the Wheel’

Drive price achievementin Ingredients

Return on Capital (ROC) > WACC

DIRA

GDT

GDT Surge

Spot

LTSA

Foodservice

Consumer


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

AF15 F16 F17 F18 F19+

Maintain flexibility

Physical trading

GrowWMP futures

volumes


What does this mean for Cold Storage?


V3 & 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


Logistics Network

Fonterra’s logistics network is responsible for storing, moving and shipping:.

Packaging and Ingredients from suppliers through to our NZ-based manufacturing plants Finished goods from NZ-based manufacturing plants through to end customers

Valu

e

Chai

nFo

nter

ra

Logi

stics

Net

wor

k

4


Guiding principles of our future logistics network

The pathway to our future logistics network, is guided by the following key principles:

Consolidating flows into major ports, to attract bigger ships

Optimising our domestic freight network

Enhancing our logistics network’s storage infrastructure

Establishing global connectivity, through international hubs

Developing our future operating capabilities

Leveraging our strategic vendors capabilities

Ensuring sustainable network infrastructure & flows

1

2 3 4

5 6 7


Optimising our asset footprint to support premium growth platforms

NeutralInvest if returns significantly exceed

cost of capital over time

Accelerate Investment

Reduce Grow with Market

Supports Earnings Stability / Growth HighLow

Su

pp

ort

s V

3 S

trat

egy

High

Low

Nutritionals

UHT Mozzarella

Cream Cheese

Butter / AMF WMP / SMP

Natural Cheese

Casein


Foodservice and consumer roll-out

• Launched Anchor™ UHT

• Launched Anmum™ infant formula

• Expansion of Anlene™ in mainland China

• Continued success in Foodservices expansion


In summary

ChinaRussiaMexicoJapan

IndonesiaSaudi Arabia

IraqPhilippines

AlgeriaVenezuela

13.4%12.5%

Confidential to Fonterra Co-operative Group

Thank you.


Supplementary Slides


ChinaChina is a key driver of global dairy markets, and will be a key influencer of long term supply / demand balance and commodity prices

Source: United States Department of Agriculture – Economics, Statistics, and Market Information System

• Demand

• China is a key driver of global dairy markets

– Growing “westernisation” of diet - were China’s dairy consumption per capita to equal that prescribed by FAO, consumption would need to grow an additional 230m tonnes (from ~35m tonnes currently)

– Domestic production growth unable to meet demand. Strong focus on quality and brand following Melamine scandal in 2008

– Imports up 39% for year to February 2014. Mostly WMP (China now accounts for 32% of global WMP imports)

-

5,000.0

10,000.0

15,000.0

20,000.0

25,000.0

30,000.0

35,000.0

40,000.0

- 1,000.0 2,000.0 3,000.0 4,000.0 5,000.0 6,000.0 7,000.0 8,000.0 9,000.0 10,000.0

Milk production, consumption & cow numbers in China: 1996 - 2013

Number of cows Milk production Consumption

Millio

n T

on

ne

s

Millio

ns

Column Regular

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Recent Rabobank analysis estimates supply gap at 10bn litres and growing

• Supply

– NZ largest exporter by some margin

• China nearly 40% of NZ’s total dairy exports (mostly WMP)

• Fonterra establishing “milk hubs” in China. China’s large dairy companies also developing large scale dairy farms in China

– Other large milk producers largely for domestic consumption, with marginal production flowing to export markets (where possible)

• Generally more intensive, grain fed, dairy markets dependent on grain prices to be competitive internationally

• Given size of in-market production in these countries, small shifts can have magnified effect on export market

• EU coming off quotas in 2015 – ramp up in production in Germany, Netherlands, and Ireland expected to hit export markets


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

Confidential to Kotahi Logistics LP.

Supply Chain Collaboration4 July 2014


NEW ZEALAND MARKET“Big Ship” benefits are dependant on:

• Full ships

• Commercialised benefit sharing models

• Port Infrastructure capability

• Consolidated Demand

• Deployment of assets and feasible modes available for consolidation purposes

• Rail versus Road

• Coastal Shipping

Big Ship Benefits• Securing long term direct vessel calls for NZ• 31% Lower carbon emissions per TEU• 25% reduction in operating cost per TEU• Sustainable returns for carriers• Sustainable services for freight owners• Reduced ocean freight pricing over time

Without freight owner/ stakeholder collaboration, there is a risk of an increase in waste and costs across the entire supply chain.

Ship Size

LANDSIDE COSTSwithoutcollaboration

LANDSIDE COSTSwith collaboration

OCEAN COSTS

Tipping Zone

Cost

s per

TEU


Alliances Summary – 3 Co-Dependent Engagements to drive Big ship efficienciesDelivering Value, Control, Traceability and Simplicity to the Finished Goods Supply Chain

3. Timaru Port

1. Maersk Line Ocean Alliance

Big Ship Benefits

Commercial model to share Big Ship Value

Vessel Calls Direct Volume

Commitment to Port Investment

Import/Export Vessel Calls Direct Volume Commitment

Enables Hinterland ExpansionFacilitates Kotahi Commitment

2. Port of Tauranga

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