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1 JP Morgan s Agriculture Corporate Access Day David Lord CEO / MD, Warrnambool Cheese and Butter 13 July

2 Presentation Contents Dairy Export Market Outlook Impact of Strong Australian Dollar Domestic Market Overview Implications for WCB 2

3 Dairy Export Market Outlook A second commodity price boom Drivers Low stocks Continuing demand growth Weather related supply issues Rising feed costs Headwinds Market sentiment Chinese demand EU pricing Sth Hemisphere spring flush Japan catastrophe t 3

4 Dairy Export Market Outlook Strong demand on world markets underpinning high commodity prices Global consumption is improving World economy continues to recover Expanding middle class in SE Asia, China and Latin America. India on the longer term radar With imports further boosted by localised events China is buying huge quantities post melamine Russia forced to cover its needs post drought Korea has an FMD problem Indian production not keeping up with growing demand Japan catastrophe stimulating demand North Africa/Middle East wary of civil unrest 4

5 Dairy Export Market Outlook Global demand underwritten by China China: facing a prolonged market deficit: Import preference remains strong Consumers continually face quality issues National inspection and licensing has removed processors and some milk flow Local milk production has fallen Monthly Chinese milk powder imports, Rebuilding supply and the supply chain will take time Costs have increased ,000,000 40,000,000 60,000,000 80,000,000 Source: Chinese customs statistics, CITIC,

6 Dairy Export Market Outlook Russia s ongoing dairy import reliance. Russian dairy imports (excluding Belarus) The #1 global dairy importer Adverse weather events in 2010 Sector development plan in place since 2006 but milk no milk production growth. Local farmgate milk price +60% from 2009 Challenged by informal sector and domestic logistics/infrastructure Increased reliance on Belarus and EU for imported product mln litres LME % Cheese Whey Butter SMP WMP Source: GTIS, Rabobank,

7 Dairy Export Market Outlook Limited impact along supply chain so far Japan is important (but its not China) Impacts of the quake and nuclear crisis are multifaceted Implications for global dairy depend on net impact of these At present it seems likely l that t On a national basis, impacts along the supply chain are not severe Short term: no major short term impact on trade Medium term: Fiscal stimulus may boost import buying Local production reduced & being directed to liquid market 7

8 Dairy Export Market Outlook Supply side is responding as high prices reach the farmgate Producing milk is profitable the world over Though growth will be constrained by deleveraging And input costs will remain high 8

9 Dairy Export Market Outlook Milk growth trends paralleling 2008 Higher commodity prices haveflowed tothethe farmgate Production response slowed by weatherrelated issues EU under quota so have room to move US expanding but facing input cost pressure 9

10 Dairy Export Market Outlook Focus now shifts to Southern Hemisphere Spring flush Figure 2: Milk Production Growth in Key Export Regions Latest month Last 3 months EU 2.7% (Apr) 3.2% US 1.5% (Apr) 1.9% NZ* 31% for 3 months to May 2011 Australia.8% (Apr) 1.3% Argentina 17.7% (Apr) 17.7% Brazil -3.0% (Apr) -1.6% Summer rain has turned NZ season around. Projections for FY12 season of + 5 6% Aust slightly up but slowed due to excessive rains. May have 1 2% growth SUM* 4.3% (Apr) 3.3% (to Apr) Source : Rabo Bank 10

11 Dairy Export Market Outlook US supply response critical to supply balance Net Dairy Trade USA Not the lowest cost but the lowest cost capable of significant expansion 15%ti 1.5% tipped for 2011; bl below 10yr annual growth rate Industry increasing its focus on export opportunities and recognising grewards available offshore Rate of export growth determined by offshore demand/supply gap tres MEQ Thousand lit 1,400,000 1,200,000 1,000, , , , , , ,000 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q ,000 Source: USDEC 11

12 Dairy Export Market Outlook Dairy commodity prices: bullish outlook despite some weakness Prices will eventually come down; but trade will be at elevated levels Commodity prices too far above costs in too many regions Requirements in China will probably stabilise Demand will be slowed by retail price inflation But not fast, and not by as much as 2009 Demand conditions generally sound Lower cost regions remain constrained Costs of production will remain generally high No GFC on horizon 12

13 Impact of a Strong $AUD Consistently high $AUD presents challenges for FX policy AUD/USD Exchange Rates With the exception of 2009, the Australian dollar has undergone a decade of sustained appreciation Sharp rise in the $AUD against the $USD in FY11 (up 27%). For WCB improving export prices and effective hedging have helped offset the impact A consistently high or slowly softening $AUD in FY12 will be a more challenging environment to manage 13

14 $AUD Consensus Outlook Forecast USD/AUD Rates Jun 11 Sep 11 Dec 11 Mar 12 Jun 12 ANZ May 3 NAB May 16 CBA 29 June Average AUD strength forecast to persist for at least another six months Leading economist median at 1.02 by Dec 11 Some economists predicting ongoing support for AUD Source: Financial Review 14

15 Impact of a Strong $AUD Stronger average prices in FY12 will be offset by adverse FX movement 2012 Turnover (USD 300 million) DA 2012 WCB Achieved rate DA Rate ( ) Increase from Achieved to Budgeted rates % increase 9.4% 2012 FX Revenue Impact ($ million) (27.6) Exportcommodity priceshave recovered since 2009 butnot to highsof 2008 WCB expects average international pricing to improve in FY12 versus FY11 average An average FX rate of $1.025 will impact revenues by $27.6 million versus FY11 achieved rate Correlation between bt export commodity prices and AUD is required dto maintain i consistent dairy export returns 15

16 Domestic Market Overview Downward pressure on domestic wholesale prices to continue in FY12 Source: DA Situation & Outlook Report 2011 Private labels continue to grow at expense of proprietary brands Retail sales flat due to cautious household spending and borrowing Price based competition between the two major supermarket chains resulting in deep price reductions Competition also impacting on non grocery channel 16

17 Implications for WCB Diversifying revenues can help counter the commodity cycle 0.5% 2.9% 7.5% H1 FY11 7.9% Commodities 81.2% Consumer Goods Other GOI Joint Venture (incl. services) WCB Japan Joint Venture H1 FY % 21.1% 21.8% 41.5% Earnings from commodity products dominate when international markets are strong. JV s and consumer business units feature strongly when global markets are softer (8.8%) 8%) Dairy commodity revenues up 25.3% due to improved pricing which flows onto higher farmgate prices paid for raw milk Domestic consumer products margins impacted dby higher h input costs. Unable to pass on these costs in a competitive retail market Joint venture contributions improved but overtaken by commodity returns WCB has diversified its income streams to mitigate the impact of trading in volatile International Commodity markets 17

18 Implications for WCB Access to Stable milk supply essential to maximising returns Access to stable and growing milk supply is critical to extract maximum benefit from buoyant commodity markets. WCB sources milk from prime dairying regions in SE Victoria and SE South Australia. SOUTH AUSTRALIA NEW SOUTH WALES Adelaide VICTORIA Melbourne WCB 18

19 Implications for WCB WCB well positioned to benefit from continuing strong market conditions WCB is able to increase production by up to 10% without major capex. WCB is currently implementing growth and value add initiatives o Expansion of Sungold capacity o Capability to produce higher specification powders o Capacity upgrade for Warrnambool branded cheddars at Mil Lel plant Business cases under development on a number of additional i value add projects WCB is a low cost and efficient processor with significant product mix flexibility Manufacturing Scale in cheese, powder and butter plants Unique single site configuration 19

20 Implications for WCB WCB has the Financial capacity to support growth projects WCB s recent financialperformance andsignificant improvement infinancial position allows the business to be ready to take advantage of opportunities. Half Year ended 31 December (A$m) Dec 10 Dec 09 Change Revenue Operating net cash flow Net Cash Flow Net Debt/Net debt plus equity% (61.5) Earnings per share (cents) Net Tangible Assets per share ($)

21 First Half FY11 Highlights Sales Revenue up 24.9% Sales Revenue $254.6 million up $50.8 million or 24.9% International dairy prices up by 36.4%, total volume down by 6.6% Consumer Goods prices steady with volumes up 25.3% NPAT up 309.0% NPAT of $36.4 million up $27.5 million or 309.0% EBITDA $59 million. Operating cash flow $30 million Successful share placement and rights issue that raised a net $35.1m Strategic Initiatives Net debt reduced by $60 million with gearing returning to traditional levels Business improvement projects approved and commenced utilising funds raised in H1 21

22 Conclusion Long term industry conditions remain positive WCB is well placed to benefit 22

23 Questions 23