FONTERRA ANNUAL RESULTS 2013 FONTERRA CO-OPERATIVE GROUP LIMITED 1
John Wilson Chairman 2
Key highlights FARMGATE MILK PRICE $5.84kgMS DIVIDEND 32 cps FINAL CASH PAYOUT $6.16 NET PROFIT EARNINGS PER SHARE DEBT TO DEBT PLUS EQUITY $736m 44 cps 39.6% 3
Cash payout 7.90 0.30 8.62 0.32 6.37 0.27 6.40 0.32 6.16 0.32 (1) 6.10 7.60 6.08 5.84 8.30 2010 2011 2012 2013 2014F Dividend (1) Farmgate Milk Price (2) (1) Cents per share (2) $ per kgms 4
Drought impact on NZ milk supply 2012/13 milk supply Drought Impact Source: Fonterra Co-operative Group Limited 5
Stronger Capital Structure Nov 2012 Mar 2013 Apr 2013 May 2013 Trading Among Farmers launched More flexible contracts for new and growing, farmers 1:40 Bonus Issue Second Supply Offer No drought related capital outflows confirming redemption risk has been removed 6
Theo Spierings CEO 7
Results highlights Volume Volume up in all segments, excluding ANZ Asia/Africa & Middle East - up 11% NZ Milk Products - up 1% Latin America - up 6% GROUP SALES VOLUME 4m MT Australia/New Zealand - down 2% (excluding Norco) Value NPAT of $736m - up 18% Normalised EBIT - down 3% Normalised EPS of 47 1 cps GROUP NORMALISED EBIT $1BN Note 1: Normalised EPS is calculated as net profit after tax attributed to equity holders of the Company, adjusted for normalisation adjustments, divided by the weighted average number of Cooperative shares on issue. The normalisation adjustments are tax effected. 8
NZ Milk Products highlights Normalised EBIT ($m) 501 494 72 246 +1% Volume 1% increase to 2.8 million MT Record volumes in first half, slowed in second half as drought impacted milk supply 422 255 2012 2013 First Half Second Half Note: NZ Milk Products includes Group overhead costs -2% Value Strong performance in the 1 st half 2nd half impacted by the extreme drought Negative impact on product mix due to losses on domestic liquid milk Significant discretionary cost savings 9
NZMP key performance drivers Normalised EBIT ($m) 26 107 49 18 43 501 494 2012 Price Premiums Product Mix Quality Issues Global Sourcing Other/Cost Savings 2013 10
Volatility in prices of powder and non-powder products NZ Milk Products profit impact ($m) 150 100 50 0-50 -100-150 -200-250 -300-350 Aug-08 Feb-09 Aug-09 Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 Feb-13 Aug-13 11
Australia and NZ highlights Normalised EBIT ($m) -2% Volume 1 Lower volumes in Australia due to less private label sales and consolidation of brands 227 142 2012 2013 Note 1: Volume growth after adjusting for the sale of the Norco business. -37% Value NZ brands earnings up slightly Australian brands margins impacted by competitive pressure from retailers Strong competition for milk impacted Australian ingredients margins 12
ANZ key performance drivers EBIT ($m) 37 53 5 227 30 19 142 93 Normalised EBIT 2012 Australia Brands Australia Ingredients NZ Brands & Rural Services Normalised EBIT 2013 Plant Closure Right Sizing Reported EBIT 2013 13
Reshaping our Australian business Tough environment Five key priorities Retailers Intense retailer pressure 1. Streamline brands portfolio 2. Grow everyday nutrition Processors Strong rivalry 3. Expand high-value nutritionals 4. Drive foodservice business Suppliers Aggressive competition for milk supply 5. Reduce cost and complexity 14
Asia/Africa/Middle East highlights Normalised EBIT ($m) +11% Volume Growth driven by Greater China, Indonesia, Malaysia and Vietnam Value 182 209 +16% Asia/AME now our largest consumer business Up 22% in ASEAN/MENA 1 Up 21% in Greater China 1 2012 2013 Note 1: Normalised EBIT measured by constant currency. ASEAN/MENA means Fonterra s business unit that operates in South East Asia, the Middle East and North Africa. There are some countries that fall within the ASEAN/MENA business unit that are located outside these geographical regions such as Sri Lanka and Mauritius. It is part of the Asia/AME reportable segment. 15
Asia/AME key performance drivers Normalised EBIT ($m) +21% 2 +6% 2 +44% 2 +20% 2 182 209 2012 Everyday Nutrition Advance Nutrition 1 1 Foodservice 1 Greater China 2013 Note 1: ASEAN/Mena only Note 2: Year on year percentage change for the category 16
Latin America highlights Normalised EBIT ($m) 132 137 25 54 109 75 2012 2013 Soprole DPA Other +7% +4% Volume Soprole volumes up 4% DPA volumes up 2% Value Soprole s normalised EBIT up 31% Improved earnings from yoghurts Growth in liquid milk and cheese DPA normalised EBIT down 54% Last year included a $19m benefit from review of manufacturing revenue DPA Brazil earnings impacted by currency (but up 9% in local currency) 17
Latam key performance drivers Normalised EBIT ($m) 26 25 9 5 132 137 2012 Soprole DPA Southern Cone Other 2013 18
Working Capital and Cash Flow Working Capital Days 1 Operating & Investing Cash Flow 105 106 98 696 564 688 129 2011 2012 2013 Average working capital days improved by 8 days to 98 days ($400m cash benefit) 2011 2012 2013 Impact of advance rate change Note 1: excluding supplier payables 19
Strong Balance Sheet Debt to Debt Plus Equity 1 41.8% The new capital structure has addressed redemption risk 39.1% 39.6% No drought related capital outflows during the year Change in advance rate schedule had a small impact on the Balance Sheet 2011 2012 2013 Capital expenditure was $925m Note 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). 20
Strategy Update & Outlook 21
Global trends driving demand for dairy Continued rise of emerging markets Nutrition for the old Commodity price volatility Sustainability Nutrition for the young Disruption 22
Good progress on strategy STRATEGIC PATHS PROGRESS Darfield investment & Studholme acquisition EVERYDAY NUTRITION 1 Optimise NZ milk Optimise and drive value add products Strong quality improvement and food safety focus 2 Build and grow beyond our current consumer positions Reshape Australia brands Launch of Anchor UHT in China OUT-OF-HOME 3 Deliver on foodservice potential Asia and China roll-out tracking ahead of plan $100m investment in UHT plant to remove supply constraints ADVANCED NUTRITION 4 Grow our position in Anlene Growing Anlene in China and selected growth markets in South East Asia 5 Develop selected leading position in paediatrics & maternal Pursue Anmum growth in China and Indonesia Higher demand from emerging markets for paediatrics third party manufacturing ENABLERS 6 Selectively invest in milk pools Signed agreements to start second farming hub in China Two farming hubs will produce 300m litres of milk 7 Alignment of business and organisation Support review completed in August Australia rightsizing Investing resources in China expansion 23
Adding value to our NZ milk pool 24
Everyday Nutrition Focus: Fewer, bigger brands Build from the core: butter and cheese Build more FMCG-oriented culture Global Everyday Nutrition Brand Portfolio Crafted Quality Natural Taste Italian Culinary Taste Enhancement Dairy Expert Everyday Affordable & Accessible Local Jewel Emerging Future Global Power Brand Global Power Brand Local Jewels 25
Foodservice Grow our leading positions in key target markets Significant year-on-year growth Annual sales now over $1.3bn Continue to drive growth through: Greater investment in supply capacity Distinctive chef-led solution selling model Product/technology leadership 26
Advanced Nutrition Key focus to develop Anmum in selected markets Market leader in Malaysia Top 3 in Indonesia Build on Anmum s success in Hong Kong and extend further into China Continue to grow Anlene in high calcium category Expand Anlene in China and growth regions in South East Asia 27
Strategy shifts portfolio to higher value add ILLUSTRATIVE ONLY 28
Outlook 2014 Forecast Cash Payout of $8.62 Forecast Farmgate Milk Price of $8.30 Estimated dividend of 32 cps Headwinds for Fonterra Higher input costs make it harder to drive value growth in brands and foodservice in first half Negative impact on product mix margins as milk powder prices significantly outpace cheese and casein prices First half 2014 result will be significantly lower than first half 2013 Prospects for second half look more positive for consumer businesses but remain uncertain for NZ Milk Products Estimated dividend of 32 cps unchanged Fonterra can draw on its Balance Sheet and Cash Flow strength to support estimated dividend, if required Confident in our Volume and Value strategy Difficult to predict when extreme price volatility on product mix will reverse, but expectations are that impact is likely to be short-term Future prospects for dairy and for Fonterra positive - our growth ambitions remain unchanged 29
Supplementary Information 30
Annual results summary Million Year ended 31 July 2013 Year ended 31 July 2012 Change Total Sales Volume (million MT) 3.96 3.94 0% Revenue 18,643 19,796 (6%) Normalised EBIT (NZD million) 1,002 1,028 3% Net Profit After Tax (NZD million) 736 624 18% Earnings per share (cents) 44 41 7% Dividends per share (cents) 32 32 0% 31
Normalisation adjustments Million Year ended 31 July 2013 Year ended 31 July 2012 Costs associated with planned closure of Cororooke site (30) Costs associated with the Group s Strategy Rightsizing (38) Restructuring costs associated with the Group Strategy Refresh (30) Other items 3 (3) Impairment losses recorded in equity accounted investees (8) Total normalised items (65) (41) 32
Reconciliation to Prospective Information $ Million NZMP ANZ Asia/ AME Latam Inter- Segments TOTAL Prospective EBIT 517 201 223 125 (12) 1,054 Adjustments: Changes in Org structure 17 12 (2) 6 1 - Prospective EBIT adjusted Prospective normalisation adjustment 500 213 221 131 (11) 1,054-25 - - - 25 Prospective normalised EBIT adjusted 500 238 221 131 (11) 1,079 Actual EBIT 480 93 207 137 20 937 Actual normalisation adjustments 14 49 2 - - 65 Actual normalised EBIT 494 142 209 137 20 1,002 33
NZMP contribution margin $million Year ended 31 July 2013 Year ended 31 July 2012 Sales Volume (000MT) 2,824 2,790 Gross Margin 1,251 1,285 Selling, marketing and distribution expenses (277) (269) Contribution margin 974 1,016 Contribution margin per MT ($) 345 364 Growth (5%) 34
Whole milk powder and cheese prices Weighted Average USD GDT Cheese Prices vs WMP Prices 5,200 4,900 H2 2013 4,600 4,300 4,000 3,700 H1 2013 Cheese WMP 3,400 3,100 2,800 2,500 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Jul-13 35
NZ Milk Products Sales Volume by Product 2,824 MT 2,790 MT 454 452 72 66 309 301 469 477 489 464 1,031 1030 2013 2012 Whole Milk Powder Skim Milk Powder Cream Cheese Casein Other 36
NZD millions Balance sheet strength Strong Fundamentals Diversified Funding Sources Credit Rating S&P Fitch A+ (stable outlook) AA- (stable outlook) Offshore DCM 30% Bank Facilities 50% Weighted Average Term to Maturity As at 31 July 2013 (Drawn debt) 3.41 years NZ DCM 20% 3,500 3,000 2,500 2,000 Debt Maturity Profile (Year Ending July) Bank Facilities - Total Limits Debt Capital Markets Drawn Facilities $715m 18% Strong Liquidity 1,500 1,000 500 0 Undrawn Facilities $3,289m 82% 37
NZD m Capital Expenditure 1000 900 888 53 925 28 70 800 700 644 22 57 192 144 600 500 400 492 27 13 74 17 135 LATAM Asia/AME ANZ NZMP 300 586 683 200 378 470 100 0 2010 2011 2012 2013 38
Final dividend declared Board declared final dividend of 16 cps Dividend Per Share Full year dividend is 32 cps 32 32 32 Record Date of 10 October 2013 30 Payment Date of 18 October 2013 2011 2012 2013 2014 (estimate) 39