Fonterra Co-operative Group Limited · NZX:FCG
Fonterra Co-operative — Investor Day (February 2017)
95 slides from Fonterra Co-operative's investor day presentation, February 2017
Slide 1: Fonterra Investor Day – Ingredients Business
Fonterra Investor Day INGREDIENTS BUSINESS FEBRUARY 2017
Slide 2: Disclaimer
Disclaimer This presentation may contain forward-looking statements and projections. There can be no certainty of outcome in relation to the matters to which the forward-looking statements and projections relate. These forward-looking statements and projections involve known and unknown risks, uncer
Slide 3: Contents
Contents Session Objectives Welcome • Purpose Simon Till • Overview of day Ingredients Value Creation • Business overview • Ingredients strategy Lukas Paravicini • Quality of earnings and drivers Regulated Return • Explain Milk Price Model (MPM) • Ability to win/lose against MPM Paul Washer Optimisa
Slide 4: Welcome – Simon Till
Welcome – Simon Till Director Capital Markets Page 4 © Fonterra Co-operative Group Ltd.
Slide 5: Investor Day purpose
Investor Day purpose Ingredients – the engine of Fonterra “Improve understanding of the Ingredients business and key earnings drivers” 1. 1 Value creation framework • The business – Full value chain, optimisation and product mix • Quality of earnings – Regulated return and value-add, key drivers 2.
Slide 6: Ingredients value chain
Ingredients value chain Milk Optimisation Contract Production Shipment Customer Collection Collect milk Optimise Find demand Lowest cost Deliver Supply high from over product mix for for over 30 and highest 2.7 million MT value 10,000 supplier 20 billion litres product groups quality to over 140 pro
Slide 7: Ingredients Value Creation – Lukas Paravicini
Ingredients Value Creation Lukas Paravicini CFO Page 7 © Fonterra Co-operative Group Ltd.
Slide 8: Global scale and leadership
Global scale and leadership Global sales force accessing 140+ countries World’s largest milk processor¹ World’s largest dairy exporter² Fonterra’s % share of global 22 48% Intake (million tonnes) 17 39% 15 14 14 13 exports 12 8 8 8 17% 16% DMK Nestle Friesland Danone Lactalis Arla Foods Dean Foods D
Slide 9: Fonterra has increased the value of New Zealand milk and encouraged volumes to grow
Fonterra has increased the value of New Zealand milk and encouraged volumes to grow Global milk prices (USD / litre) New Zealand versus Australian milk pool (m kgMS) 0.8 2,000 1,800 0.6 1,600 1,400 EU M kgMS 0.4 1,200 1,000 US 800 0.2 600 NZ / Fonterra 0 400 1980 1984 1988 1992 1996 2000 2004 2008 2
Slide 10: Ingredients business is two-thirds of Fonterra's earnings
Ingredients business is two-thirds of Fonterra’s earnings FY16 Normalised EBIT $1.4b $1.2b Farm Source Stores ($1m) Latam Ingredients $18m Australia Ingredients $63m Ingredients $1.2b Consumer & NZ Ingredients $1,140m Foodservice $0.6b China Farms ($0.06b) Group1 ($0.37b) 1. Unallocated costs and el
Slide 11: Value created at each stage
Value created at each stage Milk Optimisation Contract Production Shipment Customer Collection • Collect all milk • Set optimal 18- • Sell to plan • Produce to plan • Store and ship • Payment on month plan and contracted competitive • Capture right to • Generate • In-market earn regulated • Create d
Slide 12: NZ Ingredients earnings significantly exceed Milk Price Model benchmark
NZ Ingredients earnings significantly exceed Milk Price Model (MPM) benchmark Other Gross Normalised FY16 Revenue Milk Cost COGS Margin SG&A EBIT NZ Ingredients 1,583m kgMS Fonterra Total: $11.8b $6.2b $3.9b $1.7b $0.6b $1.14b per kgMS: $7.49 $3.90 $2.49 $1.10 $0.38 $0.72 Milk Price Model 1,566m kgM
Slide 13: Important definitions for New Zealand Ingredients
Important definitions for New Zealand Ingredients Prices Contract Price Price Achievement Base Price Stream Return Reference Weighted average price of Reference Price Price standard specification RCPs on Regulated Return GDT and Spot Milk Price Gap Contract Actual realised selling price of Price Fon
Slide 14: New Zealand Ingredients earnings and drivers
New Zealand Ingredients earnings and drivers Component Definitions Drivers + Earnings component of Milk Price from WACC • WACC rate Regulated (weighted average cost of capital) return on modelled • Fixed asset base (model) Return assets • Actual working capital – RCP sales rate, advance rate • Timin
Slide 15: Regulated Return and Price Achievement and most important earnings buckets
Regulated Return and Price Achievement and most important earnings buckets FY16 New Zealand Ingredients earnings ($m) (435) 650 105 140 1,140 680 Regulated Stream Price Milk Price Other NZ Ingredients Return Return Achievement Gap EBIT Note: Regulated Return is that earned in the FY (based on actual
Slide 16: RCP products make up the bulk of our volume; Non-RCP the bulk of our value
RCP products make up the bulk of our volume Non-RCP products the bulk of our value In FY16, NZ Ingredients manufactured 2.7m MT In FY16, Milk Price Model 72% were RCP products production was 3m MT 2,000 RCP Products1 Non-RCP Products2 2,000 RCP Products1 72% of total 28% of total 100% of total 1,600
Slide 17: Value of Non-RCP comes from higher selling prices relative to RCP
Value of Non-RCP comes from higher selling prices relative to RCP FY16 Revenue Milk Cost Other COGS Gross Margin NZ Ingredients 1,583m kgMS per kgMS: $7.49 $3.90 $2.49 $1.10 Fonterra Non-RCP 423m kgMS per kgMS: $8.46 $4.04 $2.13 $2.30 RCP 1,083m kgMS per kgMS: $5.81 $3.85 $1.38 $0.59 Milk Price Mode
Slide 18: Strong value creation strategy in place
Strong value creation strategy in place Our Vision and Objectives Cash Generators Growth Generators New Business Generators ‘Must do’ ‘Can do’ ‘Want to do’ Source of cash to finance growth Source of future cash Mould-breaking investment opportunities CREATE OPTIONALITY REBALANCE PORTFOLIO MULTI-HUBS
Slide 19: Our multi-hub strategy is already in place
Our multi-hub strategy is already in place Primary investment Complementing our New Zealand Milk Pool • Enable growth of Ingredients business to support customer demand (All) • Secure access for our NZ milk exports (China and Sri Lanka) • De-risk supply for ingredients customers (Australia and Europ
Slide 20: We are rebalancing our New Zealand asset portfolio
We are rebalancing our New Zealand asset portfolio through recent and future investments High Neutral Accelerate Investment (Invest if returns significantly exceed cost of capital over time) UHT Mozz / SOS Specialty & Cream Functional Cheese Proteins Supports V3 Strategy Natural Reduce Grow with Mar
Slide 21: Developing optionality across Ingredients to deliver higher sustainable earnings
Developing optionality across Ingredients to deliver higher sustainable earnings Financial (futures) Higher Sustainable Asset Flexibility Mix Optimisation Markets Earnings New capacity removing Increase our contract book to Made deeper to enable asset That are less volatile and production constraint
Slide 22: Key messages on Ingredients value
Key messages on Ingredients value • Ingredients business is two-thirds of Fonterra’s earnings • Milk Price Model allows us to earn a Regulated Return • Optionality in NZ Ingredients business creates higher earnings than Milk Price Model • Our strategy has increased optionality and quality of earning
Slide 23: Regulated Return – Paul Washer
Regulated Return Paul Washer Director Financial Performance & Planning Page 23 © Fonterra Co-operative Group Ltd.
Slide 24: Milk Price Model & Regulated Return
Milk Price Model & Regulated Return Component Definitions Drivers + Earnings component of Milk Price from WACC • WACC rate Regulated (weighted average cost of capital) return on modelled • Fixed asset base (model) Return assets • Actual working capital – RCP sales rate, advance rate • Timing of sale
Slide 25: Rationale for a Milk Price Model
Rationale for a Milk Price Model • Currently there is no true market for all raw milk Share of New Zealand milk collection 2015/16 produced in New Zealand season¹ • No ‘market price’ for milk collected within Tatua Miraka Synlait 0.8% 1.1% New Zealand 2.9% Other Open Coun 1.3% • Farmgate Milk Price
Slide 26: Milk Price Model follows three basic principles
Milk Price Model follows three basic principles • Farmgate Milk Price methodology is codified in the Farmgate Milk Price Manual • This detailed framework is guided by the Farmgate Milk Price Principles: –1 Should reflect the benefits of scale and other economies enjoyed by Fonterra –2 Should be the
Slide 27: Milk Price Model allows Fonterra to retain specified dollar amount as Regulated Return
Milk Price Model allows Fonterra to retain specified dollar amount as Regulated Return Currently over $600m 2016 Milk Price Model Reference Commodity Products 100% NZD Per kgMS¹ Based on GDT and spot prices of reference commodity Milk Price Revenue $9.1b $5.83 products (RCPs) Combination of actual a
Slide 28: Milk Price Model passes number of risks through to Milk Price but some are carried by EBIT
Milk Price Model passes number of risks through to Milk Price but some are carried by EBIT Drivers of the Milk Price Drivers of the Regulated Return Changes that ‘pass through’ to • Adjusted annually in line with market interest rates and the Milk Price WACC rate funding spreads to government bonds
Slide 29: Milk Price then forms key component of New Zealand Ingredients COGS
Milk Price then forms key component of New Zealand Ingredients COGS Milk Price paid to NZ farmers NZ Ingredients Reference Commodity Products RCPs Non-RCPs Optimisation 100% ~70% ~30% Milk Price Revenue Revenue Revenue Operating and Operating and Milk Price Cash Costs Overhead Costs Overhead Costs R
Slide 30: Key messages on Regulated Return
Key messages on Regulated Return • Fixed dollar amount calculated on annual basis • Variable component linked to actual working capital • Independent of milk volume in given year • Can be offset by pricing risk in product mix decisions Page 30 © Fonterra Co-operative Group Ltd.
Slide 31: Optimisation – Josh Sigmund
Optimisation Josh Sigmund Director NZMP Sales and Transformation Page 31 © Fonterra Co-operative Group Ltd.
Slide 32: Optimisation & Stream Return
Optimisation & Stream Return Component Definitions Drivers + Earnings component of Milk Price from WACC • WACC rate Regulated (weighted average cost of capital) return on modelled • Fixed asset base (model) Return assets • Actual working capital – RCP sales rate, advance rate • Timing of sales` +/-
Slide 33: Fonterra's optimisation process
Fonterra’s optimisation process 18 12 6 1 0 Months Strategic Tactical Operational Strategic Portfolio Management Global Ingredients S&OP1 Manufacturing and Logistics • Group function driven by • Single global S&OP for • Rolling 2-week schedule analysis and scenario-testing Ingredients • Controlled b
Slide 34: Optimisation factors
Optimisation factors 1 Commodity prices / Stream returns 3 New Zealand asset footprint Return ($) 2 Supply 4 Customer demand / contract profile Page 34 © Fonterra Co-operative Group Ltd.
Slide 35: Optimisation allocates the components of milk to the highest value product streams
Optimisation allocates the components of milk to the highest value product streams Whole Milk Fat Mixes, Cream SM Cheese Permeate, SMP Skim Milk Cream Lactose Minerals 0.8% AMF SM Permeate* Standardised Whole Milk Ammix Butter Lactose 4.6% SM Retentate WMP Fritz Butter Buttermilk TMP, MPC, NPN1 0.2%
Slide 36: Fonterra produces and sells three distinct groups of dairy ingredients
Fonterra produces and sells three distinct groups of dairy ingredients Powders Cheese Protein Page 36 © Fonterra Co-operative Group Ltd.
Slide 37: Downstream / by-products are created when we produce any one product
Downstream / by-products are created when we produce any one product Powder Stream — Whole Milk Power Protein Stream — Rennet Casein AMF BMP Butter BMP WPC Lactose Page 37 © Fonterra Co-operative Group Ltd.
Slide 38: We evaluate stream returns fortnightly and optimise our available production
We evaluate stream returns fortnightly and optimise our available production Powder Stream Protein Stream Whole Milk Powder Rennet Casein Base Price $2,800 $7,000 NZD / MT product Variable Cost - 200 - 1,000 NZD / MT product Product Margin $2,600 $6,000 NZD / MT product Yield x 1.75 x 0.36 MT produc
Slide 39: Relative product stream returns provide short and long-term value creation opportunities
Relative product stream returns provide short and long-term value creation opportunities Optimisation allows us to profit from short-term Long-term strategy is to move asset portfolio optionality towards higher returning Non-RCP streams 14% Average: +12c/kgMS 12% Median: +27c/kgMS 10% Stream Return
Slide 40: New Zealand's milk supply profile and our asset footprint provide considerable constraints
New Zealand’s milk supply profile and our asset footprint provide considerable constraints NZ Total Factory Capacity Peak Plants run at maximum capacity Year 1 Year 2 Year 3 Optionality in the shoulders of the season New Zealand asset base Page 40 © Fonterra Co-operative Group Ltd.
Slide 41: Current footprint allows flexibility between RCP and Non-RCP product streams
Current footprint allows flexibility between RCP and Non-RCP product streams Production capacity by commodity group Production capacity by RCP and Non-RCP Non-RCP production range of approximately 25% to 45% Other MPC Casein Non-RCP Cheese RCP SMP WMP North Island South Island NZ North Island South
Slide 42: Committed volumes impact flexibility but offer incremental value
Committed volumes impact flexibility but offer incremental value 100% 80% Optimisable Demand % of Demand 60% 40% GDT 20% Committed Demand Contracted Demand 0% 1 2 3 4 5 6 7 8 9 10 11 12 Month Note: Numbers are for illustration purposes and do not reflect actuals Page 42 © Fonterra Co-operative Group
Slide 43: Key messages on Optimisation
Key messages on Optimisation • Drives product mix • Maximises for total shareholder value – Milk Price and EBIT combined • Based on projected demand at forecast prices • Constrained by milk supply and asset footprint • Creates potential (positive or negative) stream return risk • Long-run prices fav
Slide 44: Global Operations – Robert Spurway
Global Operations Robert Spurway COO Global Operations Page 44 © Fonterra Co-operative Group Ltd.
Slide 45: Operations and Milk Price Gap
Operations and Milk Price Gap Component Definitions Drivers + Earnings component of Milk Price from WACC • WACC rate Regulated (weighted average cost of capital) return on modelled • Fixed asset base (model) Return assets • Actual working capital – RCP sales rate, advance rate • Timing of sales` +/-
Slide 46: Global Operations expertise from grass-to-glass
Global Operations expertise from grass-to-glass End-to-end control of our products Over 10,000 suppliers Fonterra vats: 14 depots 96 primary plants across 4.5 million cows 2.4 million farm 506 tankers 33 site locations 20 billion litres collections 95 million kilometres 2.7m MT of product Kotahi Mae
Slide 47: Supporting all parts of Fonterra business
Supporting all parts of Fonterra business CONSUMER FOODSERVICE STRATEGY STRATEGY GLOBAL ENHANCING INGREDIENTS OUR STRATEGY REPUTATION Page 47 © Fonterra Co-operative Group Ltd.
Slide 48: Partner in the delivery of our Ingredients strategy
Partner in the delivery of our Ingredients strategy To be the #1 preferred supplier of dairy Global Operations strategy connection ingredient solutions Consolidating our #1 dairy ingredients reputation Globally Optimised, Multi-hub, Multiple sources through foundations of trust in source, delivery p
Slide 49: Production spread across different product groups
Production spread across 10 different product groups In FY16, NZ Ingredients manufactured 2.7m MT In FY16, Milk Price Model 72% were RCP products production was 3m MT 2,000 RCP Products1 Non-RCP Products2 2,000 RCP Products1 72% of total 28% of total 100% of total 1,600 1,600 1,200 1,200 kMT kMT 800
Slide 50: Majority of costs in primary processing and storage
Majority of costs in primary processing and storage $0.4b $1.9b $0.7b $0.2b $0.5b $3.7b Direct manufacturing Secondary Total Global Shared Shipping Milk collection and domestic supply processing / Operations services costs chain cost other costs $1.28 / kgMS $2.47 / kgMS • Collecting raw • Fixed cos
Slide 51: Gap to Milk Price Model is driven by production of Non-RCPs and higher storage costs
Gap to Milk Price Model is driven by production of Non-RCPs and higher storage costs $1.9b $3.7b Direct manufacturing Secondary Total Global Shared Shipping Milk collection and domestic supply processing / Operations services costs chain cost other costs $1.28 / kgMS $2.47 / kgMS RCPs $1.03 / kgMS 1
Slide 52: Performance focus is on balancing customer service and lower unit costs
Performance focus is on balancing customer service and lower unit costs while mitigating risks Manufacturing costs Key risks Ingredient variable costs / kgMS manufactured Peak milk costs ($m) 75 $0.90 $0.96 $0.96 $0.91 59 $ 0.78 13 0 FY12 FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16 Ingredient fixed cost
Slide 53: Capital plan is driven by asset portfolio strategy
Capital plan is driven by asset portfolio strategy High Neutral Accelerate Investment (Invest if returns significantly exceed cost of capital over time) UHT Mozz / SOS Specialty & Cream Functional Cheese Proteins Supports V3 Strategy Natural Reduce Grow with Market cheese (Allocation) Butter / AMF W
Slide 54: Passed period of significant capacity spend and now focusing on higher return on capital
Passed period of significant capacity spend and now focusing on higher return on capital investments 900 800 Waitoa UHT 700 600 $ million 500 400 300 Slice-on-Slice 200 100 0 FY15 FY16 FY17 CIP Kitchen Capacity Stay in business Enviromental / Food Safety Investing for Returns Page 54 © Fonterra Co-o
Slide 55: Key messages on Global Operations
Key messages on Global Operations • Manufacture according to optimal plan • Focus on gap to Milk Price Model but strategic decisions to take on more cost in order to produce Non-RCPs or add value to RCPs • Key value drivers are efficiency, service, quality, and asset footprint • Future investments a
Slide 56: NZMP – Kelvin Wickham
NZMP Kelvin Wickham COO NZMP Page 56 © Fonterra Co-operative Group Ltd.
Slide 57: NZMP Sales and Price Achievement
NZMP Sales and Price Achievement Component Definitions Drivers + Earnings component of Milk Price from WACC • WACC rate Regulated (weighted average cost of capital) return on modelled • Fixed asset base (model) Return assets • Actual working capital – RCP sales rate, advance rate • Timing of sales`
Slide 58: NZMP is the leading player in the globally traded dairy market
NZMP is the leading player in the globally traded dairy market New Zealand Globally Traded Dairy Market1,3 Formal Dairy Market2,3 • Significant participant in • Global export/import market • Reflects total dairy demand tradable market • Informs Farmgate Milk Price 21b L 66b L 415b L 25b L 2% growth
Slide 59: Volatility is here to stay
Volatility is here to stay 6,000 200 5,000 150 4,000 Import Volume (000 MT) 3,000 100 USD/MT 2,000 50 1,000 0 - 5/01/1997 5/01/1999 5/01/2001 5/01/2003 5/01/2005 5/01/2007 5/01/2009 5/01/2011 5/01/2013 5/01/2015 NZ WMP price ($/MT) Crude oil price ($/MT) WMP Imports1 1. China, Algeria and Venezuela
Slide 60: NZMP – ingredients business with global reach
NZMP – ingredients business with global reach Our major hubs and sales offices are close to our customers NZ & Australia Ingredients Sales Volumes North Asia Greater China 630K 161K Europe MT MT 778K & MEA Russia MT 18% 2% Netherlands 43% 17% Canada France USA Americas 22% 4% Egypt China Japan Alger
Slide 61: We have a long history of developing products and markets
We have a long history of developing products and markets Whole milk powder Protein for into Venezuela sports drinks 2000s 1990s 1980s 1970s Technical sales Specialty proteins at scale delegations to China Mozz cheese technology Functional proteins for Mechanise casein bars production 1960s Page 61
Slide 62: Five strategic pathways to drive sustained value creation
Five strategic pathways to drive sustained value creation Top quartile engagement Committed Sales & marketing capability build Teams Global milk pools Global supply chain Segmentation and value and logistics hubs Connecting Customer propositions Customer-led Our World Leadership Customer plans opera
Slide 63: Investing in our People and Processes
Committed Investing in our People and Processes Teams 1 Sales & Marketing Capability 2 Customer-central Roadmap 3 Integrated Business Planning 4 SmartPrice Data feed Segmentation Scientific Analytics and Price Guidance SmartPrice Page 63 © Fonterra Co-operative Group Ltd.
Slide 64: Customer segmentation – targeted value propositions
Customer segmentation – targeted Customer value propositions Leadership Customers Volume Price Achievement 0% 20% 40% 60% 80% 100% Partners Priority Value Resellers SmartServe Page 64 © Fonterra Co-operative Group Ltd.
Slide 65: Five focus categories to drive future differentiation
Five focus categories to drive future Category differentiation … Solutions … and develop solutions with a segmented customer base Consumer Powders Dairy Beverages Dairy Foods Active Nutrition Paediatrics Definition Powders supplied to Dairy/non-dairy Foods that use dairy Category covering Dairy nutr
Slide 66: Unlocking value through Central Portfolio Management
Unlocking value through Central Portfolio Central Portfolio Management Management Sales Book Management Arbitrage Customer PRM Solutions Monetising Optionality • Sales tactics • Tariff efficiency across • Spread between buy- • Asset flexibility global milk pools side and sell-side • Monetising insig
Slide 67: Enabled by the continued development in our supply chain
Enabled by the continued development in Connecting our supply chain Our World US Europe Whey Pools Whey and lactose partnership supports our whey Multi-origin whey sourcing options increases portfolio and provides lactose for standardisation supply optionality and supply security; giving us in New Z
Slide 68: Examples of delivering solutions for our customers to build sustainable premiums
Examples of delivering solutions for our customers to build sustainable premiums Tailored Whey Offering Cheese Innovation Whey innovation for sports nutrition with leading Japanese New affordable cheese formulation with increased ‘stretch’ dairy company – backed by multi-origin sourcing options for
Slide 69: Strong ability to capture premiums over time
Strong ability to capture premiums over time Price Achievement (US$m) Actual 500 460 480 Forecast 434 450 FY15 FY16 FY17 FY18 FY19 Actuals (NZ$) $550m $650m Page 69 © Fonterra Co-operative Group Ltd.
Slide 70: Key messages on NZMP
Key messages on NZMP • Global sales network and well established customer base • Proven track record navigating volatility, building markets and innovation • Earning premiums for product and service differentiation above reference prices • Focused investment in innovation, capability and services to
Slide 71: Fonterra Strategy – Theo Spierings
Fonterra Strategy Theo Spierings CEO Page 71 © Fonterra Co-operative Group Ltd.
Slide 72: On track to meet our 2025 ambition
On track to meet our 2025 ambition Page 72 © Fonterra Co-operative Group Ltd.
Slide 73: Delivering our strategy
Delivering our strategy Volume to higher Value at Velocity FY16 result 1 Optimise DIRA • GDT volume lower NZ milk Consumer 31% • Ingredients 2 Build and grow 5% beyond our current GDT – Optionality improved mix consumer positions Foodservice 12% 2% 24% – Ingredients solutions for 3 Deliver 15% 20% c
Slide 74: Strategic planning cycle
Strategic planning cycle STRATEGIC STRATEGIC STRATEGIC ANALYSIS CHOICES IMPLEMENTATION Define and Define and Define and disaggregate disaggregate disaggregate 3 1 3 1 3 1 Synthesise Analyse Synthesise Analyse Synthesise Analyse 2 2 2 Identify the key questions and Make choices on adjustments to Iden
Slide 75: Food has a massive global economic, social and environmental footprint
Food has a massive global economic, social and environmental footprint… Global dairy industry supports Family of 40% 1 30,000 Global employment billion livelihoods 1 billion consumers 25% 10% NZ exports Consumer spending 133 $12 billion into the million farms New Zealand NZ$8 trillion economy Page 7
Slide 76: The productivity and climate challenge
The productivity and climate challenge • Dairying is 20% of all global agricultural land • Today farmers grow 5-6 times the amount of produce from the same hectare of land as 100 years ago BUT… Post-war era Today Tomorrow 3-4% <1% 2-3% ? • Global productivity growth of food production was 3-4% annua
Slide 77: Resurgent nationalism brings uncertainty
BREXIT Resurgent TURKEY nationalism brings CHINA uncertainty RUSSIA USA Page 77 © Fonterra Co-operative Group Ltd.
Slide 78: Global mega trends and social responsibility influence our choices
Global mega trends and social responsibility influence our choices • Climate change working against future • Resurgence of nationalism brings of food uncertainty • Food production contributes 30% of Nationalism • Protectionism threatens global trade global greenhouse gas emissions • Volatility in co
Slide 79: Strategic planning cycle
Strategic planning cycle STRATEGIC STRATEGIC STRATEGIC ANALYSIS CHOICES IMPLEMENTATION Define and Define and Define and disaggregate disaggregate disaggregate 3 1 3 1 3 1 Synthesise Analyse Synthesise Analyse Synthesise Analyse 2 2 2 Identify the key questions and Make choices on adjustments to Iden
Slide 80: Our strategic choices are anchored by our beliefs and assessed through commercial filters
Our strategic choices are anchored by our beliefs and assessed through commercial filters Beliefs Filters Dairy is demand-led Strategic Return on Relevance Capital NZ milk can sustainably grow at 2-3% p.a. Market Ability to Offshore milk is needed to Potential Win meet demand Page 80 © Fonterra Co-o
Slide 81: Strategy house
Strategy house Our Purpose & Values Cash Generators Growth Generators New Business Generators Group Themes “Must Do” “Can Do” “Want to Do” 1 Optimise Everyday NZ milk How and where do we use Are we capturing maximum What are the best long term NZMP to seed Consumer 2 stream returns? uses for each Mi
Slide 82: Strategic choices
Strategic choices V3 Strategy Future Growth Platforms Sustainable ‘Cash’ and ‘Growth’ ‘Growth’ and ‘New Business’ Long-term Model • Market / Product • Innovation • Future of Food Scope Selection • Disruption • Future State Operations • Commercial Models • Technology • Consumer of the Future • Growth
Slide 83: Strategic planning cycle
Strategic planning cycle STRATEGIC STRATEGIC STRATEGIC ANALYSIS CHOICES IMPLEMENTATION Define and Define and Define and disaggregate disaggregate disaggregate 3 1 3 1 3 1 Synthesise Analyse Synthesise Analyse Synthesise Analyse 2 2 2 Identify the key questions and Make choices on adjustments to Iden
Slide 84: Ingredients strategy in place and underway
Ingredients strategy in place and underway Financial (futures) Higher Sustainable Asset Flexibility Mix Optimisation Markets Earnings New capacity removing Increase our contract book to Made deeper to enable asset That are less volatile and production constraints reduce demand constraints flexibilit
Slide 85: Consumer & Foodservice strategy delivering higher incremental returns
Consumer & Foodservice strategy delivering higher incremental returns … by focusing on key …enabled by our current and …commercially delivered …focused on benefit platforms… future core strengths… through 8 big plays 4 + 4 Markets BENEFIT PLATFORMS TECHNICAL DIFFERENTIATORS 8 BIG PLAYS Energy Consum
Slide 86: Supplementary Slides
Supplementary Slides Confidential to Fonterra Co-operative Group Page 86
Slide 87: Gross Margin composition in FY15
Gross Margin composition in FY15 FY15 Revenue Milk Cost Other COGS Gross Margin NZ Ingredients 1,554m kgMS per kgMS: $8.43 $4.75 $2.73 $0.95 Fonterra Non-RCP 395m kgMS per kgMS: $9.24 $5.57 $1.94 $1.73 RCP 1,092m kgMS per kgMS: $6.79 $4.50 $1.57 $0.72 Milk Price Model 1,614m kgMS per kgMS: $6.53 $4.
Slide 88: Ingredients business with global reach
Ingredients business with global reach Leadership position in key product portfolios Global Ingredients FY16 Sales Profile and Greater China Estimated Fonterra Share of Region’s Dairy Imports WMP 61% SMP 56% Europe MEA Butter 49% AMF 83% WMP 41% Cheese 22% SMP 11% Protein 3% Butter 25% AMF 58% North
Slide 89: Example NZMP products
Example NZMP products Consumer Powders Dairy Beverages Dairy Foods Active Nutrition Paediatrics Products • WMP (Instant, Reg • UHT WMP • Mozzarella • WPC/WPI • IF, FO & GUMP etc.) • MPC • Natural Cheese • MPC (70, 85, base powders • Instant SMP • SMP (Reg & UHT) (Edam, Gouda, functional) • Paediatri
Slide 90: Appendix – Milk Price Model
Appendix Milk Price Model Confidential to Fonterra Co-operative Group Page 90
Slide 91: Milk Price Model – building blocks
Milk Price Model – building blocks Assumes all milk collected in a season is processed into a Reference Commodity Product (RCP) • Allocation of milk to product streams broadly matches Fonterra Revenue • Sales phasing aligns to Fonterra, and contract phasing broadly aligns • Lactose for standardisati
Slide 92: Milk Price Model – detailed P&L
Milk Price Model – detailed P&L Milk Price Model (NZD $m) 2016 2015 2014 Million kgMS 1,566 1,614 1,584 Net Revenue 8,832 9,937 16,834 Milk Cost (6,101) (7,096) (14,151) Cash Costs (1,815) (1,889) (1,819) Depreciation (266) (263) (250) Regulated Return (EBIT) 650 689 614 WACC – fixed assets (407) (3
Slide 93: Milk Price Model – components
Milk Price Model – components (0.68) Page 93 © Fonterra Co-operative Group Ltd.
Slide 94: Milk Price Model – cash costs assumptions
Milk Price Model – cash costs assumptions Milk • Fonterra’s collection cost Collection • Manufacturer’s specifications of resource Factory usages (energy, labour, losses) for modern powder plants, but Fonterra’s unit costs Cash Costs • Bought-in lactose for powder Lactose standardisation • Reflect a
Slide 95: Milk Price Model – capital charge
Milk Price Model – capital charge • Fixed asset base reflects: – Manufacturer’s costs for ‘standard’ 2.5m litres per day milk powder plants – Other assets based on Fonterra replacement costs – WACC charge and depreciation allowed for in respect of fixed assets – Working capital requirements over the
Fonterra Co-operative Group — Investor Day (February 2017) on 6ix