Fonterra Co-operative Group Limited · NZX:FCG
Fonterra Co-operative — FY2017 Earnings Presentation
45 slides from Fonterra Co-operative's earnings presentation, Sep 25, 2017
Slide 1: Annual Results 2017
Annual Results 2017 OUR POTENTIAL 25 SEPTEMBER 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: Our Co-Operative
Our Co-Operative Confidential to Fonterra Co-operative Group Page 3
Slide 4: Good season for our farmers
Good season for our farmers Return to solid results after two seasons of unusually low milk prices 8.50 Total 7.90 0.10 7.20-7.30 available for 6.37 0.30 6.40 6.52 payout1 6.16 0.27 0.32 0.32 0.40 4.65 4.30 0.25 0.40 6.10 7.60 6.08 5.84 8.40 4.40 3.90 6.12 6.75 2010 2011 2012 2013 2014 2015 2016 201
Slide 5: Milk supply recovering to 2015/16 season levels
Milk supply recovering to 2015/16 season levels 100 • 2016/17 season ended 90 at 1,526m kgMS 80 Volume (m litres/day) • Wet spring conditions 70 offset by stronger autumn production 60 • 2017/18 season 50 forecast volumes of 40 1,575m kgMS, back to 30 Season Total Milk Solids (kgMS) Peak Day Milk mo
Slide 6: Global dairy market – positive outlook with continued balancing of supply and demand
Global dairy market – positive outlook with continued balancing of supply and demand Supply EU Russia China Demand 12 months EU’s largest dairy 12 months production -2% export market – trade imports +9% US Last 3 months +1% embargo remains Last 3 months (Apr, May, Jun) (May, Jun, Jul) +15% 12 months
Slide 7: Dairy prices rose strongly in response over the year
Dairy prices rose strongly in response over the year Improved Farmgate Milk Price put pressure on margins Products informing milk price up significantly Other products up but to a lower degree Whole Milk Powder Cheddar 5,500 6,000 4,500 5,000 +42% +38% 3,500 4,000 2,500 3,000 1,500 2,000 Aug Sep Oct
Slide 8: Globally competitive cash payout
Globally competitive cash payout Driven by strong Co-op and world-class strategy Global milk prices (USD / litre) • 2016/17 $6.12 milk price 0.8 added additional $3 billion into the NZ economy 0.6 • Farmgate Milk Price Manual EU reinforces competitive milk 0.4 EUUS NZ price – FY17: added six cents f
Slide 9: Our Potential
Our Potential Confidential to Fonterra Co-operative Group Page 9
Slide 10: Outlook for dairy remains strong
• Outlook for dairy remains strong Global • Improved prices with positive outlook but volatility will continue Context • Opportunities despite continued geopolitical uncertainty • Strategy delivering – higher milk price and solid profit Value • Demand led-strategy to optimise NZ milk, supported by o
Slide 11: Solid business performance
Solid business performance VOLUME REVENUE NORMALISED EBIT 22.9B LME $19.2B $1,155M 3% 12% 15% RETURN ON CAPITAL1 NPAT EPS ANNUAL DIVIDEND YIELD2 11.1% $745M 46C 40CPS 6.7% Down from 12.4% 11% Stable Ingredients Consumer and Foodservice China Farms Volume (LME)3 21.3 B Volume (LME)3 5.5 B Volume (LME
Slide 12: More volume to higher value
More volume to higher value 1 billion LMEs shifted to Consumer, Foodservice and Advanced Ingredients 1 Optimise DIRA NZ milk Consumer 7% • GDT 3% – Volumes aligned with 2 Build and grow GDT beyond our current 2% lower production consumer positions Foodservice 12% 5% • Ingredients 3 27% 20% Deliver –
Slide 13: Delivery of FY17 strategic priorities
Delivery of FY17 strategic priorities Achievements 1 Optimise NZ milk Optimise Global Operations Production costs lower 2 Deliver sustainable price achievement Advanced Ingredients up 9% Build and grow beyond our current consumer positions 3 Drive Consumer growth strategy Successful Anlene re-
Slide 14: Australia – delivering on our offshore milk strategy
Australia – delivering on our offshore milk strategy Vertically integrated cheese / whey / nutritionals milk pool $200m plus turnaround over two years Growing volume and value in Australia • Right assets ROC (%) – Optimal asset footprint now in place 16 – 50% expansion in Stanhope capacity 12 Today
Slide 15: China opportunity
China opportunity Fonterra well positioned in every segment LME b 2013 TODAY Fonterra Milk Source (%)3 1 Optimise Ingredients NZ milk 8b 8b 80 10 10 2 Build and grow beyond our current 3.5b 3.7b consumer positions 3 Consumer & Foodservice Deliver on Foodservice potential 28b 31b 90 10 4 Grow 0.4b 1.
Slide 16: Beingmate is a key investment
Beingmate is a key investment Challenging last 12 months Strong strategic rationale remains • Regulatory changes 1. Market fundamentals are strong – Long-term, brand rationalisation will benefit 2. Partnership with Beingmate part of a major domestic players larger, profitable Greater China – New reg
Slide 17: Strategy focused on achieving our ambition
Strategy focused on achieving our ambition Three strategic horizons Growth • Creating sustainable SUSTAINABLE CO-OP value for all stakeholders • Investing in INNOVATIVE CO-OP technology and people for the future • Demand-led strategy to STRONG V3 CO-OP optimise NZ milk, supported by milk pools NOW 3
Slide 18: We are embracing tomorrow's innovation in what we do today
We are embracing tomorrow’s innovation in what we do today AGTECH ENERGY & CLEAN FOOD SAFETY & ROBOTICS DIGITAL CONSUMERS OF HYPER- TECH TRACEABILITY LIVING THE FUTURE PERSONALISATION PRECISION ENERGY & BLOCKCHAIN NEW GAMIFICATION DIGITAL FARMING WATER MANUFACTURING RETAIL SUSTAINABLE EFFICIENCY SUS
Slide 19: We have already begun the innovation journey
We have already begun the innovation journey Growth SUSTAINABLE CO-OP DISRUPTIVE INNOVATIVE CO-OP BUSINESS MODELS NEW INNOVATION EXPONENTIAL TECHNOLOGIES DIGITAL TRANSFORMATION PARTNERSHIPS STRONG V3 CO-OP NOW 3 years 5 years 10+ years Page 19 © Fonterra Co-operative Group Ltd.
Slide 20: Velocity and VelocityNXT are very actively adding to our culture and performance
Velocity and VelocityNXT are very actively adding to our culture and performance Velocity New Accountability Entrepreneurship Mindset Bias to action Growth Cash is king Innovation Performance Tangible financial recurring benefits Launched in May this year 3,600+ initiatives completed Hundreds of ide
Slide 21: Our Performance
Our Performance Confidential to Fonterra Co-operative Group Page 21
Slide 22: Value creation
Value creation Solid profit with ongoing financial discipline GROSS MARGIN CAPEX 17.0% $851M RETURN ON CAPITAL Down from 21.1% 10% 11.1% OPEX WORKING CAPITAL $2,370M 75 DAYS 6% 2 days Down from 12.4% NORMALISED EBIT NPAT EPS $1,155M $745M 46C 15% 11% Note: Return on Capital (ROC) excludes goodwill,
Slide 23: Ingredients
Ingredients Return on capital of 10.3% Volume (m LME)¹ Volume • Challenging NZ milk collection profile 22,391 (5%) 21,304 • Lower closing inventory carried into this year • Growth in Advanced Ingredients of 9% (473m LME) Value • NZ Ingredients margins impacted by rising reference product 2016 2017 p
Slide 24: Consumer & Foodservice
Consumer & Foodservice Return on capital of 47.2% Volume (m LME)1 Volume 12% • 576m more LME into higher-value, exceeded 400m target 4,881 5,457 • Foodservice growth of 27% Value • Normalised EBIT growth of 6% – an increase of $34m – Significantly higher earnings in Greater China 2016 2017 – Strong
Slide 25: Consumer and Foodservice
Consumer and Foodservice Significant growth but higher input costs created margin pressure Consumer Foodservice Volume (m LME)1 Volume (m LME)1 3,066 3% 3,147 27% 2,310 1,815 2016 2017 2016 2017 Gross Margin (%) Gross Margin (%) 29% 29% 27% 22% 2016 2017 2016 2017 1. Includes sales to other strategi
Slide 26: Consumer and Foodservice
Consumer and Foodservice Solid performance led by Greater China Asia Greater China Volume Normalised EBIT Volume Normalised EBIT 10% 1,703 244 46% 1,278 1,549 201 209 876 131 2016 2017 2016 2017 2016 2017 2016 2017 Oceania Latin America Volume1 Normalised EBIT Volume Normalised EBIT (5%) 1,834 1,742
Slide 27: Financial discipline
Financial discipline Strength of the balance sheet underpins our Co-op NET DEBT2 DEBT / EARNINGS3 GEARING1 $5.6B 3.5 44.3% Up 2% Up from 2.8x TOTAL EQUITY CREDIT RATING Stable $7.2B A STABLE A- STABLE Up 4% Fitch S&P 1. Gearing ratio is economic net interest bearing debt divided by economic net inte
Slide 28: Financial strength of the Co-op
Financial strength of the Co-op Continued strong balance sheet supports solid credit rating Gearing1 Working capital days2 49.7% 44.3% 44.3% 98 103 39.6% 42.3% 87 77 75 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 Net debt3 Debt / EBITDA ratio4 7,120 5,473 5,601 4.5 4.7 4,467 4,732 3.0 3.5 2.8
Slide 29: Return on capital
Return on capital Comparison to competitors1 Revenue Mix Asset Efficiency Ingredients2 Consumer Total EBIT % Ratio Return on Capital3 4 2015 2016 2017 66% 34% 6.0% 2.5 8.9% 12.4% 11.1% 43% 57% 5.1% 3.2 10.4% 9.9% 8.8% 19% 81% 5.3% 3.0 7.9% 7.5% 7.4% 1. Arla and FrieslandCampina based on FY16 results
Slide 30: Outlook
Outlook Confidential to Fonterra Co-operative Group Page 30
Slide 31: FY18 strategic priorities driving value
FY18 strategic priorities driving value 1 Optimise Protect market share of NZ milk NZ milk Deliver sustainable value creation in NZMP 2 Build and grow Deliver Everyday Nutrition focused growth path beyond our current consumer positions Target positions in Affordable Nutrition 3 Deliver on Fo
Slide 32: Our ambition is on track
Our ambition is on track From (2015) 2016 2017 Ambition Ingredients Ingredients Ingredients $0.7 / LME $0.6 / LME $0.7 / LME Revenue1 Consumer & Foodservice Consumer & Foodservice Consumer & Foodservice $1.2 / LME $1.5 / LME $1.3 / LME $1.2 / LME Gross Margin 17% 21% 17% 20%+ Normalised EBIT $1.0b +
Slide 33: Strong outlook for 2018
Strong outlook for 2018 • Forecast for 2017/18: – A forecast Farmgate Milk Price of $6.75 per kgMS – A forecast earnings performance of 45-55 cents per share – Solid performance, strong Co-op, future-focused strategy • Global supply and demand – Strong global demand – renewed interest in dairy nutri
Slide 34: Supplementary Information
Supplementary Information Confidential to Fonterra Co-operative Group Page 34
Slide 35: Normalised EBIT reconciliation
Normalised EBIT reconciliation Year ended Year ended $ million 31 July 2017 31 July 2016 Profit after tax 745 834 Add: Net finance costs 355 499 Add: Taxation expense 20 98 Total reported EBIT 1,120 1,431 Add: Impairment of assets in Australia - 23 Add: Impairment of Investment in Beingmate 35 - Add
Slide 36: NZ Ingredients product mix
NZ Ingredients product mix Full Year ended Full Year ended Full Year ended Full Year ended 31 July 2017 31 July 2017 31 July 2016 31 July 2016 $ per MT $ per MT Sales volume (000 MT) Reference products 1,841 - 1,920 - Non-reference products 696 - 720 - Revenue ($ million) Reference products 7,846 4,
Slide 37: Asia – Consumer & Foodservice
Asia – Consumer & Foodservice Tough year due to significantly higher input costs Volume (m LME)1 Volume 10% • Growth in Foodservice volumes across region 1,549 1,703 • Successful product launches and campaigns in Sri Lanka Value 2016 2017 • Lower profit but in line with expectations due to increase
Slide 38: Greater China – Consumer & Foodservice
Greater China – Consumer & Foodservice Ongoing growth and profitability with strong Foodservice contribution Volume (m LME)1 Volume 46% • Volume growth driven by Foodservice 1,278 • Category and range expansion in Consumer 876 • Anmum sales volumes up 91% in China Value 2016 2017 • Profit up 60% eve
Slide 39: Oceania – Consumer & Foodservice
Oceania – Consumer & Foodservice Overall higher earnings driven by Australia turnaround Volume (m LME)1 Volume 1,834 (5%) 1,742 • Lower volumes due to sale of businesses and transfer of UHT volumes to Ingredients Value • Australia turnaround now delivering stable, strong earnings 2016 2017 • NZ impa
Slide 40: Latin America – Consumer & Foodservice
Latin America – Consumer & Foodservice Good result in challenging environment Volume (m LME)1 Volume • Strong growth by Soprole in Chile supported by 18% successful product launches and new branding 623 735 • Overall volumes impacted by adverse economic situations in Brazil and Venezuela Value 2016
Slide 41: China Farms
China Farms Significantly improved operating performance Volume (m LME)1 Volume 47% 335 • Increased sales volumes by 47% 229 • First full year of mature operations for both hubs Value • Cash costs reduced by a further 0.21 RMB per litre – a 6% reduction 2016 2017 • Improved performance reflects adop
Slide 42: Diversified and prudent funding position
Diversified and prudent funding position Diversified profile¹ Prudent liquidity Drawn Facilities At 31 July 2017 ($ billion) USD DCM 14% At 31 July 2017 ($ billion) $0.85b 18% Bank Facilities NZD DCM 12% Undrawn 46% Facilities $3.81b EUR/GBP 12% 82% AUD DCM 10% CNY DCM 6% Bank facility maturity prof
Slide 43: Executive rewards
Executive rewards How senior executives’ remuneration packages work VELOCITY HISTORIC FUTURE VLI • LTI is linked to EPS and LTI LTI ROC • VLI was a targeted two- year plan to accelerate STI STI STI and reward the Fonterra business transformation SUPERANNUATION SUPERANNUATION SUPERANNUATION – replaci
Slide 44: Glossary
Glossary Acronyms and Definitions AMF Fluid and Fresh Dairy Regulated Return Anhydrous Milk Fat The Fonterra grouping of skim milk, whole milk and The earnings component of Milk Price generated cream – pasteurised or UHT processed, from a WACC return on an assumed asset base BMP concentrated milk pr
Slide 45: Glossary
Glossary Fonterra Strategic Platforms Ingredients The Ingredients platform comprises bulk and specialty dairy products such as milk powders, dairy fats, cheese and proteins manufactured in New Zealand, Australia, Europe and Latin America, or sourced through our global network, and sold to food produ
Fonterra Co-operative Group — FY2017 Earnings Presentation on 6ix