Fonterra Co-operative Group Limited · NZX:FCG

Fonterra Co-operative — FY2015 Earnings Presentation

37 slides from Fonterra Co-operative's earnings presentation, September 2015

1. Slide 1: 2015 Annual Results

   2015 ANNUAL RESULTS SEPTEMBER 2015 JOHN WILSON, CHAIRMAN THEO SPIERINGS, CEO LUKAS PARAVICINI, CFO

2. Slide 2: Forward Looking Statements

   Forward Looking Statements This presentation contains forward looking statements, and forecasts, including statements of current intention, statements of opinion and predictions as to possible future events. Such statements are not statements of fact and there can be no certainty of outcome in relat

3. Slide 3: John Wilson – Chairman

   JOHN WILSON – CHAIRMAN Page 3 © Fonterra Co-operative Group Ltd.

4. Slide 4: A Tough Season for Farmers

   A TOUGH SEASON FOR FARMERS 8.50 7.66 7.90 6.40 6.16 0.10 0.07 6.37 0.30 5.20 0.27 0.32 4.46 0.32 4.65 0.48 0.25 0.59 3.87 7.59 4.72 6.10 7.60 6.08 5.84 8.40 4.40 2007 2008 2009 2010 2011 2012 2013 2014 2015 Farmgate Milk Price¹ Dividend² Final Cash Payout – three-year rolling average³ 1. Farmgate Mi

5. Slide 5: Challenging Year Globally

   CHALLENGING YEAR GLOBALLY Economic and Dairy supply/demand Fall in dairy prices geopolitical issues imbalance 6,000 USD per MT Whole Milk Powder • China Slowdown • Eurozone Demand 4,000 • Oil and mineral prices Supply 2,000 • Russian embargo • ISIS Middle East 0 Jan-14 Jul-14 Jan-15 Jul-15 • Forecas

6. Slide 6: Dairy Supply / Demand Imbalance

   DAIRY SUPPLY / DEMAND IMBALANCE Supply Russia EU China Demand EU’s largest dairy Year to date Year to date % export market -21% US production +1 Trade embargo remains imports Year to date production +1% Asia (excl China) Year to date imports +14% Middle East & Africa New Zealand Year to date Fonterr

7. Slide 7: Key Drivers of Milk Price

   KEY DRIVERS OF MILK PRICE Revenue, cash costs and capital costs 12.00 • Revenue has been volatile 10.00 • Dairy prices 8.00 $ per kgMS • Currency (FX) 6.00 • Costs relatively stable 4.00 • Cost of capital 2.00 • Operating costs 0.00 2011 2012 2013 2014 2015 Revenue Cash and Capital Costs Farmgate Mi

8. Slide 8: Milk Price Revenue

   MILK PRICE REVENUE Dairy price volatility has had a significant impact on Milk Price Dairy Prices (USD per MT) Dairy Prices 6,000 • Significant volatility 2012 WMP Price USD/MT to 2015 4,000 • WMP prices fell 44% in last 2,000 12 months 0 Exchange Rate Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-1

9. Slide 9: Milk Price Costs

   MILK PRICE COSTS Stable total cost base Milk Price Cost of Capital Milk Price Cost of Capital • Capital costs are lower 8.5% 7.7% 7.4% 6.8% reflecting lower cost of debt 6.1% • Benefited milk price by 15 cents per kgMS or $240 million to milk price in 2015 vs. 2011 2011 2012 2013 2014 2015 Milk Pric

10. Slide 10: We Responded by Drawing on Our Co-op Strengths

    WE RESPONDED BY DRAWING ON OUR CO-OP STRENGTHS • Supporting farmer cash flows through timing of advance rate ($900 million) • Farm Source benefits – 6-month extended credit at Fonterra Farm Source stores – $4 million of Fonterra Farm Source rewards dollars taken up by 9,000 farmers – Compliance reli

11. Slide 11: 2016 Outlook

    2016 OUTLOOK • The 2015/16 pay-out: – A forecast Farmgate Milk Price of $4.60 per kgMS – A strong forecast EPS performance of 40-50 cps • In addition 50 cents per kgMS loan to support farmers¹ • Global markets remain volatile and difficult to forecast milk price early in season • Capex for the 2016

12. Slide 12: Theo Spierings – CEO

    THEO SPIERINGS – CEO Page 12 © Fonterra Co-operative Group Ltd.

13. Slide 13: Strong Rebound in Profitability

    STRONG REBOUND IN PROFITABILITY VOLUME¹ REVENUE² NORMALISED EBIT 4.3M MT $18.8BN $974M 9% 15% 94% NET PROFIT AFTER TAX DIVIDEND PER SHARE RETURN ON CAPITAL³ $506M 25 CPS 8.9% 183% 150% Ingredients Consumer and Foodservice International Farming Volume 3.0m MT Volume⁵ 1.7m MT Volume 0.2m MT Normalised

14. Slide 14: Strengthening of Performance in the Second Half

    STRENGTHENING OF PERFORMANCE IN THE SECOND HALF Volume¹ (000 MT) Normalised EBIT ($m) 4,303 974 3,965 2,114 598 1,977 503 100 1,988 2,189 403 376 2014 2015 2014 2015 First Half Second Half First Half Second Half 1. Volume includes 324,650 MT from DPA consolidation. Excluding this, volume increased 0

15. Slide 15: Strategic Investments for the Future

    STRATEGIC INVESTMENTS FOR THE FUTURE Led to higher financing costs New Zealand $900m China Other Advance Offshore rate timing $750m Incremental debt Beingmate $450m Accelerated Additional $360m Capacity financing $690m China Farms • Pahiatua costs of Depreciation • Edendale 6 cps and retained Essent

16. Slide 16: Lukas Paravicini – CFO

    LUKAS PARAVICINI – CFO Page 16 © Fonterra Co-operative Group Ltd.

17. Slide 17: Profit Available for Dividend

    PROFIT AVAILABLE FOR DIVIDEND Total Dividend of 25 cents per share Profit Available for Dividend Non Cash Adjustments 100 (427) 974 (26) 621 (138) (77) 60 466 Normalised DPA Interest Other Adjusted Financial Australia DPA & Profit EBIT NPAT Instruments YDD Hyperinflation to Shareholders Cents per Sh

18. Slide 18: Ingredients

    INGREDIENTS A solid result driven by New Zealand ingredients Normalised EBIT¹ ($m) • NZ ingredients: Volume $264 million gross margin higher -2% 973 – Improved stream returns Normalised – Optimised product mix to pricing 679 EBIT Growth – Lower peak costs 674 +43% 387 • Australian ingredients: ($92)

19. Slide 19: New Zealand Ingredients

    NEW ZEALAND INGREDIENTS Solid performance over last 5 years¹ Gross Margin ($ per MT) 530 454 461 443 $ per MT 366 2011 2012 2013 2014 2015 Normalised EBIT² ($ million) 699 501 $ million 494 420 280 2011 2012 2013 2014 2015 1. Comparatives reflect business structures at the time and have not been res

20. Slide 20: Consumer and Foodservice

    CONSUMER AND FOODSERVICE Strong volume and margin growth Volume (m LME)1 • Asia and Greater China – record performance 4,501 • Lower input costs for NZ sourced product +14% 3,934 • Australia margins impacted by yoghurt and dairy desserts • Solid performance from Latin America 2014 2015 • Return on C

21. Slide 21: Asia Consumer and Foodservice

    ASIA CONSUMER AND FOODSERVICE Record Performance Volume (m LME) Volume 1,558 • Sri Lanka recovery grew volumes 1,234 +26% • Foodservice growth of 11 per cent – Targeting Italian kitchen and Asian bakeries 2014 2015 – Growth in butter and UHT Normalised EBIT ($m) Value 202 • Pricing strategy delivere

22. Slide 22: Latin America Consumer and Foodservice

    LATIN AMERICA CONSUMER AND FOODSERVICE Solid growth in normalised EBIT Volume (m LME) Volume +18% 603 • Consolidation of DPA 511 • New products launched in Brazil • Increased consumer prices in Chile 2014 2015 Normalised EBIT ($m) Value +17% 110 • Driving market share through product innovation 94 •

23. Slide 23: Oceania Consumer and Foodservice

    OCEANIA CONSUMER AND FOODSERVICE Progress in Australian reshape and driving product innovation in NZ Volume (m LME) Volume -1% • Lower volume in NZ due to UHT production 1,760 1,749 moving into ingredients • Australian domestic foodservice up 10 per cent 2014 2015 Normalised EBIT ($m) Value 51 • Gro

24. Slide 24: Taking Decisive Steps to Turnaround Australian Performance

    TAKING DECISIVE STEPS TO TURNAROUND AUSTRALIAN PERFORMANCE Review Fix leaks Improve Transform Portfolio Business   In progress In progress A profitable business • Multi-hub strategy • Maintained milk • # 1 supplier • END GAME • Integrated model supply Coles/Woolworths • A Profitable • Cheese/whey/

25. Slide 25: Greater China Consumer and Foodservice

    GREATER CHINA CONSUMER AND FOODSERVICE Record Performance Volume (m LME) Volume 591 • Growth driven by foodservice and Anchor™ +38% 429 • Foodservice business rolled out to 13 new cities to total of 40 2014 2015 Normalised EBIT ($m) Value +463% 45 • Lower inputs costs improved margins • Distribution

26. Slide 26: International Farming

    INTERNATIONAL FARMING Important part of our strategy to build an integrated dairy business in China Ying Hub in Ying County Capacity 200 million litres Yutian Beijing (玉田) Milking cows 7,000 (北京市) Normalised EBIT ($44m) Young stock 13,400 Ying Hangu Yield 28.5 litres per (应县) Hebei (汉沽) • Chinese mi

27. Slide 27: Operating Expenses Controlled

    OPERATING EXPENSES CONTROLLED Growing at a slower rate than milk collection NZ Milk Solids collected Operating Expenses¹ • Higher operating (m kgMS) ($m) expenses of $177m in 2015 comprise: 4.6% 3.0% 1,614 – One-off costs of 1,584 2,387 $100 million relating to yoghurt and dairy 1,493 1,463 2,238 2,

28. Slide 28: Financial Strength and Discipline

    FINANCIAL STRENGTH AND DISCIPLINE Working Capital Days Gearing 105 106 103 49.7% 3.3% 46.4% 98 39.6% 42.3% 87 2011 2012 2013 2014 2015 2013 2014 2015 Advance 2015 Rate Adjusted Timing¹ $900m Strong fundamentals Fitch AA- (stable outlook) Credit Rating S&P A (credit watch) Debt Weighted Average As at

29. Slide 29: Diversified and Prudent Funding Profile

    DIVERSIFIED AND PRUDENT FUNDING PROFILE Diversified profile¹ Prudent liquidity USD DCM 16% Drawn Facilities Bank $1.7bn Facility NZD DCM 14% 35% Undrawn 47% Facilities $3.2.bn AUD DCM 11% 65% CNY DCM 7% GBP DCM 6% Bank facility maturity profile² DCM maturity profile³ At 31 July 2015 ($ billion) At 3

30. Slide 30: Theo Spierings – CEO

    THEO SPIERINGS – CEO Page 30 © Fonterra Co-operative Group Ltd.

31. Slide 31: Drive Performance

    DRIVE PERFORMANCE Shifting volume to higher value 1 CAGR Optimise (FY14-FY18) NZ milk 3% 13% GDT -2.4% 2 Build and grow Ingredient Sales +4.9% 3% beyond our current 12% 23% consumer positions Foodservice +16.3% 3 3% 10% 12% 28% Deliver Consumer +8% on Foodservice potential 7% 30% 4 6% Grow Total FY1

32. Slide 32: On-going Transformation

    ON-GOING TRANSFORMATION CASH + MINDSET = PERFORMANCE Page 32 © Fonterra Co-operative Group Ltd.

33. Slide 33: Business Transformation

    BUSINESS TRANSFORMATION Recurring and one-off savings building over 24 months Transformation Scope Cash Impact  Sales mix / pricing  Operations  Milk Price  Procurement  Earnings  Total Shareholder  Supply Chain Returns  Balance Sheet  Overheads  Working Capital  Cash flow  Capex Page 33

34. Slide 34: Executing Our Strategy to Deliver Superior Performance

    EXECUTING OUR STRATEGY TO DELIVER SUPERIOR PERFORMANCE From (2015) Ambition $0.8 / LME $1.2 / LME Revenue $10 / kgMS $14 / kgMS Gross Margin 17% 20%+ Normalised EBIT $974m 50%–100% uplift Return on Capital 8.9% 11%–13% Gearing¹ 45%–50% 40%–45% 1. Fonterra’s target is to maintain its strong investmen

35. Slide 35: Stronger Together

    STRONGER TOGETHER Page 35 © Fonterra Co-operative Group Ltd.

36. Slide 36: Supplementary Slide

    SUPPLEMENTARY SLIDE Page 36 © Fonterra Co-operative Group Ltd.

37. Slide 37: Normalisation Adjustments

    NORMALISATION ADJUSTMENTS Year ended Year ended $ million 31 July 2015 31 July 2014 Total EBIT 942 503 Gain on Latin America strategic realignment (129) - Impairment of assets in Australia 108 - Restructuring and redundancy provisions 33 - Time value of options 20 Total normalisation adjustments 32

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