Fonterra Co-operative Group Limited · NZX:FCG
Fonterra Co-operative — FY2016 Earnings Presentation
39 slides from Fonterra Co-operative's earnings presentation, September 2016
Slide 1: Annual Results 2016 – Our Potential
Annual Results 2016 OUR POTENTIAL SEPTEMBER 2016
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: Very tough season for farmers
Very tough season for farmers But solid earnings growth and strong Co-operative 8.50 7.90 0.10 6.37 0.30 6.40 6.16 Indicative 5.65 payout level 0.27 0.32 0.32 4.65 for budgeting 4.30 0.401 0.25 0.40 6.10 7.60 6.08 5.84 8.40 4.40 3.90 5.25 2010 2011 2012 2013 2014 2015 2016 2017 forecast Farmgate Mil
Slide 5: NZ milk supply in second year of decline
NZ milk supply in second year of decline Impacted by the low milk price environment 100 90 80 Volume (m litres/day) 70 60 50 40 Season Total Milk Collection Peak Day 30 — 2014/15 1,614m kgMS (up 2%) 90m litres 20 — 2015/16 1,566m kgMS (down 3%) 87m litres 10 — 2016/17 F 1,523m kgMS (down 3%) ~85m li
Slide 6: Global factors driving milk price
Global factors driving milk price Cautious signs of recovery Balance Inventories But NZ dollar returning adjusting still strong1 NZD:USD • Challenging milk NZ 0.74 73c price levels Demand Record low inventory 0.72 0.70 • Globally and in Supply + China Customer inventories + 0.68 = New Zealand at nor
Slide 7: Global dairy market – strong long-term fundamentals
Global dairy market – strong long-term fundamentals Supply EU Russia China Demand 12 months EU’s largest dairy 12 months production +4% export market imports +27% US Last 3 months Trade embargo remains Last 3 months (Apr, May, Jun) 0% (May, Jun, Jul) +21% 12 months production +1% Asia (excl China) M
Slide 8: Milk price in line with global markets
Milk price in line with global markets Closing gap NZ farmers are paid Global milk prices (USD / litre) 0.8 0.6 EU 0.5 US 0.4 0.4 Fonterra 0.3 US EU 0.2 0.2 Sep Sep NZ / Fonterra 2015 2016 0 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 Note: All prices are adjusted to a milk composition of 3.5%
Slide 9: Benefits from a strong Co-operative
Benefits from a strong Co-operative Competitive Milk Price Complemented by Co-op Initiatives Milk Price model put in place in 2009 • Changes to approaches used since then Strong Co-operative balance sheet have resulted in structural increase • Early dividend & Co-op support loan Additional 36c to th
Slide 10: Our Potential
Our Potential Confidential to Fonterra Co-operative Group Page 10
Slide 11: Global Context, Value Creation, Trust
• Future for dairy remains strong Global • Low global commodity prices Context • Unstable world • Transforming our business leads to strong results Value • Strategy is working – more milk into higher value products Creation • Paying off – higher earnings and a stronger Co-op • Doing what we said we
Slide 12: Transformation is unlocking value
Transformation is unlocking value Initiatives1 Capex1 4,000 $944M Owner’s mindset Business-led Free Cash Flow1 Debt $2.2B -$1.6B Relentless execution >4,000 employees involved Working Capital Closing Inventory -10 days -21% 1. Actual figures shown – not movements Note: Free Cash Flow is net op
Slide 13: Delivering our strategy
Delivering our strategy Volume to higher Value at Velocity 1 Optimise DIRA • GDT volume lower NZ milk Consumer 31% 5% • Ingredients 2 Build and grow GDT beyond our current – Optionality improved mix consumer positions Foodservice 12% 2% 24% – Ingredients solutions for 3 15% 20% customers adding valu
Slide 14: Ingredients delivering value
Ingredients delivering value Sustainable price achievement through global sales strategy NZ & Australia Ingredients FY16 Sales Volumes Change on FY15 China North Asia Europe & MEA 17% 630K 161K 2% MT MT Amsterdam Chicago Americas Tokyo 778K Dubai Shanghai Mexico City 353K MT MT SEA Singapore 297K 10
Slide 15: Australian business transformation
Australian business transformation Right foundation in place for sustainable returns Business transformation Outlook for the future From … • Disconnect between milk price and reality • Profitable business • Loss-making brands and contracts • Focus on cheese / whey / nutritionals • Ingredients loss
Slide 16: China opportunity
China opportunity Fonterra well positioned in every segment LME b 2013 TODAY Fonterra Milk Source (%) 1 Optimise Ingredients NZ milk 8b 6b 80 10 10 2 Build and grow beyond our current 3.5b 3.5b consumer positions 3 Consumer & Foodservice Deliver on Foodservice potential 28b 30b 100 4 Grow 0.4b 1b ou
Slide 17: China Farms roadmap
China Farms Roadmap to integrated business in China following major industry change Key milestones #1 strategic Clear Plan, Support Test, Build & Learn Scale & Efficiency Downstream Value market 2008 2009-13 2014-15 2016-18 Integrated China • Support NZ • Hub 1 (Yutian) • Hub 2 (Ying) • Local partne
Slide 18: Our Performance
Our Performance Confidential to Fonterra Co-operative Group Page 18
Slide 19: Continued strong business performance
Continued strong business performance VOLUME REVENUE NORMALISED EBIT 23.7B LME $17.2B $1,358M 4% 9% 39% RETURN ON CAPITAL1 NET PROFIT AFTER TAX ANNUAL DIVIDEND / YIELD2 $506%M 12.4 $834M 40CPS 7.3% Up from 8.9% 65% 60% Ingredients Consumer and Foodservice China Farms Volume (LME)3 22.4B Volume (LME)
Slide 20: Value creation
Value creation Higher return on capital from gains on all business drivers GROSS MARGIN CAPEX 21.1% $944M RETURN ON CAPITAL Up from 17.4% 38% 12.4 OPEX WORKING CAPITAL $506M% $2,528M 8% 77 DAYS Down 10 days Up from 8.9% NORMALISED EBIT DIVESTMENTS $1,358M $308M 39% Note: Return on Capital (ROC) excl
Slide 21: Ingredients
Ingredients Return on capital of 13.4% Volume (m LME)¹ Volume • Strong sales volume despite lower milk collections and 4% 22,391 21,483 challenging global market • Lower closing inventory • Higher sales of non-reference products (e.g. cheese) Value 2015 2016 • Optimising product returns through opti
Slide 22: Consumer and Foodservice
Consumer and Foodservice Return on capital of 41.7% Volume (m LME)1 Volume 8% 4,881 • 380m more LME into higher-value (1b in last two years) 4,501 • Foodservice growth of 15% • Strong innovation agendas driving more volume into higher-returning products Value 2015 2016 • Normalised EBIT significantl
Slide 23: Consumer and Foodservice – growth and margin expansion
Consumer and Foodservice Growth and margin expansion in both channels Consumer Foodservice Volume (m LME)1 Volume (m LME)1 5% 2,920 3,066 15% 1,815 1,581 2015 2016 2015 2016 Gross Margin (%) Gross Margin (%) 27% 29% 27% 22% 2015 2016 2015 2016 1. Includes sales to other strategic platforms Page 23 ©
Slide 24: Consumer and Foodservice – further delivery of strategy
Consumer and Foodservice Further delivery of strategy – 1 billion more LME in last two years Asia1 Greater China Volume Normalised EBIT Volume Normalised EBIT 5% 1,549 48% 876 1,476 131 244 591 198 45 2015 2016 2015 2016 2015 2016 2015 2016 Oceania Latin America2 Volume Normalised EBIT Volume Normal
Slide 25: Oceania – Consumer & Foodservice
Oceania – Consumer & Foodservice Good result – strong in NZ and return to profit in Australia Volume (m LME)1 Volume 1,749 5% 1,834 • NZ volume growth in fresh milk, butter & powders • Supported new product launches including Anmum NZ, Kapiti Sorbet, Top Notch tubs • Launch of Anchor micro-filtrated
Slide 26: Asia – Consumer & Foodservice
Asia – Consumer & Foodservice Earnings up despite flat volumes Volume (m LME)1 2 Volume 5% • Sri Lanka volumes up 22% 1,476 1,549 • Foodservice growth of 10% across region2 • Launched low cost milk powder in Ethiopia Value 2015 2016 • Uplift from lower milk prices partially offset by price decreases
Slide 27: Greater China – Consumer & Foodservice
Greater China – Consumer & Foodservice Ongoing growth & profitability with strong Foodservice contribution Volume (m LME)1 Volume 48% 876 • Foodservice growing in all channels and markets 591 on back of strong brands • Strong position in the imported milk segment • Anmum distribution increased Value
Slide 28: Latin America – Consumer & Foodservice
Latin America – Consumer & Foodservice Good result in challenging macro-economic environment Volume (m LME)1 Volume • Sustained volume growth from Soprole driven by 3% 623 innovation agenda 603 • Volume growth and market share gains in Brazil • Lower volume growth due to Venezuelan supply issues 201
Slide 29: China Farms
China Farms Key to integrated dairy business Volume (m LME)1 Volume • Increased milk volume sold by 40% 40% 229 • Ying expansion now complete – further volume 164 growth in FY17 and FY18 as herd establishes • Building first farm at third hub (Abbott JV) Value 2015 2016 • Reduced cash costs by RMB 0.
Slide 30: Return on capital – comparison to competitors
Return on capital Comparison to competitors1 Revenue Mix Asset Efficiency Ingredients Consumer Total EBIT % Ratio Return on Capital 2016 2015 2014 63% 37% 8.3% 2.1 12.4%2 8.9% 4.7% 43% 57% 5.1% 3.4 9.9%3 10.4% 8.9% 13% 87% 3.9% 3.1 7.5%3 7.9% 9.7% 1.Arla and Friesland based on FY15 results (Dec year
Slide 31: Financial discipline
Financial discipline Strengthening balance sheet supports solid credit rating NET DEBT2 DEBT / EARNINGS3 GEARING1 $5.5B 2.8X 44.3 23% Down from 4.7x $506M% FREE CASH FLOW CREDIT RATING A A- Down from 49.7% $2.2B STABLE STABLE Fitch S&P 1. Gearing ratio is economic net interest bearing debt divided b
Slide 32: Financial strength of the Co-op
Financial strength of the Co-op Strengthening balance sheet supports solid credit rating Gearing¹ Working capital days2 49.7% 44.3% 106 98 103 39.1% 39.6% 42.3% 87 77 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Net debt3 Debt / EBITDA ratio4 7,120 5,473 4.5 4.7 4,229 4,467 4,732 2.9 3.0 2.8 20
Slide 33: Diversified and prudent funding position
Diversified and prudent funding position Diversified profile¹ Prudent liquidity Drawn Facilities At 31 July 2016 ($ billion) USD DCM 15% At 31 July 2016 ($ billion) $0.9b 19% Bank Facility NZD DCM 15% Undrawn 48% Facilities $3.7b AUD DCM 9% 81% CNY DCM 7% GBP DCM 6% Bank facility maturity profile DC
Slide 34: Outlook
Outlook Confidential to Fonterra Co-operative Group Page 34
Slide 35: Plan for FY17
Plan for FY17 1 Optimise Optimisation and Price Achievement NZ milk Fonterra story / 4.31 am 2 Build and grow beyond our current consumer positions 3 Accelerate growth in consumer and foodservice Deliver on Foodservice potential in our 8 strategic and leadership markets 4 Brazil transformation Grow
Slide 36: Our ambition is on track
Our ambition is on track From (2015) Ambition 2016 Ingredients Ingredients $0.7 / LME $0.6 / LME Revenue1 Consumer & Foodservice $1.2 / LME Consumer & Foodservice $1.5 / LME $1.3 / LME Gross Margin 17% 20%+ 21% Normalised EBIT $1.0b 50-100% uplift 39% uplift Return on Capital2 8.9% 11-13% 12.4% Gear
Slide 37: Building momentum reflected in outlook for 2017
Building momentum reflected in outlook for 2017 • Forecast for 2016/17: – A forecast Farmgate Milk Price of $5.25 per kgMS – A forecast earnings performance of 50-60 cents per share – Reflects performance improvements across the business • Global supply and demand to continue to change over course o
Slide 38: Supplementary Information
Supplementary Information Confidential to Fonterra Co-operative Group Page 38
Slide 39: Normalised EBIT reconciliation
Normalised EBIT reconciliation Year ended Year ended $ million 31 July 2016 31 July 2015 Profit after tax 834 506 Add: Net finance costs 499 518 Add/(Less): Taxation expense (credit) 98 (82) Total reported EBIT 1,431 942 Add: Impairment of assets in Australia 23 108 Add: Restructuring and redundancy
Fonterra Co-operative Group — FY2016 Earnings Presentation on 6ix