Fonterra Co-operative Group Limited · NZX:FCG
Fonterra Co-operative — FY2010 Earnings Presentation
39 slides from Fonterra Co-operative's earnings presentation, Oct 18, 2010
Slide 1: 2010 Annual Results Market Briefing
2010 Annual Results Market Briefing 18 October 2010 Andrew Ferrier (CEO) / Jonathan Mason (CFO)
Slide 2: Presentation outline
Presentation outline 1. Snapshot of Fonterra 2. Industry Overview 3. 2010 Annual Results Update 4. Strategic Priorities & Outlook 5. Capital Structure 6. Questions & Answers Page 2
Slide 3: Snapshot of Fonterra
Snapshot of Fonterra (Fonteers Page 3 Dairy for life
Slide 4: Fonterra, the global Dairy leader
Fonterra, the global Dairy leader • Largest milk processor in the world • Geographical diversification with manufacturing sites and offices throughout the world (14.7bn litres of Deliver Sustainable Co-operative milk sourced from NZ and 6.6bn from offshore) World class • A unique global supply chain
Slide 5: Fonterra operates across the full spectrum with a diversified portfolio of dairy businesses
Fonterra operates across the full spectrum with a diversified portfolio of dairy businesses Margins Dairy Consumer* Speciality* Ingredients Trade & WMP, SMP, butter, cheese etc. Referred to as Operations Commodities & Ingredients for Global Ingredients DMV Fonterra reporting CheddarPlus, C21 etc. Ex
Slide 6: Strong foundation laid for continued execution of strategy
Strong foundation laid for continued execution of strategy 2009 (Examples) 2010 (Examples) Deliver Sustainable Co-operative • globalDairyTrade • New Mosgiel and Crawford Street hubs Performance • Adoption of new Milk Price • Opening of ED4 (world’s largest Milk Dryer) • First full year of operation
Slide 7: Industry Overview
Industry Overview (Fonteers Page 7 Dairy for life
Slide 8: Import requirements of developing regions expected to rise
Over the next 10 years, the import requirements of developing regions is expected to rise +5.8 +6.3 +13 +11 +10 -0.4 +42 +45 +35 +36 USA/Canada Rest of Europe +12 +19 EU 27 +8.5 +13 China +16 +18 Middle East & South East Asia India +5.6 +8.0 North Africa Rest of Africa +5.8 Latin America +1.5 Milk P
Slide 9: Fonterra is uniquely positioned to supply Asia's dairy deficit
Fonterra is uniquely positioned to supply Asia’s dairy deficit Net Trade in Dairy, 2009 14.3 18.4 11.3 2.8 0.5 3.6 Canada 2.2 Other 0.3 Europe 0.9 Japan USA China 0.1 India Sth Korea 2.5 3.0 7.6 0.5 EU27 Mexico Other Middle East Brazil North Africa 2.9 Africa 1.1 3.6 New Zealand Units – million tonn
Slide 10: Strong correlation exists between wealth and value-added consumption
Strong correlation exists between wealth and value- added consumption GDP / capita and cheese consumption (proxy for high value-add) Page 10 Source: OECD (1970-2009 where available)
Slide 11: 2010 Annual Result
2010 Annual Result (Fonteers Page 11 Dairy for life
Slide 12: 2010 financial result snapshot
2010 financial result snapshot 2009 $m Movement Movement 2010 $m (restated1) $m % Revenue 16,726 16,035 691 4% Cost of Milk2 (7,664) (5,793) (1,871) (32%) Other purchases/inventory (6,311) (7,424) 1,113 15% movement/supplier premiums Operating expenses (1,999) (2,036) (37) (2%) Other operating incom
Slide 13: Normalised EBIT
Normalised EBIT 2010 $m 2009 $m Reported EBIT1 1,078 990 Non-recurring items (174) (32) Impairment of equity accounted investees – 61 Normalised EBIT 904 1,019 Page 13 1. Reported EBIT includes non-recurring items and impairment of equity accounted investees.
Slide 14: Revenue and normalised EBIT by business segments
Revenue and normalised EBIT by business segments Segment Revenue Normalised EBIT1 ($m) ($m) Commodities 11,225 339 & Ingredients 10,504 548 2010 2009 Revenue from Consumer 5,501 565 Equity Accounted businesses Investments (combined) 5,531 474 Page 14 1. After excluding non-recurring item and impairm
Slide 15: Commodities & Ingredients
Commodities & Ingredients Normalised EBIT ($m) • EBIT impacted by the following key drivers: (1) Market volatility meant that prices for some non-powder products, such as cheese and casein, lagged international powder prices 548 (2) Average pricing on some contracts with customers lagged increases i
Slide 16: Non powder prices lagged powder price increases
Non powder prices lagged powder price increases Milk Price Fonterra’s YOY Price Basket of Products Actual Production Movement 8% AMF & BMP Other: Cheese, 10% Butter 26% Casein, Liquid Milk, MPC, Whey etc. Skim Milk AMF & BMP 24% 8% Powder 13% Cream (includes Butter) 17% Skim Milk Powder Whole Milk 5
Slide 17: Strategies to improve flexibility and agility of Fonterra
Strategies to improve flexibility and agility of Fonterra Increased Volatility of Dairy Prices • FY08: globalDairyTrade launched gDT • FY09: Commodity Risk Management launched team established • FY09: Streamlining of supply chain and manufacturing processes begins • FY10: ED4 commences production (i
Slide 18: Strong normalised EBIT growth for consumer businesses
Strong normalised EBIT1 growth for consumer businesses Normalised EBIT $m 600 CAGR 565 19% 500 474 392 400 332 300 200 100 0 2 2007 2008 2009 2010 1. Combined ANZ/AME/Latam segment Normalised EBIT (adjusted for non-recurring items and impairment of equity accounted investees). Page 18 2. 12 month pe
Slide 19: Fonterra Australia & New Zealand
Fonterra Australia & New Zealand Normalised EBIT ($m) • 17% increase in normalised EBIT over last year • Market share growth across all major categories 290 • Strategy of leadership in priority categories starting to deliver step change results (e.g. yoghurt 248 acquisition in Australia and divestme
Slide 20: Fonterra Asia/AME
Fonterra Asia/AME Normalised EBIT ($m) • Normalised EBIT up 31% over previous period, up 48% on a local currency basis • Strong revenue growth in nutritional segments driven by marketing 157 120 campaigns and innovation • Operating gross margin improved by 8 percentage points over last year 2009 201
Slide 21: Fonterra Latam
Fonterra Latam Normalised EBIT ($m) • Normalised EBIT up 11% on previous period • Soprole in Chile (the largest investment included under Latam) has 118 a strong year despite the impact of 106 the Chilean earthquake • Earnings in the Dairy Partners Americas JV was impacted by macro factors such as t
Slide 22: Gearing is lowest in our history
Gearing1 is lowest in our history The improvement in the gearing ratio is 57.6% due to: • Increase cash receipts through issue of new Co-operative shares 53.0% 52.4% 52.1% • Sale of certain non-strategic assets and restriction of non-essential capital expenditure • Change in capital structure approv
Slide 23: Strategic Priorities & Outlook
Strategic Priorities & Outlook Page 23
Slide 24: Strategic priorities for the coming year
Strategic priorities for the coming year • Enhance flexibility and agility in Trade and Operations by continuing to : – expand globalDairyTrade – improve supply chain and manufacturing systems Deliver – invest in technology to improve production flexibility Sustainable – enhance commodity risk manag
Slide 25: Strategic priorities for the coming year (cont)
Strategic priorities for the coming year (cont) • Rapidly expand Global Ingredients and Foodservices by continuing to: Grow Lasting – leverage Fonterra’s technology in overseas markets to Customer build value added ingredients businesses Partnerships – develop customer partnerships for innovative in
Slide 26: Outlook
Outlook • Forecast total payout (before retentions) for 2010/11 season firmed up to $7.00-7.10 – Unchanged forecast for Milk Price of $6.60 – Distributable Profit range narrowed to 40-50 cents per share from earlier guidance of 30-50 cents per share • Board is targeting a dividend range for 2011 of
Slide 27: Capital Structure
Capital Structure (Fonteers Page 27 Dairy for life
Slide 28: Strong support for new capital structure
Strong support for new capital structure • Clear mandate for change with over 89% support (of 80% of farmers who voted) for proposal to evolve capital structure • Reinforced by around 6% of shares already being “dry” • Changes will: Remove redemption (balance sheet) risk for Fonterra Improve fin
Slide 29: Next Steps – 18 Months
Next Steps – 18 Months • Capital Market Advisors and Market Design Advisor appointed • Constitution sets preconditions • Finalising design of Fonterra Shareholders’ Market and Fonterra Shareholders’ Fund – watch the space • DIRA changes required • Education of farmer shareholders and potential Fonte
Slide 30: Supplementary Information
Supplementary Information Page 30
Slide 31: Record milk collected, up 0.4%
Record milk collected, up 0.4% Upper North Island : 7% Central North Island : 4% Milk Collected Litres 14.7bn New Zealand (1,286m kgMS) Global 6.6bn Lower North Island : 4% Total 21.3bn Upper South Island : 4% Central South Island : 12% Lower South Island : 9% Page 31
Slide 32: Whole Milk Powder Prices on globalDairyTrade
Whole Milk Powder Prices on globalDairyTrade US$/MT 4,500 4,000 3,500 3,000 gDT average contract price for events in that 2,500 month 2,000 gDT average weighted price of shipments in that month 1,500 Page 32
Slide 33: Distributable Profit compared to Net Profit After Tax
Distributable Profit compared to Net Profit After Tax Cents Per $ million Share Reflects ‘conventional’ Profit after tax Profit after tax 669 50 comparable to other corporate entities Tax effect of retentions1 131 10 Reflects Fonterra’s status Distributable Profit 800 60 as a Co-operative and is mos
Slide 34: Milk price methodology
Milk price methodology Sample of Fonterra’s actual sales prices of reference commodity products (moving to Revenue increasing/sole reliance on globalDairyTrade). Key inputs include product streams, sales phasing Manufacturers specification of resource usage for modern powder plants but with less Pro
Slide 35: Currency Hedging
Currency Hedging • Hedging resulted in a 2010 Fonterra Average Conversion Rate (FACR) of US66.7 cents (2009: US66.5 cents) • Average spot USD rate was US70.8 cents for 2010 NZD/USD Spot Price against Fonterra Average Conversion Rate (FACR) 31 May 2007 to 31 July 2010 Page 35
Slide 36: Reduced debt contributed to lower interest costs
Reduced debt contributed to lower interest costs Net Debt ($bn) Net Interest ($m) 5.9 5.2 4.3 4.5 Non current 4.1 Current 448 3.9 (less cash) 318 313 1.4 1.1 0.4 2008 2009 2010 2008 1 2009 2010 Page 36 1. 12 month period (unaudited, sourced from management information).
Slide 37: Gearing
Gearing 31 July 2010 31 July 2009 ($m) ($m) Net Interest bearing Debt position Total borrowings 4,924 5,794 Cash and cash equivalents (559) (600) Interest bearing advances included in other non-current (122) (86) assets Bank overdraft 25 58 Value of derivatives used to manage changes in hedged 226 5
Slide 38: Prudent liquidity profile
Prudent liquidity profile 2009 year end 2010 year end (% of net debt) (% of net debt) < 1 year < 1 year 7% 18% 1 to 2 years > 5 years 3% 37% > 5 years 46% 2 to 5 years 2 to 5 years 56% 33% Facility availability + Debt maturity profile (rolling one year ending July) 4,000 CP 1y standby 3,500 AUD inve
Slide 39: Cash Flow analysis – 2010 against 2009
Cash Flow analysis – 2010 against 2009 Cash Flow ($m) 1,479 (354) (1,154) 542 21 534 Page 39
Fonterra Co-operative Group — FY2010 Earnings Presentation on 6ix