Dairy for life PERFORMANCE REVIEW Interim Results 201 6 MARCH 2016 A oun CO-OPERATIVE OUR MARKETS OUR PERFORMANCE 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 relation to the matters to which the statements relate. These forward looking statements involve known and unknown risks, uncertainties, assumptions and other important factors that could cause the actual outcomes to be materially different from the events or results expressed or implied by such statements. Those risks, uncertainties, assumptions and other important factors are not all within the control of Fonterra Co-operative Group (Fonterra) and its subsidies (the Fonterra Group) and cannot be predicted by the Fonterra Group and include changes in circumstances or events that may cause objectives to change as well as risks, circumstances and events specific to the industry, countries and markets in which the Fonterra Group operates. They also include general economic conditions, exchange rates, interest rates, regulatory environments, competitive pressures, selling price, market demand and conditions in the financial markets which may cause objectives to change or may cause outcomes not to be realised. None of Fonterra Co-operative Group Limited or any of its respective subsidiaries, affiliates and associated companies (or any of their respective officers, employees or agents) (Relevant Persons) makes any representation, assurance or guarantee as to the accuracy or likelihood of fulfilment of any forward looking statement or forecast or any outcomes expressed or implied in any forward looking statement or forecast. The forward looking statements and forecasts in this report reflect views held only at the date of this presentatation. Statements about past performance are not necessarily indicative of future performance. Except as required by applicable law or any applicable Listing Rules, the Relevant Persons disclaim any obligation or undertaking to publicly update any forward looking statements or forecasts, whether as a result of new information or future events. No offer of securities This presentation does not constitute investment advice, or an inducement or recommendation to acquire or dispose of any securities in Fonterra or the Fonterra Shareholders’ Fund, in any jurisdiction. Page 2 © Fonterra Co-operative Group Ltd. OVERVIEW Confidential to Fonterra Co-operative Group Page 3 A tough season for farmers Low milk price, but our Co-op delivered a strong result 2015/16 forecast payout • • • • Farmgate Milk Price Available for payout¹ Forecast full year dividend Cash payout² Strong interim results (6 months) • • • • • • • Normalised EBIT Interim earnings per share Interim dividend per share Co-operative Support loan Farm Source™ deferred payment terms Higher interim dividend Intention to pay final dividend earlier Strength of the Co-op to support farmers 1. Total available for payout is forecast Farmgate Milk Price plus forecast earnings per share. 2. Cash payout is forecast Farmgate Milk Price plus forecast dividend per share. Page 4 © Fonterra Co-operative Group Ltd. $3.90 PER KGMS $4.35 – $4.45 PER KGMS 40 cents PER SHARE $4.30 PER KGMS $665 MILLION 25 CENTS 20 CENTS Milk supply in NZ lower than last season 2015/16 season forecast to be 4% lower 100 90 Volume (m litres/day) 80 70 60 50 40 Season 30 20 10 Jun Page 5 Jul © Fonterra Co-operative Group Ltd. Aug Total Milk Solids Peak Day Milk —– 2013/14 1,584 kgMS 87.1 litres —– 2014/15 1,614 kgMS 89.7 litres —– 2015/16 1,545 kgMS (Forecast) 86.9 litres Sep Oct Nov Dec Jan Feb Mar Apr May Global trade in dairy – temporary imbalance Key changes in net trade from 2014 to 2015 25 Billions LME 20 EU quotas removed – more than 1bn litres additional milk 15 10 US – higher domestic market consumption Net Exports 14 Net Exports 15 Net Imports 14 Net Imports 15 China – Slow down, imported finished goods Russia – Trade embargo 5 0 Note: Trade expressed in terms of tonnes of Liquid Milk Equivalent (milk standardized to 4.2% fat and 3.5% protein). These are the top 10 net importing and the top 10 exporting markets Page 6 © Fonterra Co-operative Group Ltd. Outlook • Good operating performance to continue • Forecast 2015/16 total available for payout: – A forecast Farmgate Milk Price of $3.90 per kgMS – A strong forecast earnings performance of 45-55 cents per share • Intention to pay final dividend earlier • Dairy market outlook – WMP price expected to lift through balance of 2016 – Expecting EU to revert to normal growth of 1% per annum – Expecting China WMP imports to grow steadily at 4-5% per annum – Either a supply or demand shock could significantly change this outlook Page 7 © Fonterra Co-operative Group Ltd. Strong Co-op • Driving performance – Volume to higher value and increased earnings – Cash flow focus – Strong balance sheet – Higher dividend • Fonterra Co-op Support loan • Intention to pay final dividend earlier • More support on the ground: regional heads • Fonterra Farm Source™ – Extended credit – $31 million – Rewards programme delivered $8.5 million in benefits to farmers Page 8 © Fonterra Co-operative Group Ltd. PERFORMANCE Confidential to Fonterra Co-operative Group Page 9 Performance has been strong VOLUME REVENUE GROSS MARGIN 12.6BN LME $8.8BN 21% 8% 9% Up from 16% NORMALISED EBIT NET PROFIT AFTER TAX INTERIM DIVIDEND PER SHARE $506M $665 $409M 20CPS 77% 123% Ingredients¹ 100% Consumer and Foodservice International Farming Volume (LME) 6% chg Volume (LME) 10% chg Volume (LME) 54% chg Gross Margin 15% Gross Margin 28% Gross Margin (21%) Normalised EBIT $617m Normalised EBIT $241m Normalised EBIT ($29m) 1. Ingredients excludes unallocated costs. Page 10 © Fonterra Co-operative Group Ltd. Ingredients Delivered a strong performance Volume (m LME) Volume +6% 11,826 11,158 • Higher sales of non-reference products • Late season inventory from 2015 cleared Value 31 Jan 2015 Investments in NZ capacity – efficiencies, better yields • NZ ingredients 31 Jan 2016 Normalised EBIT ($m)¹ +27% 486 31 Jan 2015 617 31 Jan 2016 1. Ingredients normalised EBIT excludes unallocated group costs. Page 11 • © Fonterra Co-operative Group Ltd. • – No peak costs – Improved optionality and manufacturing performance – Positive stream returns – favourable product mix Australia ingredients – adverse product mix – EBIT $28 million loss Global dairy market – strong long-term fundamentals New Zealand • Significant participant in tradable market 21b L Globally Traded Dairy Market1,3 • Global export/import market • Informs Farmgate Milk Price 66b L Formal Dairy Market2,3 • Reflects total dairy demand 406b L 25bn L (2% growth4) 91bn L (5.5% growth4) 2014 Baseline 2020 Projection 1. 2. 3. 4. 465bn L (2.3% growth4) Source: International Farm Comparison Network (IFCN), Economist Intelligence Unit (EIU), Euromonitor, Fonterra analysis. Measured as total global imports. Source: Euromonitor. Volume expressed on an LME basis with standardised composition of milk, 4.2% fat and 3.5% protein Growth is compound annual growth. Page 12 © Fonterra Co-operative Group Ltd. Changes in the globally traded market impacting prices Significant change in imports and exports EU – more than 2.6bn litres additional milk since 2013 LME (billion) 25 20 Russia – embargo increasing volume of EU exports to Asia 15 China – imports at more normal levels in 2015 (higher in 2013/14 due to supply shock). Plus product mix changes Asia and Middle East imports growing steadily 10 5 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 2012 2013 2014 2015 0 NZ EU27 US Australia Russia China Asia ME & Africa Net Exports - Powders Page 13 © Fonterra Co-operative Group Ltd. Net Exports - Other Net Imports - Powders Net Imports - Other New Zealand ingredients market reach Past 18 months lower sales to China offset by higher volume into other markets 28% China Europe & MEA 245K MT 814K MT Amsterdam Americas North Asia Chicago Mexico City 560K MT 11% Tokyo 18% 924K MT Dubai Shanghai SEA Singapore 13% 1,047K MT 9% Major sales hubs 294K MT 9% Auckland New Zealand Note: Major sales hub rounded volumes for 18 months to 31 Jan 2016 and percentage compared to 18 months to 31 Jan 2015. Note: Sales are reported based on the Global Ingredients and Operations management structure and not on a shipped to basis. Page 14 © Fonterra Co-operative Group Ltd. Consumer and foodservice Strong volume and margin growth – generating higher value demand Volume (m LME) Volume +10% 2,249 31 Jan 2015 2,484 31 Jan 2016 Normalised EBIT ($m) +108% 241 116 31 Jan 2015 Page 15 © Fonterra Co-operative Group Ltd. 31 Jan 2016 • 235 million of additional LME • More volume higher up the value chain • Strong foodservice volume growth Value • Continued to build on strong result of second half 2015 • Broad-based performance • Volume growth, strength of our brands and lower input costs Consumer and foodservice Strong performance across the business – generating higher volume demand Greater China Asia Volume¹ Normalised EBIT Volume¹ +7% +24% 108 783 733 Normalised EBIT 440 355 56 68 15 H1 2015 H1 2016 H1 2015 H1 2016 Oceania H1 2016 H1 2015 H1 2016 Latin America Volume¹ Normalised EBIT +11% 868 H1 2015 33 960 Normalised EBIT2 Volume¹ +3% 293 301 35 32 H1 2015 H1 2016 H1 2015 H1 2016 10 H1 2015 H1 2016 H1 2015 H1 2016 1. Volume (m LME). 2. Venezuela has been impacted by the currency translation. Excluding Venezuela, Latin America normalised EBIT was 50% higher. Page 16 © Fonterra Co-operative Group Ltd. Australia – cheese, whey and nutritionals focus A clear plan and progress made on returning business to profitability Review  Fix leaks Improve Portfolio  Transform Business  In progress A profitable business • Multi-hub strategy • Integrated model • Cheese/whey/ nutritionals Page 17 © Fonterra Co-operative Group Ltd. • Maintain milk supply • Stanhope rebuild underway • Profitable end game • Cost reductions • Key priorities: • Winning supply chain • Major supply agreements at Darnum • Working capital improvements • Sale of nonstrategic assets – Complete Stanhope – Fill Darnum – Grow brands International farming ventures Key to integrated dairy business Volume (m LME) Volume +54% 103 67 • New farms coming on stream • Two hubs complete – 10 farms in total • Access to secure, high quality milk supply Value 31 Jan 2015 31 Jan 2016 Normalised EBIT ($m) • Scale achieved to capture downstream value • Lower milk price and higher volumes increased operating deficit – • Page 18 (27) (29) 31 Jan 2015 31 Jan 2016 © Fonterra Co-operative Group Ltd. RMB0.95 reduction in milk price Largely offset by operational improvements International farming ventures Roadmap to integrated business in China following major industry change Key milestones A Clear Plan, Support 2008 Test, Build and Learn 2009-13 • Trigger point – industry change • • Clear business • plan: – Support NZ • exports – Develop safe, secure local supply – Build integrated business – Built first farm Page 19 © Fonterra Co-operative Group Ltd. Scale and Efficiency 2014-15 Developed Hub 1 (Yutian) • Developed Hub 2 (Ying) Biosecurity/food safety • • Effluent management Downstream value 2016-18 • Local partnerships • On-farm efficiencies Developing highervalue demand Milk supply at scale • Abbott JV (Hub 3) #1 strategic market Integrated China business Strong financial discipline delivering results Working capital improvements and strong cash flow Reduced working capital days¹ 104 31 Jan 2012 97 31 Jan 2013 97 31 Jan 2014 87 31 Jan 2015 76 • Key focus of transformation • Supply chain improvements and inventory volumes lower • Improved terms for receivables and payables • Strong cash flow benefited from – Higher earnings – Working capital improvements, including milk suppliers payable returning to normal – Reduced capex and sale of non-strategic assets • Free cash flow at the half year typically negative reflecting seasonal business 31 Jan 2016 Strong free cash flow² 346 (736) 31 Jan 2012 (541) (861) 31 Jan 2013 31 Jan 2014 (1,761) 31 Jan 2015 31 Jan 2016 1. Working capital days excludes milk suppliers payable. 2. Free cash flow is funds available for dividend, interest and debt. Page 20 © Fonterra Co-operative Group Ltd. Financial strength of the Co-op Strong balance sheet and solid credit rating • Gearing¹ 46.9% 31 Jan 2012 40.0% 31 Jan 2013 44.6% 31 Jan 2014 50.7% 31 Jan 2015 49.2% 31 Jan 2016 Reduced gearing achieved after – Paying a higher dividend – Funding Beingmate acquisition – Completion of expansion capex • Lower net debt of $6.9bn, higher earnings and equity • On track for gearing of 40-45% by financial year-end • Ratings reflect Co-op’s strength Strong credit rating Fitch A (stable outlook) S&P A(stable outlook) Credit Rating Debt Weighted Average Term to Maturity As at 4.3 years 31 Jan 2016 – Highest rated agricultural co-op globally • Strong access to capital • Conservative funding maturity 1. Gearing ratio is economic interest bearing debt divided by economic net interest bearing debt plus equity excluding cash flow hedge reserve. Page 21 © Fonterra Co-operative Group Ltd. Transformation – delivering cash benefits Transformation Cash Benefits¹ $ million 730 410 430 500 Milk Price EBIT Recurring2 One-time Revenue and costs Working capital Balance sheet Cash flow Half-year 1. The estimated FY16 cash benefits of business transformation initiatives implemented in H1. 2. Recurring cash benefits will impact both EBIT and the Farmgate Milk price and are based on assumptions set at commencement of the business transformation Page 22 © Fonterra Co-operative Group Ltd. SUPPLEMENTARY SLIDE Normalised EBIT reconciliation $ million Six months to 31 January 2016 Six months to 31 January 2015 Profit after tax 409 183 Add: Net finance costs 266 303 Add/(less): Taxation expense/(credit) 77 (3) Total EBIT 752 483 Less: Gain on DairiConcepts sale (68) - Add: Impairment of assets in Australia 12 - (less)/Add: Time value of options (31) 22 Net gain on Latin America strategic realignment - (129) Total normalisation adjustments (87) (107) Total normalised EBIT 665 376 Page 24 © Fonterra Co-operative Group Ltd.