Dairy for life PERFORMANCE REVIEW Annual Results 201 6 SEPTEMBER 2016 OUR OUR POTENTIAL OUR PERFORMANCE 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, 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 and projections. Those risks, uncertainties, assumptions and other important factors are not all within the control of Fonterra Co-operative Group Limited (Fonterra) and its subsidiaries (the Fonterra Group) and cannot be predicted by the Fonterra Group. While all reasonable care has been taken in the preparation of this presentation none of Fonterra 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 completeness of any information in this presentation or likelihood of fulfilment of any forward-looking statement or projection or any outcomes expressed or implied in any forward-looking statement or projection. The forward-looking statements and projections in this report reflect views held only at the date of this presentation. 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 update any information in this presentation. This presentation does not constitute investment advice, or an inducement, recommendation or offer to buy or sell any securities in Fonterra or the Fonterra Shareholders’ Fund. Page 2 © Fonterra Co-operative Group Ltd. Our Co?Operative Confidential to Fonterra Co-operative Group Page 3 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 0.32 0.27 6.16 5.65 0.32 4.65 0.25 0.401 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 Milk Price Dividend 1. For farm budgeting purposes a 40 cent dividend is assumed (based on FY17 EPS forecast 50-60 cents) – this is consistent with Fonterra policy of paying out 65-75 per cent of adjusted net profit after tax over time Note: Farmgate Milk Price: $ per kgMS; Dividend: $ per share Page 4 4.30 © Fonterra Co-operative Group Ltd. Indicative payout level for budgeting NZ milk supply in second year of decline Impacted by the low milk price environment 100 Volume (m litres/day) 90 80 70 60 50 40 Season 30 Total Milk Collection Peak Day — 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 litres Jun Page 5 Jul © Fonterra Co-operative Group Ltd. Aug Sep Oct Nov Dec Jan Feb Mar Apr May Global factors driving milk price Cautious signs of recovery Inventories adjusting Balance returning But NZ dollar still strong1 • Challenging milk price levels NZD:USD NZ Record low inventory Demand Supply + China Customer inventories at normal levels EU Intervention levels extended to 350k MT 1. NZD: USD exchange rate for 12 months to 31 Aug 16 Page 6 © Fonterra Co-operative Group Ltd. 73c 0.74 0.72 + 0.70 = 0.68 • Globally and in New Zealand • Prices starting to recover 0.66 0.64 0.62 1 Sep 2015 31 Aug 2016 Global dairy market – strong long-term fundamentals Supply Demand 12 months production Last 3 months (Apr, May, Jun) US 12 months production Russia EU +4% 0% EU’s largest dairy export market Trade embargo remains China 12 months imports Last 3 months (May, Jun, Jul) +27% +21% +1% Asia (excl China) Middle East & Africa 12 months imports 12 months imports -6% +2% Fonterra in NZ Latin America 12 months imports +10% Australia 12 months production -3% 12 months production Last 3 months (Jun, Jul, Aug) -3% -4% Note: All 12 month figures are rolling 12 months compared to previous comparable period: Australia (July), EU (June), United States (July), China (July), Asia (May), Middle East & Africa (May), Latin America (May), New Zealand (August) Source: Government milk production statistics; GTIS trade data; Fonterra analysis Page 7 © Fonterra Co-operative Group Ltd. Milk price in line with global markets Closing gap NZ farmers are paid Global milk prices (USD / litre) 0.8 0.6 0.5 EU 0.4 0.4 0.3 US 0.2 US Fonterra EU 0.2 0 1980 Sep 2015 NZ / Fonterra 1984 1988 1992 1996 2000 2004 2008 2012 Sep 2016 2016 Note: All prices are adjusted to a milk composition of 3.5% protein and 4.2% fat and for spot exchange rates Source: DairyNZ (NZ to May 2014); Fonterra announced payout (milk price and dividend) (NZ from June 2014); USDA; European Milk Market Observatory (Netherlands milk price) Page 8 © Fonterra Co-operative Group Ltd. Benefits from a strong Co-operative Competitive Milk Price Milk Price model put in place in 2009 • Changes to approaches used since then have resulted in structural increase Additional 36c to the Farmgate Milk Price1 • 2016 milk price would have been $3.54 using model assumptions from 2009 – $560m additional to milk price Reflects improvements by Fonterra and in our operating environment • Improved manufacturing performance • Improved supply chain • Lower manufacturing and capital costs 1. Fonterra Farmgate Milk Price Statement 2016 Page 9 © Fonterra Co-operative Group Ltd. Complemented by Co-op Initiatives Strong Co-operative balance sheet • Early dividend & Co-op support loan Farm Source™ rewards & benefits • Around $30 million in savings for our farmers Enhanced digital offering & apps • Co-op updates and timely milk collection info Business support on the ground • Regional heads and technical reps Our Potential Confidential to Fonterra Co-operative Group Page 1 0 Global Context Value Creation Trust Page 11 © Fonterra Co-operative Group Ltd. • Future for dairy remains strong • Low global commodity prices • Unstable world • Transforming our business leads to strong results • Strategy is working – more milk into higher value products • Paying off – higher earnings and a stronger Co-op • Doing what we said we would do • Investing in our communities and our future • Very focused on future delivery Transformation is unlocking value   Business-led  Relentless execution Owner’s mindset >4,000 employees involved Initiatives1 Capex1 4,000 $944M Free Cash Flow1 Debt $2.2B -$1.6B Working Capital Closing Inventory -10 days -21% 1. Actual figures shown – not movements Note: Free Cash Flow is net operating cash flows less net investing cash flows; Debt is economic net interesting bearing debt Page 12 © Fonterra Co-operative Group Ltd. Delivering our strategy Volume to higher Value at Velocity 1 Optimise 2 Deliver Foodservice 15% on Foodservice potential 4 12% 2% 20% 8% Grow • Consumer and Foodservice Develop – Added 380m more LMEs 7 Align our business and organisation – 1 billion added in 2 years 58% Selectively invest in milk pools – Ingredients solutions for customers adding value – Return on capital of 13.4% leading positions in paed & maternal nutrition 6 – Optionality improved mix – Lower operating costs FY16 23.7b LME our Anlene™ business 5 • Ingredients GDT 24% Build and grow beyond our current consumer positions 3 • GDT volume lower DIRA 31% Consumer 5% NZ milk – Return on capital of 41.7% Ingredients 19% % FY16 sales volume growth over FY15 Note: Return on Capital (ROC) excludes goodwill, brands and equity accounted investments Page 13 Wheel © Fonterra Co-operative Group Ltd. Source: shows percentage of total FY16 external sales (LME) by strategic platform; Growth rates include intercompany sales to other strategic platforms Ingredients delivering value Sustainable price achievement through global sales strategy NZ & Australia Ingredients FY16 Sales Volumes Change on FY15 China Europe & MEA 630K MT 17% Amsterdam Americas Chicago Mexico City North Asia 161K MT 2% Tokyo 353K MT = 0% 778K MT 4% Shanghai Dubai SEA Singapore 297K MT 721K MT 10% Auckland Melbourne Major sales hubs 2% Note: FY16 sales (MT) and growth on FY15 are shown on the basis of the shipping destination for the product Page 14 © Fonterra Co-operative Group Ltd. Oceania Australian business transformation Right foundation in place for sustainable returns Business transformation From …  Outlook for the future • Disconnect between milk price and reality • Profitable business • Loss-making brands and contracts • Focus on cheese / whey / nutritionals • Ingredients loss of $92m • Stanhope rebuild complete in 2017 To … • Market connected milk price • Grow our core consumer and foodservice brands • Sold non-strategic assets • Continue efforts to fill Darnum • Ingredients normalised EBIT of $63m • Strong position in the industry Page 15 © Fonterra Co-operative Group Ltd. China opportunity Fonterra well positioned in every segment LME b 1 Optimise NZ milk 2 Build and grow beyond our current consumer positions 3 Deliver on Foodservice potential 4 Grow our Anlene™ business 5 Develop leading positions in paed & maternal nutrition 6 Selectively invest in milk pools 7 Align our business and organisation 2013 TODAY Fonterra Milk Source (%) Ingredients 8b 3.5b 6b 3.5b 80 10 10 Consumer & Foodservice 28b 0.4b 30b 1b 100 Advanced Nutrition 2b 0.02b 3b 0.27b1 50 50 Domestic Milk Pool 36b2 0.06b 0.23b 100 Total Fonterra China 1. Today includes Beingmate sales of 0.25b LME 2. Based on external data and analysis Source: Euromonitor; Fonterra analysis Page 16 © Fonterra Co-operative Group Ltd. 4b 5b b LME Fonterra b LME China market2 80 NZ 8 75 AU EU China China Farms Roadmap to integrated business in China following major industry change Key milestones Clear Plan, Support 2008 • Support NZ exports • Safe, secure local supply • Integrated business Test, Build & Learn 2009-13 Scale & Efficiency 2014-15 • Hub 1 (Yutian) • Hub 2 (Ying) • Local partnerships • Biosecurity / food safety • On-farm efficiencies • Developing highervalue demand • Effluent management • Scale milk supply • Abbott JV (Hub 3) FY16 milestones • Hub 2 complete • Operating efficiencies • Challenging milk price Page 17 Downstream Value 2016-18 © Fonterra Co-operative Group Ltd. FY17 plan • Integration into global sales • Access to fresh milk market • E-commerce #1 strategic market Integrated China business Our Performance Confidential to Fonterra Co-operative Group Page 18 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 Up from 8.9% 65% Ingredients 7.3% 60% Consumer and Foodservice China Farms Volume (LME)3 22.4B Volume (LME)3 4.9B Volume (LME)3 0.2B Gross Margin 14.3% Gross Margin 28.7% Gross Margin (22.4%) Normalised EBIT $1,204M Normalised EBIT $580M Normalised EBIT ($59M) Return on Capital1 13.4% Return on Capital1 41.7% 1. Return on Capital (ROC) excludes goodwill, brands and equity accounted investments; Group ROC including these items was 9.2% in FY16 (FY15: 6.9%) Page 19 dividend © Fonterraover Co-operative Ltd. 2. FY16 volumeGroup weighted average closing FCG share price ($5.50) across the year; 3. Includes sales to other strategic platforms Value creation Higher return on capital from gains on all business drivers RETURN ON CAPITAL 12.4 $506M% Up from 8.9% GROSS MARGIN CAPEX 21.1% $944M Up from 17.4% 38% OPEX WORKING CAPITAL $2,528M 77 DAYS 8% Down 10 days NORMALISED EBIT DIVESTMENTS $1,358M $308M 39% Note: Return on Capital (ROC) excludes goodwill, brands and equity accounted investments; Group ROC including these items was 9.2% (2015: 6.9%) Page 20 © Fonterra Co-operative Group Ltd. Ingredients Return on capital of 13.4% Volume (m LME)¹ 21,483 Volume 4% 22,391 • • • Strong sales volume despite lower milk collections and challenging global market Lower closing inventory Higher sales of non-reference products (e.g. cheese) Value 2015 2016 Normalised EBIT ($m) 973 1,204 • • • • Optimising product returns through optionality Ingredients solutions meeting customer needs Lower costs in manufacturing – improved yield, lower exception stocks, no peak costs Australia: $63m normalised EBIT and reduced working capital Velocity 2015 2016 • 1. Includes sales to other strategic platforms Note: Return on Capital (ROC) excludes goodwill, brands and equity accounted investments Page 21 © Fonterra Co-operative Group Ltd. Good working capital performance through focus on inventory and supply chain Consumer and Foodservice Return on capital of 41.7% Volume (m LME)1 4,501 Volume 8% 4,881 • • • 380m more LME into higher-value (1b in last two years) Foodservice growth of 15% Strong innovation agendas driving more volume into higher-returning products Value 2015 2016 Normalised EBIT ($m) • • 580 408 Velocity • • 2015 2016 1. Includes sales to other strategic platforms Note: Return on Capital (ROC) excludes goodwill, brands and equity accounted investments Page 22 © Fonterra Co-operative Group Ltd. Normalised EBIT significantly up in Oceania, Asia and Greater China Reduced capital base through divestments and lower working capital Turnaround of Australian business Operating efficiencies and improved go-to-market across all regions Consumer and Foodservice Growth and margin expansion in both channels Consumer Volume (m LME)1 2,920 Foodservice 5% Volume (m LME)1 3,066 1,581 2015 2016 Gross Margin (%) Page 23 29% 2015 2016 © Fonterra Co-operative Group Ltd. 1,815 2016 Gross Margin (%) 27% 1. Includes sales to other strategic platforms 2015 15% 22% 2015 27% 2016 Consumer and Foodservice Further delivery of strategy – 1 billion more LME in last two years Asia1 Volume Greater China 5% 1,476 Normalised EBIT Volume Normalised EBIT 48% 1,549 198 244 876 131 591 45 2015 2016 2015 2016 1,749 2016 2015 2016 Latin America2 Oceania Volume 2015 5% Normalised EBIT Volume 1,834 97 603 Normalised EBIT 3% 623 110 108 2016 2015 2016 51 2015 2016 2015 2016 2015 1. FY15 figures adjusted for reclassification of the North Asia business from Foodservice to Ingredients (FY15: 82 million LME, $4m normalised EBIT) 2. Excluding Venezuela, Latin America result: volume up 25 million LME to 611 million LME, normalised EBIT up $20 million to $99 million Note: Volume shown is million LME (includes sales to other strategic platforms) and normalised EBIT is million NZ $ Page 24 © Fonterra Co-operative Group Ltd. Oceania – Consumer & Foodservice Good result – strong in NZ and return to profit in Australia Volume (m LME)1 1,749 Volume 5% 2015 1,834 2016 Normalised EBIT ($m) 97 1. Includes sales to other strategic platforms Page 25 © Fonterra Co-operative Group Ltd. NZ volume growth in fresh milk, butter & powders • Supported new product launches including Anmum NZ, Kapiti Sorbet, Top Notch tubs • Launch of Anchor micro-filtrated milk in Victoria and record Foodservice sales Value • Best-in-class service levels with supermarkets • Divestment of loss-making business in Australia Velocity 51 2015 • 2016 • Executing strategy faster in both markets • Turnaround in performance in Australia Asia – Consumer & Foodservice Earnings up despite flat volumes Volume Volume (m LME)1 2 1,476 5% 1,549 • Sri Lanka volumes up 22% • Foodservice growth of 10% across region2 • Launched low cost milk powder in Ethiopia Value 2015 2016 Normalised EBIT ($m) 198 244 • Uplift from lower milk prices partially offset by price decreases across markets • Increased advertising spend supporting key product launches in Sri Lanka, MEA, and Malaysia Velocity • 2015 2016 Supporting forward deployment initiative in Middle East for Ingredients 1. Includes sales to other strategic platforms 2. FY15 figures adjusted for reclassification of the North Asia business from Foodservice to Ingredients (FY15: 82 million LME, $4m normalised EBIT) Page 26 © Fonterra Co-operative Group Ltd. Greater China – Consumer & Foodservice Ongoing growth & profitability with strong Foodservice contribution Volume Volume (m LME)1 48% 876 • Foodservice growing in all channels and markets on back of strong brands • Strong position in the imported milk segment • Anmum distribution increased 591 2015 2016 Value • Normalised EBIT ($m) 131 45 2015 1. Includes sales to other strategic platforms Page 27 © Fonterra Co-operative Group Ltd. 2016 Strength across markets – Taiwan and Hong Kong both delivering strong results Velocity • Focus on reducing costs across business • Integrating businesses with China Farms Latin America – Consumer & Foodservice Good result in challenging macro-economic environment Volume Volume (m LME)1 603 3% 2015 Normalised EBIT ($m) 110 • Sustained volume growth from Soprole driven by innovation agenda • Volume growth and market share gains in Brazil • Lower volume growth due to Venezuelan supply issues 623 2016 108 Value • Implemented new go-to-market models in Soprole and Brazil – results now being seen • High Brazil milk price impacted returns in second half • Continued high-value from trading business in Caribbean Velocity 2015 2016 • Positive results from our Brazil transformation • Reduced exposure of US dollars in Venezuela 1. Includes sales to other strategic platforms Note: Excluding Venezuela, Latin America result: volume up 25 million LME to 611 million LME, normalised EBIT up $20 million to $99 million Page 28 © Fonterra Co-operative Group Ltd. China Farms Key to integrated dairy business Volume (m LME)1 164 Volume 40% 229 • • • 2015 2016 Normalised EBIT ($m) 2015 2016 Increased milk volume sold by 40% Ying expansion now complete – further volume growth in FY17 and FY18 as herd establishes Building first farm at third hub (Abbott JV) Value • • Reduced cash costs by RMB 0.81 per litre – Lower feed, labour, effluent, overheads costs Low Chinese milk price continues to impact earnings Velocity • -44 1. Includes sales to other strategic platforms Page 29 © Fonterra Co-operative Group Ltd. -59 • Hubs 1 & 2 now complete – capex now at maintenance levels Plan to capture downstream value by integrating our farms into our brands and sales channels in China Return on capital Comparison to competitors1 Revenue Mix Ingredients Consumer 63% 37% 43% 13% 57% 87% Total EBIT % Asset Efficiency Ratio Return on Capital 2016 2015 2014 2.1 12.4%2 8.9% 4.7% 5.1% 3.4 9.9%3 10.4% 8.9% 3.9% 3.1 7.5%3 7.9% 9.7% 8.3% 1.Arla and Friesland based on FY15 results (Dec year end), Fonterra based on FY16 results 2.Fonterra ROC as calculated for FY16 Annual Report 3.ROC for competitors calculated as NOPAT divided by Invested Capital. NOPAT defined as reported NPAT plus finance costs; Invested capital defined as two-year closing balance average of debt + equity – deferred tax Page 30 © Fonterra Co-operative Group Ltd. Financial discipline Strengthening balance sheet supports solid credit rating GEARING1 44.3 $506M% Down from 49.7% NET DEBT2 DEBT / EARNINGS3 $5.5B 2.8X 23% FREE CASH FLOW $2.2B Down from 4.7x CREDIT RATING A STABLE Fitch S&P 1. Gearing ratio is economic net interest bearing debt divided by economic net interest bearing debt plus equity excluding cash flow hedge reserve 2. Economic net interest-bearing debt 3. Debt payback ratio is economic net interest bearing debt divided by EBITDA. Both debt and EBITDA are adjusted for the impact of operating leases Page 31 © Fonterra Co-operative Group Ltd. A- STABLE Financial strength of the Co-op Strengthening balance sheet supports solid credit rating Working capital days2 Gearing¹ 39.1% 39.6% 42.3% 2012 2013 2014 Net debt3 49.7% 2015 44.3% 106 2016 2012 4,467 2012 2013 2013 5,473 4,732 2014 103 2015 87 77 2014 2015 2016 4.5 4.7 Debt / EBITDA ratio4 7,120 4,229 98 2016 2.9 3.0 2012 2013 2.8 2014 2015 2016 1. Gearing ratio is economic interest bearing debt divided by economic net interest bearing debt plus equity excluding cash flow hedge reserve; 2. Working capital days excludes amounts owing to suppliers; 3. Economic net interest-bearing debt ($ million); 4. Ratio is economic net interest bearing debt divided by EBITDA. Both debt and EBITDA adjusted for the Group impact Page 32 are © Fonterra Co-operative Ltd.of operating leases Diversified and prudent funding position Diversified profile¹ At 31 July 2016 ($ billion) USD DCM 15% Bank Facility 48% Prudent liquidity At 31 July 2016 ($ billion) Undrawn Facilities $3.7b 81% NZD DCM 15% AUD DCM 9% GBP DCM 6% CNY DCM 7% Bank facility maturity profile DCM maturity profile² At 31 July 2016 ($ billion) 1.8 At 31 July 2016 ($ billion) 1.8 1.2 WATM³: 2.9 years 1.2 0.6 0.6 0.0 0.0 1. Includes undrawn facilities and commercial paper 2. Excluding commercial paper 3. WATM is weighted average term to maturity Page 33 © Fonterra Co-operative Group Ltd. Drawn Facilities $0.9b 19% WATM³: 6.5 years Outlook Confidential to Fonterra Co-operative Group Page 34 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 Deliver on Foodservice potential 4 Grow our Anlene™ business 5 Selectively invest in milk pools 7 Align our business and organisation Page 35 Brazil transformation Maximise value through growth of the Beingmate partnership Develop leading positions in paed & maternal nutrition 6 Accelerate growth in consumer and foodservice in our 8 strategic and leadership markets © Fonterra Co-operative Group Ltd. China Farms – Downstream Value Australian endgame Disrupt Velocity / Engagement Our ambition is on track From (2015) Ambition Ingredients Revenue1 $0.7 / LME Consumer & Foodservice 2016 Ingredients $1.2 / LME $1.5 / LME $0.6 / LME Consumer & Foodservice $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% Gearing3 45-50% 40-45% 44.3% 1. Includes sales to other strategic platforms; 2. Return on Capital (ROC) excludes goodwill, brands and equity accounted investments; Group ROC including these items was 9.2% in FY16 (FY15: 6.9%); 3. Fonterra’s target is to maintain its strong investment grade credit rating and debt payback & cash flow coverage metrics that support this Page 36 © Fonterra Co-operative Group Ltd. 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 of this season – Expecting EU to revert to normal growth of 1% per annum – Fonterra inventory at historic low and milk supply forecast down – China imports in last 3 months are up 21% on last year – A supply or demand shock could significantly change the current outlook Page 37 © Fonterra Co-operative Group Ltd. Supplementary Information Confidential to Fonterra Co-operative Group Page 38 Normalised EBIT reconciliation $ million Year ended 31 July 2016 Year ended 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 provisions - 33 Less: Gain on DairiConcepts sale (68) - Less: Gain on Latin America strategic realignment - (129) (Less)/Add: Time value of options (28) 20 Total normalisation adjustments (73) 32 Total normalised EBIT 1,358 974 Page 39 © Fonterra Co-operative Group Ltd.