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

  1. Slide 1: 2010 Annual Results Market Briefing

    2010 Annual Results Market Briefing 18 October 2010 Andrew Ferrier (CEO) / Jonathan Mason (CFO)

  2. 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

  3. Slide 3: Snapshot of Fonterra

    Snapshot of Fonterra (Fonteers Page 3 Dairy for life

  4. 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

  5. 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

  6. 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

  7. Slide 7: Industry Overview

    Industry Overview (Fonteers Page 7 Dairy for life

  8. 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

  9. 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

  10. 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)

  11. Slide 11: 2010 Annual Result

    2010 Annual Result (Fonteers Page 11 Dairy for life

  12. 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

  13. 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.

  14. 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

  15. 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

  16. 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

  17. 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

  18. 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

  19. 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

  20. 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

  21. 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

  22. 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

  23. Slide 23: Strategic Priorities & Outlook

    Strategic Priorities & Outlook Page 23

  24. 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

  25. 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

  26. 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

  27. Slide 27: Capital Structure

    Capital Structure (Fonteers Page 27 Dairy for life

  28. 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

  29. 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

  30. Slide 30: Supplementary Information

    Supplementary Information Page 30

  31. 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

  32. 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

  33. 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

  34. 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

  35. 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

  36. 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).

  37. 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

  38. 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

  39. 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