Fonterra Investor Day – February 2017 – Presentation

FonterraInvestor DayINGREDIENTS BUSINESSFEBRUARY 2017

© Fonterra Co-operative Group Ltd.
Page 2
DisclaimerThis presentation may contain forward-looking state
ments 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 statemen
ts and projections involve
known and unknown risks, uncertainties, assumptions
and other important factors that could cause the a
ctual outcomes to be
materially different from the events or results exp
ressed or implied by such statements and projection
s. 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 pre
dicted by the Fonterra Group.
While all reasonable care has been taken in the pre
paration of this presentation none of Fonterra or a
ny of its respective
subsidiaries, affiliates and associated companies (
or any of their respective officers, employees or a
gents) (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 sta
tement or projection or any outcomes expressed or i
mplied in any forward-looking
statement or projection. The forward-looking statem
ents and projections in this report reflect views h
eld only at the date of this
presentation.
Statements about past performance are not necessari
ly indicative of future performance.
Except as required by applicable law or any applica
ble Listing Rules, the Relevant Persons disclaim an
y obligation or undertaking to
update any information in this presentation.
This presentation does not constitute investment ad
vice, or an inducement, recommendation or offer to
buy or sell any securities in
Fonterra or the Fonterra Shareholders’ Fund.

© Fonterra Co-operative Group Ltd.
Page 3
Session
Objectives
WelcomeSimon Till
•
Purpose
•
Overview of day
Ingredients Value CreationLukas Paravicini
•
Business overview
•
Quality of earnings and drivers
•
Ingredients strategy
Regulated ReturnPaul Washer
•
Explain Milk Price Model (MPM)
•
Ability to win/lose against MPM
OptimisationJosh Sigmund
•
Optimisation model at Fonterra
•
Relative value of product streams
OperationsRob Spurway
•
Manufacturing footprint and capacity
•
Conversion cost drivers
•
Capital spend profile
NZMP SalesKelvin Wickham
•
Product portfolio – key categories
•
Depth of market
•
Ability to capture value
StrategyTheo Spierings
•
Fonterra strategy & ambition
•
Role of Ingredients
Q&A / Close
•
Open Q&A
Contents

© Fonterra Co-operative Group Ltd.
Page 4
Welcome – Simon Till Director Capital Markets

© Fonterra Co-operative Group Ltd.
Page 5
Investor Day purpose“Improve understanding of the Ingredients business
and key earnings drivers”
1.
Value creation framework•
The business–
Full value chain, optimisation and product mix
•
Quality of earnings–
Regulated return and value-add, key drivers
2.
Strategy•
Current: developing optionality, higher sustainable
earnings
•
Future: decision-framework, global market trends
Ingredients – the engine of Fonterra
12

© Fonterra Co-operative Group Ltd.
Page 6
Ingredients value chain
Collect milk
from over
10,000 supplier
shareholder
farms
Optimise
product mix for
20 billion litres
of milk to
maximise value
Find demand
for over 30
product groups
through our
global NZMP
sales force
Lowest cost
and highest
quality
production at
over 30 sites
Deliver
2.7 million MT
to over 140
countries via
global supply
chain
Supply high
value
products and
solutions to
hundreds of
customers
Milk
Collection
Contract
Production
Optimisation
Shipment
Customer

© Fonterra Co-operative Group Ltd.
Page 7
Ingredients Value CreationLukas ParaviciniCFO

© Fonterra Co-operative Group Ltd.
Page 8
Global scale and leadership
22
17
15
14
14
13
12
8
8
8
Fonterra
DFA
Lactalis
Arla Foods
Nestle
Friesland
Campina
Dean Foods
DMK
Saputo
Danone
Intake (million tonnes)
1. Source: IFCN 2015. DFA collects 28.1 million tonn
es but processes an estimated 17.1 million tonnes.
11 million tonnes sold to other processors.
2. Source: Fonterra, Global Trade Information Servic
es. Note: Excludes intra-European trade, informatio
n for calendar year 2015.
Global sales force accessing 140+ countriesWorld’s largest milk processor¹
World’s largest dair
y exporter²
17%
48%
16%
39%
Total Market
share
WMP share
SMP share
Butter share
Fonterra’s % share of
global
exports

© Fonterra Co-operative Group Ltd.
Page 9
0
0.20.40.60.8
1980
1984
1988
1992
1996
2000
2004
2008
2012
2016
Fonterra has increased the value of New Zealand milk and encouraged volumes to growNote: 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 (Netherlan
ds milk price)
Global milk prices (USD / litre)
New Zealand versus
Australian milk pool (m kgMS)
NZ / FonterraUSEU
400600800
1,0001,2001,4001,6001,8002,000
M kgMS
NZ
AUS

© Fonterra Co-operative Group Ltd.
Page 10
Ingredients business is two-thirds of Fonterra’s earnings1. Unallocated costs and eliminationsNote: Total Ingredients EBIT includes ($16m) in eli
minations and other EBIT
IngredientsConsumer &FoodserviceChina FarmsGroup
1
$1.4b
$1.2b$0.6b($0.06b)($0.37b)
FY16 Normalised EBIT
$1.2b
NZ Ingredients
$1,140m
Australia Ingredients
$63m
Latam Ingredients
$18m
Farm Source Stores
($1m)

© Fonterra Co-operative Group Ltd.
Page 11
Milk
Collection
Contract
Production
Optimisation
Shipment
Customer
Value created at each stage
•
Collect all milk
•
Capture right to earn regulated return
•
Set optimal 18-month plan
•
Create maximum value from all product streams
•
Sell to plan
•
Generate demand and premiums for spec, supply, terms, etc.
•
Produce to plan and contracted sales
•
Minimise cost and maximise quality
•
Store and ship
•
In-market storage for greater flexibility
•
Payment on competitive terms
•
Create value-in-use for customers
Monetise Optionality
•
Creating value through flexibility between products, assets and customers including financial derivatives

© Fonterra Co-operative Group Ltd.
Page 12
NZ Ingredients earnings significantly exceed Milk Price Model (MPM) benchmark
Milk Price Model
1,566m kgMS
Revenue
Milk Cost
Other
COGS
Gross
Margin
SG&A
Normalised
EBIT
$9.1b$5.83
$6.1b$3.90
$2.0b$1.29
$1.0b$0.64
$0.4b$0.23
$0.65b
$0.41
Total:per kgMS:
FY16
NZ Ingredients
1,583m kgMS
Total:per kgMS:
$11.8b
$7.49
$6.2b$3.90
$3.9b$2.49
$1.7b$1.10
$0.6b$0.38
$1.14b
$0.72
Fonterra

© Fonterra Co-operative Group Ltd.
Page 13
Milk Price
Model (MPM)
NZ
Ingredients
Milk CostOther CostsMargin
Important definitions for New Zealand Ingredients
Regulated ReturnPrice AchievementStream Return
Base Price
Contract Price
Reference Price
EarningsRegulated Return
Allowed return on capital per the MPM
Price Achievement
Price achieved over and above benchmark Base Prices
Stream Return
Differential between MPM GM and GM on benchmark Base Prices
Milk Price Gap
Cost differential between Fonterra actuals and MPM
PricesReference Price
Weighted average price of standard specification RCPs on GDT and Spot
Contract Price
Actual realised selling price of Fonterra product
Base Price
Market-referenced benchmark used internally by Fonterra (GDT referenced)
Milk Price Gap
Note: RCP = Reference Commodity Product (WMP, SMP,
Butter, AMF, BMP)
Non-RCP = All other Ingredients products (eg. Chees
e, Proteins, Specialty, Nutritionals)

© Fonterra Co-operative Group Ltd.
Page 14
New Zealand Ingredients earnings and drivers
•
WACC rate
•
Fixed asset base (model)
•
Actual working capital – RCP sales rate, advance rat
e
•
Timing of sales
•
Base prices
•
Volumes
•
Customer willingness-to-pay for solutions/services/
supply
•
Contract risk, e.g. long-dated, fixed-price
•
Actual manufacturing footprint
•
Product mix and volumes
•
Operating performance
•
Timing of manufacture
Component
Definitions
Drivers
Regulated
Return
Stream
Return
Price
Achievement
Milk Price
Gap
Other
•
Timing of sales
•
Performance of individual businesses
•
Global dairy prices and ability to arbitrage
•
Opex spend levels
•
Product mix
•
Asset flexibility
•
Volumes
•
Customer demand and contract profile
+ Earnings component of Milk Price from WACC
(weighted average cost of capital) return on modell
ed
assets
+ Revenue achieved over Base Price-
Incremental supply chain costs over Milk Price mod
el
+/- Risk management on contract pricing+/- Delta between actuals and Milk Price costs for R
CPs
+/- Delta between actual operating costs for produci
ng
Non-RCPs and Milk Price Model cost for processing same volume of milk into RCPs
+ Liquid milk sales (under DIRA)+ Kotahi (incremental to Milk Price) & DFE JV earning
s
+ Global sourcing-
Incremental SG&A over Milk Price model
+/- Gross margin differential between Non-RCP produc
t
streams and WMP stream (based on base prices)

© Fonterra Co-operative Group Ltd.
Page 15
Regulated Return and Price Achievement and most important earnings buckets
1,140
680
140
650
(435)
105
Regulated
Return
Stream
Return
Price
Achievement
Milk Price
Gap
Other
NZ Ingredients
EBIT
FY16 New Zealand Ingredients earnings ($m)Note: Regulated Return is that earned in the FY (ba
sed on actual sales) rather than total outlined in
the Milk Price model for the season (a different ti
me period)

© Fonterra Co-operative Group Ltd.
Page 16
0
400800
1,2001,6002,000
WMP
SMP Cream BMP Cheese Casein MPC Nuts &
Other
Lactose Whey
kMT
Non RCP Streams (37% of Production)
RCP Streams (63% of Production)
RCP Products
1
72% of total
Non-RCP Products
2
28% of total
In FY16,
NZ Ingredients
manufactured 2.7m MT
72% were RCP products
In FY16,
Milk Price Model
production was 3m MT
1. RCP = Reference Commodity Product (WMP, SMP, Cre
am (Butter & AMF), BMP) – only products manufactured
in the Milk Price Model
2. Non-RCP = All other Ingredients products (eg. Ch
eese, Proteins, Specialty, Nutritionals)
Note: Manufacture of Non-RCP product streams (eg. C
asein) produces RCP by-products (eg. Cream) – these
volumes are not included in the Milk Price Model
RCP products make up the bulk of our volumeNon-RCP products the bulk of our value
0
400800
1,2001,6002,000
WMP
SMP
Cream
BMP
kMT
RCP Products
1
100% of total

© Fonterra Co-operative Group Ltd.
Page 17
Value of Non-RCP comes from higher selling prices relative to RCP
RCP
1,083m kgMS
per kgMS:
$5.81
$3.85
$1.38
$0.59
NZ Ingredients
1,583m kgMS
Revenue
Milk Cost
Other COGS
Gross Margin
per kgMS:
$7.49
$3.90
$2.49
$1.10
Milk Price Model
1,566m kgMS
per kgMS:
$5.83
$3.90
$1.29
$0.64
FY16
Non-RCP
423m kgMS
per kgMS:
$8.46
$4.04
$2.13
$2.30
Fonterra

© Fonterra Co-operative Group Ltd.
Page 18
Strong value creation strategy in place
Our Vision and Objectives
Cash Generators
Growth Generators
New Business Generators
Organisational Capabilities:
Org design will need to support new approach
Capital Structure:
Global Co-op Model
‘Must do’
Source of cash to finance growth
‘Can do’
Source of future cash
‘Want to do’
Mould-breaking investment opportunities
CREATE OPTIONALITY•
Improve asset flexibility to achieve a 50% reduction in Non-RCP force-make and improve returns from Non-RCP streams
•
Increase options in our contract book through more flexible contracting and channels to market
•
Grow and leverage financial contracts
MULTI-HUBS•
Align demand with most attractive milk pools
•
Accelerate investment in whey from Europe
•
Build nutritionals/cheese/whey COE in Australia
•
Invest in Chilean milk hub to service expansion in Brazil
•
Align China Farms to in-market processing facilities
REBALANCE PORTFOLIO•
Rebalance current portfolio to improve earnings stability and enable growth
•
Invest in mozzarella, UHT (NZ sourced and recombined), speciality and nutritionals
•
Reduce allocations to natural cheese and casein

© Fonterra Co-operative Group Ltd.
Page 19
Our multi-hub strategy is already in place
•
Enable growth of Ingredients business to support customer demand (All)
•
Secure access for our NZ milk exports (China and Sri Lanka)
•
De-risk supply for ingredients customers (Australia and Europe)
•
Optimise our ingredients manufacturing footprint (Europe and US)
•
Enable our development of higher margin consumer brands and foodservice opportunities (Chile, China and Australia)
Primary investment
Complementing our New Zealand Milk Pool
Milk Powders / FoodserviceWhey
Cheese / Whey / NutritionalsUHT

© Fonterra Co-operative Group Ltd.
Page 20
We are rebalancing our New Zealand asset portfolio through recent and future investments
Neutral
(Invest if returns significantly
exceed cost of capital over time)
Accelerate Investment
Reduce
(Allocation)
Grow with Market
Supports Earnings Stability/Growth
High
Low
Supports V3 Strategy
HighLow
Specialty &
Functional
Proteins
UHT
Mozz / SOS
Cream
Cheese
Butter / AMF
WMP / SMP
Natural
cheese
Casein

© Fonterra Co-operative Group Ltd.
Page 21
Developing optionality across Ingredients to deliver higher sustainable earnings
Precedents
Grain (Cargill)Utilities (electricity)Oil industry
-400-300-200-100
0
100200300
May-98
Oct-98
Mar-99
Aug-99
Jan-00
Jun-00
Nov-00
Apr-01
Sep-01
Feb-02
Jul-02
Dec-02
May-03
Oct-03
Mar-04
Aug-04
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
Dec-12
May-13
Oct-13
Relative Variable Cost Stream Returns (cents/kgMS)
Relative Stream Returns: RCP's vs Non-RCP's
Relative Stream Returns (Non-RCP less RCP)
Volatility (Change in Monthly Relative Returns)
Deeper demand, increased penetration of key markets (eg. cheese in US/EU/JPN)
If the scale of our capacity is matched by greater
depth and flexibility in sales channels, and financi
al markets,
substantially higher and less volatile earnings are
possible
New capacity removing
production constraints
That are less volatile and
difficult for competitors to
match
Increase our contract book to
reduce demand constraints
Made deeper to enable asset
flexibility to be monetised
Asset Flexibility
Higher Sustainable
Earnings
Mix Optimisation
Financial (futures)
Markets
Production Constraints
Asset
Flexibility
Positive impact on Earnings and Milk Price
Greater Optionality
Peak Milk Production

© Fonterra Co-operative Group Ltd.
Page 22
Key messages on Ingredients value•
Ingredients business is two-thirds of Fonterra’s ea
rnings
•
Milk Price Model allows us to earn a Regulated Retu
rn
•
Optionality in NZ Ingredients business creates high
er earnings than Milk Price Model
•
Our strategy has increased optionality and quality
of earnings

© Fonterra Co-operative Group Ltd.
Page 23
Regulated Return Paul WasherDirector Financial Performance & Planning

© Fonterra Co-operative Group Ltd.
Page 24
Milk Price Model & Regulated Return
•
WACC rate
•
Fixed asset base (model)
•
Actual working capital – RCP sales rate, advance rat
e
•
Timing of sales
•
Base prices
•
Volumes
•
Customer willingness-to-pay for solutions/services/
supply
•
Contract risk, e.g. long-dated, fixed-price
•
Actual manufacturing footprint
•
Product mix and volumes
•
Operating performance
•
Timing of manufacture
Component
Definitions
Drivers
Regulated
Return
Stream
Return
Price
Achievement
Milk Price
Gap
Other
•
Timing of sales
•
Performance of individual businesses
•
Global dairy prices and ability to arbitrage
•
Opex spend levels
•
Product mix
•
Asset flexibility
•
Volumes
•
Customer demand and contract profile
+ Earnings component of Milk Price from WACC
(weighted average cost of capital) return on modell
ed
assets
+ Revenue achieved over Base Price-
Incremental supply chain costs over Milk Price mod
el
+/- Risk management on contract pricing+/- Delta between actuals and Milk Price costs for R
CPs
+/- Delta between actual operating costs for produci
ng
Non-RCPs and Milk Price Model cost for processing same volume of milk into RCPs
+ Liquid milk sales (under DIRA)+ Kotahi (incremental to Milk Price) & DFE JV earning
s
+ Global sourcing-
Incremental SG&A over Milk Price model
+/- Gross margin differential between Non-RCP produc
t
streams and WMP stream (based on base prices)

© Fonterra Co-operative Group Ltd.
Page 25
Rationale for a Milk Price Model•
Currently there is no true market for all raw milk produced in New Zealand
•
No ‘market price
’ for milk collected within
New Zealand
•
Farmgate Milk Price provides farmers with a market signal
1. Information from Dairy NZ Annual Reports
Share of New Zealand milk collection 2015/16 season¹
400600800
1,0001,2001,4001,6001,8002,000
M kgMS
NZ
AUS
Fonterra
84.1%
Westland3.7%
Open Country Dairy6.1%
Synlait2.9%
Tatua0.8%
Miraka1.1%
Other1.3%

© Fonterra Co-operative Group Ltd.
Page 26
•
Farmgate Milk Price methodology is codified in the F
armgate Milk Price Manual
•
This detailed framework is guided by the Farmgate Mi
lk Price Principles:
–
Should reflect the benefits of scale and other econ
omies enjoyed by Fonterra
–
Should be the
maximum
amount an
efficiently
-
run
commodity player can
sustainably
pay
–
Should allocate the impact of risks between supplie
rs (via the Farmgate Milk Price)
and Fonterra based on an ability to manage it
Milk Price Model follows three basic principles
123
Transparent governance, audit and reporting process
es

© Fonterra Co-operative Group Ltd.
Page 27
Milk Price Model allows Fonterra to retain specified dollar amount as Regulated Return1. 1,566m kgMSNote: MPM year-end is 31 May versus Fonterra at 31
July; gross revenue shown
Based on GDT and spot prices
of reference commodity
products (RCPs)
Combination of actual and
assumed operating costs –
includes depreciation
WACC return on both fixed
assets and working capital
NZD
$9.1b$2.4b$0.6b$6.1b
$5.83$1.52$0.41$3.90
WACC rate 5.9%
$6.9b fixed assets
$1.3b working capital
Reference Commodity
Products 100%
Milk Price Revenue
Milk Price Cash Costs
Regulated Return
(Milk Price Capital Costs)
Farmgate Milk Price
Per kgMS¹
Currently over $600m
2016 Milk Price Model

© Fonterra Co-operative Group Ltd.
Page 28
Drivers of the Regulated Return
Drivers of the Milk Price
Milk Price Model passes number of risks through to Milk Price but some are carried by EBIT
WACC rate
Fixed asset
base
Working
capital
Timing of
sales
•
Adjusted annually in line with market interest rates an
d
funding spreads to government bonds (NZ 5-year)
•
Beta adjusted through 5-yearly review
•
Reviewed annually to assess sufficient modelled capacity to

process forecast milk volumes
•
Assets depreciated over asset life then ‘replaced’
•
Moves with changes in RCP sales rates and the advance rate of payments to Fonterra suppliers
•
Model uses Fonterra’s actual sales phasing of RCPs
•
Regulated return may be earned through product sale i
n next
financial year
Changes that ‘pass through’ to the Milk PriceRCP product mixRCP sales phasingCommodity pricesCurrencyResource unit costsMilk collection and logistics costs

© Fonterra Co-operative Group Ltd.
Page 29
Milk Price then forms key component of New Zealand Ingredients COGS
1. Includes “approved adjustments” in respect of, f
or example, premiums for organic milk and winter mi
lk
Milk Price paid to NZ farmers
NZ Ingredients
Reference Commodity Products
100%
RCPs
~70%
Milk Price Revenue
Milk Price Cash Costs
Regulated Return
(Milk Price Capital Costs)
Operating and
Overhead Costs
Revenue
Farmgate Milk
Price¹
Farmgate Milk
Price¹
Operating and
Overhead Costs
Revenue
NZ Ingredients EBIT
Non-RCPs
~30%
Optimisation
Farmgate Milk Price

© Fonterra Co-operative Group Ltd.
Page 30
•
Fixed dollar amount calculated on annual basis
•
Variable component linked to actual working capital
•
Independent of milk volume in given year
•
Can be offset by pricing risk in product mix decisions
Key messages on Regulated Return

© Fonterra Co-operative Group Ltd.
Page 31
OptimisationJosh Sigmund Director NZMP Sales and Transformation

© Fonterra Co-operative Group Ltd.
Page 32
Optimisation & Stream Return
•
WACC rate
•
Fixed asset base (model)
•
Actual working capital – RCP sales rate, advance rat
e
•
Timing of sales`
•
Base prices
•
Volumes
•
Customer willingness-to-pay for solutions/services/
supply
•
Contract risk, e.g. long-dated, fixed-price
•
Actual manufacturing footprint
•
Product mix and volumes
•
Operating performance
•
Timing of manufacture
Component
Definitions
Drivers
Regulated
Return
Stream
Return
Price
Achievement
Milk Price
Gap
Other
•
Timing of sales
•
Performance of individual businesses
•
Global dairy prices and ability to arbitrage
•
Opex spend levels
•
Product mix
•
Asset flexibility
•
Volumes
•
Customer demand and contract profile
+ Earnings component of Milk Price from WACC
(weighted average cost of capital) return on modell
ed
assets
+ Revenue achieved over Base Price-
Incremental supply chain costs over Milk Price mod
el
+/- Risk management on contract pricing+/- Delta between actuals and Milk Price costs for R
CPs
+/- Delta between actual operating costs for produci
ng
Non-RCPs and Milk Price Model cost for processing same volume of milk into RCPs
+ Liquid milk sales (under DIRA)+ Kotahi (incremental to Milk Price) & DFE JV earning
s
+ Global sourcing-
Incremental SG&A over Milk Price model
+/- Gross margin differential between Non-RCP produc
t
streams and WMP stream (based on base prices)

© Fonterra Co-operative Group Ltd.
Page 33
Fonterra’s optimisation process1. S&OP = Sales & Operations Planning
18
12
6
1
0
•
Rolling 2-week schedule
•
Controlled by central planning with local scheduling
•
Consumer regions plan in-line with demand forecasts
•
Single global S&OP for Ingredients
•
Consumer regions input via demand signals sent to S&OP
•
Overseen by Global S&OP
•
Group function driven by analysis and scenario-testing
•
Manages Global S&OP
•
Defines global asset portfolio
Global Ingredients S&OP
1
Strategic Portfolio Management
Tactical
Manufacturing and Logistics
Operational
Strategic
Months

© Fonterra Co-operative Group Ltd.
Page 34
Commodity prices / Stream returns
New Zealand
asset footprint
Supply
Customer demand / contract profile
Optimisation factors
Return ($)
12
34

© Fonterra Co-operative Group Ltd.
Page 35
Optimisation allocates the components of milk to the highest value product streams1. NPN = Non-Protein Nitrogen
Water 86%
Total Solids 14%
Minerals 0.8%Lactose 4.6%NPN
1
0.2%
Whey Protein 0.6%Casein Protein 2.9%
Milk Solids 8.5%
Fat 4.8%
Protein 3.7%
Skim Milk
Whole Milk
Cream
Standardised
Whole Milk
AMF
Ammix
Butter
Fritz Butter
Fat Mixes,
Cream
Cheese
Buttermilk
BMP
Complex
Lipids
WMP
UHT Milk
Yoghurt
Cheese
SM
Permeate*
SM
Retentate
TMP, MPC,
MPI
Casein
Caseinate
Casein Whey
Cheese
Whey
Whey Cream
Whey AMF
Treated
Whey
WPC, WPI
Lactalbumin
Whey
Permeate
ALAMIN
SMP
SM
Permeate,
Lactose
SM
Permeate,
Lactose
Ethanol
Lactose*
Whey
Powder
SM
Retentate

© Fonterra Co-operative Group Ltd.
Page 36
Fonterra produces and sells three distinct groups of dairy ingredients
Powders
Cheese
Protein

© Fonterra Co-operative Group Ltd.
Page 37
BMP
BMP
Butter
WPC
Lactose
AMF
Downstream / by-products are created when we produce any one product
Powder Stream — Whole Milk Power
Protein Stream — Rennet Casein

© Fonterra Co-operative Group Ltd.
Page 38
Protein Stream
Rennet Casein
Powder Stream
Whole Milk Powder
$2,800
-
200
$2,600
x 1.75
$4,550
+ 700
$5,250
525
$7,000
-
1,000
$6,000
x 0.36
$2,160
+ 4,200
$6,360
636
Base Price
NZD / MT productNZD / MT product
Variable Cost
NZD / MT product
Product Margin
MT product / MT MS
Yield
NZD / MT MS
Base Product Return
NZD / MT MS
Downstream Products
NZD / MT MS
Stream Return
NZc / kg MS
Stream Return (c/kgMS)
We evaluate stream returns fortnightly and optimise our available production
Note: Numbers are for illustration purposes only

© Fonterra Co-operative Group Ltd.
Page 39
Relative product stream returns provide short and long-term value creation opportunitiesOptimisation allows us to profit from short-term optionality
Long-term strategy is to move asset portfolio towards higher returning Non-RCP streams
Individual Product Streams
Stream Return (c/kgMS)
0%2%4%6%8%
10%12%14%
-200
-180
-160
-140
-120
-100
-80
-60
-40
-20
0
20
40
60
80
100
120
140
160
180
200
Relative Stream Returns: 2006-2016
Non-RCP less RCP (cents/kgMS)
Average: +12c/kgMSMedian: +27c/kgMS

© Fonterra Co-operative Group Ltd.
Page 40
New Zealand’s milk supply profile and our asset footprint provide considerable constraints
PeakPlants run at maximum capacity
NZ Total
Factory
Capacity
Year 1Year 2Year 3
New Zealand asset base
Optionality in the shoulders of the season

© Fonterra Co-operative Group Ltd.
Page 41
Current footprint allows flexibility between RCP and Non-RCP product streamsProduction capacity by commodity group
Production ca
pacity by RCP and Non-RCP
Non-RCP production range of approximately 25% to 45%
North Island
South Island
NZ
North Island
South Island
NZ
OtherMPCCaseinCheeseSMPWMP
Non-RCPRCP

© Fonterra Co-operative Group Ltd.
Page 42
Committed volumes impact flexibility but offer incremental valueNote: Numbers are for illustration purposes and do
not reflect actuals
Contracted Demand
Committed Demand
GDT
Optimisable Demand
0%
20%40%60%80%
100%
1
2
3
4
5
6
7
8
9
10
11
12
% of Demand
Month

© Fonterra Co-operative Group Ltd.
Page 43
•
Drives product mix
•
Maximises for total shareholder value – Milk Price and EBI
T combined
•
Based on projected demand at forecast prices
•
Constrained by milk supply and asset footprint
•
Creates potential (positive or negative) stream return r
isk
•
Long-run prices favour allocation to Non-RCP capacity
Key messages on Optimisation

© Fonterra Co-operative Group Ltd.
Page 44
Global Operations Robert SpurwayCOO Global Operations

© Fonterra Co-operative Group Ltd.
Page 45
Operations and Milk Price Gap
•
WACC rate
•
Fixed asset base (model)
•
Actual working capital – RCP sales rate, advance rat
e
•
Timing of sales`
•
Base prices
•
Volumes
•
Customer willingness-to-pay for solutions/services/
supply
•
Contract risk, e.g. long-dated, fixed-price
•
Actual manufacturing footprint
•
Product mix and volumes
•
Operating performance
•
Timing of manufacture
Component
Definitions
Drivers
Regulated
Return
Stream
Return
Price
Achievement
Milk Price
Gap
Other
•
Timing of sales
•
Performance of individual businesses
•
Global dairy prices and ability to arbitrage
•
Opex spend levels
•
Product mix
•
Asset flexibility
•
Volumes
•
Customer demand and contract profile
+ Earnings component of Milk Price from WACC
(weighted average cost of capital) return on modell
ed
assets
+ Revenue achieved over Base Price-
Incremental supply chain costs over Milk Price mod
el
+/- Risk management on contract pricing+/- Delta between actuals and Milk Price costs for R
CPs
+/- Delta between actual operating costs for produci
ng
Non-RCPs and Milk Price Model cost for processing same volume of milk into RCPs
+ Liquid milk sales (under DIRA)+ Kotahi (incremental to Milk Price) & DFE JV earning
s
+ Global sourcing-
Incremental SG&A over Milk Price model
+/- Gross margin differential between Non-RCP produc
t
streams and WMP stream (based on base prices)

© Fonterra Co-operative Group Ltd.
Page 46
Global Operations expertise from grass-to-glass
Over 10,000 suppliers
4.5 million cows
20 billion litres
96 primary plants across
33 site locations
2.7m MT of product
55 Fonterra owned stores
30 third party providers
Kotahi Maersk strategic p/ship
5 deep sea ports, >1,800 voyages
300+ destination ports
14 depots
506 tankers
95 million kilometres
Fonterra vats:
2.4 million farm
collections
Secondary processing:
Eltham cheese,
Canpac infant formula
Coda logistics reduces
waste
End-to-end control of our products

© Fonterra Co-operative Group Ltd.
Page 47
FOODSERVICESTRATEGY
GLOBAL INGREDIENTS STRATEGY
CONSUMERSTRATEGY
ENHANCING OUR REPUTATION
Supporting all parts of Fonterra business

© Fonterra Co-operative Group Ltd.
Page 48
Globally Optimised, Multi-hub, Multiple sources
Turning the wheel with
integrated category teams
Partner in the delivery of our Ingredients strategyTo be the #1 preferred supplier of dairy ingredient solutions
Global Operations strategy connection
Consolidating our #1 dairy ingredients reputation through foundations of trust in source, delivery performance and customer satisfactionConversion cost leadershipCreation of
differentiated products and
segmented supply chains
and to create customer
value across the dairy ingredients portfolioGlobal supply points for security and speed of supp
ly

© Fonterra Co-operative Group Ltd.
Page 49
Production spread across 10 different product groups
0
400800
1,2001,6002,000
WMP
SMP Cream BMP Cheese Casein MPC Nuts &
Other
Lactose Whey
kMT
Non RCP Streams (37% of Production)
RCP Streams (63% of Production)
RCP Products
1
72% of total
Non-RCP Products
2
28% of total
In FY16,
NZ Ingredients
manufactured 2.7m MT
72% were RCP products
In FY16,
Milk Price Model
production was 3m MT
1. RCP = Reference Commodity Product (WMP, SMP, But
ter, AMF, BMP) – only products manufactured in the M
ilk Price Model
2. Non-RCP = All other Ingredients products (eg. Ch
eese, Proteins, Specialty, Nutritionals)
Note: Manufacture of Non-RCP product streams (eg. C
heese) produces RCP by-products (eg. Cream) – these
volumes are not included in the Milk Price Model
0
400800
1,2001,6002,000
WMP
SMP
Cream
BMP
kMT
RCP Products
1
100% of total

© Fonterra Co-operative Group Ltd.
Page 50
$1.9b
$3.7b
$0.4b
$0.7b
$0.2b
$1.28 / kgMS
$2.47 / kgMS
$0.5b
Majority of costs in primary processing and storage
•
Fixed costs of $730m
•
Variable costs of $865m
•
Domestic supply chain costs of $315m
•
Eltham cheese
•
Waitoa UHT
•
Canpac
•
Waharoa Agbiz
•
Heerenveenwhey and lactose
•
Product management and development
•
Asset footprint and optimisation
•
Plant automation and process control
•
Product testing laboratories
•
Overheads
•
Sea freight costs
•
Collecting raw milk from farm vats
Milk collection
Direct manufacturing and domestic supply chain cost
Secondary processing / other
Shared services
Shipping costs
Total Global Operations costs

© Fonterra Co-operative Group Ltd.
Page 51
0.45
0.36
0.23
0.55
0.34
0.12
Variable
Costs
Fixed Costs
Domestic
Supply
Chain Costs
Non-RCPs
$1.28 / kgMS
$2.47 / kgMS
1.03
1.01
$1.9b
$3.7b
Gap to Milk Price Model is driven by production of Non-RCPs and higher storage costs
1.26
0.69
Powder Plants Cream Plants
$2.02 / kgMS
(Fonterra GO Plants)
Milk collection
Direct manufacturing and domestic supply chain cost
Secondary processing / other
Shared services
Shipping costs
Total Global Operations costs
$1.03 / kgMS
RCPs

© Fonterra Co-operative Group Ltd.
Page 52
Ingredient variable costs / kgMS manufactured
Peak milk costs (
$m)
Ingredient fixed costs / kgMS manufactured
Manufacturing qu
ality costs ($m)
Performance focus is on balancing customer service and lower unit costs while mitigating risksManufacturing costs
Key risks
13
75
59
0
FY13
FY14
FY15
FY16
50
74
64
33
11
7
37
14
FY13
FY14
FY15
FY16
GradingComplaints
$0.90
$0.96
$0.96
$0.91
$ 0.78
FY12
FY13
FY14
FY15
FY16
$0.74
$0.78
$0.71
$0.74
$0.78
FY12
FY13
FY14
FY15
FY16

© Fonterra Co-operative Group Ltd.
Page 53
Capital plan is driven by asset portfolio strategy
Neutral
(Invest if returns significantly
exceed cost of capital over time)
Accelerate Investment
Reduce
(Allocation)
Grow with Market
Supports Earnings Stability/Growth
High
Low
Supports V3 Strategy
HighLow
Specialty &
Functional
Proteins
UHT
Mozz / SOS
Cream
Cheese
Butter / AMF
WMP / SMP
Natural
cheese
Casein

© Fonterra Co-operative Group Ltd.
Page 54
Passed period of significant capacity spend and now focusing on higher return on capital investments
0
100200300400500600700800
900
FY15
FY16
FY17
$ million
Capacity
Stay in business
Enviromental / Food Safety
Investing for Returns
CIP KitchenWaitoa UHTSlice-on-Slice

© Fonterra Co-operative Group Ltd.
Page 55
•
Manufacture according to optimal plan
•
Focus on gap to Milk Price Model but strategic decisions to
take on more
cost in order to produce Non-RCPs or add value to RCPs
•
Key value drivers are efficiency, service, quality, and asset
footprint
•
Future investments aligned to value add strategy and capa
city requirements
Key messages on Global Operations

© Fonterra Co-operative Group Ltd.
Page 56
NZMPKelvin WickhamCOO NZMP

© Fonterra Co-operative Group Ltd.
Page 57
NZMP Sales and Price Achievement
•
WACC rate
•
Fixed asset base (model)
•
Actual working capital – RCP sales rate, advance rat
e
•
Timing of sales`
•
Base prices
•
Volumes
•
Customer willingness-to-pay for solutions/services/
supply
•
Contract risk, e.g. long-dated, fixed-price
•
Actual manufacturing footprint
•
Product mix and volumes
•
Operating performance
•
Timing of manufacture
Component
Definitions
Drivers
Regulated
Return
Stream
Return
Price
Achievement
Milk Price
Gap
Other
•
Timing of sales
•
Performance of individual businesses
•
Global dairy prices and ability to arbitrage
•
Opex spend levels
•
Product mix
•
Asset flexibility
•
Volumes
•
Customer demand and contract profile
+ Earnings component of Milk Price from WACC
(weighted average cost of capital) return on modell
ed
assets
+ Revenue achieved over Base Price-
Incremental supply chain costs over Milk Price mod
el
+/- Risk management on contract pricing+/- Delta between actuals and Milk Price costs for R
CPs
+/- Delta between actual operating costs for produci
ng
Non-RCPs and Milk Price Model cost for processing same volume of milk into RCPs
+ Liquid milk sales (under DIRA)+ Kotahi (incremental to Milk Price) & DFE JV earning
s
+ Global sourcing-
Incremental SG&A over Milk Price model
+/- Gross margin differential between Non-RCP produc
t
streams and WMP stream (based on base prices)

© Fonterra Co-operative Group Ltd.
Page 58
NZMP is the leading player in the globally traded dairy marketSources: International Farm Comparison Network (IFC
N), Economist Intelligence Unit (EIU), Euromonitor,
Fonterra analysis
Note: Volume is on an LME basis with standardised c
omposition of milk (4.2% fat / 3.5% protein)
New Zealand
Globally Traded Dairy Market
1,3
Formal Dairy Market
2,3
•
Significant participant in tradable market
•
Global export/import market
•
Informs Farmgate Milk Price
•
Reflects total dairy demand
21b L
66b L
415b L
25b L
2% growth pa
91b L
5.5% growth pa
465b L
2.3% growth pa
2015 Baseline
2020 Projection

© Fonterra Co-operative Group Ltd.
Page 59
Volatility is here to stay
- 50 100 150 200
0
1,0002,0003,0004,0005,0006,000
5/01/1997
5/01/1999
5/01/2001
5/01/2003
5/01/2005
5/01/2
007
5/01/2009
5/01/2011
5/01/2013
5/01/2015
Import Volume (000 MT)
USD/MT
WMP Imports
1
1. China, Algeria and Venezuela
NZ WMP price ($/MT)
Crude oil price ($/MT)

© Fonterra Co-operative Group Ltd.
Page 60
NZMP – ingredients business with global reachOur major hubs and sales offices are close to our customers
Netherlands
USA
Mexico
New Zealand
Singapore
China
Japan
Major NZMP sales hubs
Americas
Europe & MEA
Greater
China
North Asia
Dubai
NZMP sales office
South Korea
Taiwan
Australia
Thailand
Egypt
Algeria
France
Nigeria
Brazil
Russia
Venezuela
Canada
Philippines
South Africa
NZ & Australia Ingredients Sales Volumes
353
K
MT
= 0%
778
K
MT
4%
721
K
MT
2%
630
K
MT
17%
161
K
MT
2%
297
K
MT
10%
40%
43%
22%
12%
2%
18%
SEA
Oceania
FY16
growth rate
FY15
growth rate
FY16 sales volume

© Fonterra Co-operative Group Ltd.
Page 61
We have a long history of developing products and markets
1960s
1970s
1980s
1990s
2000s
Mechanise casein production
Technical sales
delegations to China
Whole milk powder into Venezuela
Specialty proteins at scaleMozz cheese technology
Functional proteins for bars
Protein for sports drinks

© Fonterra Co-operative Group Ltd.
Page 62
Customer
Leadership
Committed
Teams
Five strategic pathways to drive sustained value creation
Segmentation and value propositionsCustomer plansPrice and contract management
Strong innovation pipelineBuild NZMP Brand
Customer price risk management solutionsArbitrageFinancing solutions
Global milk poolsGlobal supply chain and logistics hubsCustomer-led operations
Top quartile engagementSales & marketing capability build
Category
Solutions
Central
Portfolio
Management
Connecting
Our World

© Fonterra Co-operative Group Ltd.
Page 63
Sales & Marketing Capability
Customer-central Roadma
p
Integrated Business Planning
SmartPrice
Investing in our People and Processes
13
24
Segmentation
and Price Guidance
Scientific Analytics
SmartPrice
Data feed
Committed
Teams

© Fonterra Co-operative Group Ltd.
Page 64
0%
20%
40%
60%
80%
100%
Partners
Priority Value
Resellers
SmartServe
Customer segmentation – targeted value propositions
Customer
Leadership
Customers
Volume
Price
Achievement

© Fonterra Co-operative Group Ltd.
Page 65
Five focus categories to drive future differentiation ...... and develop solutions with a segmented customer base
Consumer Powders
Dairy Foods
Active Nutrition
Paediatrics
Dairy Beverages
Powders supplied to B2B customers for repacking
Dairy/non-dairy beverages and cultured brands, targeted at mainstream consumers
Foods that use dairy as a key ingredient:cheese, butter, desserts
Category covering sports, healthy lifestyles/aging and medical nutrition
Dairy nutrition to support the growth and development of new-borns and infants
Affordability and new experiences
Freshness and premiumisation
Convenience and westernisation
Increasing health awareness
Nutrition offerings that match benefits parents are looking for
Consumer Trends
Definition
Category
Solutions

© Fonterra Co-operative Group Ltd.
Page 66
Unlocking value through Central Portfolio Management
Customer PRM Solutions
Arbitrage
•
Spread between buy-side and sell-side products
•
Contract markets eg. fixed price
•
Tariff efficiency across global milk pools
•
Geographic pricing spreads
Sales Book Management
•
Sales tactics
•
Monetising insights
•
Contract tenor
Monetising Optionality
•
Asset flexibility
•
Mix optimisation
•
Financial markets
Central
Portfolio
Management

© Fonterra Co-operative Group Ltd.
Page 67
Enabled by the continued development in our supply chain
New regional hub
Milk Powder / Foodservice
Whey
Cheese / Whey / Infant Formula
UHT / Foodservice
ChileCheese and butter to Mexico and the US
Europe Whey PoolsMulti-origin whey sourcing options increases supply optionality and supply security; giving us the right to win and grow with our key partners
USWhey and lactose partnership supports our whey portfolio and provides lactose for standardisation in New Zealand
Connecting
Our World
AustraliaCheese to North Asia

© Fonterra Co-operative Group Ltd.
Page 68
New affordable cheese formulation with increased ‘stretch
’
for pizzas in our key Asia markets
Whey innovation for sports nutrition with leading Japa
nese
dairy company – backed by multi-origin sourcing options
Dubai in-market warehouse increasing customer responsiveness on order lead times
Long fixed price contracts to a portfolio of customers to manage cost of goods – backed by hedging derivative
Tailored Whey Offering
Cheese Innovation
Financial Services
Supply Chain Solution
Examples of delivering solutions for our customers to build sustainable premiums

© Fonterra Co-operative Group Ltd.
Page 69
Strong ability to capture premiums over timePrice Achievement (US$m)
ForecastActual
Actuals (NZ$)
$550m
$650m
434
460
450
480
500
FY15
FY16
FY17
FY18
FY19

© Fonterra Co-operative Group Ltd.
Page 70
•
Global sales network and well established customer base
•
Proven track record navigating volatility, building market
s and innovation
•
Earning premiums for product and service differentiation
above reference prices
•
Focused investment in innovation, capability and services to
win with
targeted customers
•
Leveraging global supply footprint to build out success op
tions
Key messages on NZMP

© Fonterra Co-operative Group Ltd.
Page 71
Fonterra StrategyTheo Spierings CEO

© Fonterra Co-operative Group Ltd.
Page 72
On track to meet our 2025 ambition

© Fonterra Co-operative Group Ltd.
Page 73
2%
20%
58%
8%
12%
Delivering our strategy
•
GDT volume lower
•
Ingredients–
Optionality improved mix
–
Ingredients solutions for customers adding value
–
Lower operating costs
–
Return on capital of 13.4%
•
Consumer and Foodservice –
Added 380m more LMEs
–
1 billion added in two years
–
Return on capital of 41.7%
Volume to higher Value at VelocityNote: Return on Capital (ROC) excludes goodwill, br
ands and equity accounted investments
Source: Wheel shows percentage of total FY16 exter
nal sales (LME) by strategic platform; Growth rates
include intercompany sales to other strategic plat
forms
Deliver on Foodservice potentialSelectively invest in milk poolsGrow our Anlene™ businessDevelop leading positions in paed & maternal nutritionOptimise NZ milk
1
Alignour business and organisationBuild and growbeyond our current consumer positions
324567
DIRA
GDT
Ingredients
Foodservice
Consumer
15%
5%
31%
24%
19%
FY16
23.7b
LME
%
FY16 sales volume growth over FY15
FY16 result

© Fonterra Co-operative Group Ltd.
Page 74
Strategic planning cycle1. Strengths, Weaknesses, Opportunities and Threats.
What this gives usApproachTiming
A clearer picture of SWOT¹ in each
pathway, and a blue ocean view of
technologies and innovation with
potential to transform our business
model
Identify the key questions and
assumptions that underpin the
success of the 7 strategic pathways
STRATEGIC
ANALYSIS
Define and
disaggregate
Analyse
Synthesise
1
2
3
Feb ‘17
Make choices on adjustments to
where and how to compete within
each strategic pathway
STRATEGIC
CHOICES
Define and
disaggregate
Analyse
Synthesise
1
2
3
A strong link between the Ambition and the most important moves that
need to be taken at BU level
April ‘17
Identify the most important actions
to take to maximize the chances of
successfully ‘landing’ the strategy
STRATEGIC
IMPLEMENTATION
Define and
disaggregate
Analyse
Synthesise
1
2
3
A clear implementation plan
connected to action, aligned and
integrated with the three year
business plan
June ‘17

© Fonterra Co-operative Group Ltd.
Page 75
Food has a massive global economic, social and environmental footprint...
40%
Global employment
10%
Consumer spending
NZ$8 trillion
133
million
farms
Global dairy
industry supports
1
billion
livelihoods
Family of
30,000
1 billion
consumers
25%
NZ exports
$12 billion
into the
New Zealand
economy

© Fonterra Co-operative Group Ltd.
Page 76
The productivity and climate challenge
•
Dairying is 20% of all global agricultural land
•
Today farmers grow 5-6 times the amount of produce from the same hectare of land as 100 years ago BUT...
•
Global productivity growth of food production was 3-4% annually for much of the post war era
•
However it has now fallen to below 1% annually
•
If global food productivity growth was 2-3%, the impact on combating global poverty would be immense
Post-war era
3-4%
Today
<1%
Tomorrow
2-3% ?

© Fonterra Co-operative Group Ltd.
Page 77
CHINA
TURKEY
RUSSIA
USA
BREXIT
Resurgent
nationalism
brings
uncertainty

© Fonterra Co-operative Group Ltd.
Page 78
Climate ChangeClimate Change
Global TrendsGlobal Trends
Socio-economicSocio-economic
NationalismNationalism
ProductivityProductivity
Global mega trends and social responsibility influence our choices
•
Dairying is 20% of all global agricultural land
•
Current food productivity growth is 1% per annum
•
If we could raise it to 2-3% we could help alleviate world poverty
•
Climate change working against future of food
•
Food production contributes 30% of global greenhouse gas emissions
•
Serious land degradation affects 20% of world’s arable land
•
Feeding the world (7.5B people), a third of which is wasted
•
Food has a massive global impact:
-
40% of global employment
-
NZ$8 trillion industry – 10% of consumer spend
•
Dairy contributes >NZ$12bn to the NZ economy supported by a 30,000 strong family
•
Resurgence of nationalism brings uncertainty
•
Protectionism threatens global trade
•
Volatility in commodity prices to prevail

© Fonterra Co-operative Group Ltd.
Page 79
Strategic planning cycle
What this gives usApproachTiming
Make choices on adjustments to
where and how to compete within
each strategic pathway
STRATEGIC
CHOICES
Define and
disaggregate
Analyse
Synthesise
1
2
3
A strong link between the Ambition and the most important moves that
need to be taken at BU level
April ‘17
A clearer picture of SWOT¹ in each
pathway, and a blue ocean view of
technologies and innovation with
potential to transform our business
model
Identify the key questions and
assumptions that underpin the
success of the 7 strategic pathways
STRATEGIC
ANALYSIS
Define and
disaggregate
Analyse
Synthesise
1
2
3
Feb ‘17
Identify the most important actions
to take to maximize the chances of
successfully ‘landing’ the strategy
STRATEGIC
IMPLEMENTATION
Define and
disaggregate
Analyse
Synthesise
1
2
3
A clear implementation plan
connected to action, aligned and
integrated with the three year
business plan
June ‘17

© Fonterra Co-operative Group Ltd.
Page 80
Our strategic choices are anchored by our beliefs and assessed through commercial filtersBeliefs
Filters
Dairy is demand-ledNZ milk can sustainably grow at 2-3% p.a.Offshore milk is needed to meet demand
Strategic
Relevance
Market
Potential
Ability to
Win
Return on
Capital

© Fonterra Co-operative Group Ltd.
Page 81
Strategy house
Out-of-home
Deliver on
Foodservice
potential
Advanced
Selectively invest
in milk
pools
Enablers
Group Themes
Grow
our
Anlene businessDevelop
leading positions
in paed & maternal nutritionOptimise NZ milk
1
Align
our business and
organisation
Everyday
Build and grow
beyond our
current consumer positions
324567
Our Purpose & Values
Cash Generators
“Must Do”
Growth Generators
“Can Do”
New Business Generators
“Want to Do”
Organisational Capabilities
Capital Management
Are we capturing maximum
stream returns?
What level of NZ milk pool
growth is sustainable?
Are we capturing maximum
value through our current
commercial model?
What are the best long term
uses for each Milk Pool?
Where does Consumer and
Foodservice growth create the
most value?
Can we win in our target growth
markets with our current
proposition and capabilities?
Is there enough whitespace in
our target markets to satisfy our
growth ambitions?
How do we compete effectively
in low cost markets as well as
traditional developed markets?
Are we the natural owner of milk
pools?
How and where do we use
NZMP to seed Consumer
brands?
Where does an integrated model create
competitive advantage?
What are the capabilities needed to
implement our strategy?

© Fonterra Co-operative Group Ltd.
Page 82
Strategic choices
V3 Strategy
‘Cash’ and ‘Growth’
Future Growth Platforms
‘Growth’ and ‘New Business’
Sustainable
Long-term Model
•
Innovation
•
Disruption
•
Technology
•
Digital Transformation
•
M&A
•
Future of Food
•
Future State Operations
•
Consumer of the Future
•
Sustainable Production
ScopeValue Horizon
1-3 years
5-10 years
>10 years
•
Market / Product Selection
•
Commercial Models
•
Growth Paths
•
Resource Allocation

© Fonterra Co-operative Group Ltd.
Page 83
Strategic planning cycle
What this gives usApproachTiming
A clearer picture of SWOT¹ in each
pathway, and a blue ocean view of
technologies and innovation with
potential to transform our business
model
Identify the key questions and
assumptions that underpin the
success of the 7 strategic pathways
STRATEGIC
ANALYSIS
Define and
disaggregate
Analyse
Synthesise
1
2
3
Feb ‘17
Make choices on adjustments to
where and how to compete within
each strategic pathway
STRATEGIC
CHOICES
Define and
disaggregate
Analyse
Synthesise
1
2
3
A strong link between the Ambition and the most important moves that
need to be taken at BU level
April ‘17
Identify the most important actions
to take to maximize the chances of
successfully ‘landing’ the strategy
STRATEGIC
IMPLEMENTATION
Define and
disaggregate
Analyse
Synthesise
1
2
3
A clear implementation plan
connected to action, aligned and
integrated with the three year
business plan
June ‘17

© Fonterra Co-operative Group Ltd.
Page 84
Ingredients strategy in place and underway
Precedents
Grain (Cargill)Utilities (electricity)Oil industry
-400-300-200-100
0
100200300
May-98
Oct-98
Mar-99
Aug-99
Jan-00
Jun-00
Nov-00
Apr-01
Sep-01
Feb-02
Jul-02
Dec-02
May-03
Oct-03
Mar-04
Aug-04
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
Mar-09
Aug-09
Jan-10
Jun-10
Nov-10
Apr-11
Sep-11
Feb-12
Jul-12
Dec-12
May-13
Oct-13
Relative Variable Cost Stream Returns (cents/kgMS)
Relative Stream Returns: RCP's vs Non-RCP's
Relative Stream Returns (Non-RCP less RCP)
Volatility (Change in Monthly Relative Returns)
Deeper demand, increased penetration of key markets (eg. cheese in US/EU/JPN)
If the scale of our capacity is matched by greater
depth and flexibility in sales channels, and financi
al markets,
substantially higher and less volatile earnings are
possible
New capacity removing
production constraints
That are less volatile and
difficult for competitors to
match
Increase our contract book to
reduce demand constraints
Made deeper to enable asset
flexibility to be monetised
Asset Flexibility
Higher Sustainable
Earnings
Mix Optimisation
Financial (futures)
Markets
Production Constraints
Asset
Flexibility
Positive impact on Earnings and Milk Price
Greater Optionality
Peak Milk Production

© Fonterra Co-operative Group Ltd.
Page 85
Consumer & Foodservice strategy delivering higher incremental returns
Critical enablers & capability development required
– our right to win
...
enabled by our current and
future core strengths
...
Consumer and recombined
powders
Functional proteins
Milkfat and emulsion expertise
Unlocking & validating the
nutritional benefits of our dairy
components
Grass to glass traceability
Enabling authentic/genuine milk
production
TECHNICAL DIFFERENTIATORS
...
by focusing on key
benefit platforms
...
EnergyThe day-to-day sustained fuel we need to function. Growth and DevelopmentNutrition that fuels growth & development. MobilityNourishment enhancing the strength, stamina & flexibility of joints, muscles & bones. CognitionNutrition that delivers enhanced mental performance.
BENEFIT PLATFORMS
Uncompromised Taste Texture and QualityProduct solutions providing superior taste & functionality
...
commercially delivered
through 8 big plays
8 BIG PLAYS
ADVANCED MOBILITYADVANCED COGNITION
45
EVERYDAY VITALITYUNLEASH POTENTIALCULINARY @HOME
321
QSR SUPPLIER OF CHOICEASIAN BAKERIES –CHEF LEDITALIAN KITCHENS –CHEF LED
678
...focused on4 + 4 Markets
Demand Generation Route to Market
End to End Supply Chain Capital
People Operating Model Digital

Page 86
Confidential to Fonterra Co-operative Group
Supplementary Slides

© Fonterra Co-operative Group Ltd.
Page 87
Gross Margin composition in FY15
NZ Ingredients
1,554m kgMS
Revenue
Milk Cost
Other COGS
Gross Margin
per kgMS:
$8.43
$4.75
$2.73
$0.95
Non-RCP
395m kgMS
per kgMS:
$9.24
$5.57
$1.94
$1.73
RCP
1,092m kgMS
per kgMS:
$6.79
$4.50
$1.57
$0.72
Milk Price Model
1,614m kgMS
per kgMS:
$6.53
$4.40
$1.51
$0.69
FY15
Fonterra

© Fonterra Co-operative Group Ltd.
Page 88
Ingredients business with global reachLeadership position in key product portfoliosNote: FY16 sales (MT) are shown on the basis of the
shipping destination for the product.
Global Ingredients FY16 Sales Profile and Estimated Fonterra Share of Region’s Dairy Imports
Americas
WMP
23%
SMP
4%
Butter
26%
AMF
54%
Cheese
8%
Protein
28%
Europe MEA
WMP
41%
SMP
11%
Butter
25%
AMF
58%
Cheese
5%
Protein
11%
Greater China
WMP
61%
SMP
56%
Butter
49%
AMF
83%
Cheese
22%
Protein
3%
North Asia
WMP
2%
SMP
14%
Butter
70%
AMF
7%
Cheese
19%
Protein
11%
SEA
WMP
67%
SMP
28%
Butter
91%
AMF
59%
Cheese 36%Protein
8%

© Fonterra Co-operative Group Ltd.
Page 89
Example NZMP products
Consumer Powders
Dairy Foods
Active Nutrition
Paediatrics
Dairy Beverages
•
WMP (Instant, Regetc.)
•
Instant SMP
•
Flavoured milk powders
•
FFMP & Powder Blends
•
Casein(ates) & MPCs
•
UHT WMP
•
MPC
•
SMP (Reg & UHT)
•
WPCs
•
Mozzarella
•
Natural Cheese (Edam, Gouda, Egmont)
•
Butter
•
AMF
•
MPC
•
WPC/WPI
•
MPC (70, 85, functional)
•
Functional WPCs
•
Caseinates
•
TMP
•
Specialty whey e.g. hydrolysates
•
IF, FO & GUMP base powders
•
Paediatric grade WMP, SMP & BMP
•
WPC80, D90
•
IF grade Lactose & GOS
•
Hydrolysate, lactoferrin
•
Probiotics
Products

Page 90
Confidential to Fonterra Co-operative Group
AppendixMilk Price Model

© Fonterra Co-operative Group Ltd.
Page 91
Assumes all milk collected in a season is processed
into a Reference Commodity Product (RCP)
Milk Price Model – building blocks

•
Allocation of milk to product streams broadly matches Font
erra
•
Sales phasing aligns to Fonterra, and contract phasing br
oadly aligns
•
Lactose for standardisation – effectively a ‘negative rev
enue’
•
Notional US$ revenue converted to NZ$ at Fonterra’s a
verage monthly conversion rate
Revenue
•
Manufacturer specifications of resource usage for modern po
wder plants, but Fonterra unit costs
•
Fonterra collection costs
•
Commission / supply chain costs assume set percentage sold via
GDT, and minimal offshore network
•
Administration / overhead a scaled down (RCP only) ver
sion of Fonterra costs
Cash costs
Capital charge
•
Manufacturer specifications for ‘standard’ 1.9 million li
tre per day milk powder plants – new powder
plants 2.4 million litres per day from 2013 on
•
Other assets based on Fonterra replacement cost
•
Working capital follows Fonterra’s, but based on powder
stream only
•
Depreciation allowance and post-tax WACC capital charge
on total capital employed
lessless

© Fonterra Co-operative Group Ltd.
Page 92
Milk Price Model – detailed P&LNote: Milk Price year is to 31 May versus Fonterra
financial year ending 31 July
Milk Price Model (NZD $m)
2016
2015
2014
Million kgMS
1,566
1,614
1,584
Net Revenue
8,832
9,937
16,834
Milk Cost
(6,101)
(7,096)
(14,151)
Cash Costs
(1,815)
(1,889)
(1,819)
Depreciation
(266)
(263)
(250)
Regulated Return (EBIT)
650
689
614
WACC – fixed assets
(407)
(393)
(436)
WACC – net working capital
(73)
(120)
(26)
Tax
(170)
(176)
(152)
NPAT
–
–
–
Fixed assets
$6.9b
$6.5b
$6.4b
Working capital
$1.3b
$2.3b
$0.9b
WACC rate
5.9%
6.1%
6.8%

© Fonterra Co-operative Group Ltd.
Page 93
Milk Price Model – components
(0.68)

© Fonterra Co-operative Group Ltd.
Page 94
Milk Price Model – cash costs assumptions
Cash Costs
Milk CollectionFactoryLactoseSupply ChainAdmin / Overhead
•
Fonterra’s collection cost
•
Manufacturer’s specifications of resource usages (energy, labour, losses) for modern powder plants, but Fonterra’s unit costs
•
Bought-in lactose for powder standardisation
•
Reflect assumption that Milk Price business supported by an offshore network
•
Based on Fonterra’s, but reflect narrower scope of milk price business

© Fonterra Co-operative Group Ltd.
Page 95
•
Fixed asset base reflects:–
Manufacturer’s costs for ‘standard’ 2.5m litres per
day milk powder plants
–
Other assets based on Fonterra replacement costs
–
WACC charge and depreciation allowed for in respect
of fixed assets
–
Working capital requirements over the course of the
season primarily vary with Milk
Price sales phasing and the profile of payments to
farmers (Advance Rate Schedule)
–
Capital charge is applied to monthly net working ca
pital balance (one implication is
that farmers are compensated for deferral of paymen
ts for milk, and that Milk Price
therefore effectively includes an interest componen
t, which varies from year to year)
–
WACC is post-tax, so separate provision included fo
r tax
Milk Price Model – capital charge