Fonterra 2021 Annual Meeting Materials

FONTERRA ANNUAL MEETING
9 DECEMBER 2021
CHAIRMAN’S ADDRESS

Before going into the formal business of the meeting we will take a look back at the
year that’s been and how 2022 is shaping up.

In a few minutes I’ll ask Miles to come up and share his perspective, along with a short
summary of the Co-op’s financial performance over the past year.

From my perspective, our Co-op ends 2021 in a strong position on a range of fronts –
our financial results, the implementation of our strategy, and just as importantly to me,
our relationship with you, our owners.

Despite all of the disruption here at home and out in our global markets, our Co-op
has performed well over the past year, demonstrating the value of a New Zealand
owned Co-operative of scale.

Fonterra’s scale gives us a level of optionality that is unique in New Zealand dairy.
It enables us to manage risk and uncertainty on behalf of our kiwi farming families.
We have benefited greatly from our ability to move your milk between the markets,
categories and products that deliver the most value.

Miles and his team did a great job of leveraging this strength to deliver a strong
financial performance this year, especially given the difficult COVID-19 operating
environment.

For a lot of our team members, 2021 has been incredibly tough. Many of our
international team are working away from home, or in densely populated cities where
COVID is rife.

I’d like to use this opportunity to say a simple thank you to all of our international team
on behalf of us farmers.

The hard work and commitment of all our people was reflected in our key 2021
financial results:

• A final farmgate Milk Price of $7.54, which exceeded our opening forecast
for the year.
• Net debt is down $872 million this year to be $3.8 billion, bringing our
gearing ratio down to just under 36%.
• Our Total Group normalised EBIT – which reflects the underlying
performance of the business – was up 8% to $952 million.
• And normalised earnings per share was 34 cents, leading to total dividend
payments of 20 cents for the year.

It was a strong performance under the circumstances, and we’ve carried that
momentum into the first quarter of the new financial year, which Miles will talk to in a
moment.

To a large extent, we are now seeing the benefits of changes we have made to the
Co-op’s culture, which started more than 3 years ago.

Within the management team, that has been led by Miles.

He took on the CEO role at an incredibly difficult time for our Co-operative and has not
shied away from making some tough decisions. I’d like to acknowledge his continued
leadership.

At the same time, the Board has been addressing its governance culture.
We have sought to realign Fonterra’s strategic objectives with its purpose and to better
align our risk appetite to that of our shareholders.

We have adjusted our dividend policy, debt targets, and risk appetite statement to be
more conservative and strengthen our balance sheet.

That gives us options, as we consider the future and look to grow.

As we complete our business reset, we have turned our attention to the next phase of
our strategy, which is to focus on growing value.

In September we released our long-term strategy. If you haven’t read the strategy
booklet yet, I’d encourage you to do so.

Within it we outline the strategic choices we have made to grow value by making the
most of our competitive advantages, reducing our exposure to risks outside of our
control and ultimately making our business more sustainable for generations to come.

The strategic direction we have articulated is inherently based on successful changes
to our capital structure – which are necessary if we are to maintain the sustainable
access to high-quality milk that our strategy, and financial goals are predicated on.

We’ve looked out to 2030 and can see an exciting future for New Zealand dairy.
At a time when total New Zealand milk supply faces a likely decline, or be flat at best,
the world has come calling for more of our sustainably produced milk.

The milk supply pressures we face in New Zealand are not unique to Fonterra.
So, we are looking at a future where you have a highly sought-after product and an
increasingly scarce supply. That smells like value to me.

And it’s important that we achieve higher value for our milk, as we all look to offset the
rising input costs we face on-farm.

In-line with the strategy, our future growth initiatives will look different to how the Co-
op has operated in the past.

Exercising a more conservative approach to risk, we will approve capital allocation
with more rigour, for a series of investments, rather than betting the farm on one or
two big plays.

We believe innovation, research and development, and collaborations with strategic
partners are critical to our strategy.

Allocating funding and resources for those initiatives is a priority for the Board.

Out to 2030, we aim to approve funding of $1 billion into moving milk into higher value
products within our core business of Ingredients and Foodservice.

And will make $2 billion available for investment into a mix of further growth – including
opportunities for nutrition science – and potential returns to shareholders subject to
the capital structure outcome.

We also see a significant opportunity to develop and monetize our intellectual property
and dairy knowhow that is hugely valuable to our customers.

As I said earlier, the future for New Zealand dairy is exciting.

But we are not being naïve about the very real challenges we all have in front of us
right now.

One of my mentors, a former Dairy Board Director often said to me: “Peter, things are
never as good as they look, but they’re never as bad as they seem. Take a long-term
view”.

I think it’s a pretty powerful message for dairy farmers right now.

Despite the Co-op’s improved performance, I know many of our farmers feel under
enormous pressure.

The rate of change on-farm, COVID, labour shortages, and environmental reforms
have pushed many farmers into protest, and others out of the industry.

Some of that change is being driven by regulation.

More so, it is being driven by consumer, customer and community expectations.

Last year one of our customers stopped doing business with 47 of their suppliers
because they did not meet their sustainability standards and these suppliers couldn’t
help them achieve their future sustainability targets.

We need to learn to live with constant change. “The only constant in life is change.”
An industry that understands consumer insights and has a customer orientation will
ultimately be successful.

Coordinated change at a national level is also necessary if we want to keep the
commercial competitive advantage that comes with being the world’s most carbon
efficient dairy farmers.

I’ve heard Miles say before that, if the world can develop a vaccine for COVID in a
matter of months, surely with the same level of attention and resources we can develop
solutions for the other changes we face.

I share his confidence.

At the heart of this is a question for us as a country: do we believe in our future as a
food and fibre nation?

If we decide yes, then we need to start investing in the future of our food and fibre
sector at a level commensurate with the fact that the sector accounted for 79% of New
Zealand’s merchandise exports in 2021.

Through a science-backed approach and nationally coordinated investment, together
both industry and Government can solve our significant challenges of methane and
water quality, while continuing to grow the sector’s export earnings at a sustainable
pace.

Fonterra will do our bit.

One of the responsibilities of being a national co-operative of scale is having a
meaningful voice in conversations with the Government about realistic timeframes for
the changes that are needed.

Our scale also affords us the mandate and resources to be part of the search for
solutions on behalf of farmers.

That’s why, as part of our long-term strategy, we announced our intention to approve
funding of $1 billion for sustainability initiatives to meet the Co-op’s environmental
commitments and develop more sustainable offerings for customers.

We also announced an intention to increase spending on research and development
to approximately $160 million a year by 2030, that’s a 50% increase on today.

In closing, I’d like to thank all of our farmers and shareholders for their loyalty and
commitment over the past year.

We have needed to make some more big decisions this year, and I acknowledge the
uncertainty that has created, and the impact some of those decisions have had on all
shareholders.

But they have us well placed to take advantage of favourable industry dynamics and
focused on delivering on our full potential.

I’d now like to pass over to Miles for a recap of the financial year and his perspective
on the Co-op’s progress since those numbers were announced.

---

FONTERRA ANNUAL MEETING
9 DECEMBER 2021
CHIEF EXECUTIVE OFFICER’S ADDRESS

E ngā Mana / e ngā reo
Tēna koutou / tēna koutou / tēna koutou katoa
Nau mai / haere mai / ki te hui a tau.
Ka mihi / ki ngā mate
Haere / haere / haere atu ra.
Ko tatou / te hunga ora / e tau nei.
Ka mihi Ki te hau kainga Ngai Tahu
No reira / Tēna koutou / Tēna koutou / Tēna koutou katoa.

I would like to reiterate Tiaki and Peter’s words of welcome and acknowledge those
who have passed away during the year.

I would also like to acknowledge Ngai Tahu as the host iwi in Invercargill.

There’s three important topics I would like to cover today – a summary of our
performance in 2021, our long-term strategy and how 2022 is shaping up.

So, let’s get into it.

We saw strong performance across all our key metrics last year, and this included
people, environment and financial.

From a people perspective, our engagement with employees, farmers and customers
improved.

From an environmental perspective, we reduced our carbon emissions from coal by
more than 11%, as Te Awamutu completed its first season using renewable wood
pellets.

I also appreciate that on-farm you have done a huge amount too – so thank you.

From a financial perspective, Peter has already mentioned the key numbers.

But to recap we improved our earnings at the same time as delivering a $7.54 milk
price.

We showed that, to a point, we can have solid earnings and a decent milk price.
We also continued to reduce our debt and achieved our target debt to EBITDA ratio of
2.7x.

That’s a significant milestone for our Co-op – it shows that the focus on financial
discipline is paying off.

We’ve got our balance sheet back into a more healthy position and this allows us to
look more to the future.

And, as an intergenerational business, that’s incredibly important.

We leaned on a number of the Co-op’s strengths to get us to this position.

And these strengths have been invaluable as we’ve faced into the challenges and flow
on effects of COVID-19.

The first strength which I would like to talk about today is our New Zealand
manufacturing network and the team that operates them.

The network gives us a huge amount of optionality in terms of the products we can
make.

And our people are focused on driving efficiency and improving performance at each
of our plants.

This continuous improvement creates more value which flows through into the
Farmgate Milk Price.

What you see on this slide is some of the ways we measure our efficiency at our sites.

I won’t dive into the detail, but the key point is, for the last few years, these measures
have been trending in the right direction.

Another huge asset in our Co-operative is our diversification across channels and
markets.

Last year our volumes and EBIT were more or less evenly split across our three
regions and channels.

This diversification allows us to allocate milk into the products and markets that
generate the best overall returns for the Co-op.

In 2021 this saw us allocate less milk to AMENA and more milk to Greater China and
parts of Asia Pacific and we did this because that’s where demand was the strongest.

Our third strength, or asset, is our global supply chain – including Kotahi, which is our
joint venture with Silver Fern Farms.

It’s because of our scale that Kotahi could partner with Maersk shipping line and the
Port of Tauranga.

And it’s because of this partnership that our Co-op could continue to get product to our
customers last year.

With all the disruptions to the global supply chain this was something our customers
didn’t take for granted and we saw this reflected in both milk price and earnings.

2021 also saw our Co-op make the most of what our farmer owners and employees
have built over the years – that’s a New Zealand co-op which has scale and optionality
and can compete internationally.

We can now look out to the future and give clarity about where we want to be in 2030
and the kind of value growth we’re going after.

So, let’s take a look at that...

The first thing I would say about the future is the fundamentals of dairy – in particular,
New Zealand dairy – look strong.

And you’re seeing that play out this year.

We know the world’s population is growing and living longer.

Asia’s middle class is rapidly increasing – they want more protein and more
convenience in their life.

People are more aware than ever of the links between nutrition and health.

Put simply, the world wants what we’ve got – sustainably produced, high-quality,
nutritious milk.

This comes at a time when we see milk supply in New Zealand likely to decline or be
flat at best.

On one hand, this requires the right capital structure to help ensure we don’t lose the
benefits of what generations of farmers have built before us.

But on the other hand, it gives us more options to be selective about what we do with
your Co-op’s milk.

In doing so, we are confident we can increase the value we generate over the next
decade.

To make this happen we have made three strategic choices – continue to focus on
New Zealand milk, be a leader in sustainability and be a leader in dairy innovation and
science.

We’ve heavily stress tested these choices and know they can give us a competitive
edge, mitigate risks and position us to have a sustainable future well beyond 2030.

We believe New Zealand milk is the most valuable milk in the world due to our grass-
fed farming model, which means our milk has a carbon footprint around 70% lower
than the global average.

We have an opportunity to differentiate New Zealand milk further by focusing our
capital here.

That’s why we’ve started a divestment process for our Soprole and Prolosur
businesses in Chile and also why we’re looking at various ownership options for
Fonterra Australia.

By successfully completing these processes – and also continuing to hit our business
targets – we intend to return a significant portion of the net sale proceeds from these
transactions to our shareholders and unit holders by FY24.

We will direct some of our capital towards improving our sustainability.

As I mentioned earlier, we already have a unique low-carbon position.

When I was talking with CEOs and other industry leaders in Europe recently, it was
very clear that sustainability is also the top of their lists.

They all recognise that it’s increasingly a ticket to the game and an important
competitive advantage.

Customers want to know where their food comes from and the environmental impact
it leaves.

This is why we have an aspiration for our Co-op to be net zero carbon by 2050.

It’s also why over the next decade we will invest around $1 billion in reducing carbon
emissions and improving water efficiency and treatment at our manufacturing sites.

We also know that to maintain our carbon footprint advantage against the northern
hemisphere we must look to solve the methane puzzle.

Our investment in sustainability will allow us to tell a compelling New Zealand
sustainable nutrition story through our brands.

This in turn will support growth in Foodservice and momentum in our
Consumer channel across our key markets.

It will also allow us to gain more value through our Ingredients channel by helping
customers meet their own sustainability goals.

Another area where we will invest to differentiate our Co-op’s New Zealand milk is in
carving out a leadership position in dairy innovation and science.

Our Co-op has a long and proud heritage of dairy innovation.

We are building on this and developing new solutions which aim to solve problems our
customers face in their operations and help people live healthier and longer lives. 

Being a leader in dairy innovation and science will require us to increase our
investment in R&D and innovation, as Peter has already talked to.

This will be used to develop more products to reach new customers and make the
most of opportunities in Active Living.

But we also believe that the next phase of the nutrition journey is just being discovered.

Food has evolved over many years from a simple energy source towards what
consumers of today are looking for – taste, convenience and pleasure.

We are now seeing that some types of food, like dairy, could help answer many of
life’s challenges – such as immunity, cognition and even stress.

And when you combine these benefits with technology and data we’ve got something
really powerful.

It’s an area called Nutrition Science.

We believe it could unlock more value from our specialty ingredients.

And to help us narrow down and prioritise where we can build a competitive advantage,
we have set up a small dedicated team.

By taking this path and focusing on New Zealand milk, sustainability and dairy
innovation, we are going after a number of key value targets at the same time as a
sustainable milk price.

We’re aiming for a 40-50% increase in operating profit from FY21.

With the reduced interest from having less debt, this should give us the ability to
steadily increase dividends to around 40-45 cents per share by FY30.

And by 2030, we’re also targeting a Group Return on Capital of 9-10%, up from 6,6%
in 2021. 

Peter has talked about the capital investment that’s sitting behind these targets and
you can see that on this slide.

But I also want to highlight that through our planned divestments and improved
earnings, we also intend to return about $1 billion or 60 cents per share to
shareholders and unit holders by FY24.

We’re also intending to make available around $2 billion for a mix of investment in
further growth and potential returns to shareholders.

Because these targets go out to 2030, we've had to make a number of assumptions
and, as is always the case in the global markets, there is risk and uncertainty which
could mean our actual results are different – but these targets are what we are all
aiming for.

Every year we need to steadily put in place the building blocks to get us there.

With this in mind, we’ve got four priorities this year:

We need to make the shift from a reset to growth.

We will progress the work to divest our integrated Chilean business and prepare the
process of deciding the most appropriate ownership structure for Fonterra Australia.

We also need to narrow down and prioritise the areas within Nutrition Science
Solutions where we believe we can build a competitive advantage.

And, of course, we need to keep hitting our environment, people and business
performance targets.

And we’re off to a good start.

For example, we’ve formed a dairy science collaboration with Vitakey to further unlock
the benefits of our probiotic strains.

Vitakey specialises delivering the right nutrients to the right part of the body at the right
time.

We’ve also made good progress in finding a solution to the challenge of on-farm
emissions.

We have been working on Kowbucha™, a probiotic which could switch off the bugs
that create methane in cows. Initial lab results have been promising, showing a 50%
reduction in methane, and we’re now at the stage of trialling it on farm.

We’re progressing with the divestment of our Chilean business and the ownership
review of Australia.

And you would have seen we delivered $190 million of EBIT in Q1.

We’ve also lifted and narrowed the forecast Farmgate Milk Price range to $8.40 - $9.00
per kgMS.

This increases the midpoint of the range to NZD $8.70 per kgMS.

The higher milk price saw the Co-op revise its earnings guidance to 25-35 cents per
share from 25-40 cents per share as margins come under pressure.

As we move through the year, we will continue to be faced with the challenge of COVID
but the team and I will stay focused on our four priorities, keeping an eye on today but
also looking out to the future.

Let’s keep working together. Thank you.

Nō reira,/ me uu tātou / ki te kōrero / tātou, tātou
Tēna koutou
Tēna koutou

Tēna koutou katoa

Thank you and I will now hand back to Peter.

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ILT Stadium Southland, Invercargill
9 December 2021

2
Chairman’s Review
Welcome
Chief Executive Officer’s Address

3
Approval of remuneration of Shareholder Elected Directors
Approval of remuneration of Co-operative Councillors
Approval of remuneration of Members of Directors’
Remuneration Committee
Appointment of KPMG as auditor and authorisation of the
Directors to fix the auditor’s remuneration
Ratification of appointment of Mr Clinton Dines
lllll
lllll

4
Approval of Milk Price Panel related amendments
to the Constitution
Approval of Governance and Representation Review related
amendments to the Constitution and the Co-operative
Council By-laws
Approval of 2020 Review of Council related amendments to the
Constitution and the Co-operative Council By-laws
Approval of the Co-operative Council programme and budget

5
General Business
Voting Paper Collection
Closing

Chairman’s Address

Chief Executive Officer’s Address

9
¹
²
1.Attributable to equity holders of the Co-operative, excludes non-controlling interest
2.Economic net interest-bearing debt (ENIBD) gearing ratio, refer to Glossary for definition

10
20172018201920202021
20172018201920202021
20172018201920202021
Note: Metrics are for the year ended 31 July

11
Asia PacificAMENA
Greater
China
Total
Volume (‘000 MT)¹
EBIT contribution¹
,
²
Ingredients
Foodservice
Consumer
Total
Note: Figures are for the year ended 31 July 2021. Comparative information has been restated for consistency with the currentperiod, and FY21 quarterly breakdown has been restated for
increased accuracy of attribution
1.Prepared on a normalised Continuing Operations basis. Normalised EBIT contributions sum to $1,044 million, and does not aligntoreported Continuing Operations due to excluding
unallocated costs and eliminations
2.Inclusive of Group Operations’ EBIT attribution

12

13
2000201020202030
There will be more people
needingnutrition.
The world wants sustainably
produced, high-quality,
nutritious milk.
By retail value RSP (US$b)
0
50
100
150
200
250
2015201620172018201920202021202220232024202520262027202820292030
Milk
Global demand for dairy is
expected to continue to
increase by about 2% per
annum out to 2030
3
.
Alternatives
NEXT 5 YEARS
NEXT 10 YEARS
NEXT 15 YEARS
1.Oxford Economics (www.oxfordeconomics.com) –Global Economics Databank, August 2021. Estimate based on earning 2X median household income.
2.Euromonitor International (www.euromonitor.com) –Euromonitor Passport, August 2021.
3.IFCN Dairy Research Network (www.ifcndairy.org) –IFCN Annual Dairy Sector Data with Long Term Outlook, September 2021.

14

15
Average Farmgate
Milk Price range for the decade
Increase in operating
profitfrom FY21
Group Return on Capital,
up from6.6% in FY21
Note: Thefigures on this slide are targets that we are aiming to achieve only. Theyshould not be taken as forecasts or as a guarantee of returns to shareholders.
Theyare subject tosuccessfully completing a number of business initiatives,andassumptions, each of which could materially affectthe actual outcomes.The key
assumptions and risks relating to these targets are set out in the Appendix of the booklet titledOur Path to 2030.Please also refer to the important cautionsand
disclaimer at the beginning of this presentation.
Intended to be distributed
to shareholders by
FY24after asset sales
Available for
investment in a mix of
further growth and
return to shareholders
Invested in moving milk
to higher value products
Invested in
sustainability

16
Make the shift from
a reset to value
growth.
Progress the work
to divest our
integrated Chilean
business and
prepare the process
of deciding the
most appropriate
ownership model
for Fonterra
Australia.
Narrow down and
prioritise the areas
within Nutrition
Science Solutions
where we can build
a competitive
advantage.
Keep hitting our
environment,
people and
business
performance
targets.

17
Vitakeycollaboration
to unlock the benefits of
probiotics
Making good progress
with the divestment of
Chilean business and
ownership review of the
Australian business
Forecast Farmgate
Milk Price range
per kgMS
Kowbucha
TM
moves to on farm trials
after showing a
methane reduction of
up to 50% in the lab
EBIT of $190 million
delivered in Q1,
despite a significantly
higher milk price
Full year earnings
guidance of
25-35 cents per share

Approval of remuneration of
Shareholder Elected Directors

Approval of remuneration of
Co-operative Councillors

Approval of remuneration of
members of the Directors’
Remuneration Committee

Appointment of KPMG as
auditor and authorisation of
the Directors to fix the
auditor’s remuneration

Ratification of appointment
of Mr Clinton Dines

Approval of Milk Price Panel
related amendments to the
Constitution

Approval of Governance and
Representation Review
related amendments to the
Constitution and the Co-
operative Council By-laws

Approval of 2020 Review of
Council related amendments
to the Constitution and the
Co-operative Council By-laws

Chairman -Fonterra Co-operative Council

Approval of the
Co-operative Council
programme and budget