Northington Partners Independent Report

21 May 2024

Northington Partners Independent Report

The attached independent report, prepared by Northington Partners at the request of the Fonterra Co-
operative Council (on behalf of Fonterra), for the purposes of s109LA of the Dairy Industry Restructuring
Act 2001, has been provided to shareholders by the Fonterra Co-operative Council.


ENDS

For further information contact:

Anya Wicks
Company Secretary
Phone: +64 21 283 0945

---

FONTERRA
CO-OPERATIVE
COUNCIL
Review of 1H24 Performance
Fonterra Co-operative Group
April 2024

Review of 1H24 Performance |
2
Important Notice
Declarations
This report is dated 30 April 2024 and has been prepared by Northington Partners at the request of
the Fonterra Co-operative Council (“
FCC”) on behalf of Fonterra Co-operative Group Limited
(“
Fonterra”) for the purposes of s109LA of the Dairy Industry Restructuring Act 2001. The report is
intended to provide Fonterra shareholders and unitholders with an independent review of Fonterra’s
performance for 1H24.
The analysis and views expressed in this report have been prepared independently of Fonterra and
FCC by Northington Partners. Fonterra has not provided any input into the content of this report and
provides no warranty or assurance as to the accuracy, adequacy or completeness of the information
in it. Fonterra does not accept or assume any duty, responsibility or liability to any party (including,
without limitation, in negligence) in connection with this report.
Qualifications
Northington Partners provides an independent corporate advisory service to companies operating
throughout New Zealand. The company specialises in corporate advisory, mergers and acquisitions,
capital raising support, expert opinions, financial instrument valuations, and business and share
valuations. Northington Partners is retained by a mix of publicly listed companies, substantial
privately held companies, and state-owned enterprises.
The individuals responsible for preparing this report are Greg Anderson B.Com, M.Com (Hons), Ph.D,
Jonathan Burke B.Com (Hons) and Fletcher Edmond, CFA, BSc. Each individual has a wealth of
experience in providing independent corporate finance advice to a wide range of clients.
Disclaimer and Restrictions on the Scope of our Work
In preparing this report, Northington Partners has relied on publicly available information, unless
stated otherwise. Northington Partners has not performed anything in the nature of an audit of that
information, and does not express any opinion on the reliability, accuracy, or completeness of the
information provided to us and upon which we have relied.
Northington Partners has used the provided information on the basis that it is true and accurate in
material respects and not misleading by reason of omission or otherwise. Accordingly, neither
Northington Partners nor its Directors, employees or agents, accept any responsibility or liability for
any such information being inaccurate, incomplete, unreliable or not soundly based or for any errors
in the analysis, statements and opinions provided in this report resulting directly or indirectly from any
such circumstances or from any assumptions upon which this report is based proving unjustified.
We reserve the right, but will be under no obligation, to review or amend our report if any additional
information which was in existence on the date of this report was not brought to our attention, or
subsequently comes to light.
To the maximum extent permitted by law, Northington Partners, its affiliates, directors, officers and
employees will not be liable for any loss or damage arising as a result of reliance being placed on any
of the information contained in this report.

Review of 1H24 Performance |
1H24 Highlights
Continuation of Strong Total
Group Earnings Performance
Reported EBIT from continuing operations in 1H24 increased by $122m (+14%) to $986m compared to 1H23. However, we note that this
result is $40m lower than the same period last year when stripping out the $162m impairment in the Consumer channel for the prior period.
Return on capital on a 12-month rolling basis was up to 13.4% vs 8.6% on the prior period, reflecting a solid performance in the prevailing
market conditions and the impact of recent divestments. The composition of earnings between channels was materially different to the
same period last year with lower earnings from Ingredients offset by higher earnings in Foodservice and Consumer.
Favourable Price Relativities
for the Ingredients Channel
Tailing off
EBIT for the Ingredients channel was down $383m (-45%) to $467m vs 1H23, largely attributable to a decline in earnings contribution from
Price Relativities. Fonterra expects the contraction of Price Relativities (between Reference and Non-Reference products) and margins to
continue during 2H24. Earnings related to this key driver were estimated to have contributed 6c per share to 1H24 continuing operations
EPS of 43c (relative to 16c contribution to 37c EPS in 1H23). Based on Fonterra’s FY24 earnings outlook, Price Relativities in the second
half of the year are expected to reduce materially.
Strong performance in
Foodservice and Consumer
Compared to 1H23, Foodservice EBIT was up $203m (+146%) to $342m and Consumer EBIT was up $140m (+378%) to $177m (when
adjusting for the prior period impairments). Much of this was due to favourable pricing and lower cost milk driving increased margins. As
noted above, margins in both channels are expected to tighten in 2H24 as a result of higher Reference product pricing on GDT and a higher
cost of milk.
Simplified Business with
Strong Balance Sheet
Recent asset sales have resulted in a business with more of a focus on NZ milk and core operations. The asset sales have also supported a
significant reduction in net debt and gearing levels, with the Gearing Ratio dropping to 34.6% vs 43.3% in 1H23. The reduction in net debt
provides Fonterra with significant balance sheet flexibility for future investment and / or capital management.
Farmgate Milk Price Range
Narrowed
While the range of the Forecast Farmgate Milk Price for the 2023/2024 season has narrowed to $7.50 - $8.10 per kgMS (from $7.30 -
$8.30 per kgMS ), the mid-point remains unchanged at $7.80 per kgMS.
Earnings Outlook Maintained
Despite achieving 1H24 earnings from continuing operations of 43c per share, Fonterra has maintained its full year guidance of 50c – 65c
per share. This implies projected earnings for 2H24 of 7c – 22c per share and reflects the company’s view that Price Relativities will
materially reduce and margins in Foodservice and Consumer will return to more historical levels.
Ongoing Weakness in the
Fonterra Farmers Market for
Shares
Following Fonterra’s capital review announcement in 2021, there has been ongoing weakness in the Fonterra farmers’ market for shares
(NZX:FCG) relative to the price of units in the Fonterra Shareholders’ Fund (NZX:FSF). This weakness has extended into the current period
with the market capitalisation of Fonterra (based on the current FCG price) now significantly below the book value of net assets. The price of
Fonterra shares is also now ~35% below the price of Fund units, relative to an average discount of 14% in the period since announcing the
capital structure review (May 2021) and implementation of the Flexible Shareholding (April 2023).
1
2
4
3
5
6
7
3

Section 1:
1H24 Results Review
FONTERRA
CO-OPERATIVE
COUNCIL

Review of 1H24 Performance |
Fonterra reported earnings (EBIT) from continuing operations of $986m for the half, a modest reduction of $40m on 1H23 when
excluding impairments from the previous period.
Total Group Financial Performance
NZ$ Million (Continuing Operations)1H241H23% Change
Sales Volume (‘000 MT)1,7211,6991%
Total Revenue 11,08512,333(10%)
Cost of Goods Sold(9,049)(10,287)(12%)
Gross Profit2,0362,046(0%)
Gross Margin18.4%16.6%n/a
Operating Expenses(1,109) (1,057) 5%
Impairments-(162)n/a
Other Items593759%
Reported EBIT98686414%
Reported EBIT Margin8.9%7.0%n/a
Net Finance Costs & Tax(272) (320) (15%)
Net Profit After Tax (Continuing Ops)714 544 31%
Net Profit After Tax (Discontinued. Ops)(40) 2 n/a
Total Group Net Profit After Tax674 546 23%
Earnings Per Share (Continuing Ops)$0.43$0.3330%
Dividend per Share$0.15$0.1050%
Fonterra delivered a solid earnings result for 1H24, with reported earnings before interest and tax
(EBIT) and reported net profit after tax (NPAT) above 1H23 performance and long-term historical
averages. Reported EBIT from continuing operations increased by 14% to $986m, modestly down
when adjusting for $162m of impairments in 1H23.
Similar to 1H23, Fonterra’s results for 1H24 are complicated by earnings relating to discontinued
businesses, being DPA Brazil in 1H24 and Hangu China farm and Soprole in 1H23. We have
therefore focused on the results for the continuing operations, as summarised in the adjacent table
and commentary below.
–Flat sales volumes and lower product pricing contributed to a 10% reduction in revenue
($11,085m in 1H24 vs $12,333m in 1H23).
–Offsetting the revenue decline, group gross profit for 1H24 held steady on 1H23 ($2,036m vs
$2,046 in 1H23) due to improved gross margins (18.5% 1H24 vs 16.6% 1H23). This was largely
driven by higher margins and sales volume in the Foodservice and Consumer channels, more than
compensating for lower margins in the Ingredients channel.
–Operating expenses from continuing operations increased by $52m (5%) reflecting ongoing
inflationary pressures as well as technical and professional costs. Management reports these are
primarily related to the upfront costs of delivering future cost efficiencies which should support
future cost savings.
–Reported EBIT from continuing operations was up $95m (14%) when including the $162m of
brand impairments in the Consumer channel in 1H23.
–The resulting reported NPAT for 1H24 was $674m on a continuing and discontinued operation
basis (40c per share), compared to an equivalent $546m in 1H23 (33c per share). 1H24 NPAT
benefited from a significant decline in finance costs due to recent divestments and the resulting
reduction in debt costs.
–Based on the full year earnings guidance of 50c – 65c per share and the 43c per share from
continuing operations in 1H24, expected EPS for 2H24 is a significantly lower 7c – 22c per share.
–The Group declared an interim dividend in 1H24 of 15c per share, a 5c increase compared to
1H23. While below the target payout range of 40% to 60%, the dividend policy is based on full
year performance and it is typical for the interim dividend to conservatively allow for some second
half downside.
Reported EBIT and Reported EBIT Margin (Continuing Operations)
5
917
602
543
864
986
9.1%
6.3%
5.4%
7.0%
8.9%
1H201H211H221H231H24
Reported EBITEBIT Margin

Review of 1H24 Performance |
424
242
198
166
522
298
Core OperationsGlobal MarketsGreater China
1H231H24
850
139
(125)
467
342
177
IngredientsFoodserviceConsumer
1H231H24
Financial Performance by Channel & Segment
There was a material shift in the composition of operating earnings (EBIT) between channels in
1H24 vs 1H23:
EBIT from the Ingredients channel was down by $383m in 1H24, reflecting the following key
factors:
–Lower sales volumes of Non-Reference products and reduced margins, largely due to a
relatively higher cost of milk for Non-Reference products compared to Reference Products;
–Lower regional margins in Australia (due to a higher milk price) and weaker demand for milk
protein concentrate and cheese in China; and
–An increase in the cost of milk (as per the Milk Price calculation) due to changes in lactose
prices. This lactose-related benefit was significantly reduced compared to 1H23.
Conversely, EBIT for Foodservice and Consumer was up $203m and $140m respectively when
adjusting for impairments in the Consumer channel in 1H23. Both segments benefited from:
–Favourable margins predominantly driven by a comparatively lower cost of milk as well as
higher in-market pricing; and
–Increased sales volumes, mainly driven by UHT cream in China for Foodservice and Consumer
products in Sri Lanka and the Middle East.
Similar market dynamics led to a shift in earnings contributions across the three Segments
–Core Operations reported a $258m reduction in EBIT, largely reflecting lower margins in New
Zealand milk processing (Ingredients).
–Global Markets earnings were up $142m (adjusting for 1H23 impairments) to $522m, largely
driven by improvements in the Consumer channel.
–Greater China delivered a $76m increase in EBIT (adjusting for 1H23 impairments), with a
particularly strong pick-up in Foodservice across the region.
While the price differential between Non-Reference and Reference products contributed to lower performance in the Ingredients channel,
the lower cost of milk and firm end-product pricing led to significant margin & earnings improvement in Fonterra’s downstream businesses.
Reported EBIT by Channel (NZ$ million)
6
Reported EBIT by Segment (NZ$ million)
$37m when
adjusted for $162m
impairment.
$380m when
adjusted for $138m
impairment.
$222m when
adjusted for $24m
impairment.
Note: Segment and Channel Information is available for continuing operations only

Review of 1H24 Performance |
2,000
3,000
4,000
5,000
6,000
7,000
Aug-22Oct-22Dec-22Feb-23Apr-23Jun-23Aug-23Oct-23Dec-23Feb-24
USD / MT
Cheddar (Non-Reference Product)Whole Mik Powder (Reference Product)
Fonterra’s Price Relativities for Reference and Non-Reference products were broadly in line with 1H23, but the benefit to earnings declined
materially (~6cps vs ~16cps in 1H23). The difference is largely attributable to a lower margin differential (relatively higher cost of milk) and
reduced volumes for Non-Reference products.
Price Relativities
Historical Price Relativities (Non-Reference / Reference Product Prices)
7
Price Relativities at the start of the period remained strong, with the price of cheddar ~1.6x the
price of WMP (a key proxy for Reference products) in late August. However, the Price Relativities
have since tracked back to levels closer to recent averages (~1.3x).
Fonterra believes the margin differential between Non-Reference and Reference products is set
to return to more normalised levels with the price for cheddar adjusting down to within long-term
historical averages, reflecting expectations for higher production in the US. Both contract and
forward pricing are also indicating a contraction in the pricing differential between Reference and
Non-Reference products.
It is therefore likely that the price and margin differential between Non-Reference and Reference
products and the contribution to Group financial performance will continue to contract through
2H24, contributing to lower earnings across the Ingredients channel (particularly versus FY23).
This is consistent with the expected weakening in second half earnings implied from Fonterra’s
FY24 earnings guidance – earnings per share from continuing operations for 1H24 was 43c vs
expected EPS in the second half of 7c – 22c (see page 10).
Source: Global Dairy Trade, adjusted forward 3 months to reflect shipment delay.
WMP and Cheddar used as proxies for Reference & Non-Reference Products.
Price Relativities (Cheddar vs WMP)
1H24
0.8
0.9
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
AugSepOctNovDecJanFebMarAprMayJunJul
Cheddar Price Relative to WMP Price as
Proxy for Price Relativities
FY21FY22FY23FY24 YTD
1H232H23
First Half
2H24

Review of 1H24 Performance |
$7.14
$7.54
$9.30
$8.22
FY20FY21FY22FY23FY24
The Farmgate Milk Price range has narrowed from $7.30 - $8.30 to $7.50 - $8.10 per kgMS,
reflecting a well contracted sales book and ~90% of USD cash flows being hedged for the
remainder of the season.
With only several weeks until the end of the 2023/2024 season, the mid-point Farmgate Milk
Price of $7.80 per kgMS represents a ~5% reduction on the prior year but a significant
improvement on the guidance provided earlier in the season ($6.00 - $7.50/kgMS in August
2023). This reflects that in contrast to the 2022/2023 season where GDT auction prices for key
Reference products declined over the course of the year, prices early in the current season have
generally been on an improved trajectory since August. This trend is summarised in the GDT Price
Index chart below (representing the change in prices for both Reference and Non-Reference milk
products).
While the forecast Farmgate Milk Price has narrowed to $7.50 - $8.10, the mid-point remains $7.80.
Milk Price Range of $7.50 - $8.10 per kgMS
Historical Farmgate Milk Price vs 2023/24 Season Forecast
GDT Price Index
8
1
As per forecast update 21 March 2023
$8.10 High
$7.50 Low
Forecast Farmgate Milk Price
for 2023/24 Season
1
Source: GDT
600
800
1,000
1,200
1,400
1,600
1,800
Index Value
2022/2023
Season
2023/2024
Season
(to mid-April)

Review of 1H24 Performance |
13,009
12,313
12,303
12,281
12,146
12,356
13,005
12,774
12,303
7.7%
6.5%
6.7%
6.6%
6.1%
6.8%
8.6%
12.4%
13.4%
1H20FY201H21FY211H22FY221H23FY231H24
Average Capital Employed Return on Capital
Fonterra’s recent focus on capital management, improved earnings performance and recent divestments (including DPA Brazil in 1H24)
have contributed to a significant reduction in borrowings and a sustained increase in return on capital.
Financial Position and Return on Capital
NZ$ Million1H241H23% Change
Assets
Cash and Cash Equivalents239319(25%)
Receivables2,1222,870(26%)
Inventories6,4997,034(8%)
Other Current Assets 3622,025(82%)
PP&E6,2836,2620%
Intangible Assets1,8131,881(4%)
Other Non-Current Assets 9131,000(9%)
Total Assets18,23121,391(15%)
Liabilities
Payables4,7905,906(19%)
Current Borrowings1,2702,120(40%)
Other Current Liabilities4651,789(74%)
Non-Current Borrowings3,3713,426(2%)
Other Non-Current Liabilities25522115%
Total Liabilities10,15113,462(25%)
Net Assets8,0807,9292%
Equity Attributable to Co-op8,0147,9131%
Adjusted Net Debt (NZ$ million) and Gearing Ratio (%)
Fonterra’s net borrowings have reduced by ~$2.2bn since 1H20. This has been achieved by ~$2bn in
asset sales over the period (China Farms, Soprole, DPA Brazil) and ongoing earnings improvements,
offset by the $800m capital return in 2023.
Gearing levels have also reduced materially to 34.6% at 1H24 vs 43.3% 1H23 and 49.8% in 1H20.
With the first half typically representing a seasonal peak in debt levels, Fonterra should be
comfortably below its LTA gearing target of 35% at the end of FY24. This will provide the Company
with considerable financial flexibility and debt headroom (to support consistent dividend levels and /
or new investment).
Recent capital management initiatives and Fonterra’s improved earnings performance have also
contributed to a sustained increase in its return on capital (“
ROC”) with 1H24 ROC of 13.4% well
above both the 8.6% achieved in 1H23 and the long-term LTA target of 9% - 10%.
9
$6,442m
$6,108m
$5,607m
$5,811m
$4,224m
49.8%
47.3%
44.1%
43.3%
34.6%
1H201H211H221H231H24
Adjusted Net DebtGearing Ratio
Historical Return on Capital (Based on Fonterra Estimates)
1
1
Rolling twelve months

Review of 1H24 Performance |
$0.04
$0.18
$0.25
$0.22
$0.37
$0.43
$0.12
$0.06
$0.09
$0.13
$0.43
$0.15
$0.16
$0.24
$0.34
$0.35
$0.80
$0.58
FY19FY20FY21FY22FY23FY24
1H2H
Fonterra remains cautious around the outlook for the remainder of the year and has maintained
FY24 earnings guidance of 50c – 65c per share (mid-point 58c). This compares to consensus broker
estimates towards the upper end of Fonterra’s guidance and implies EPS for the second half of just
7c – 22c. The lower earnings expectation in 2H24 primarily reflects:
–An increasing cost of milk (bottom chart) and less favourable in-market pricing contributing to
margins in the Foodservice and Consumer segments reducing to levels more consistent with
historical levels;
–Price Relativities between Reference and Non-Reference products continuing to contract,
contributing to significant headwinds for the margin differential on Non-Reference and Reference
products, with the potential for the gap to close completely; and
–Normal seasonal factors mean that 2H earnings are typically lower due to lower sales volumes
and lower milk collections impacting cost recovery in Core Operations.
Fonterra has maintained its earnings guidance for FY24 of 50c – 65c per share, implying 2H24 earnings of 7c – 22c per share. The second
half outlook reflects Fonterra’s expectation of a higher milk price, lower Price Relativities and lower margins in the Foodservice and
Consumer channels.
Full year FY24 Outlook
Despite the cautious outlook for the remainder of the year, Fonterra now has a stronger balance
sheet which should support its ability to sustain dividend levels. Consistent with Fonterra’s FY24
earnings guidance and target dividend payout policy of 40% – 60%, total dividends for FY24 should
be in the vicinity of 30c (consistent with broker estimates but above the LTA target for FY24 of 22c –
27c). This suggests a 2H24 dividend similar to the 1H24 dividend of 15c.
At Fonterra’s current share price (farmer-only market), FY24 dividends of 30c per share would
represent a cash dividend yield of >12%.
10
Monthly Milk Prices (NZ$ per kgMS)Normalised Earnings Per Share for 1H24 and Projection for 2H24
1
1
1H24 based on continuing operations, 2H24 based on midpoint forecast earnings range of 50c – 65c per share.
1
Source: Fonterra Extract
1
2022/23 season monthly
milk price (Farmgate Milk
Price of $8.22)
2023/24 season monthly
milk price (estimated
midpoint Farmgate Milk
Price of $7.80)

Section 2:
LTAs and Update on Flexible
Shareholding
FONTERRA
CO-OPERATIVE
COUNCIL

Review of 1H24 Performance |
While Fonterra last year indicated that it might update the LTAs established in 2021, no changes were announced at the interim results.
Strategic Update and Long-Term Aspirations
Fonterra had previously indicated that the LTAs last updated and amended in September 2021 might
be updated in early 2024. As part of the FY23 results, the Company also introduced two new
operational efficiency measures being 1) cash operating expenses per kgMS, and 2) gross profit from
Core Operations per kgMS.
As part of the 1H24 results, Fonterra subsequently confirmed there was no intention to update the
LTAs but that it remains comfortable with the targets and that an update would be provided to the
market if this view changed.
With no update to the LTAs, this suggests that Fonterra remains on-track to achieve the long-term
targets for FY30 EPS of 55c – 65c. This effectively represents flat earnings growth over the next 6
years given the FY24 guidance of 50c – 65c. We expect this reflects uncertainty around future Price
Relativities and the expectation that margins will reduce to long-term historical levels across the
Foodservice and Consumer channels. If this view changes over the remaining LTA period, Fonterra
will update the market, or possibly revise its LTAs.
12
1.22
1.27
1.21
1.30
1.35
1.02
1.09
1.10
1.26
1.09
(2023 prices)
HY20HY21HY22HY23HY24FY30
Inflation-AdjustedActualTarget Improvement
Cash Operating Expenses per kgMS (12-month rolling average vs long-term target)
At the results announcement for FY23, Fonterra announced a target of reducing cash operating
expenses per kgMS by 4% every year (to 2030) as part of its aspiration of sustainably removing ~$1
billion of overall costs from both its operational and overhead cost base by 2030.
Cash operating expenses per kgMS in 1H24 have tracked counter to this target, increasing 9c to
$1.35 (7% increase on 1H23). However, we note:
−Approximately 4c of the increase was due to expenses for efficiency initiatives (e.g. automation)
that are intended to drive future cost savings;
−~5c related to a change in product mix with more volumes going to Foodservice and Consumer
which have higher operating expenses but also contribute higher EBIT margins; and
−Key costs such as wages, insurance and distribution are likely growing at levels greater than CPI.
In the current environment, it is likely that meeting these cost efficiency targets will continue to be
difficult over the medium term.
LTA MeasureForecast
FY22
Actual
FY22
Forecast
FY24
Actual
1H24
Forecast
FY27
Forecast
FY30
EBIT ($ million)875–975991*1,025–
1,125
986
(cont. ops)
1,150–
1,250
1,325–
1,425
Earnings per
Share (cents)
25–4035*45–554350–6055–65
Return on Capital6.5%–7.0%6.8%*7%–8%13%7.5%–8.5%9%–10%
Capital
Investment
($ million)
650617980289980980
Debt to EBITDA2.4x3.2x<2.5xn/a<2.5x<2.5x
Gearing Ratio35%42%<35%35%<35%<35%
Dividends (cents)15–2020* 22–271530–3540–45
* Indicates that target was met
Note: LTAs when released only had targets for FY22, FY24, FY27 & FY30
Note: This report was finalised 30 April 2024 based on information disclosed as part of Fonterra’s HY24 interim results. On 16 May 2024, Fonterra announced a material change in strategic direction, including:
•That it was exploring full or partial divestment of some or all of the global Consumer business and other integrated businesses Fonterra Oceania and Fonterra Sri Lanka.
•Given the potential divestment, the Board has subsequently withdrawn the FY30 financial targets but remains committed to meeting sustainability targets and associated investment plans as well as the
cost efficiency targets.

Review of 1H24 Performance |
121
1,035
229
244
1,024
167
Undershared
(less than 80%)
Close to Equally Shared
(80 - 120%)
Overshared
(Over 120%)
July 2023February 2024
Flexible Shareholding – Initial Review
13
Fonterra’s Flexible Shareholding was announced in May 2021 and introduced in April 2023. Since then,
it is required to periodically disclose certain shareholding metrics including ceased-farmer holdings and
the distribution of farmer shareholders relative to the Share Standard (1 share per kgMS supplied). The
recent February 2024 disclosure confirms that Fonterra was within its specified thresholds for the
Flexible Shareholding metrics (shares on issue above the Share Standard, shares held by ceased
farmers and shares held by the Fonterra Shareholders’ Fund). However, the data also highlights
movements in farmer shareholdings relative to the Share Standard since the first disclosure for July
2023.
We have summarised the change in the distribution of farmer milk supply relative to shareholding levels
in the chart below. Farmers described as “undershared” are those that have shares less than 80%
relative to the Share Standard, “close to equally shared” being those that are 80% – 120% of the Share
Standard and “overshared” being those with more than 120% of the Share Standard. Over the 7-month
period, the recent data demonstrates significant compositional changes at the under and over shared
ends of the spectrum.
Farmer Milk Supply Relative to Share Standard (million kgMS)
Increase in # farms from 939 in
July 23 to 1,307 in Feb 24
Avg supply per farmer increased
from 129,000 to 187,000kgMS
Fonterra’s new Flexible Shareholding structure has been in force since April 2023 and has resulted in many farmers looking to adjust their
shareholding.
Increase in # farms from 1,276 in
July 23 to 1,337 in Feb 24
Avg supply per farmer decreased
from 179,000 to 125,000kgMS
While it is difficult to determine the drivers of changes in farmer shareholdings relative to milk
supply, we note that:
−Milk supply from undershared farmers has more than doubled to 244 million kgMS from an
increase in the number of undershared farms of only ~40%. The average milk supply from
farmers in this category has increased from 129,000kgMS to >187,000kgMS (vs an overall
average supply of 174,000kgMS). This change is more than can be explained by the level of
new farmers joining the Co-operative and suggests larger farms have been sharing down;
−Milk supply in the overshared category has decreased by ~62 million kgMS despite an increase
in the number of farms in this category. There has been a significant decrease in average farm
supply from this category, from 179,000kgMS to 125,000kgMS. This suggests that overshared
farms are increasingly smaller farms; and
−An increase in the “restricted market discount” since the Flexible Shareholding structure came
into effect (see next page) suggests a buyer / seller imbalance (i.e. insufficient buyer demand
from undershared farmers in the farmers-only market to support selling farmers).
For example, overshared farmers supplied 167 million kgMS
in the 12 months to February 2024 (compared to the 229
million kgMS supplied in the 12 months to July 2023).

Review of 1H24 Performance |
Restricted Market Discount
Average Daily Trading Volume on NZX - 2019/2020 Season vs Current SeasonDiscount of FCG Share Price to FSF Share Price
1
14
One of the consequences of Fonterra’s changes to the shareholding structure and the capped shareholders’ fund has been a poorly
performing share price in the farmers-only market relative to the price for units, with the price differential at all-time highs.
-40%
-35%
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
Price Discount
Capital Structure Review
Announcement Date
New Capital Structure
Implementation
The price of Fonterra shares (FCG) in the farmer-only market is trading at all time high discounts
compared to the price for units in the Fonterra Shareholders’ Fund (FSF). The current discount of
~35% compares to an average in the period between announcement of the capital structure review
and implementation of the Flexible Shareholding regime of ~14%. All else equal, this represents over
$200,000 in lost value to an average fully shared-up farmer (the current value of FCG shares vs the
value of FSF units and an average farm size of 174,000kgMS).
We expect much of the recent widening in discount will be transitory as farmers reweight their
shareholding for individual reasons, but the discount has been exacerbated by the significant
decrease in market volumes for FCG shares. Average 12-month daily volumes are less than one third
of the levels in the 2019/2020 season prior to changes to the capital structure and the removal of
investors from the market. We note that liquidity in the FSF market has also decreased materially
meaning price discovery in both markets has likely diminished.
We expect that some level of steady state “equilibrium” in the long-run restricted market discount will
eventually be reached as farmers obtain their desired shareholding levels. However, there is still
likely to be periods of volatility (increase or decrease in the restricted market discount) caused by a
range of external factors (droughts, financial conditions, etc).
362,787
110,882
461,687
61,079
0
100,000
200,000
300,000
400,000
500,000
600,000
700,000
800,000
900,000
2019/2020 Season2023/2024 Season
FCGFSF
1
Calculated as (FCG price per share / FSF price per share) - 1

Appendix – Supporting Information

Review of 1H24 Performance |
Progress Against FY24 Integrated Scorecard
Key Performance Indicator (KPI)
FY22
Actual
FY23
Actual
FY24
Scorecard
FY24
1H
People
Serious harm8540*
Gender diversity (Band 12+)37.6%39.5%40.0%39.4%
Culture Measure-79-78
Nature
GHG emissions (Scope 1,2)(11.2%)(14.1%)(15.6%)(20.2%)*
FEP adoption (New Zealand)71%85%92%89%*
Water Improvement Plans in place-44.0%100.0%On Track*
Relationships
Share of New Zealand milk collected for the season to 31 May79.1%79.0%79.0%78.5%
Delivered in full, on time (DIFOT, ex-New Zealand)51.6%53.2%80.0%Behind
Financial / Assets &
Infrastructure
Cash operating expenses per kgMS (real)1.341.391.37Behind
Gross profit from Core operations per kgMS (real)8.839.218.52Behind
Return on capital6.8%12.4%8.0% - 9.0%Ahead*
Farmgate Milk Price ($)9.308.226.00 – 7.50$7.30 - $8.30*
Alignment Rights
Total shareholder return (share price plus dividend)$2.73 ($0.20)$3.20 ($1.00)No TargetNo Target
On-farm profitability ($ per hectare)4,1502,063No TargetNo Target
16
* Indicates that target was met

Review of 1H24 Performance |
Historical Financial Information
Sales Volume (‘000 MT)
Reported EBIT (NZ$ million)
Revenue (NZ$ million)
Normalised EBIT (NZ$ million)
Total Assets (NZ$ million)
Total Equity (NZ$ million)
1
1
Excluding non-controlling interests
Note: Includes continued & discontinued operations where known.
17
Capital Expenditure (NZ$ million)
Free Cash Flow (NZ$ million)
2,189
2,324
2,131
2,003
2,075
2,037
1,994
1,921
1,994
1,780
1H151H161H171H181H191H201H211H221H231H24
9,746
8,388
9,232
9,836
9,745
10,423
9,915
10,797
13,249
11,257
1H151H161H171H181H191H201H211H221H231H24
376
665
607
458
312
584
684
607
940
1,019
1H151H161H171H181H191H201H211H221H231H24
483
752
644
(176)
312
806
657
607
858
953
1H151H161H171H181H191H201H211H221H231H24
18,796
19,076
19,344
20,161
20,301
20,148
19,955
20,816
21,391
18,231
1H151H161H171H181H191H201H211H221H231H24
6,249
6,795
7,054
6,568
6,421
6,257
7,148
6,700
7,913
8,014
1H151H161H171H181H191H201H211H221H231H24
763
453
244
346
316
112
147
180
245
225
1H151H161H171H181H191H201H211H221H231H24
(1,761)
346
(417)
(690)
(782)
369
(632)
(849)
(30)
(413)
1H151H161H171H181H191H201H211H221H231H24

Review of 1H24 Performance |
Reported EBIT Bridge by Segment and Channel
Reported EBIT Bridge by Channel
Reported EBIT Bridge by Segment
18
$953m
$858m
($324m)
($38m)
($21m)
$59m
$57m
$87m
$7m
$261m
$34m
($27m)
ReportedCore OperationsGlobal MarketsGreater ChinaCore OperationsGlobal MarketsGreater ChinaCore OperationsGlobal MarketsGreater ChinaDiscontinued
Operations
Reported
1H23 EBITIngredientsFoodServiceConsumer1H24 EBIT
$953m
$858m
($324m)
$59m
$7m
($38m)
$57m
$261m
($21m)
$87m
$34m
($27m)
ReportedIngredientsFoodserviceConsumerIngredientsFoodserviceConsumerIngredientsFoodserviceConsumerDiscontinued
Operations
Reported
1H23 EBITCore OperationsGlobal MarketsGreater China1H24 EBIT

Review of 1H24 Performance |
Continuing and Discontinuing Operations
19
NZ$ Million6 Months to January 20236 Months to 30 January 2024
Continuing
Operations
Discontinued
Operations
Total
Group
Continuing
Operations
Discontinued
Operations
Total
Group
Sales Volume (‘000 MT)1,6992951,9941,721591,780
Total Revenue 12,33391613,24911,08517211,257
Cost of Goods Sold(10,287)(664)(10,951)(9,049)(106)(9,155)
Gross Profit2,0462522,2982,036662,102
Gross Margin (%)16.6%27.5%17.3%18.4%38.4%18.7%
Operating Expenses(1,219)(258)(1,477)(1,109)(99)(1,208)
Other Items37-3759-59
Reported EBIT864(6)858986(33)953
Reported EBIT Margin (%)7.0%(0.7%)6.5%8.9%(19.2%)8.5%
Normalisations-6565-6666
Normalised EBIT86459923986331,019
Reported Net Profit After Tax5442546714(40)674
Normalised Net Profit After Tax5446761171426740

Review of 1H24 Performance |
Summary of Normalisations
ItemImpact on EBITImpact on Gearing
Loss on Sale of DPA Brazil▲$66m loss on sale▼
Sale proceeds reduce Net Debt, while the loss on sale
decreases Equity. All else equal, the net impact should be
a reduction in Gearing.
Normalisation Adjustments to EBIT
NZ$ million1H211H221H231H24
Disposals($50m)-($82m)($66m)
Impairment $23m---
Total($27m)-($82m)($66m)
Reported EBIT$657m$607m$858m$953m
Normalisations$27m-$82m$66m
Normalised EBIT$684m$607m$940m$1,019m
Impact of FY23 Normalisations
20

Review of 1H24 Performance |
Abbreviations & Definitions
TermDefinition
Co-op, Group or the CompanyFonterra Co-operative Group Limited
DIRADairy Industry Restructuring Act
DPA BrazilDairy Partners Americas Brazil
EBITEarnings before interest and tax
EBITDAEarnings before interest, tax, depreciation and amortisation
EPSEarnings per share
ESGEnvironmental, social and governance
FCGShares in Fonterra Co-operative Group Ltd (FCG.NZ)
FGMPFarmgate Milk Price
FSFShares in Fonterra Shareholders’ Fund (FSF.NZ)
FundFonterra Shareholders’ Fund (FSF.NZ)
FYFinancial year ending 31 July
GDTGlobal Dairy Trade
kgMSKilograms of milk solids
LTAsLong Term Aspirations
MTMetric tonnes
NPATNet profit after tax
Non-Reference ProductsProducts that are not included in the calculation of the Farmgate Milk Price.
NWCNet working capital
NZDNew Zealand dollars
PP&EPlant, property and equipment
Price RelativitiesRefers to the difference in the weighted average price (in USD) between the Reference Product portfolio and Non Reference Product portfolio.
Reference ProductsIncludes commodity products and groups that are included in the calculation of the Farmgate Milk Price.
Share StandardMeans one share per one kgMS supplied
RHSRight hand side (axis)
ROCReturn on capital employed
USDUnited States dollars
WMPWhole milk powder
21

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