Normalised EBIT ($m)

2010 Annual Results
Market Briefing
18 October 2010
Andrew Ferrier (CEO) / Jonathan Mason (CFO)
Presentation outline
1. Snapshot of Fonterra
2. Industry Overview
3. 2010 Annual Results Update
4. Strategic Priorities & Outlook
5. Capital Structure
6. Questions & Answers
Page 2
Snapshot of Fonterra
Page 3
•
•
World class
producer & exporter
•
•
•
•
A substantial pastoral supply of milk with a strong competitive position in New Zealand, collecting around
90% of the milk produced
Financial flexibility
•
•
Strong investment grade ratings - S&P: A+ (Stable) Fitch: AA- (Stable)
Gearing at lower end of target range and conservative liquidity position
Build Trusted
Brands in
Chosen Markets
Low cost milk supply
base
Largest milk processor in the world
Geographical diversification with manufacturing sites and offices throughout the world (14.7bn litres of
milk sourced from NZ and 6.6bn from offshore)
A unique global supply chain with about 95% of production exported to more than 100 markets around the
world
Accounts for around 45% of international dairy trade (by total share of exports of WMP, SMP, AMF)
Generation of approximately 25% of New Zealand’s export receipts
Leading consumer
market positions
•
•
Leading brands with leading market shares in core markets
Excellent customer relationships
Grow Lasting
Customer
Partnerships
Deliver Sustainable Co-operative
Performance
Fonterra, the global Dairy leader
•
Favourable industry
dynamics
Global milk consumption in key developing markets is forecast to increase faster than supply over the next
decade
Strong positions with global customers in rapidly growing high margin dairy categories that leverage
proprietary product and process innovations
Page 4
•
Fonterra operates across the full spectrum with a
diversified portfolio of dairy businesses
Margins
Dairy
Ingredients
Trade &
Operations
Global Ingredients
& Foodservices
ANZ
Page 5
Speciality*
WMP, SMP, butter,
cheese etc.
DMV Fonterra
Excipients, Clear
Protein etc.
CheddarPlus, C21 etc.
Referred to as
Commodities &
Ingredients for
reporting
purposes
Anchor, Bega, CalciYum, Fresh n’ Fruity, Mainland, Perfect
Italiano, SKI etc.
Asia/AME
Latam
Consumer*
Anlene, Anmum, Anchor ,
Fernleaf, Mainland etc.
Dairy Partners Americas
(DPA)
Soprole, Nestle brands etc.
*In some circumstances margins on high value consumer products are equivalent or greater to margins earned on
speciality products
Strong foundation laid for continued execution of
strategy
2009 (Examples)
Deliver Sustainable Co-operative
Performance
e.g. Increased scale, flexibility and operational
efficiencies
Build Trusted Brands in Chosen Markets
e.g. Continued investment in growing
categories, exit of mature positions and
consolidating operations (e.g. Soprole)
Grow Lasting Customer Partnerships
e.g. Leverage proprietary processing and
product IP
Page 6
2010 (Examples)
• globalDairyTrade
• Adoption of new Milk Price
• First full year of operation of Tangshan farm in
China
• Transformation of supply chain begins
• Cost savings offset inflation
• New Mosgiel and Crawford Street hubs
• Opening of ED4 (world’s largest Milk Dryer)
• globalDairyTrade:
- more products/volume
- twice a month
- reference price for NZX dairy futures
• Every Farm Every Year launched
• Expansion of China farms
• Cost savings offset inflation
• Acquisition of SKI brand in Australia from
Nestle
• Increase holding in Soprole to 99%
• Divestment of Western Australia business
• Launch of Anlene and Anmum Materna in
regional cities in China
• Expansion of Food Services in Asia (e.g. UHT
cream investment)
• Acquisition of remaining stake in Saudi JV
• Investment in UHT plant expansion (Takanini)
• Divestment of JV with Arla in the UK
• Commercialisation of CheddarPlus in New
Zealand
• New innovation centre in Chicago
• Commercialisation of C21
• Commercialisation of CheddarPlus
internationally
• Expansion of DMV Fonterra Excipients JV in
Europe
• Expansion of Dairy Concepts JV in the USA
Industry Overview
Page 7
Over the next 10 years, the import requirements of developing
regions is expected to rise
+13 +11
+5.8 +6.3
+10
-0.4
+42 +45
+35 +36
USA/Canada
+12 +19
Rest of Europe
EU 27
+8.5 +13
China
+16 +18
+5.6 +8.0
Middle East &
North Africa
South East Asia
India
Rest of Africa
+5.8
+1.5
Latin America
Milk Production Growth to 2019 (million MT)
ANZ
Milk Production 2009 (million MT)
Milk Consumption Growth to 2019 (million MT)
Page 8
Milk Consumption 2009 (million MT)
Sources: Fonterra. Standardised Milk Equivalent (ME) basis: 1 MT of NZ Milk = 1.15MT of standardised milk equivalent; 1 MT of standardised milk equivalent = 7.4MT of WMP
Fonterra is uniquely positioned to supply Asia’s dairy
deficit
Net Trade in Dairy, 2009
18.4
14.3
11.3
2.8
0.5
3.6
2.2
Canada
Other
Europe
0.3
0.9
USA
0.1
India
3.0
2.5
0.5
Mexico
Brazil
2.9
EU27
Other
Africa
7.6
Sth Korea
Middle East
North Africa
1.1
Units – million tonnes
of milk equivalents
Source – Fonterra
2.1
Japan
China
3.6
New Zealand
Uruguay
Other Asia
Other
Latam
Net Trade Surplus
Australia
Argentina
Net Trade Deficit
Page 9
9
Strong correlation exists between wealth and valueadded consumption
GDP / capita and cheese consumption
(proxy for high value-add)
Page 10
Source:
OECD (1970-2009 where available)
2010 Annual Result
Page 11
2010 financial result snapshot
2010 $m
2009 $m
(restated1)
Revenue
16,726
16,035
691
4%
Cost of Milk2
(7,664)
(5,793)
(1,871)
(32%)
Other purchases/inventory
movement/supplier premiums
(6,311)
(7,424)
1,113
15%
Operating expenses
(1,999)
(2,036)
(37)
(2%)
277
119
158
133%
EBIT3
1,078
990
88
9%
Net finance costs
(313)
(448)
(135)
(30%)
Tax
(80)
681
(148)
N/A
Profit after tax
685
610
75
12%
Other operating income
1.
2.
3.
Page 12
Movement
$m
Movement
%
The Group has changed its accounting policy to recognise the tax effect of distributions to shareholders within the tax expense line in the income
statement. As a result of this change, the tax effect of distributions to Shareholders of $177 million recognised in equity for the year ended 31 July
2009 is now presented on the income statement.
The milk season runs from 1 June to 31 May. The Cost of Milk sold represents the Cost of Milk collected from suppliers for the season. Adjustments
for the 1 June to 31 July period to align the milk season with the financial year are made in the other purchases and inventory movement line.
Operating Profit, plus share of equity accounted earnings (2010: $56m; 2009: $129m) less impairment of equity accounted investees (2010: nil;
2009: $61 million).
Normalised EBIT
2010 $m
2009 $m
Reported EBIT1
1,078
990
Non-recurring items
(174)
(32)
–
61
904
1,019
Impairment of equity accounted investees
Normalised EBIT
Page 13
1.
Reported EBIT includes non-recurring items and impairment of equity accounted investees.
Revenue and normalised EBIT by business segments
Segment Revenue
Normalised EBIT1
($m)
($m)
Commodities
& Ingredients
11,225
10,504
339
548
2010
2009
Consumer
businesses
(combined)
Page 14
1.
5,501
5,531
565
474
After excluding non-recurring item and impairment of equity accounted investees. 2009 does not include Group eliminations of $3 million.
Revenue from
Equity
Accounted
Investments
Commodities & Ingredients
Normalised EBIT ($m)
• EBIT impacted by the following key
drivers:
(1) Market volatility meant that prices
for some non-powder products, such
as cheese and casein, lagged
international powder prices
548
339
2009
Page 15
2010
(2) Average pricing on some contracts
with customers lagged increases in
cost of milk
(3) Partially offset by efficiency gains
arising from streamlining processes,
more efficient dryers (ED4) and cost
savings initiatives
Non powder prices lagged powder price increases
Milk Price
Basket of Products
8%
YOY Price
Movement
AMF & BMP
10%
Butter
24%
Skim Milk
Powder
58%
Page 16
Fonterra’s
Actual Production
26%
8%
Other: Cheese,
Casein, Liquid Milk,
MPC, Whey etc.
AMF & BMP
13%
Cream (includes Butter)
17%
Skim Milk
Powder
36%
Whole Milk
Powder
Whole Milk
Powder
Strategies to improve flexibility and agility of Fonterra
Increased Volatility of Dairy Prices
gDT
launched
• FY08: globalDairyTrade launched
• FY09: Commodity Risk Management
team established
• FY09: Streamlining of supply chain
and manufacturing processes begins
• FY10: ED4 commences production
(improves processing flexibility in
South Island)
• FY11: globalDairyTrade goes twice a
month
Measured by absolute changes on a monthly basis
Page 17
• FY11: Launch of NZX Dairy Futures
market
Strong normalised EBIT1 growth for consumer
businesses
Normalised EBIT
$m
600
474
500
400
565
CAGR
19%
392
332
300
200
100
0
2007
1.
Page 18
2.
2008
2
2009
2010
Combined ANZ/AME/Latam segment Normalised EBIT (adjusted for non-recurring items and impairment of equity accounted
investees).
12 month period (unaudited, sourced from management information).
Fonterra Australia & New Zealand
Normalised EBIT ($m)
• 17% increase in normalised EBIT
over last year
• Market share growth across all major
categories
• Strategy of leadership in priority
categories starting to deliver step
change results (e.g. yoghurt
acquisition in Australia and
divestment of Western Australia
ice cream business)
290
248
2009
2010
Market
Position
Cheese
Spreads
Yoghurt
Milk
Ice
Cream
Australia
#1
#1
#2
#3
-
NZ
#1
#1
#1
#1
#1
Page 19
• Fonterra reputation with Australian
farmers strengthened with ANZ milk
intake increasing despite an overall
industry reduction
Fonterra Asia/AME
Normalised EBIT ($m)
• Normalised EBIT up 31% over
previous period, up 48% on a local
currency basis
157
120
2009
2010
ANLENE
Market leadership across all markets in Asia with >70% share
in top markets
ANMUM
Maternal market leader with market share of >50% share in
key Asian markets
FOODSERVICES
Leading in foodservices solutions and contributed to 28% of
Asia/AME earnings this financial year
GEOGRAPHIES
Malaysia, Indonesia, Philippines, Sri Lanka, Middle East,
Taiwan, Thailand, Vietnam, Singapore, China, Hong Kong,
Mauritius
Page 20
• Strong revenue growth in nutritional
segments driven by marketing
campaigns and innovation
• Operating gross margin improved by
8 percentage points over last year
with focus on higher value add
categories
• Higher market shares across
value-add categories (Anlene,
Anmum)
Fonterra Latam
Normalised EBIT ($m)
• Normalised EBIT up 11% on previous
period
106
2009
118
2010
Largest dairy consumer brand in Chile
Dairy Partners Americas
JV between Fonterra and Nestlé
Largest milk processor in Latin America
Brands in following
geographies
Chile, Brazil, Ecuador, Venezuela
Page 21
• Soprole in Chile (the largest
investment included under Latam) has
a strong year despite the impact of
the Chilean earthquake
• Earnings in the Dairy Partners
Americas JV was impacted by macro
factors such as the devaluation of the
Venezuelan currency and
non-recurring tax credits realised
last financial year
Gearing1 is lowest in our history
The improvement in the gearing ratio is
due to:
57.6%
52.4%
53.0%
52.1%
44.9%
2006
Page 22
2007
2008
2009
•
Increase cash receipts through issue of
new Co-operative shares
•
Sale of certain non-strategic assets and
restriction of non-essential capital
expenditure
•
Change in capital structure approved by
shareholders has resulted in dividend
payments being made in place of Value
Returns payments. Accounting standards
do not permit the recognition of a
dividend until it has been declared.
Consequently the final dividend can no
longer be accrued at balance date
2010
1. Gearing is measured in terms of economic net interest bearing debt over economic net interest bearing debt plus equity (reflecting the
effect of debt hedging in place at balance date).
Strategic Priorities & Outlook
Page 23
Strategic priorities for the coming year
• Enhance flexibility and agility in Trade and
Operations by continuing to :
– expand globalDairyTrade
– improve supply chain and manufacturing systems
Deliver
Sustainable
Co-operative
Performance
– invest in technology to improve production flexibility
– enhance commodity risk management capabilities
• Continued focus on environmental
commitments and community involvement
(e.g. roll out of Every Farm, Every Year)
• Bedding down of new capital structure
Page 24
Strategic priorities for the coming year (cont)
• Rapidly expand Global Ingredients and
Foodservices by continuing to:
Grow Lasting
Customer
Partnerships
– leverage Fonterra’s technology in overseas markets to
build value added ingredients businesses
– develop customer partnerships for innovative
ingredients products (e.g. for beverage industry)
– pursue disciplined strategic investments
Build Trusted
Brands in
Chosen
Markets
Page 25
• Building a strong track record of growth in
Consumer businesses by continuing to:
– invest in brand positioning
– move into higher margin categories
– grow market position through disciplined strategic
investment
Outlook
• Forecast total payout (before retentions) for 2010/11 season firmed up to
$7.00-7.10
–
Unchanged forecast for Milk Price of $6.60
–
Distributable Profit range narrowed to 40-50 cents per share from
earlier guidance of 30-50 cents per share
• Board is targeting a dividend range for 2011 of 25-35 cents per share,
consistent with its stated policy of paying 65-75% of adjusted
Distributable Profit as an Annual Dividend
Page 26
Capital Structure
Page 27
Strong support for new capital structure
• Clear mandate for change with over 89% support (of 80% of
farmers who voted) for proposal to evolve capital structure
• Reinforced by around 6% of shares already being “dry”
• Changes will:
 Remove redemption (balance sheet) risk for Fonterra
 Improve financial flexibility for farmers
• These features allow a more sustainable retention policy, with
retentions being a major contributor to fresh equity
• The new regime also offers scope for new equity raising
Page 28
Next Steps – 18 Months
• Capital Market Advisors and Market Design Advisor appointed
• Constitution sets preconditions
• Finalising design of Fonterra Shareholders’ Market and Fonterra
Shareholders’ Fund – watch the space
• DIRA changes required
• Education of farmer shareholders and potential Fonterra Shareholders’
Fund investors
Page 29
Supplementary Information
Page 30
Record milk collected, up 0.4%
Upper North Island : 7%
Central North Island : 4%
Milk Collected
New Zealand
Global
Total
Litres
14.7bn
(1,286m kgMS)
6.6bn
21.3bn
Lower North Island : 4%
Upper South Island : 4%
Central South Island : 12%
Lower South Island : 9%
Page 31
Whole Milk Powder Prices on globalDairyTrade
US$/MT
4,500
4,000
3,500
3,000
2,500
2,000
1,500
Page 32
gDT average contract
price for events in that
month
gDT average weighted
price of shipments in
that month
Distributable Profit compared to Net Profit After Tax
$ million
Cents Per
Share
Profit after tax
669
50
Tax effect of retentions1
131
10
Distributable Profit
800
60
1.
Page 33
Reflects ‘conventional’
Profit after tax
comparable to other
corporate entities
Reflects Fonterra’s status
as a Co-operative and is
most comparable to
reported result of other
Co-operatives (used as
reference in determining
payout before retentions)
Represents the additional tax credit that would be available if all current year profits and this tax credit were declared as a dividend.
Milk price methodology
Page 34
Revenue
Sample of Fonterra’s actual sales prices of reference commodity products (moving to
increasing/sole reliance on globalDairyTrade). Key inputs include product streams, sales
phasing
less Production Costs
Manufacturers specification of resource usage for modern powder plants but with
Fonterra’s unit costs, Fonterra’ collection costs, Fonterra’s supply chain costs (note:
supply chain costs assume that Milk Price business doesn’t have offshore network)
less Overheads
Based on Fonterra’s costs, but reflect narrower scope of Milk Price Business
less Capital charge
Asset base times reasonable rate of return
Cost of Milk
Included in Fonterra’s Cost of Goods Sold
Currency Hedging
• Hedging resulted in a 2010 Fonterra Average Conversion Rate (FACR) of US66.7 cents (2009: US66.5
cents)
• Average spot USD rate was US70.8 cents for 2010
NZD/USD Spot Price against Fonterra Average Conversion Rate (FACR)
31 May 2007 to 31 July 2010
Page 35
Reduced debt contributed to lower interest costs
Net Debt ($bn)
Net Interest ($m)
5.9
5.2
4.3
Non current
4.5
4.1
3.9
Current
(less cash)
448
318
1.4
2008
Page 36
1.
1.1
2009
313
0.4
2010
12 month period (unaudited, sourced from management information).
2008 1
2009
2010
Gearing
31 July 2010
($m)
31 July 2009
($m)
Net Interest bearing Debt position
Total borrowings
4,924
5,794
Cash and cash equivalents
(559)
(600)
Interest bearing advances included in other non-current
assets
(122)
(86)
25
58
226
55
Economic net interest bearing debt
4,494
5,221
Total equity less cash flow hedge reserves
5,526
4,635
Economic debt: debt plus equity
44.9%
53.0%
Bank overdraft
Value of derivatives used to manage changes in hedged
risks and other FX movement on debt
Page 37
Prudent liquidity profile
2009 year end
2010 year end
(% of net debt)
(% of net debt)
< 1 year
7%
< 1 year
18%
> 5 years
37%
1 to 2 years
3%
> 5 years
46%
2 to 5 years
56%
2 to 5 years
33%
Facility availability + Debt maturity profile
(rolling one year ending July)
4,000
CP
1y standby
3,500
AUD inventory f unding
NZD million
3,000
18m working cap
3y AUD f acility
2,500
4y bank f acility
2,000
NZMTN
1,500
EMTN
1,000
USPP
NZD retail issue
500
Other bond issue
0
Page 38
Leases
Un-drawn 2010
and
committed
2011
2012
2013
2014
2015
2016
2017
Maturing year
2018
2019
2020
2021
2022
2023
2024
Cash Flow analysis – 2010 against 2009
Cash Flow ($m)
1,479
(354)
(1,154)
542
Page 39
21
534