Networkers Business Update December 2014
Agenda Forecast Milk Price Global markets V3 Strategy Growing our share of New Zealand milk Page 2
Forecast Milk Price 110 100 2012/13 2013/14 2014/15 Forecast Farmgate Milk Price $4.70 KGMS Volume (m litres/day) 90 80 70 60 50 40 30 20 10 Jun Aug Oct Jan Mar May Page 3
Advance Rate schedule Month Current Announced Advance Rate Capacity Adjustment Payment New Base Advance Rate Monthly Payment rate June Paid July $4.48 $0.52 $4.48 $5.00 July Paid August $4.48 $0.52 $4.48 $5.00 August Paid September $4.48 $0.52 $4.48 $5.00 September Paid October $4.48 $4.48 $4.48 October Paid November $4.00 Peak $4.00 $4.00 November Paid December $4.00 Period $4.00 $4.00 December Paid January $4.00 $4.00 $4.00 January Paid February $4.00 $0.52 $3.85 $4.37 February Paid March $4.00 $0.52 $3.85 $4.37 March Paid April $4.00 $0.52 $3.85 $4.37 April Paid May $4.00 $0.52 $3.85 $4.37 May Paid June $4.05 $0.52 $3.90 $4.42 July Retro $4.30 $3.95 August Retro $4.60 $4.35 September Retro $4.90 $4.40 October Retro $5.05 $4.45 Total $5.30 $0.25 $4.70 Page 4
GDT WMP prices 6,000 5,000 Impact NZ Drought 2008 Impact Cold snap/brief dry Conditions in NZ Impact NZ Drought 2013 4,000 3,000 Market Consensus of Long Run Price 2,000 1,000 Impact Global Financial Crisis Impact Strong global milk production of 2.8% Impact Strong Supply NZ / EU / US Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Apr 16 F10 F11 F12 F13 F14 Milk Price $6.10 $7.60 $6.08 $5.84 $8.40 WMP (Weighted Average USD Shipment) $2,905 $3,606 $3,362 $3,397 $4,827 Page 5
Comparison of forecast WMP Prices between the September $5.30 f/cast and December $4.70 f/cast $4,500 $4,000 $3,500 $3,000 $2,500 $2,000 Oct 14 Nov 14 Dec 14 WMP Contract Prices (USD) Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Months NZD 5.30 Price Series Revised NZD 4.70 Series Page 6
Global supply remains strong European Union Milk production up 5% in 2014 Extra 5.7 billion litres Russian trade bans impacting exports Private Storage Aid extended until 28 Feb 2015 US Milk production up 2% in 2014 Extra 1.2 billion litres Prices slowly converging with global market Australia Milk production up 5% in 2014 Extra 343 million litres New Zealand Fonterra milk production up 3.9% season to date Page 7
Challenging global situation in key dairy regions Russia (Demand) Trade ban continues in place for EU s largest dairy export market Unlikely to change in short term Oil price Large dairy importers like Venezuela, Algeria and Iran, likely to feel pressures if oil price stays low. Ebola outbreak Middle East extremist factions China (Demand) Import growth slowed Imported milk powder inventory levels falling but still above normal levels South East Asia (Demand) Increasing competition from EU / US Currency weakening and inflationary pressure Page 8
Global prices looking forward Weighted Average Auction Results Weighted average price by future shipping month (RPP) Liquid Milk Equivalent (litres) 70 60 50 40 30 20 10 References: Agrifax / IFCN / Fonterra Analysis China production and consumption Net Imports LME (litres) Production LME (litres) 0 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Page 9
Ingredients is a value-adding business 1 Optimise NZ milk Milk curve...delivering significant value 2 Build and grow beyond our current consumer positions 110 100 NEW ZEALAND 2012/13 3 4 5 6 7 Deliver on Foodservice potential Grow our Anlene business Develop leading positions in paed & maternal nutrition Selectively invest in milk pools Align our business and organisation Volume (m litres/day) 90 80 70 60 50 40 30 20 10 2013/14 2014/15 Jun Aug Oct Jan Mar May Steep, high volume milk curve Most efficient ingredients processor $3.88 first 5 years $6.80 last 5 years Average payout has increased Driven by GDT sustained higher commodity prices Price achievement above GDT Page 10
Investing in additional capacity Volume (m litres/day) 110 100 90 80 70 60 50 40 30 20 10 Optionality 10% more capacity at peak¹ 2012/13 2013/14 2014/15 Jun Aug Oct Jan Mar May $755 million investment in Lichfield, Edendale and Pahiatua $50 million on improving plant capacity Consumer and Foodservice Waitoa UHT facility First shipments of UHT sent to China $126 million investment to meet Asian demand Will process >100 million litres a year Clandeboye $72 million investment Will double capacity to produce individual quick frozen (IQF) grated mozzarella Eltham $32 million for slice-on-slice cheese Expected completion in mid-2015 Used in Quick Service Restaurants Te Rapa $32 million investment for cream cheese foodservice Capacity to process additional 20,000 tonnes Page 11
Consumer growth is our strategic priority $6.3b Revenue from Consumer and Foodservice in the 2014 financial year Page 12
Convergence of pricing NZ v EU and US Page 13
Maximising Farmer Returns Volume = Scale Growth Less Costs Higher EBIT lower working capital lower capex Value = gross margin More Cash Farmers Page 14
Forecast Farmgate Milk Price Forecast Dividend Range Forecast Cash Payout $4.70 KGMS 25-35 CENTS $4.95-$5.05 Page 15
Building a globally relevant Co-op 2010 2012 2012 2013 2014 2015 Page 16