CLARITY
FONTERRA ANNUAL REVIEW 2013
FONTERRA CO-OPERATIVE GROUP LIMITED
COMMITMENT
COMMITMENT
Contents
2 / CHAIRMAN’S LETTER
8 / CHIEF EXECUTIVE’S LETTER
16 / kEy FINANCIAl HIGHLIGHTS
18 / BUSINESS PERFORMANCE
36 / SUSTAINABIlITy AND
SOCIAL RESPONSIBILITY
46 / CORPORATE GOVERNANCE
52 / BOARD OF DIRECTORS
54 / SUMMARy FINANCIAl STATEMENTS
77 / AUDITORS’ REPORT
78 / STATUTORy INFORMATION
79 / NON-gAAP MEASURES
80 / FIVE-yEAR SUMMARY
82 / glOSSARy
Being a world-class leader
in food quality and safety
takes both courage and
commitment; courage
to make the hard calls,
commitment to keep
getting better.
We’re a business built on trust –
in our people and in our products.
When we believe we have any risk
to consumer safety, no matter how
minute, we protect that trust by
protecting people.
This year we did the right thing with
our product recall and we would do
it again without hesitation. Looking
back, we’ve done things right but we
also could have done things better.
This is where our commitment to
keep getting better comes into play.
We have complete clarity about
what we need to do. Fonterra will
be a co-operative known for our
transparency, our high levels of food
safety and quality and the trust shown
in us by customers and consumers.
That’s our commitment.
LETTER FROM
THE CHAIRMAN
This year has been a test of our resilience. After an outstanding first half
for both production and performance, our Farmer Shareholders were hit
by the widespread and, in places, extreme drought across New Zealand.
2
FONTERRA ANNUAL REVIEW 2013
FINAL CASH
PAYOUT
$6.16
FArmgATe
mILk PrICe
ANNUAL
DIVIDeND
$5.84/kgMS
32 cents per share
As farms and farmer confidence
began to recover through autumn
with a generally mild winter, we were
then faced with our whey protein
precautionary recall.
The drought meant a drop in production
of nine per cent in the second half of
the Season, with milk supply for the full
year down two per cent to 1,463 kgMS.
It hit our farmers hard, both physically
and financially. With our stronger capital
structure we were able to utilise our
Co-operative’s financial strength to
help our farmers through the drought’s
immediate impact by raising the
Advance Rate we pay for their milk.
We paid a final Cash Payout to our 100
per cent shared up Farmer Shareholders
of $6.16, comprising the Farmgate Milk
Price of $5.84 per kgMS and a stable
dividend of 32 cents per share.
This final Cash Payout is higher
than our forecast made at the
beginning of the Season, but the
financial pressure on-farm during
the drought means few Farmer
Shareholders will be enjoying a
strong budget surplus for the
2012/13 Season.
Lower dairy commodity prices over
the first half of the year, followed
by the drought, saw revenue fall by
six per cent to $18.6 billion. We delivered
a net profit after tax of $736 million, an
increase of 18 per cent on the prior year.
Earnings per share were up seven per
cent to 44 cents per share.
A Sense of
Perspective
We ended the year with a strong
balance sheet, with a debt to
debt plus equity ratio of 39.6 per
cent compared to 39.1 per cent in
the prior year.
The slight increase is attributable to the
higher Advance Rate paid to our farmers
to assist them during the drought. This
balance sheet strength enabled us to
confidently invest for growth, including
total capital expenditure of $925 million.
This included completing our greenfields
Darfield site. These investments
ensure we continue to provide new
capacity and meet demand for high
value products.
As we set about strengthening our
reputation post our precautionary
recall, it is important to apply some
perspective and take the long-term
view, an approach that is fundamental
to our farmers.
Without downplaying the events in any
way, it is important to acknowledge
that fears for the worst did not happen.
We saw confidence in Fonterra
displayed in the GlobalDairyTrade
events after the precautionary recall.
Prices rose and record sales volumes
and revenues were achieved with
109,664 tonnes selling for $685 million
in August. Two very strong results
don’t make a long-term trend given
commodity markets are volatile, but we
are optimistic about demand patterns
as we look out over the first half of
the new Season.
Without downplaying the events in
any way, it is important to acknowledge
the fears for the worst did not happen.
We saw confidence in Fonterra displayed
in the GlobalDairyTrade events after
the precautionary recall.
FONTERRA ANNUAL REVIEW 2013
3
We provided
additional
flexibility to
encourage milk
growth through
new milk supply
contracts.
We have a strong Co-operative
and an equally strong track
record. Generations of farmers
have built up a reputation for
the quality of milk produced in
New Zealand and exported to
the world. We have kept true to
our values, refusing to take risks
with public safety.
At the same time it is important that
we continue with our reviews and use
them to bring new levels of discipline
and strength to our Co-operative. The
thorough internal inquiry instigated
by our Chief Executive is completed
and an action plan is already in place.
The Board is also undertaking its
own independent inquiry. We have
also indicated our full co-operation
with the New Zealand Government’s
Joint Ministerial Inquiry which will
take place over a longer timeframe.
With all reviews there is an opportunity
to learn.
This includes examining the events
from a wider New Zealand perspective.
We have an agriculturally dependent
economy, with dairy the lead
contributor, and agriculture will remain
the backbone of our economy for the
foreseeable future. As a country we
must develop new technology-based
export industries, but we must also
celebrate and safeguard the role of the
pastoral sector, especially given a world
where food demand is growing rapidly.
The expectations of consumers and
customers are growing rapidly. China
is an excellent example. Consumers
there are rapid adopters of technology
and trends, often leapfrogging ahead
of consumers in more mature markets
when it comes to embracing change.
4
FONTERRA ANNUAL REVIEW 2013
We need to be just as forward-looking
in our market approach. This is not
simply about getting food on the
table and it would be a mistake to
think so. We’re not the only country
to see China as a significant growth
opportunity. There is significant
competition out there, and we need
to earn and maintain a reputation for
being smart as well as safe producers
of food.
The dairy industry, along with the other
primary food industries, can do this.
As we take a smarter approach to our
new growth markets, the reputation
we have built up for food safety and
quality, which will become increasingly
important, must still be protected.
As sectors achieve new levels of
safety and traceability, regulators
need to conclusively confirm this to
their global counterparts. Market
access cannot be taken for granted
and regulatory frameworks must
reflect global expectations.
New Zealand has successfully
negotiated valuable regional
and bilateral trade agreements.
Keeping those market doors
open needs constant attention
as consumers look to their
governments to ensure the food
on their tables is safe.
The markets of South East Asia, Middle
East, Africa and China provide us
with new opportunities. It is critical
that together we ensure industry and
government resources are in place to
ensure that we can stay ahead of the
rapidly evolving demands of consumers
in the developing markets.
Our Stronger Capital Structure
We now have a very real asset in our capital structure
and this came into its own during the financial year.
We saw the successful launch of both
the Fonterra Shareholders’ Market
and the Fonterra Shareholders’
Fund. The Fonterra Shareholders’
Market brought in greater flexibility,
with farmers able to buy and sell
Shares throughout the year at the
prevailing price.
Meanwhile, the response to the Fund
from both institutions and smaller
investors, was a genuine expression
of confidence in the Co-operative and
our performance.
We have seen the good levels of
liquidity required for a successful
market. This in turn led to strong
price discovery which gave us the
confidence to proceed with a Bonus
issue and a successful Supply Offer.
This provided farmers with additional
flexibility in managing their own
farming businesses.
We provided further flexibility
to encourage milk growth through
new milk supply contracts. These
include the option for Farmer
Shareholders who want to grow to
take advantage of different, staged
payment options for Shares. We hold
to the principle of shares backing
milk, but we are now able to give
more time for farmers to have fully
backed production. Expect to see
more of this flexibility going forward.
FONTERRA ANNUAL REVIEW 2013
5
Sustainability
Leadership
Fonterra continues to take
the lead in encouraging
and supporting our Farmer
Shareholders’ efforts in
sustainable farming.
A national roadshow in April,
undertaken in partnership with
DairyNZ, saw some 1,500 farmers turn
out to talk about changing market
expectations, the importance of
sustainability and the support being
provided by their Co-operative.
Farmers have made a significant
investment in recent years
in upgrading farm systems,
fencing and riparian planting,
and providing bridges or
culverts for herd crossings
to protect waterways.
Our farmers deserve credit and they
also deserve advice and support
from us which is straightforward and
accurate. They also need realistic
timeframes in which to get work done
to meet sustainability goals.
Our Supply Fonterra programme, with
its environmental, food integrity and
animal welfare components, is helping
farmers to identify sustainability risks,
achieve compliance with regional rules
and to future proof their farm systems.
The standards set in the programme
mean our Farmer Shareholders are
well placed to meet the new water
protection goals laid out in the
Sustainable Dairying Water Accord.
We are increasingly working in
partnership with our Farmer
Shareholders and we bring this
same approach to our community
initiatives. An excellent example of
this is our Fonterra Milk for Schools
programme. By April 2014 we will
have completed the national rollout of
this. A real highlight of the rollout has
been the enthusiasm of our Farmer
Shareholders who have got involved
visiting schools to coincide with their
first milk deliveries and hosted children
on farms.
6
FONTERRA ANNUAL REVIEW 2013
Forecast Reflects
Confidence
Following our September
Board meeting, we
announced a lift in our
Forecast Farmgate Milk
Price for the 2013/14
Season of 50 cents to
$8.30 per kgMS.
The increase – along with an estimated
dividend of 32 cents per share –
amounts to a Forecast Cash Payout
of $8.62 for our 100 per cent shared
up Farmer Shareholders. It reflects
the continuing strong international
prices for dairy. While we do expect
volatility and the Forecast Cash Payout
could move up or down over the
coming months, this Season is highly
likely to produce a strong payout to
our farmers.
CASH PAYOUT
Dividend Cents per Share
Farmgate Milk Price $ per kgMS
$7.90
0.30
7.60
$8.62
0.32
8.30
$6.37
0.27
6.10
$6.40
0.32
6.08
$6.16
0.32
5.84
Acknowledgements
It is important to pay
tribute to Sir Henry van der
Heyden and Ralph Waters
who retired as Directors
during the year.
Sir Henry stepped down as Chairman
in December after 11 years of service to
Fonterra. His clear sense of direction
and his complete faith in the concept
of a single united Co-operative
helped Fonterra through its crucial
formative years and saw us emerge
as a strong, integrated and successful
Co-operative. Under his leadership, our
Farmer Shareholders have seen their
investment in dairying grow and the
Co-operative successfully pursue its
Volume and Value strategy.
Ralph Waters joined the Fonterra Board
in July 2006 as an Appointed Director.
He brought to the table all the qualities
we seek in an Appointed Director; a
wide and experienced view of global
business and governance, a sharp
intellect and genuine commitment to
seeing Fonterra reach its considerable
potential. We have all gained from his
knowledge and wise counsel.
As Farmer Shareholders we
owe them both a debt of
gratitude and we wish them
both well as they take on fresh
responsibilities.
We have welcomed two new Directors
to our Board this year. Blue Read, a
dairy farmer from Urenui was elected
to the Board by Farmer Shareholders.
Blue brings significant knowledge
of our industry through his past
leadership experience which included
being Chairman of the Co-operative’s
Shareholders’ Council.
Simon Israel, joined the Board as
an Appointed Director and his
appointment will need to be ratified
by Farmer Shareholders at the Annual
Meeting. Simon has more than 30
years experience in Asian consumer
and financial businesses and his
invaluable knowledge is a real asset
to the Board, as Fonterra pursues our
business strategy with its emphasis on
emerging markets.
It is equally important to
acknowledge the support
given to us by our Farmer
Shareholders. It has been a big
year and the unity and support
of our farmers has allowed us
to deal with the issues while
continuing to deliver our
strategy.
Our unity is a real strength. It makes us
unique and having a shared ambition
for our Co-operative will contribute to
our long-term success.
During my time in market in
recent weeks, both customers and
regulators have expressed a genuine
understanding that Fonterra will never
take risks with consumer safety. They
have shown a growing confidence in
our ongoing commitment to having the
best food safety and quality systems.
In the immediate future we have a
real opportunity to bring new levels
of discipline to our food safety and
quality systems. This will be a defining
moment for us and our future success.
JOHN WILSON
CHAIRMAN OF THE BOARD
2010
2011
2012
2013
2014F
FONTERRA ANNUAL REVIEW 2013
7
Even with
the tough
second half,
we recorded
a net profit
after tax of
$736 million.
THEO SPIERINGS
CHIEF EXECUTIVE
LETTER FROM THE
CHIEF EXECUTIVE
What a difference a drought makes. In the first six months
of our financial year we were right on the mark with volume
and value growth, with increased milk production and sales
volumes, good margins being achieved over commodity
benchmarks and more export records achieved.
As we celebrated an outstanding first
half however, the widespread New
Zealand drought deepened in the
second half, with conditions confirmed
as some of the most extreme on record
and the worst since 1945.
As a result, the drought affected our
second-half earnings even as we
continued to make good headway
on strategy then, on the final day
of our financial year, 31 July, we saw
test results returned which triggered
our precautionary whey protein
concentrate recall.
That single day and the subsequent
events both had a real impact and I’ll
talk about that later in this letter, but
it’s equally important to put it in the
context of our full year’s results.
Our final Cash Payout of
$6.16 per share for a 100 per
cent share-backed Farmer
Shareholder, while higher than
forecast at the beginning of
the Season, reflects the difficult
second half. It comprises the
Farmgate Milk Price of $5.84
per kgMS and a stable dividend
of 32 cents per share.
The drought meant lower milk
production, affecting Farmer
Shareholders’ incomes, especially
those drying off early to maintain the
condition of their herds. Backed by our
strong balance sheet and operating
cash flows, we were able to mitigate
the impact by increasing the Advance
Rate paid to farmers for milk. The
improved Advance Rate, together
with an improvement to the forecast
Farmgate Milk Price since the start
of the year, meant that, on average,
Farmer Shareholders received around
$100,0001 earlier in the season.
Our milk volumes for the year were
down two per cent to 1,463 million
kgMS. Exceptional autumn production
in the 2011/12 Season which helped our
inventory position meant the drop in
milk volumes was mitigated slightly in
market. As a result, we had a modest
one per cent increase in our total NZ
Milk Products sales volumes of 2.8
million metric tonnes.
Our good performance in Asia/Africa
Middle East (Asia/AME) and Latin
America was offset by a weaker second
half from NZ Milk Products and the
Australia/New Zealand consumer
business. The combined impact of
the drought, losses on liquid milk and
tough market conditions in Australia
meant normalised EBIT, at $1 billion,
fell three per cent short of last year.
Earnings also benefitted from a
tax credit of $68 million which was
primarily due to the reassessment of
deferred tax balances and recognition of
New Zealand tax losses.
The net result was that, even with the
tough second half, we recorded a net
profit after tax of $736 million, up 18
per cent compared to the prior year on
revenue of $18.6 billion which was down
six per cent compared to last year.
1 As at June 2013 compared to the opening advance rate schedule.
FONTERRA ANNUAL REVIEW 2013
9
OUr NeT PrOFIT
FOr THe 2013 YeAr
$736M
ASIA /Ame BeCOmeS OUr
LArgeST CONSUmer BUSINeSS
BY NOrmALISeD eBIT
15%
We delivered a seven per cent
increase in earnings per share.
Earnings per share was 44 cents after
taking into account our 1:40 Bonus
issue, with normalised earnings per
share1 being 47 cents per share up nine
per cent compared to last year.
The year also saw our Co-operative
working with the benefits of
permanent capital, as Trading Among
Farmers became part of our business-
as-usual way of operating. Permanent
capital helped protect our Co-operative
against redemption risk, especially
relating to the drought, and has given
us a solid foundation to invest in our
Volume and Value growth strategy.
We lived up to promises made to our
communities, launching the national
rollout of Fonterra Milk for Schools.
The programme provides each child
with a free pack of chilled Anchor™
Lite UHT Milk during the school terms.
By April 2014 we will have completed
the national rollout. We have 350,000
year 1–6 (primary) children at more
than 2,000 schools eligible and more
than 75 per cent of schools have
indicated their interest.
We also extended our KickStart
breakfast partnership with Sanitarium
in low-decile schools and entered into
our $20 million partnership with the
Department of Conservation (DOC).
The 10-year programme with DOC
will make a meaningful difference
to the water quality at five sites
near Fonterra’s farms and factories.
We have made good progress in
a short timeframe.
Precautionary
Recall
As we drive forward on strategy,
we also have important work to do
following the precautionary recall we
made in August 2013. I am determined
both will run in parallel.
Doing what’s right is one of our
Co-operative’s values. We did the
right thing at the beginning of August
by calling for a precautionary recall
of a small batch of our whey protein
product, triggered by elevated levels
of sulphate reducing clostridia (SRC).
This was a potential food safety issue.
Although we believed the risk of
botulism was minute – one in millions
– the odds don’t matter when it comes
to public safety, and especially the
safety of children.
We escalated our concern. With
the support of our customers and
regulators, most products containing
the whey protein were recalled within
24 hours, and the rest within 72 hours.
We received confirmation at the
end of August that additional
testing by the Ministry for
Primary Industries definitively
confirmed that there was no
Clostridium botulinum in our
whey protein concentrate. In
short, the ingredient was never
a health risk.
10
FONTERRA ANNUAL REVIEW 2013
1 Normalised earnings per share is calculated as net profit after tax adjusted for normalisation adjustments, divided by the
weighted average number of Co-operative Shares on issue. The normalisation adjustments are tax effected.
As we drive forward on strategy,
we also have important work to do
following the precautionary recall.
I am determined both will run in parallel.
Action Plan
A solid plan
is in place with
three clear stages.
It identified some shortcomings
around elevating food safety concerns
to me earlier, but it also confirmed that
Fonterra’s staff acted conscientiously
on new information, and generally
sought to do the right thing.
We are now implementing the
review’s key findings which cover
20 recommendations. Underway is
a significant programme of work, to
enable Fonterra to take a leadership
position in product traceability and
food safety and quality in the global
food and dairy industries.
Although the ‘all clear’ has been given
on the safety of our recalled product,
this is not the time for us to heave a
sigh of relief and go back to business
as usual. That would mean a missed
opportunity for the Co-operative to
step up and become stronger as a
result of what has happened.
We have a great opportunity to effect
positive change. We won’t drop the ball
in running the business and looking for
new opportunities. We already know
our current priority areas for reshaping
and work is well underway.
As we do this, we won’t lose sight of
the strength we have in our integrated
business. In fact we need to have
integration as a stronger part of our
culture. Thinking, acting and working
as One Fonterra will ensure better
decision making, greater collaboration
and a combined focus on the future.
While we are very relieved by the news,
it does not change our view that the
actions we took were the right ones
based on the information we had at
the time. That information dictated
there was no other responsible course
of action than a precautionary recall.
Faced with the same information, and
in the same circumstances, I would do
the same thing again.
As many of you know,
I am very familiar with China
and China is our number one
market. The word crisis in
Chinese means opportunity
as well as risk. I believe we
have that opportunity.
We have an opportunity to make a
change for the better. I am leading that
work, right now. We have three areas;
review, rebuild and restore reputation.
Our Operational Review, which I
commissioned to find out what
happened and why, concluded that no
single occurrence led to the recall and
the events that ensued, and that no
single issue was the sole contributor.
Instead, we had a series of separate
and unrelated incidents that occurred
in an unforeseen sequence.
The review confirmed we
have robust food safety and
quality systems. It also showed
we have a clear commitment
to consumer safety.
Review
Rebuild
Reputation
We have an
opportunity to
make a change for
the better. I am
leading that work,
right now. We have
three areas: review,
rebuild and restore
reputation.
FONTERRA ANNUAL REVIEW 2013
11
Volume, Value,
Velocity –
Strategy for
Growth on Track
Our V3 strategy aims to
grow both volumes and
value in our ingredients
and consumer businesses.
3
12
FONTERRA ANNUAL REVIEW 2013
Anchor™ UHT launched in China promoting New Zealand’s strong farming heritage.
In ingredients, we aim to sell
more volume at prices higher than
commodity benchmarks by providing
additional benefits to customers
in order to gain a price premium.
Through our growth strategies in the
foodservice, everyday nutrition and
advanced nutrition categories, we are
growing value returns, as we grow
sales volumes.
Our good progress this year shows we
have a strategy which is delivering the
results we want in our priority areas.
A good example is our Asia, Africa and
the Middle East consumer business.
It is now our largest consumer business
by normalised EBIT, achieving a 15
per cent increase in normalised EBIT
to $209 million. Across Asia, the
Middle East and North Africa we have
achieved 21 per cent normalised EBIT
growth in everyday nutrition, six per
cent growth in advanced nutrition and
45 per cent growth in foodservice.
Our Greater China operations
spanning China, Hong Kong
and Taiwan, continue to deliver
on the promise we identified
when we made it a priority area
for Fonterra.
We again achieved double digit
normalised EBIT growth this year,
helped by China foodservice growth of
28 per cent. Our foodservice rollout to
second and third tier cities is on track,
with foodservice growing from 12 to 19
cities across China, achieving volume
growth for bulk butter, UHT cream
and cheese.
Our China consumer business has
also experienced volume growth as
we invest in our brands. As a result,
our Anlene™ brand sits at number
one in both Shanghai and Guangzhou.
Our market share has risen in Jiangsu
and we have successfully introduced
Anlene™ into Chengdu and Chongqing.
We also launched our new Anchor™
UHT milk in China and we believe that
there is significant potential to grow
this brand over the coming years.
We continue to make good progress
developing our integrated business
model in China. Milk volumes sold by
our China Farms increased to 61,000
metric tonnes with our Yutian 1 farm
near capacity and our Yutian 2 farm
commissioned. Yutian 3 and 4 are
likely to be commissioned later this
calendar year.
We invested $48 million in China
Farms this year and post balance
date announced a second
farming hub to be developed at
Ying County, Shanxi Province.
Its development is in line with our
strategy to produce one billion litres
of milk in China by 2020.
While our precautionary recall did have
an impact in China, our work to date
with government officials, the media
and customers gives us confidence that
we are right to remain committed to
this market and our place in it.
We made a stand on public safety
which was completely the right
approach and we now need to
reinforce that this is always our
number one priority, so consumers
can have continued confidence. We’re
in an industry which takes the long
view, something which sits well with
the Chinese view around the value
of long-term relationships. All
relationships get tested occasionally,
but when you act honestly, they tend
to emerge stronger for that. That is
our aim in this valued market.
In Latin America, normalised EBIT
for Soprole rose 31 per cent to $109
million. These results come from
further volume growth with sales up
six per cent and revenue from them
up 12 per cent to $1.1 billion. We do
well in everyday nutrition in this
market, earning our space in the family
fridge through innovation which sees
new products accounting for almost
30 per cent of revenue.
Foodservice, as a whole, shows
us meeting our goal to deliver
on our potential in this rapidly
growing area.
The foodservice category includes
full and quick service restaurants,
institutions, hotels, bakeries and
airline catering facilities. With demand
for “out-of-home” meals increasing
annually, we expect our sales in this
category to grow further.
We have grown this business through
innovation such as successfully
integrating with commercial kitchens.
Our chefs work alongside customers’
chefs to develop products and menus.
These generate sustainable, profitable
demand across a full range of dairy
categories including creams, butter,
ghee, cheeses and milk. This integration
strategy is not confined to emerging
markets. In Australia, where
foodservice is a $12 billion industry,
we have built ourselves a 25 per cent
market share of the foodservice dairy
category and rank as the number
one supplier. We have also profitably
expanded our foodservice operation
in the United States.
We continued to see tough Australian
market conditions which impacted
our performance with normalised
EBIT for Australia and New Zealand
dropping 37 per cent to $142 million.1
We expect the reshaping of our
Australia business will, over time, turn
performance around. The New Zealand
consumer business performed well
with a continued focus on innovation
to drive volume and value growth.
Operating expenses were forecast to
increase by seven per cent this year,
but with a focus on cost saving through
various initiatives, we managed to
hold the increase in operating costs
across the group to only one per cent
compared to last year.
Foodservice Chef Peter Wright supervising
Rhys Barrington.
Operating and other expenses were
$63 million lower than the forecast in
the prospective financials as a result of
savings made. In addition, selling and
marketing expenses, although 10 per
cent higher than last year, were well
below our forecast as a result of more
targeted advertising and promotional
spend in consumer markets.
We optimised our working capital to
reduce average days by eight to 98
days. This excludes Farmer Shareholder
payables. The impact of this is that the
average trade working capital reduced
by $400 million compared to last year
driven by our focus on converting
inventory into cash faster.
We are making solid progress
and we are confident we are on
the right track.
1 Normalisation adjustments in Australia relate to $30 million in costs associated with the planned closure of the Cororooke
site in Australia, $7 million relating to brand impairments as part of Fonterra’s global brand strategy and restructuring costs of
$8 million as we right-sized the business
FONTERRA ANNUAL REVIEW 2013
13
Resourced
for Growth
A mild winter, spring
underway and some
very good production
conditions on-farm all
point to a flying start to
the 2013/14 Season.
Our investments over the financial
year mean we’ve resourced up to
accommodate both milk growth and
demand growth. That is very much in line
with our first strategic priority to make
the most of the milk produced by our
Farmer Shareholders in New Zealand.
When we invest, it’s all about creating
more capacity resources to meet
growing market demand for high value
products such as UHT milk and high
volume products such as powders.
This year we have invested
$925 million building production,
manufacturing and supply chain
capability to make the most
of our New Zealand milk and
developing our China Farms.
Darfield Drier Two, the biggest milk
powder drier in the world, came on
stream in August 2013 as we wrapped
up development of our Darfield site in
the milk growth region of Canterbury.
The full development involved around
$500 million in capital investment,
growing our total annual production
capacity by 220,000 metric tonnes.
We acquired the former NZDL
Studholme plant in South Canterbury,
increasing our daily Canterbury
capacity by around 840,000 litres.
Studholme is a smart acquisition
and is a natural complement to our
Darfield site and we have optimised its
processing performance.
14
FONTERRA ANNUAL REVIEW 2013
Darfield Drier Two, the largest milk drier in the world, came on stream in August 2013.
With UHT milk more commonly
consumed than fresh milk in emerging
markets, particularly China, our $126
million investment in a new UHT plant
at Waitoa will meet demand in Asia
with supply from the Waikato.
The new plant, to be progressively
commissioned from March to
May 2014, will increase our UHT
production by 50 per cent over the
next few years. The plant will include
five new UHT lines that will produce a
range of products including UHT white
milk and the UHT cream products
increasingly in demand from the
foodservice sector. A new distribution
centre will also be commissioned.
In the Netherlands, we are making
progress with the development of a
new cheese and dairy ingredients plant
in a $144 million partnership with the
A-ware Food Group. We have increased
the manufacturing capacity of this
joint venture by 25 per cent since it
was first announced.
INVeSTmeNT IN eUrOPe
$ 144M
Leadership
Strength
To achieve speed and focus with our
strategy and with our reshaping, we
must have all our people working on the
right priorities and our capital invested
in the best growth opportunities.
We have reshaped our group support
to remove duplication, flatten
management layers and bring in even
higher levels of accountability for
progressing our priorities. Our new
structure has us even more sharply
focused on the activities connected
with our strategy and our markets.
Key leadership appointments have
invigorated and diversified the
management team. In addition to
the appointment of Judith Swales
as Managing Director Australia, we
have Lukas Paravicini joining as Chief
Financial Officer and Jacqueline Chow
as Managing Director of Global Brands
& Nutrition, effective from the new
financial year.
They join a strong, dedicated
management team. We will bring
all our collective energy to achieving
the volume and value goals we set
for the business in the coming year,
to get the best performance out of
our Co-operative.
Outlook
We have a Forecast Cash Payout of
$8.62 for the new season, comprising a
Farmgate Milk Price of $8.30 per kgMS
and an estimated dividend of 32 cents
per share. To deliver, we need to build
on the good progress we made last year.
Our new forecast reflects continuing
strong international prices for dairy,
but it also represents some headwinds,
especially in the first half of the
2014 financial year where we expect
earnings will be significantly lower
than the strong performance delivered
in the first half of 2013.
To turn volume into value we have
to keep earning prices that are better
than the commodity benchmarks
and we’re currently seeing those
benchmarks rise.
This trend will make it more difficult to
drive value growth, especially across our
consumer and foodservice portfolios
in the first half of the financial year.
We also expect to see a negative
impact on our product mix returns
during the first half of the 2014
financial year as milk powder prices
significantly outpace the relative prices
of cheese and casein. It is difficult to
predict when this extreme volatility
on product mix will reverse, but
expectations are that the impact is
likely to be short-term.
Prospects for the second half look
more positive for our consumer
businesses, but remain uncertain for
NZ Milk Products. We are looking
through the current volatility and our
estimated dividend of 32 cents per
share is unchanged. We believe we
can draw upon our balance sheet
and cash flow strength to support the
estimated dividend.
We continue to have confidence in
our Volume and Value strategy in our
key markets.
Looking ahead, the prospects for
dairy look positive and our growth
ambitions remain unchanged.
We strive to achieve the absolute
best returns for our Shareholders who
deserve nothing less.
THEO SPIERINGS
CHIEF EXECUTIVE
Driving the Wheel
Adding value to our New Zealand milk pool
Each year Fonterra collects around 17 billion litres of milk in New Zealand. Our Strategy is to increase earnings by driving more milk volume into
higher value uses.
CONSUmer BrANDS
FOODSerVICe
PAeDIATrICS
LONg-Term SerVICe
AgreemeNTS
DIrA mILk*
gLOBAL DAIrY TrADe
SPOT COmmODITY &
INgreDIeNT SALeS
Required to supply*
This diagram shows at a glance how we
add value to the volumes of milk and dairy
products we sell. At the most basic level
milk is supplied to competitors under the
Dairy Industry Restructuring Act (DIRA),
effectively at cost as the price paid is based
on our Farmgate Milk Price. From there, we
aim to add value around the wheel.
benefits to customers such as service,
supply or technical agreements. We
increase value further in commodities
and ingredients through long-term supply
agreements, both within the business to
our consumer operations and outside of
it – e.g. supermarket chains or companies
selling branded liquid milk.
manufacturing capacity in Australia.
Value on volume increases even further
in foodservice. Here we successfully
generate value as we lift both sales
volumes and earnings. Finally, the wheel
is completed by growing consumer
volumes, given the margins we command
on our premium products.
First, we continue to aim to grow business-
to-business volumes at a premium to
the GlobalDairyTrade benchmarks.
Premiums are earned through additional
We generate further value on sales
volumes through third-party manufacturing
in paediatrics, where we secured new
contracts in the financial year and grew our
Underpinning the volume and value
cycle is a cost base aligned to strategy
and a continuous drive to lock in working
capital improvements.
FONTERRA ANNUAL REVIEW 2013
15
KEY FINANCIAL
HIGHLIGHTS
FOCUSING
ON PERFORMANCE
VOlUME
VAlUE
FINAL CASH PAYOUT
$6.16
NOrmALISeD eBIT
$1,002M
NeT PrOFIT AFTer TAX
$736M
eArNINgS Per SHAre
44CPS
Fonterra refers to normalised segment earnings, normalised EBIT, EBIT, EBITDA, constant currency variances, normalisation adjustments and Payout when discussing financial
performance. These are non-GAAP financial measures and are not prepared in accordance with IFRS. Management believes that these measures provide useful information as they
provide valuable insight on the underlying performance of the business. They are used internally to evaluate the underlying performance of business units and to analyse trends.
These measures are not uniformly defined or utilised by all companies. Accordingly, these measures may not be comparable with similarly titled measures used by other companies.
Non-GAAP financial measures should not be viewed in isolation nor considered as a substitute for measures reported in accordance with IFRS. Please refer to page 79 for the
reconciliation of the NZ IFRS measures to the non-GAAP measures and to page 82 for definitions of the non-GAAP measures used by Fonterra.
1 Excluding Norco divestment.
16
FONTERRA ANNUAL REVIEW 2013
AUSTRALIA & NEW ZEALAND1 2%LATIN AMERICA 6%asia, aFRiCa & MiDDLE EasT 11%NZ MILK PRODUCTS SALES VOLUME 1% 7% 18% 4% 3% NORMALISED EBIT
$1BN1
NZ MIlk
PRODUCTS
$494M
ASIA, AFRICA
& MIDDlE EAST
$209M
AUSTRAlIA
& NEW ZEAlAND
$142M
lATIN AMERICA
$137M
1 Includes Eliminations of $20 million.
FONTERRA ANNUAL REVIEW 2013
17
BUSINESS
PERFORMANCE
GROUP
OvERvIEw
KEY FINANCIALS
NZD MILLION
Volume (’000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
EBIT
Normalised EBIT
Normalised EBIT percentage
Normalised EBITDA
Net profit after tax
Earnings per share (cents per share)
Milk collected 2012/13 Season (million kgMS)
Operating cash flows
Investing cash flows
Debt to debt plus equity ratio
Return on Capital Employed
REVENUE
$18.6BN
18
FONTERRA ANNUAL REVIEW 2013
Earnings per
share was up
seven per cent
to 44 cents,
with normalised
earnings per share
being 47 cents
per share.
YEAR ENDED
31 JULY 2013
YEAR ENDED
31 JULY 2012
ChANGE
3,958
18,643
3,032
16.3%
3,941
19,769
3,048
15.4%
(2,256)
(2,238)
937
1,002
5.4%
1,532
736
44
1,463
997
(868)
39.6%
8.8%
987
1,028
5.2%
1,520
624
41
1,493
1,390
(826)
39.1%
9.3%
(6%)
(1%)
1%
(5%)
(3%)
1%
18%
7%
(2%)
(28%)
5%
Volume
Value
Total sales volume growth was flat
compared to last year, but volumes
increased in all business units
excluding Australia and New Zealand.
Sales volume was up one per cent
in NZ Milk Products, 11 per cent in
Asia, Africa and the Middle East (Asia/
AME) and six per cent in Latin America
(Latam). This was offset by lower
volume in Australia and New Zealand.
The Group recorded a net profit after
tax of $736 million, up 18 per cent
compared to the prior year, with
revenue of $18.6 billion which was
six per cent lower than last year.
The combined impact of the drought
and our reshaping programme in
Australia meant we fell short of
our Prospectus normalised EBIT
forecast of $1.1 billion, achieving a
normalised EBIT of $1 billion.
Market conditions had an impact on
earnings from NZ Milk Products with
normalised EBIT one per cent lower
and resulted in a 37 per cent decline
in normalised EBIT in Australia and
New Zealand where reshaping of
our Australian operations continues.
However, we made good progress with
our Volume and Value strategy during
the year, especially in foodservice,
everyday nutrition and advanced
nutrition and this is reflected in the
strong performance from our Soprole
business in Chile and the EBIT growth
across all dairy platforms in Asia/AME.
The key normalisation adjustments
for the 2013 year were the
$30 million in costs associated
with the planned closure of the
Cororooke site in Australia and
$38 million in costs related to
the Group’s right-sizing strategy
in Australia and New Zealand,
Asia/AME and NZ Milk Products.
Operating expenses were up one per
cent to $2.3 billion mainly as a result
of an increase in selling and marketing
expenses in China to support the
Anlene™ roll out and the launch
of Anmum™ paediatric powders
and Anchor™ UHT milk, and higher
distribution costs in Latam due to volume
growth. This was offset to some extent
by targeted cost savings initiatives.
The result includes a provision of
$14 million to cover inventory affected
by the precautionary recall of our
WPC80 product in August 2013.
Normalised EBITDA increased one per
cent to $1,532 million. Depreciation and
amortisation both increased during the
period as a result of recent growth in
capital expenditure.
We made good progress with our Volume and Value strategy during the year, especially in foodservice.
NET PROFIT AFTER TAx
18%
Net finance costs were $41 million lower
than last year mainly due to the benefit
of an increase in fair value gains from
fixed interest rate hedging and the lower
cost of funding. Earnings also benefitted
from a tax credit of $68 million which
was primarily due to the reassessment
of deferred tax balances and recognition
of New Zealand tax losses.
Earnings per share1 was up seven
per cent to 44 cents after taking
into account the Bonus issue, with
normalised earnings per share being
47 cents per share.
1 Normalised earnings per share is calculated as net profit after tax, adjusted for normalisation adjustments, divided by the
weighted average number of Co-operative Shares on issue during the year. The normalisation adjustments are tax effected.
FONTERRA ANNUAL REVIEW 2013
19
BUSINESS
PERFORMANCE
GROUP
OvERvIEw CONTINUED
The new capital
structure has
addressed
redemption
risk, and has
ended the flow of
funds in and out
of the Co-operative
at the end of
each Season.
STRONG BALANCE SHEET
39.6%
DEBT TO DEBT PLUS EQUITY
Balance Sheet
and Cash Flow
Operating cash flow benefitted from
both lower collection volumes and
Farmgate Milk Price, but this was more
than offset by the earlier payments
to our farmers with the result that
operating cash flow was lower than last
year. This change in the Advance Rate
schedule was also the key driver for the
slight increase in gearing at year end to
39.6 per cent compared to 39.1 per cent
last year.
Although the change in the Advance
Rate schedule had an impact on cash
flow and balance sheet, it did not have
a material impact on earnings.
Average working capital days
reduced to 98 days excluding Farmer
Shareholder payables. This meant that
average trade working capital reduced
by $400 million compared to last year
driven by converting inventory into
cash faster.
Capital expenditure was $925 million
for the year with the major spend being
on our new processing plant at Darfield
and investment in China Farms.
20
FONTERRA ANNUAL REVIEW 2013
CAPITAL ExPENDITURE
FOR THE YEAR
$925M
Capital
Structure
The financial year ended 31 July was the
first in which Fonterra operated under
our new capital structure, including
Trading Among Farmers.
The structure, ratified by Farmer
Shareholders in June 2012, addressed
redemption risk. It has ended the
flow of funds in and out of the
Co-operative at the end of each
Season with farmers redeeming or
buying shares to match supply.
Its ratification enabled the introduction
of the Fonterra Shareholders’ Market
and enabled external investors to
participate in our performance through
Units in the Fonterra Shareholders’ Fund.
Developments under Trading Among
Farmers included:
• The February 2013 Bonus issue of
one Share or Unit for every 40 held
on 12 April 2013. The Bonus issue
gave farmers options made possible
by Trading Among Farmers, including
using the bonus shares to back
current or future production increases,
holding them as a “dry shares”
investment or selling them to free
up cash.
• A second Supply Offer, announced
in February in which around 20 per
cent of our Farmer Shareholders
participated, offering to sell a total
of $596 million Economic Rights
to shares at the final price of $7.92.
The response was such that the offer
was scaled to 80 per cent on a pro-
rata basis. There was no change in the
number of Units on issue in the Fund
as a result of the Supply Offer, but the
total number of shares on issue was
reduced by 60 million.
• No drought-related capital outflows,
confirming redemption risk has
been addressed. This contrasts
with the drought of 2008 that saw
$742 million outflow of capital
from the Co-operative as farmers
redeemed shares. Fonterra had to
borrow at high interest rates in the
volatile debt markets during the
global financial crisis to fund
those redemptions.
Major investment in infrastructure continues.
FONTERRA ANNUAL REVIEW 2013
21
1
BUSINESS
PERFORMANCE
NZ MILK
PROduCTS
NZ Milk Products comprises the core New Zealand milk
supply chain from collection, manufacturing and logistics
through to the end sale of dairy products to business
customers and the Fonterra regional businesses. It also
includes international milk sourcing, dairy nutrition-related
joint ventures and the Co-operative’s corporate activities.
Volume
MILK PRODUCTION
New Zealand milk collection of 1,463
million kgMS for the Season1 was two
per cent lower than last Season mainly
due to the drought which significantly
impacted milk production from March
to May in many parts of the country.
At the half year, milk collection
was up six per cent compared to
the same period last Season.
This was due to excellent spring and early
summer growing conditions across most
of the country leading to robust growth
in New Zealand dairy production.
In the second half of the Season milk
collection was down nine per cent
compared to the same period last year
as the drought quickly deteriorated
pasture conditions from March to
May 2013 across New Zealand. Some
regions experienced the worst drought
in 70 years and significant rainfall did
not occur until mid April 2013 resulting
in many of our farmers drying off herds
much earlier than in previous seasons.
1 The term Season refers to 1 June 2012 to 31 May 2013.
22
FONTERRA INTERIM REPORT 2013
Consistent rainfall and above average
temperatures from mid April through
to late May improved conditions in
many drought impacted regions in
New Zealand. However milk supply
across the country for May and June
was lower than last Season reflecting
lower cow numbers milking through
to the end of the Season compared
to last year.
SALES VOLUME
Although milk collected was two per
cent lower than last Season, total
sales volume was one per cent higher
than the prior year with 2.8 million
metric tonnes of dairy product sold.
Volumes were driven by a high opening
inventory position as a result of the
exceptional autumn production in
the 2011/12 Season and lower closing
inventory at year end.
Value
Normalised EBIT of $494 million
was one per cent lower than last year.
In the first half NZ Milk Products
delivered a strong performance on the
back of price premiums, product mix,
cost savings and productivity gains.
In the second half, unprecedented
volatility caused by the extreme
drought had a negative influence on
earnings. The drought contributed to
a spike in Whole Milk Powder (WMP)
prices which were up 64 per cent from
2 January to 16 April 2013 peak price.
This had a significant impact on the
cost of milk purchased by NZ Milk
Products.
The key contributor to the
lower normalised EBIT was the
reduction in product mix due to
the loss from liquid milk, and this
was offset to some extent by a
positive contribution from price
premiums, global sourcing and
tighter cost control.
Price premiums were $26 million
higher than last year mainly due to
higher margin sales on value added
products into North Asia, Latin
America, Middle East, Africa and the
United States.
This aligns with our strategy to get
more value from New Zealand milk
through tailoring our services and
products to match our customers’
requirements.
KEY FINANCIALS
NZD MILLION
Total volume2 (‘000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
Normalised EBIT
Normalised EBIT percentage
Return on Capital Employed
YEAR ENDED
31 JULY 2013
YEAR ENDED
31 JULY 20121
ChANGE
2,824
13,917
1,251
9.0%
(892)
494
3.5%
7.4%
2,790
14,992
1,285
8.6%
(934)
501
3.3%
7.7%
1%
(7%)
(3%)
(4%)
(1%)
1 The 2012 figures have been restated to reflect the movement of RD1 from NZ Milk Products to Australia and New Zealand,
and China Farms and South America farming ventures from NZ Milk Products into Asia/AME and Latam respectively.
2 Total volume includes intercompany volumes.
CONTRIBUTION MARGIN PER MT
NZD MILLION
Total sales volumes (’000 MT)
Gross margin
Selling, marketing and distribution expenses
Contribution margin
Contribution margin per MT
YEAR ENDED
31 JULY 2013
YEAR ENDED
31 JULY 2012
2,824
1,251
(277)
974
345
2,790
1,285
(269)
1,016
364
NORMALISED EBIT: KEY PERFORMANCE DRIVERS
NZD MILLION
600
550
500
450
400
350
300
250
26
(107)
501
49
494
43
(18)
2012
PRICE
PREMIUMS
PRODUCT
MIX
QUALITY
ISSUES
GLOBAL
SOURCING
OTHER/COST
SAVINGS
2013
FONTERRA ANNUAL REVIEW 2013
23
1
BUSINESS
PERFORMANCE
NZ MILK
PROduCTS CONTINUED
Global sourcing contributed $43
million more than last year mainly due
to improved margins on value added
product sourced out of Australia and
sold into our global sales network.
NZ Milk Products had a
strong focus on cost control
and achieved a $42 million or
four per cent improvement in
operating expenses compared
to last year.
This was largely due to an improved bad
debt position, supported by reductions
in discretionary and staff costs.
Another positive contribution to
normalised EBIT includes an increase in
the share of profit from DairiConcepts,
our joint venture with Dairy Farmers of
America, which improved following the
sale of its underperforming Portales
plant in June 2012.
NORMALISED EBIT
$494M
Contribution
Margin
Contribution margin is a measure of the
underlying performance of the business.
Contribution margin of $345 per metric
tonne of sales was five per cent lower
than last year reflecting the pressure on
gross margin from the relatively higher
WMP prices.
Capital
Investment
Total capital expenditure for NZ Milk
Products was $683 million. During the
year we made a number of investments
in new and existing plants as part of
the implementation of our strategy to
simplify our supply chain and align our
production footprint to global demand.
The largest capital expenditure for the
year related to the new development
at our Darfield site with a total cost of
$152 million this year.
Other major spend related to the
acquisition of the Studholme plant,
expansion of capacity at our cream
cheese plant at Te Rapa, and initial
development of our new UHT plant
at Waitoa.
The contribution from product mix was
$107 million lower than last year, driven
largely by the loss on liquid milk. The
high contribution from product mix in
the first half as a result of favourable
relative cheese and protein pricing
and positive optimising decisions, was
eroded away in the second half as raw
milk costs increased sharply through
the drought period.
As part of the DIRA regulatory
requirements and some legacy
contractual obligations, Fonterra is
required to supply liquid milk to a
number of local processors across New
Zealand. This year as a result of the
drought, the loss on liquid milk sales
had a significant impact on NZ Milk
Products’ normalised EBIT. This was
mainly due to actual (spot) milk prices
in the second half being considerably
higher than the annual forecast
Farmgate Milk Price, and sales volume
of DIRA milk being biased towards the
second half.
The loss was a combination of the
impact of DIRA milk and losses on
liquid milk pricing on a small number
of long-term customer contracts, which
are priced on a quarterly basis. While
price risk on our long-term contracts
had the larger impact, this Season was
the last under DIRA when competitors
could cherry pick when they purchased
milk. Competitors required Fonterra
to supply large volumes of milk when
milk flows were very low, which led to
milk shortages in our own sites, and we
were unable to benefit from high dairy
commodity prices.
24
FONTERRA INTERIM REPORT 2013
We are keeping pace with this demand
by more than doubling our current
production capacity of 13,500 tonnes
of cream cheese for export. Production
began in August 2013.
The new dry store doubles capacity
at Te Rapa, allowing all production to
be stored on site prior to shipping,
reducing third party storage costs and
associated truck movements.
With UHT milk more commonly
consumed than fresh milk in emerging
markets, particularly China, our $126
million investment in a new UHT plant
at Waitoa is bridging demand in Asia
with supply from the Waikato.
The new plant will increase UHT
production by 50 per cent. The plant
will include five new UHT lines that
will produce a range of products
including UHT white milk and the
UHT cream products increasingly in
demand from the foodservice sector.
A new distribution centre will also be
commissioned.
A further $29 million investment at
Whareroa is improving our logistics
network’s storage capacity. The site
produces 403,000 metric tonnes a
year and this project will overcome
storage constraints.
The investment follows a $23 million
upgrade of Whareroa’s cool stores in
2012. These investments contribute to
our logistics efficiency, reducing freight
movements and transport costs.
Darfield Drier Two came on stream in August 2013 as we
wrapped up development of our Darfield site in the milk
growth region of Canterbury. The total investment was
approximately $500 million with $152 million spent this year.
Total annual production capacity is 220,000 metric tonnes, and this will help
meet growing demand in Asia, Africa and the Middle East.
Drier Two is the world’s largest milk powder drier and at the peak of the Season,
it will run 24 hours a day, 7 days a week producing more than 30 metric tonnes
of whole milk powder every hour. With Drier Two’s commissioning, Darfield’s
production capacity reaches 6.6 million litres per day.
INVESTMENT IN OUR
UHT PLANT AT WAITOA
$ 126M
wAITOA UHT PLANT
Te rAPA CreAm CHeeSe
DArFIeLD mILk POwDer
STUDHOLme mILk POwDer
On top of our investments in Darfield,
we have also boosted our daily
Canterbury processing capacity by
around 840,000 litres, acquiring the
former NZDL Studholme plant in
South Canterbury.
We have budgeted $61 million to
extend our export cream cheese
manufacturing operation at Te Rapa
in the Waikato and to expand our dry
store facilities. The investments gear
us up to meet proven and growing
demand while reducing supply chain
costs.
Cream cheese is a profitable product
category and demand is growing
in our key markets of China, Japan,
Asia and the Middle East. Sales have
grown rapidly with Chinese bakeries,
cheesecake manufacturers and our
Japanese ingredients business some
of the biggest customers for Te Rapa’s
cream cheese.
Milk tankers at Darfield.
FONTERRA ANNUAL REVIEW 2013
25
2
BUSINESS
PERFORMANCE
AUSTRALIA
& NEw ZEALANd
Australia and New Zealand encompasses consumer
and foodservice businesses, and a dairy processing
and manufacturing business that collects approximately
20 per cent of Australia’s milk supply. The business
also includes RD1 (New Zealand’s largest rural
supplies retailer).
Volume
Value
Total volume for Australia and New
Zealand was nine per cent lower than
last year. After adjusting for the sale of
the Norco liquid distribution business
in November 2012, which accounted
for approximately 66,000 metric
tonnes, sales volume for Australia and
New Zealand was two per cent lower
than last year.
New Zealand volumes (excluding the
impact of RD1) were five per cent
ahead of last year, but volume in our
consumer brands business in Australia
was lower, driven primarily by the loss
of a large private label contract which
offset the volume growth in butter
and spreads.
Normalised EBIT for Australia and New
Zealand was down 37 per cent to $142
million. Normalisation adjustments
relate to $30 million in costs associated
with the planned closure of the
Cororooke site in Australia, and $19
million in costs associated with group
strategy right-sizing.
The New Zealand businesses grew
normalised EBIT compared to last year
amidst a tough trading environment,
which was more than offset by Australia.
The key issues in Australia were the
heightened competition for milk supply,
and the continuation of the challenging
trading environment for consumer
brands which pressured margins.
The ingredients business had volume growth in the first half, but this
was more than offset in the second half with lower milk supply due
to the dry conditions and reduced export volumes.
Four Kapiti brand cheeses were ranked “champion”
in the 2013 NZ Champions of Cheese Awards.
7% REDUCTION IN AUSTRALIAN
OPERATING ExPENSES FOR A
SAVING OF:
$49M
26
FONTERRA INTERIM REPORT 2013
AUSTRALIA
Our ingredients manufacturing business
in Australia was impacted by lower milk
volumes as well as margin squeeze as the
competition for milk intensified. Due to
dry seasonal conditions in the second half
of the year, the ingredients business was
unable to capture the full extent of the
late Season commodity rally.
The tough trading environment in
the consumer brands business that
has been prevalent in Australia in the
last few years intensified this financial
year. Normalised EBIT was lower due
to the reduction in cheese sales to
supermarkets with lower private label
sales, the loss of some distribution of the
Mainland brand, and lower yoghurt sales
due to aggressive competitive pricing.
Our margins were impacted by
increased trade spend to defend market
share and secure distribution primarily in
cheese and yoghurts, but we managed
to maintain our market position with
volume growth in butter and spreads.
Our foodservice business in
Australia delivered a good
performance despite the
challenging trading environment.
This environment saw competitors
dealing on price. Our business supplies
premium products into the foodservice
channel and while volumes remained
relatively flat, we were able increase
margins over a two-year period reflecting
our superior offering of service, quality
and brand. The business won a number
of awards this year including the Subway
2013 Gold Standard Quality Award.
The Anchor™ LIgHT PROOF™ bottle helped drive a seven per cent gain in supermarket sales volume.
KEY FINANCIALS
NZD MILLION
Total volume2 (’000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
Normalised EBIT
Normalised EBIT percentage
Return on Capital Employed
YEAR ENDED
31 JULY 2013
YEAR ENDED
31 JULY 20121
ChANGE
884
3,745
756
20.2%
(677)
142
3.8%
4.7%
(9%)
(13%)
(13%)
1%
(37%)
972
4,299
869
20.2%
(672)
227
5.3%
7.5%
1 The 2012 figures have been restated to reflect the movement of RD1 into Australia and New Zealand from NZ Milk Products.
2 Total volume includes intercompany volumes.
FONTERRA ANNUAL REVIEW 2013
27
We are also reshaping our manufacturing
facilities, aligning them to our best market
demand prospects. Fonterra’s Australian
manufacturing facilities now supply 75
per cent of Fonterra’s global high-value
nutritional sales.
The significant reshape of the Australian
operations has already resulted in a seven
per cent reduction in operating expenses
of $49 million after excluding the impact
of Cororooke and brand impairments.
2
BUSINESS
PERFORMANCE
RESHAPE OF AUSTRALIA
AUSTRALIA
& NEw ZEALANd CONTINUED
The reshape of
the Australian
business is
progressing
to plan. It is a
tough market
with aggressive
competition,
but it is also an
important market.
The reshape of the Australian business
is progressing to plan. It is a tough
market with aggressive competition,
but it is also an important market
where we have strong brands, a premium
foodservice business, good export
volumes, efficient sites and 1,300 valued
farmers supplying high-quality milk.
Our reshaping strategy has four
priorities to turn the business around:
• Streamlining our brands portfolio to focus on fewer, stronger brands and
supporting them with greater marketing and trade resources. Our focus
is on Mainland, Perfect Italiano, Bega and Western Star which are A$100
million brands in terms of retail sales, with Western Star the single largest
brand in the A$700 million spreads category.
• Ensuring our brands portfolio are part of the Australian every day diet.
• Expanding our high-value nutritionals output to make sure we are capitalising
on the growing demand for quality dairy products in emerging markets.
• Continuing to drive our market-leading foodservice business and deliver
chef-led solutions.
28
FONTERRA INTERIM REPORT 2013
NEw ZEALAND
The New Zealand business delivered
a good result with normalised EBIT up
two per cent, despite the pressure on
brands as a result of the demand for
private label. Although price discounting
by the retailers continued, the consumer
business retained its market share
leadership position, holding the top
position in every dairy category in
branded products across New Zealand.
Product innovation continued with the
launch of Symbio yoghurt targeting
digestive health and the Mainland
cheese snacking range including cheese
sticks, blocks and crackers, which had a
very good response from the market and
contributed to volume growth.
Following the launch of the
new Anchor™ LIGHT PROOF™
Bottle for fresh white milk,
volumes grew seven per
cent compared to last year in
supermarkets. Anchor™ milk has
maintained market share and
remains the top brand in the
New Zealand Grocery channel.
Tip Top innovation helped lift market share.
Tip Top increased market share with the
launch of new ice cream products. The
business has started moving to all natural
ingredients including the removal of palm
oil from production and we are slowly
converting the whole range which the
market has responded to very positively.
EBIT for RD1, our rural services business
held in line with last year despite the
impact of the lower forecast Farmgate
Milk Price and the impact of the drought
in New Zealand, which led to lower
on-farm spend by farmers.
Tip Top had its best ever result at the New Zealand Ice cream awards
in 2013, sweeping the field with 12 medals.
FONTERRA ANNUAL REVIEW 2013
29
3
BUSINESS
PERFORMANCE
ASIA, AFRICA & THE MIDDLE
EAST INCLudING CHINA
Asia/AME comprises Fonterra’s consumer and foodservice
businesses in Asia, Africa, the Middle East and Greater China.
Asia/AME’s brands cover a wide range of consumer and
customer needs ranging from everyday dairy nutrition under
Anchor™, Fernleaf™ and Ratthi™, to advanced nutrition
offerings under Anlene™ and Anmum™. The business also
includes China Farms.
Volume
Value
Volume growth in Asia/AME was
11 per cent driven primarily by new
operations in China Farms, strong
growth in foodservice across the
region, and growth in everyday
nutrition in Indonesia and Malaysia.
This was supported by distribution
expansion of advanced nutrition in
Vietnam and geographic development
in China foodservice.
ASEAN/MENA EBIT
(CONSTANT CURRENCY)
22%
Asia/AME is now our largest
consumer business by normalised
EBIT. The business comprises ASEAN/
MENA (South East Asia, the Middle
East, North Africa and Sri Lanka) and
Greater China.
Normalised EBIT for Asia/AME was
up 15 per cent to $209 million. This
was driven mainly by strong growth
in foodservice across the region and
growth in the everyday nutrition
category in Indonesia and Malaysia.
ASEAN/MENA
ASEAN/MENA delivered a strong
result with normalised EBIT growth
of 15 per cent primarily as a result of
growth in Malaysia, Indonesia, the
Middle East and Vietnam. This was
partially offset by the Philippines where
flooding and intensified competition
impacted earnings. On a constant
currency basis normalised EBIT was
up 22 per cent as the ASEAN/MENA
currencies weakened against the
New Zealand dollar.
Everyday nutrition, advanced nutrition
and foodservice are key platforms for
growth in terms of Fonterra’s group
strategy. Across the ASEAN/MENA
region, all three platforms delivered
growth in normalised EBIT with
everyday nutrition up 21 per cent,
advanced nutrition up six per cent
and foodservice up 45 per cent.
Everyday nutrition includes the
Anchor™, Anchor™ Boneeto, Fernleaf™
and Ratthi™ brands. The robust growth
was a result of increased demand for
Anchor™ butter and cheese in the
Middle East, continued momentum in
yoghurts due to successful promotional
activities and distribution expansion
in Malaysia, and a strong offtake for
Anchor™ Boneeto in Indonesia.
30
FONTERRA INTERIM REPORT 2013
KEY FINANCIALS
NZD MILLION
Total volume2 (’000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
Normalised EBIT
Normalised EBIT percentage
Return on Capital Employed
YEAR ENDED
31 JULY 2013
YEAR ENDED
31 JULY 20121
ChANGE
375
2,059
702
34.1%
(519)
209
10.2%
22.3%
11%
3%
8%
10%
15%
339
2,001
648
32.4%
(473)
182
9.1%
20.2%
1 The 2012 figures have been restated to reflect the movement of China Farms into Asia/AME from NZ Milk Products.
2 Total volume includes intercompany volumes.
Advanced nutrition comprises the
Anlene™ and Anmum™ brands,
which maintained their market share
positions across the region with
Anlene™ in first position across all key
markets and Anmum™ in the top three
across our key markets.
The business continues to leverage
the model that has proved successful
in South East Asia and has benefitted
from customers with increasing
disposable incomes coming in to
the category.
Growth in advanced nutrition was
due to an improved performance
from Vietnam driven by distribution
expansion, and a recovery in earnings
from Thailand after normalised EBIT
was impacted by floods last year.
Product innovation has
contributed to growth this year.
The launch of the new, convenient
single serve sachets of Anlene™ and
Anmum™ in Thailand was well received
by the market.
Our foodservice business delivered
another strong result benefitting from
new bakeries and hotel chains opening
up as economies develop across
ASEAN/MENA. It achieved volume
growth of 18 per cent compared to
last year despite capacity constraints
in UHT Cream. Indonesia, Singapore,
Malaysia, Thailand, Vietnam, Phillipines
and Sri Lanka all achieved double-digit
volume growth compared to last year.
The launch of the new, convenient single serve sachets of Anlene™ and Anmum™ in Thailand was well received.
FONTERRA ANNUAL REVIEW 2013
31
3
BUSINESS
PERFORMANCE
ASIA, AFRICA & THE MIDDLE
EAST INCLudING CHINA CONTINUED
The bakery and hotel channels were
key contributors to earnings growth.
Our focus on differentiated, functional
product for the pastry and hot kitchen,
supported by our network of chefs,
continues to be successful.
Margins remained strong
through the year, driven by sales
mix and market positions relative
to competition.
The year saw significant investment
in sales capability building focused
on product knowledge and sales call
processes and tools.
GREATER ChINA
Normalised EBIT for Greater China
was up 20 per cent on last year with a
strong result from China foodservice,
Hong Kong and our businesses in
Taiwan. This was partially offset by a
lower contribution from China brands,
as a result of increased investment
to grow market share and roll out
Anlene™ into new cities. On a constant
currency basis normalised EBIT was up
22 per cent compared to last year.
China foodservice continues
to perform well with volume
growth of 28 per cent
underpinned by the rollout
of the business model across
a number of new second and
third tier cities.
During the year, the foodservice
business expanded from 12 to 19 cities
across China with particular focus on
the bakery and the hotel channels.
Volume growth was supported by
higher demand for bulk butter, UHT
cream and cheese.
In Taiwan earnings improved as a result
of higher sales of UHT milk and strong
demand for butter, while the Hong
Kong business strengthened both its
brands and foodservice operations.
This growth was offset by the China
consumer business which benefitted
from higher volume growth, but had
lower earnings as a result of higher
advertising and promotional spend.
This increased investment in our
brands ensured that we maintained our
market share in Anlene™ at number
one in both Shanghai and Guangzhou,
increased our market share in Jiangsu,
and rolled out the Anlene™ products
into Chengdu and Chongqing. We
also had pre-launch spend on our new
Anchor™ UHT milk and our consumer
paediatric milk powder products.
32
FONTERRA INTERIM REPORT 2013
CHINA FOODSERVICE
VOLUME GROWTH
28%
The precautionary recall which
occurred close to financial year end
had some impact on our business in
China. We worked through the issues
with government officials, media and
customers to manage the impact on
our brands. We took a decision to
do a “soft” launch of Anchor™ UHT on
our e-commerce channel Tmall rather
than the heavy promotion that we
had originally planned.
Milk volumes sold by China
Farms increased to 61,000
metric tonnes driven by
expansion with the Yutian 1 farm
near capacity and the Yutian
2 farm commissioned in the
current year.
At Yutian 1, the biodigester, which
manages farm effluent, was damaged
resulting in additional effluent trucking
costs and an impairment charge of
$7 million relating to the biodigestive
and associated waste treatment
systems. The Yutian 2 farm is now
complete and the Yutian 3 and 4 farms
are likely to be commissioned later this
calendar year. We invested $48 million
in China Farms this year.
Anchor™ UHT foodservice products in China.
The Yutian 2 farm is now complete
and the Yutian 3 and 4 farms are likely to
be commissioned later this calendar year.
FONTERRA ANNUAL REVIEW 2013
33
4
BUSINESS
PERFORMANCE
LATIN AMERICA
Latin America (Latam) encompasses Soprole, the market-leading integrated dairy
business in Chile, and an investment in Dairy Partners Americas (DPA), a 50/50
joint venture with Nestlé covering several markets in Latin America including Brazil,
Venezuela, Ecuador, Colombia and Argentina. Latam also includes Southern Cone, an
in-market ingredients sourcing and sales business, investments in developing dairy
farms in Brazil, a branded consumer cheese and butter business in the Caribbean
and an investment in Dairy Industries (Jamaica) Limited, a 50/50 joint venture with
GraceKennedy Group offering a range of dairy consumer products.
Volume
Total sales volume for Latam was up
six per cent. This was mainly due to
volume growth in Soprole, which was
up four per cent to 332,000 metric
tonnes driven by higher consumer
demand for liquid milk, mature cheese,
desserts and butter, and volume
growth of 43 per cent in the Southern
Cone ingredients business.
Volumes in Dairy Partners Americas
(DPA) were up two per cent to 342,000
metric tonnes driven mainly by growth
in new yoghurt categories in its
primary market Brazil. Fonterra equity
accounts for its 50 per cent share of
the DPA business.
Value
Soprole, our largest operation in Latam,
performed well with strong growth
in its consumer business. Normalised
EBIT of $109 million was up 31 per cent
compared to last year driven by volume
increases, product innovation and
improved pricing in the yoghurt and
dairy dessert categories. On a constant
currency basis normalised EBIT was
also up 31 per cent as the currency was
relatively stable.
Sales from new products launched over
the past three years account for almost
30 per cent of Soprole’s revenue and
product innovation continued this year
with the launch of 32 new products.
Our new indulgent panna cotta and
crème caramel desserts exceeded
expectations.
Yoghurt is the largest contributor
to normalised EBIT and growth in
earnings was driven by our ability
to increase revenue and margin in a
price competitive market as a result
of our strong premium brand position
in the category.
The new San Bernardo plant in Chile,
was successfully commissioned in
April increasing capacity and providing
the opportunity to capture future
market growth.
We maintained our number one
market share position in yoghurt,
liquid milk, dairy desserts and
butter, and increased our market
share in the mature cheese category
again this year, consolidating our
number two position.
SOPROLE NORMALISED EBIT
31%
In a recent “Chile-3D”1 brand research
study of 260 brands, which measured
consumer opinions across three pillars,
“Prestige”, “Most loved” and “Most
remembered”, Soprole was ranked as
the number one brand for “Prestige”
and “Most Loved” by the Chilean
people, and was the fourth ranked
brand overall. It was also the number
one company across all dairy brands.
Normalised EBIT in DPA was 46
per cent lower at $25 million driven
mainly by lower earnings in DPA
Manufacturing. This was due to a
$19 million benefit last year arising
from the review of manufacturing
cost recovery arrangements which
has not been repeated in the current
year. In addition, normalised EBIT
in DPA was negatively impacted by
currency movements.
1 “Chile 3D-2013” survey from GFK Adimark, April 2013.
34
FONTERRA INTERIM REPORT 2013
Brazil, which is the largest
market for DPA, delivered a solid
performance in the first half with
some pressure on margins in the
second half due to the cost of
milk rising.
The business showed a good recovery
compared to last year in local currency,
up nine per cent, but earnings were
adversely affected by the devaluation
of the Brazilian Real.
Earnings from DPA Venezuela
improved, however volumes were
flat and margins continue to be
impacted by government price control
restrictions in the market and currency
devaluation. We have continued to
make strategic choices to manage the
business profitably. Our expectation
is that Venezuela is likely to remain
a difficult market in which to operate
for some time.
Of the remaining businesses in
Latam the Southern Cone ingredients
business continued its turnaround
towards profitability and the Caribbean
brands business delivered another
strong year of profitable growth.
Operating costs across Latam
increased nine per cent mainly due to
higher storage and distribution costs
in Soprole, where volume growth
drove higher wage and freight costs.
Expenses were also temporarily higher
as a result of the planned transition to
our new distribution facility.
Soprole brand was ranked as the number one brand for “Prestige” and “Most Loved” in Chile.
KEY FINANCIALS
NZD MILLION
Total volume2,3 (’000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
Normalised EBIT
Normalised EBIT percentage
Return on Capital Employed
YEAR ENDED
31 JULY 2013
YEAR ENDED
31 JULY 20121
ChANGE
377
1,135
303
26.7%
(191)
137
12.1%
18.2%
6%
12%
17%
9%
4%
354
1,010
260
25.7%
(176)
132
13.1%
18.8%
1 The 2012 figures have been restated to reflect the movement of South America farming ventures from NZMP into Latam.
2 Total volume includes intercompany volumes.
3 Volume excludes DPA (Dairy Partners Americas).
FONTERRA ANNUAL REVIEW 2013
35
SUSTAINABILITY AND
SOCIAL RESPONSIbILITY
SUSTAINABILITY AND
SOCIAL RESPONSIbILITY
Fonterra seeks to
ensure an enduring
Co-operative that
sustains our farmers
and the communities
in which we live and
work around the world.
Driven by the needs
of our consumers,
customers and
communities we deliver
on this commitment
by leading the way in
dairying performance,
providing the natural
source of nutrition for
all and ensuring we
work as part of healthy
resilient ecosystems.
36
FONTERRA ANNUAL REVIEW 2013
Theo Spierings, Brand Ambassador Richie McCaw on Ritchie and Sue Morgan’s farm, Arapuni.
Sustainable
Farming
We recognise that sustainability
starts at home, on-farm, with
our farmers leading the way
by responsibly and efficiently
managing the use of natural
resources and ensuring a safe
and secure source of quality milk.
SUPPLY FONTERRA
Fonterra has created an innovative
programme to guide and support our
farmers to achieve good management
practices on-farm. The Supply Fonterra
programme is a first for dairy in
New Zealand and provides proactive
initiatives that support our farmers and
industry as a whole. Our programme
sets out environmental and food safety
requirements and provides support to
help farmers identify and manage risk,
and future-proof their farming systems.
The environmental programmes
currently cover effluent management,
waterway management and nitrogen
management. A water use management
programme is being implemented.
EFFLUENT MANAGEMENT
Every dairy farm is required to have
effluent systems and management
practices capable of 365-day
compliance with regional council
regulations. Farms are assessed each
year during the annual Farm Dairy
and Environmental Assessment to
ensure they meet these standards.
Environmental Improvement Plans
are agreed with farmers to ensure
resolution of any issues identified and
to future-proof systems as appropriate.
The Season-end numbers show a 23
per cent reduction in effluent issues
referred from on-farm Farm Dairy and
Environmental Assessments. A total
of 3,915 cases have been resolved for
the programme to date (since August
2010), of which 1,516 were closed in the
past financial year.
WATERWAY MANAGEMENT
Fonterra requires permanent exclusion
of all stock from waterways on farms
by 1 December 2013. A waterway is
defined as a river, stream, drain, canal,
lake or wetland that permanently
contains water and is, at any time of
the year, more than a metre wide and
30 centimetres deep. Using mapping
technology, farms and waterways are
mapped during the annual Farm Dairy
and Environmental Assessment to
ensure we can measure progress.
As at 31 July 2013, we had
mapped 8,483 farms. Farmers
are making significant progress
to exclude stock from defined
waterways, with 18,480
kilometres of waterways
currently mapped as being
stock excluded.
NITROGEN MANAGEMENT
Efficient nitrogen use can help reduce
the risk of nutrient loss to surface
and ground water. The Nitrogen
Management Programme aims to let
farmers know where their farm sits
relative to peers for nitrogen conversion
efficiency and nitrogen leaching loss
risk. This year farmers who provided
nitrogen records will receive a report
showing their farm’s performance on
these metrics.
Fonterra Farmer Shareholder Mark McDonald is passionate about his riparian planting.
SUSTAINABLE DAIRYING:
WATER ACCORD
Fonterra is a signatory to the pan
industry Sustainable Dairying Water
Accord which supersedes the Dairying
and Clean Streams Accord. The stated
purpose of the Accord is to enhance the
overall performance of dairy farming as
it affects freshwater and is an expression
of the dairy sector’s commitment to
industry self-improvement.
Supply Fonterra will continue
to align its environmental
programmes to the Water
Accord’s requirements to
support our farmers in meeting
the commitments.
ANIMAL HEALTH AND WELFARE
Fonterra’s commitment to Animal
Welfare is based on the Five Freedoms
as set by the World Organisation for
Animal Health. Animals are the core
of our business and their welfare
and wellbeing is paramount. We are
committed to ensuring dairy cattle
have a good quality of life.
One of our key sustainability goals is
to have global animal welfare standards
and supporting programmes across all
regions by 2020. We are working closely
with global industry organisations such
as the Sustainable Agriculture Initiative
and the World Organisation for Animal
Health to develop global animal welfare
best practice standards, indicators
and outcome measures. These will
become the benchmark for Fonterra’s
2020 Animal Welfare standards and
will incorporate measures for our on-
farm performance.
FONTERRA ANNUAL REVIEW 2013
37
SUSTAINABILITY AND
SOCIAL RESPONSIbILITY
Our goal
builds on our
leadership
as the first
major dairy
producer
to provide a
carbon footprint
for our New
Zealand origin
productions.
38
FONTERRA ANNUAL REVIEW 2013
NEw ZEALAND
CARBON FOOTPRINT
Our goal builds on our leadership as
the first major dairy producer to provide
a carbon footprint for our New Zealand
origin productions. It measures the
total quantity of greenhouse gases
released to the atmosphere over
the life cycle associated with the
production of the measured dairy
ingredients or products. We were
also significant contributors to the
development of a globally accepted
methodology of accounting for
greenhouse emissions in dairy.
NEW ZEALAND-SOURCED MILK
The 2011/12 full lifecycle emission for
milk at the farm gate is 0.90kg CO2e
per kg of fat and protein corrected
milk (FPCM). This is a three per cent
reduction on the previous year and
a one per cent reduction from the
2009/2010 baseline emissions.
The annual emission milk footprint
for New Zealand milk is subject to
economic and, particularly, climatic
factors such as drought. In 2011/12,
good growing conditions meant higher
production per cow was achieved with
less need for supplementary feeds
compared to 2010/11. On-farm emissions,
which make up approximately 85 per
cent of the total carbon footprint, have
reduced by two per cent since 2009/10,
but the use of supplementary feeds,
including palm kernel expeller (PKE),
has increased.
The graph on the right shows
New Zealand milk emissions trends
by major element. Deforestation
emissions relating to the production of
PKE (brought-in feeds) as a by-product
of the palm oil industry are taken into
account according to the International
Dairy Federation (IDF) accounting
methodology. Fonterra continues
to work with PKE suppliers towards
developing better transparency and
a reduction in PKE related emissions.
GREENHOUSE GAS EMISSIONS-ON-FARM TRENDS
kg CO2 e per kg of FPCM
1.0
0.8
0.6
0.4
0.2
0
0.65
0.65
0.64
0.11
0.10
2009/10
0.05
0.11
0.10
2010/11
0.07
0.11
0.10
2011/12
0.06
Animal Emissions
Other on-farm
Land-use Change
Brought-in Feeds
AUSTRALIA
SUSTAINABILITY FARM
PROjECTS AUSTRALIA
Fonterra is committed to improving
farmer profitability and environmental
performance. Since 2011 Fonterra
Australia has rolled out programmes
to support both these objectives and
20 per cent of our farm base has
been included in one or more since
their inception. Some of the benefits
realised have been the contribution
to reducing greenhouse gas emission
and the reduction of fertiliser waste to
streams or the atmosphere.
Successful models designed and
trialled by Fonterra, in co-operation
with our farmers, saw immediate
results which attracted outside funding
partners like the Australian and State
Governments, which have invested
over A$500,000 in additional funds
to extend the programme to a greater
Fonterra supplier base.
These projects are proving
to be a great example of
‘Learning by doing’ to improve
farm sustainability.
ChINA
Fonterra acknowledges the need to
progressively establish benchmarks
and targets for other geographies
where we operate, and to report on
progress against these. An on-farm
carbon footprint assessment will be
completed for our China farms and
will be reported against at the end of
the 2014 financial year.
FONTERRA ANNUAL REVIEW 2013
39
SUSTAINABILITY AND
SOCIAL RESPONSIbILITY
Sustainable
Manufacturing
Operating sustainably is a
foundation of our success and
we are actively committed
to reducing emissions, waste
reduction and water efficiency
and using energy in a more
efficient way. We aim to improve
our performance each year in
these priority areas.
NEw ZEALAND
AND AUSTRALIA
Darfield Drier Two.
EMISSIONS
ENERGY
Greenhouse gas emission intensity
decreased from 0.64 to 0.63 tonnes
CO2e per tonne of production, from
2011/12 to 2012/13, a two per cent
reduction. The drought in the North
Island of New Zealand impacted
emission intensity as a higher
proportion of milk was processed in
coal-fired plants in the South Island
where natural gas is not available.
This led to an increase in the average
emission intensity but this was offset
by efficiencies elsewhere.
During the year, Fonterra’s Spreyton
site in Tasmania invested A$6.5 million
to convert from coal to natural gas-
fired boilers which has led to a
48 per cent reduction in reported
emissions intensity for this site.
The efficient use of energy contributes
to our goal of reducing emissions.
We have, to date, focused on reducing
and measuring the energy consumption
involved in producing a tonne of
ingredients and reporting has been
on this basis. The reporting this year
includes emissions for both ingredient
and consumer products.
Energy use per tonne of production in
New Zealand and Australia decreased by
one per cent from 8.49 GJ/tonne in the
2012 financial year to 8.38GJ/tonne in
the 2013 financial year.
ENERGY USE PER TONNE IN
AUSTRALIA AND NEW ZEALAND
MANUFACTURING OPERATIONS
Manufacturing energy use per tonne of production (GJ/t)
8.41
8.40
8.49
8.38
10
8
6
4
2
0
40
FONTERRA ANNUAL REVIEW 2013
2010
2011
2012
2013
ENERGY EFFICIENCY
PROGRAMME
Fonterra is in its 10th year of running
one of New Zealand’s largest energy
efficiency programmes aimed at
reducing the energy intensity per
tonne of product manufactured. In the
2013 financial year, the energy intensity
per tonne for ingredient products has
decreased by 14 per cent compared to
when the programme began in 2003.
Energy efficiency initiatives have
continued with the commissioning
of Stage 1 of the Darfield site, where
the incorporation of energy efficient
technology is reflected in a low
energy use per tonne recorded over
the 2012/13 Season for the site.
Several energy saving initiatives were
undertaken at the Edendale site during
2012/13 and these are indicative of
activity throughout New Zealand
manufacturing. One of Edendale’s
initiatives focused on improving
the pasteurisers’ heat regeneration
resulting in significant energy
savings and a reduction in the site’s
greenhouse gas emissions.
WASTE
Fonterra’s eco-efficiency programme
continues to develop and incorporate
best practice into new and existing
manufacturing operations across
New Zealand. In 2013, 94 per cent of
waste was reused or recycled in our
New Zealand operations, including
our consumer business, against a
commitment of 90 per cent.
The ongoing success in
minimising waste to landfill is
due to the benefits realised
through programmes such as
Solid Waste Reduction systems
and the Recycle Lab. The Recycle
Lab is an innovative recycling
and waste minimisation program
that, since being established
in 2011, has reduced waste to
landfill by over 3,700 tonnes.
WATER
In the 2013 financial year, Fonterra
New Zealand’s operations used 40
million cubic metres of fresh water
and recycled or reused six per cent
of this. The higher consumption in
2013 relates to higher milk processing
and the inclusion of the New Zealand
consumer sites, plus the new Darfield
and Studholme sites, in the monitoring.
Our Australian sites used 3.7 million
cubic metres of water in the period from
1 July 2012 to 30 June 2013, compared to
3.2 million cubic metres in the prior year.
This was an increase over the previous
year largely driven by increased
production and a higher proportion
of water intensive products, notably
demineralised whey at Stanhope.
QUALITY
In 2013, we continued our strong
focus on our quality and food
safety infrastructure, through
the enhancement of our Quality
Standards within the Fonterra Quality
System. These outcome-based
Standards specify our non-negotiable
requirements with which our global
operations must comply.
A controlled self-assessment against
the Fonterra Quality Standards across
all our majority owned operations
revealed an inaugural compliance
score of 95 per cent providing baseline
data from which we are generating
improvement programmes.
We established a food safety and
quality risk management framework to
ensure we identify and remain ahead
of emerging food safety risks, including
mitigation activities and escalation
reporting. We established a Food
Integrity Council at senior management
level, both to track emerging risks
and to lead Fonterra’s commitment to
quality and food safety.
Raw milk quality continues to lift as
our international milk pools continue
to focus on quality and safety
improvements. Milk quality audits and
improvement programmes are being
carried out across the 16 countries
where we source milk. At the same
time there is an increasing awareness
regarding on-farm sustainability and
how it relates to the local business
environment where we operate.
One milk quality improvement project
of note was the successful installation
of a solar refrigeration unit at Hanwella
Chilling Centre in Sri Lanka. During
2013, this became fully operational,
delivering a reduction in energy usage
and improvement in quality through
reliable and consistent raw milk chilling.
The Fonterra Approved Supplier
Programme uses a risk based
approval process, which incorporates
certification schemes recognised
through the Global Food Safety
Initiative. The programme ensures we
operate a robust and safe approval
process for procured ingredients,
packaging and third party sourced
dairy products. The level of compliance
of our suppliers to the programme
continues to improve and audits of our
high risk suppliers and joint ventures
were conducted in over 25 countries.
Our overall product performance was
once again assessed by Fonterra’s
customers as being world class, via
our 2013 customer value management
survey where we achieved a score
of 8.1 for the year. It is the fourth
consecutive year in which we have
achieved a value of above 8.0 which
is considered best in class.
hEALTh AND SAFETY
At Fonterra we believe that sustainable
success can only be achieved through
our people. People make the difference
and caring for our people is a key
foundation to the way we operate.
Nothing is more important. We
focus on taking care of our people,
contractors and any other people
involved with Fonterra, including
suppliers, customers and the public.
TOTAL INJURY FREQUENCY RATE
36.5
40
30
20
10
0
23.7
18.2
14.3
12.7
8.8
2008
2009
2010
2011
2012
2013
TRIFR (per million work hours)
FONTERRA ANNUAL REVIEW 2013
41
SUSTAINABILITY AND
SOCIAL RESPONSIbILITY
PEOPLE
HEALTH &
WELLNESS
INJURY
MANAGEMENT
LEADERSHIP
CULTURE &
ENGAGEMENT
CORE
STANDARDS
LIFE
SAVERS
PLANT &
EQUIPMENT
PROCUREMENT
DESIGN
CAPITAL
DECISIONS
CRITICAL
RISK
SAFE HOME
AUDIT
PROCESS
We believe that no harm is acceptable
and this is reflected in our zero harm
approach to health and safety.
In the 2013 financial year we had three
key health and safety measures:
• Zero fatal incidents – employees,
contractors and members of the public
in operations within our control.
• Total Recordable Injury Frequency
rate (TRIFR) of less than 10 per million
work hours.
• Audit scores showing that systems
and process are implemented and that
there is extensive engagement within
our teams.
We achieved over a 30 per cent
reduction in Total Injury Frequency
Rate (TRIFR) from 12.7 to 8.8, sending
164 more employees home safely,
compared to 2012. We have delivered
a new Health and Safety Audit Tool
with a score across Fonterra of 1.84,
indicating health and safety systems
are in place and being embedded.
Minimum global standards for general
health and safety requirements, and
specific standards and control plans to
manage our critical risks; those risks
that can result in death or serious harm
(including process safety risks) have
been developed. We have launched a
governance panel with cross-functional
and cross-business unit representation
for each critical risk. The panel ensures
effective compliance of the critical risk
standard and control plan. In 2013 we
undertook global research involving
17,103 of our people to understand
what drives engagement for health
and safety for Fonterra overall, as
well as within our different regions
and business units. These research
insights will drive our leadership and
engagement initiatives in the 2014
financial year. We completed the
rollout of First Priority – our risk and
incident management system across all
of our global locations. This allows for
consistent reporting of incidents and
management of risk in all the countries
in which we operate.
Supporting
our Communities
As part of the communities
where we live and work we have
a responsibility to nourish, care
and protect. Our community
activities are targeted to enrich
people’s lives and make a real
difference to those around us.
NEw ZEALAND
FONTERRA MILK FOR SCHOOLS
‘Fonterra Milk for Schools is caring
for New Zealand kids’
Fonterra Milk for Schools is helping
build the health of future generations
of New Zealanders. Primary-aged
school children (Year 1–6) are eligible
for the programme, covering 350,000
children in more than 2,000 schools.
The national rollout will be completed
by the end of April 2014, with all
children participating in the programme
benefiting from the goodness of milk
provided daily in a free pack of chilled
Anchor™ Lite UHT Milk.
A Fonterra tanker driver talks to students at Riverdale School.
42
FONTERRA ANNUAL REVIEW 2013
Fonterra expects to invest
$15–$20 million per year in
the Milk for Schools programme,
depending on the final number
of participating schools and
children. Over 75 per cent of
eligible schools have indicated
their interest in participating.
KICKSTART BREAKFAST
KickStart Breakfast is a New Zealand
breakfast-in-schools programme.
Sanitarium provides the Weet-Bix,
Fonterra the Anchor™ Milk, and
together we work collaboratively
with local school communities to
provide a healthy breakfast to those
children that need it most.
KickStart Breakfast is the largest
programme of its kind in New
Zealand, with more than 590
schools enrolled. Over five
million breakfasts have been
served since 2009.
In May 2013, the New Zealand
Government announced support of
up to $9.5 million ($1.9 million per year
for five years) to extend the KickStart
Breakfast programme from two to
five days a week, matching the value
of the contribution from Fonterra
and Sanitarium. This expansion of
KickStart Breakfast will be rolled out
to all schools that want and need the
programme over the next year.
Riparian planting by volunteers in their local community.
DEPARTMENT OF CONSERVATION
PARTNERSHIP
This year, we joined forces with the
Department of Conservation (DOC)
in a $20 million, 10-year programme
to enhance the natural habitat of
sensitive waterways around New
Zealand. With DOC’s conservation
advice and expertise, along with
Fonterra’s on-farm environmental
progamme and support, our
partnership is out to make a
meaningful difference to the water
quality at five sites near Fonterra’s
farms and factories.
Catchment Care, a four-year partnership
with non-profit organisation
Conservation Volunteers New Zealand,
has provided volunteer support to help
local communities complete riparian
and wetland planting, fencing, weed
removal, building and maintaining
walking tracks. 186 hectares have been
improved by the programme this year,
bringing the total hectares improved
to 388.
Conservation Volunteers New
Zealand will continue to provide
volunteer support services
where appropriate through the
partnership with the Department
of Conservation.
FONTERRA ANNUAL REVIEW 2013
43
Our scholarship programme, which
has operated since 2010, is designed
to attract, support and encourage
more young talent to farming and food-
related study in order to promote the
development of the food industry in
China. We provide RMB4,000
to 100 students a year studying
animal husbandry or food science,
and there are currently 400 students
in the programme.
In partnership with the Ministry
of Agriculture we operate farmer
education programmes in Hebei,
Shandong and Shanxi. These events
attract some 1,000 farmers annually,
with agricultural experts lecturing
on animal welfare, nutrition and
environmental sustainability.
The programme, which is part of
our commitment to develop China’s
dairy industry, also involves visits to
New Zealand by Ministry delegations.
We are also partnering with the
Soong Ching Ling Foundation
to provide safe drinking water
for more than 3,000 villagers
in Guang’an City, Sichuan
Province. The RMB 1 million
project has seen 140 wells
drilled and some 40 kilometres
of water pipeline developed.
ChINA
SOONG CHING LING
FOUNDATION
The Fonterra Rural Maternity and Infant
Healthcare initiative, in partnership
with the Soong Ching Ling Foundation,
continues to improve the lives of
mothers and their babies in rural China.
We committed US$5 million
to this five-year programme
in 2009. It has delivered
ambulances and medical
equipment for healthcare
workers and has helped increase
hospital delivery rates and
decrease maternal and infant
mortality in Guizhou in 2013.
In the past year, in Guizhou, average
hospital delivery rates have increased
by 12 per cent; maternal mortality
has decreased by 33 per cent and
infant mortality by nine per cent. The
programme has provided training for
11,467 healthcare workers in 37 counties
within the Guizhou province, improving
their medical skills. The fleet of 15
ambulances has carried 2,269 women
and patients in critical condition –
driving a total of 154,601 kilometres in
often difficult, mountainous areas to
reach medical facilities.
Fonterra is now working on a range
of collaborative partnerships with
the Soong Ching Ling Foundation
and China’s Ministry of Agriculture
to promote good nutrition through
educational and community initiatives.
SUSTAINABILITY AND
SOCIAL RESPONSIbILITY
FONTERRA GRASS ROOTS FUND
The Fonterra Grass Roots Fund provides
support for a wide range of community
projects with grants between $500 and
$5,000. Seven regional Committees
and Champions are spread across
New Zealand to ensure that the local
communities where we operate each
year get a fair share of support. This
year, we received 841 applications
and provided approximately $600,000
to 289 New Zealand community
organisations and projects. In 2014,
two call periods will be held, in
August and March. We look forward
to supporting and giving back to the
communities where we live and work,
through initiatives which meet a social
need, in line with our commitment to
make a difference.
44
FONTERRA ANNUAL REVIEW 2013
SOUTh EAST ASIA
FONTERRA CHILDFUND
PARTNERSHIP
Since 2011, Fonterra has partnered
with international child development
organisation, ChildFund, to improve
the overall development of the most
deprived, excluded and vulnerable
children aged 0–5 years old in Asia.
Our joint programmes support
integrated early childhood
development services, both in centres
and community-based programmes, in
target communities in Indonesia, the
Philippines and Sri Lanka.
More than 2,000 children,
siblings, parents, teachers,
partners and volunteers
benefitted from fast-tracked
health, education and nutrition
services in year one. The next
stage of this programme will
benefit more than 1,800 children
at pre-schools or home-based
early learning centres, and 700
teachers and facilitators from
an integrated set of health and
education activities.
Sri Lanka early childhood development centre.
SRI LANKA
Fonterra has operated in Sri Lanka
for over 35 years. In February 2013, a
small farmer development programme,
to support the sustainability of the
local dairy industry by increasing the
capability and capacity of local milk
producers, was established. We collect
milk from these producers for
processing at our local site. The Milk
Sourcing Project spans three areas:
farmer training and development,
model farms and milk collection hubs,
and working with the Sri Lankan
authorities and contributing to student
development opportunities to advance
the industry.
Farmer training and development
favours the “hands on” approach
through field days, discussion groups,
practical demonstrations and mentoring.
We are aiming for best practice
farming techniques to be learnt
and adopted by local farmers so
they can farm more sustainably,
productively and profitably.
This is a long-term commitment but
we are confident that best practice
techniques can become embedded in
local farming systems within a 5–10
year timeframe.
We also work with model farms to provide
practical training and advice, which
acts as local demonstrations of best
dairy farming practice to local farmers.
FONTERRA ANNUAL REVIEW 2013
45
CORPORATE
GOvERNANCE
CORPORATE
GOvERNANCE
The Board and Management of Fonterra are committed to achieving the highest
standard of corporate governance and leadership.
To support our role as a Board, we have developed governance systems that reflect
Fonterra’s unique characteristics and requirements as a significant New Zealand based
co-operative competing in the global dairy market.
THeO SPIerINgS
CHIEF EXECuTIvE
JOHN wILSON
CHAIRMAN OF THE bOARd
IAN BrOwN
SHAREHOLdERS’ COuNCIL CHAIRMAN
46
FONTERRA ANNUAL REVIEW 2013
We focus on governance in a way that promotes:
• The interests of our Shareholders.
• Fonterra’s Co-operative philosophy which is largely expressed through our Co-operative
Principles.
•
•
•
•
Transparency, giving our Shareholders and other stakeholders the information they need
to assess our performance.
Effective risk management to ensure that Fonterra meets its business objectives and all
legal requirements.
A good balance between the roles and functions of the Board and Management.
Communication with important stakeholder groups, including Farmer Shareholders,
employees, customers, Unit holders, debt investors, governments and the communities
within which Fonterra works.
CHANGES TO THE
FONTERRA BOARD
There were a number of changes
to the Fonterra Board during the
financial year ending 31 July 2013.
In December 2012, John wilson
became Chairman of the Board
following the retirement of Sir henry
van der heyden. Sir henry stayed on
as a Director until resigning from the
Board in May 2013.
In April 2013 Ralph waters retired
from the Board as an Appointed
Director, having served on the Board
for over six years.
Blue Read was elected as a Farmer
Director in December 2012.
Simon Israel was appointed as an
Appointed Director in May 2013.
Compliance with Best Practice
Governance Standards
• review and approval of the Group
strategy and business plans;
• appointment of the Chief Executive
and reviewing the Chief Executive’s
performance;
• delegation of authority to management,
and monitoring the exercise of that
authority;
• engagement in the development of
the strategic plan and setting the
strategy for the Group and for the major
business units within the Group;
• approval of significant acquisitions
and disposals outside management’s
delegated authorities;
• oversight of the Board Committees
and the areas covered by each of those
Committees; and,
• approval and reporting of the Group’s
financial performance to Shareholders.
The Fonterra Board’s governance
framework takes into consideration
contemporary standards in New Zealand
and Australia, incorporating principles and
guidelines issued by the Financial Markets
Authority, the best practice code issued by
NZX for the Fonterra Shareholders’ Market
and the ASX Corporate Governance Council
Principles and Recommendations (ASX
Principles). These are guidelines designed
to maximise company performance and
accountability in the interests of
shareholders and the broader community.
Fonterra complies with the Fonterra
Shareholders’ Market Corporate
Governance Best Practice Code.
gUIDeLINe 1: LAY SOLID
FOUNDATIONS FOr mANAgemeNT
AND OVerSIgHT
Our Board Charter
The Board Charter outlines the key values
and practices of Fonterra and provides a
reference point for the Board as a whole,
and for individual Directors, in the
execution of their duties. The Charter is
reviewed annually, as are the Committee
Charters, and is available on fonterra.com.
The roles and responsibilities of the Board
as set out in the Board Charter include:
• declaration of the Farmgate Milk Price
and Dividends;
• review of the dividend policy
and declaration of the interim and
final dividend;
FONTERRA ANNUAL REVIEW 2013
47
CORPORATE
GOvERNANCE
The performance of senior executives is
evaluated using the same principles that
are applied to the performance assessment
of other managers and people leaders in
Fonterra. There is a performance framework
agreed with the Fonterra Management
Team that includes key principles of:
• clarity and prioritisation of objectives;
• agreement of expectations;
• managing performance with respect to
clear milestones;
• ‘how’ as well as ‘what’ – Fonterra’s
values guiding everyday behaviours;
• ensuring sustainable growth in
capability and performance; and,
• ongoing feedback, coaching and review.
New executives are introduced into
the business using a robust induction
programme with clearly defined
expectations and timescales tailored to
their specific role, covering areas such as
team leadership, stakeholder management
and operational expectations relevant to
their position.
gUIDeLINe 2: STrUCTUre THe BOArD
TO ADD VALUe
Our Board
The Constitution of Fonterra provides for
not more than 13 Directors and sets out
how they are appointed.
In accordance with the Constitution,
not more than nine Directors are
elected by Farmer Shareholders from
the Shareholder base, and not more
than four Directors are appointed by the
Board. The Appointments, Remuneration
and Development Committee oversees
the process for identifying and
recommending potential appointees, and
makes appropriate recommendations
to the Board. The Board of the Fonterra
Shareholders’ Fund is also consulted.
The Appointed Directors are selected
to enable the Board to access a full
complement of skills and competencies
needed to lead an enterprise of Fonterra’s
size, sophistication and complexity. They
bring to the Board perspectives and
experience to augment the direct industry
knowledge and other expertise provided
by the Elected Directors.
Elected Directors must be qualified
as Shareholders under section 12.3 of
the Constitution and are therefore not
considered Independent Directors.
Appointed Directors may not be
Shareholders and they are expected by
Fonterra to maintain independence for
the length of their term. The Board has
determined that Simon Israel, David
Jackson, Sir Ralph Norris and John waller
48
FONTERRA ANNUAL REVIEW 2013
are Independent Directors under the
Fonterra Shareholders’ Market Rules as at
31 July 2013.
John wilson, who is an Elected Director,
is the Board-elected Chairperson
and following good governance, the
Chairperson and Chief Executive Office
roles at Fonterra are not exercised by the
same individual.
Nominations Committee
As noted above, the Appointments,
Remuneration and Development Committee
oversees the process for appointments to
the Board. To the extent the Board is
responsible for appointing Directors, the
Appointments, Remuneration and
Development Committee (AR&D) satisfies
the role of a Nomination Committee.
Board meetings
Performance assessment
Directors formally assess the performance
of the Board as a whole each year. A regular
programme of peer review of individual
Directors also occurs. Feedback from
senior management is incorporated into
these processes as appropriate, and the
performance of the Board against its
Statement of Intentions is monitored by
the Shareholders’ Council and reported
to Shareholders annually. The Board is
also responsible for reviewing the Chief
Executive’s performance.
Independent professional advice
Any Director of the Board is entitled to
seek independent professional advice
relating to the affairs of the Company or
to his or her other responsibilities as a
Director. Fonterra will pay the reasonable
cost of independent professional advice.
gUIDeLINe 3: PrOmOTe eTHICAL AND
reSPONSIBLe DeCISION mAkINg
Ethics framework
The Board is committed to maintaining high
ethical standards across the Group, in all
aspects of the business in all parts of the
world. Fonterra’s Code of Business Conduct
– The Way We Work – provides practical
guidelines on how to apply Fonterra’s values
in everyday work situations and when
working with customers, Shareholders,
suppliers and the wider community.
This document is available in several
languages, to facilitate its accessibility to
Fonterra’s global employee base.
The way we work has been written in
simple, straightforward language. An
independently run telephone, e-mail and
web-based hotline provides individuals
with a confidential channel to raise difficult
ethical issues. In the 2013 financial year, 20
calls were raised globally with the hotline.
All were fully investigated and appropriate
action taken, including managing issues
through other hR processes.
The Board meets formally at least seven
times a year and has regular and ad hoc
teleconferences to ensure the Board is
kept informed, and to deal with specific
issues as they arise. Between full Board
meetings, the Board uses Committees
and working Groups to advance its work
programme and to enhance the efficiency
and effectiveness of its decision making.
Information for the Board
It is important that all members of the
Board are appropriately informed of the
Group’s activities.
Directors are supplied with detailed
monthly performance reports and analysis
in advance of all Board meetings, together
with papers on any significant commercial
initiatives, and information on the
Group’s competitive position and general
economic indicators.
The Directors also make a point of meeting
away from head-office on a semi-regular
basis so that they can broaden their
understanding of the business through
direct contact with managers and
customers. Directors also regularly visit key
markets to gain a better understanding of
the global dairy market.
Director Training
Following appointment to the Board,
Directors undertake an induction
programme to familiarise themselves with
the Group. Areas covered include:
• business strategy and planning;
• an overview of key financial metrics to
monitor business performance;
• an overview of material areas of the
Fonterra business, through meetings
with key executives; and,
• the Fonterra Constitution and other
governance systems.
Directors are expected to keep themselves
abreast of changes and trends in the
business and in the Company’s
environment and markets, and trends in
the economic, political, social and legal
climate generally. Directors are also
expected to keep up to date with
governance issues.
Board Committees
COMMITTEE OR GROUP
MEMBERShIP AS AT 31 JULY 2013
PURPOSE
Audit, Finance
and Risk Committee
(AFRC)
Appointments,
Remuneration
and Development
Committee (AR&D)
Co-operative Relations
Committee (CRC)
Governance and
Representation
Committee (GRC)
International Farming
Board Committee
(IFBC)
David Jackson (Chair)
David MacLeod
Ian Farrelly
John wilson (Chair)
David Jackson (observer)
Ian Farrelly
John Monaghan
John Monaghan (Chair)
Ian (Blue) Read
Jim van der Poel
Malcolm Bailey (Chair)
John Monaghan
Ian (Blue) Read
Jim van der Poel (Chair)
Ian Farrelly
David Jackson
John waller
Malcolm Bailey
Sir Ralph Norris
Simon Israel
Sir Ralph Norris
To assist the Board in fulfilling its governance responsibilities in
relation to Fonterra’s financial reporting, audit activities, treasury
matters and risk management and internal control frameworks.
To assist the Board in fulfilling its governance responsibilities
in relation to the recruitment, retention, remuneration and
development of Directors, executives and other employees,
and to promote a safe and healthy working environment.
Malcolm Bailey
Nicola Shadbolt
To assist the Board in fulfilling its governance responsibilities
in relation to the supply of milk from Fonterra suppliers, and to
seek to resolve supplier complaints before reference to the Milk
Commissioner.
Nicola Shadbolt
To assist the Board in reviewing and developing the model for
Governance and Representation.
Nicola Shadbolt
John wilson
To assist the Board in ensuring that International Farming and farm
extension services options are consistent with strategy and that
appropriate risk mitigations, financial measures and operational
controls are in place.
Board and Committee Attendance
John wilson1
David Jackson
David MacLeod
Sir henry van der heyden2
Ian Farrelly
Jim van der Poel
John Monaghan
John waller
Malcolm Bailey
Nicola Shadbolt
Ralph waters3
Sir Ralph Norris
Ian (Blue) Read4
Simon Israel5
Total Meetings
BOARD
REGULAR
SPECIAL
AFRC
9/9
8/9
9/9
8/8
9/9
9/9
9/9
9/9
9/9
9/9
4/7
7/9
4/4
2/2
9
9/9
8/9
9/9
7/7
8/9
9/9
9/9
9/9
8/9
8/9
6/6
8/9
5/5
1/2
9
–
6/6
6/6
–
5/6
–
–
6/6
3/6
–
–
1/3
–
–
6
AR&D
8/9
–
–
7/9
9/9
–
9/9
–
–
–
7/7
5/9
–
–
9
CRC
–
–
–
–
1/2
3/3
3/3
–
3/3
2/3
–
–
2/2
–
3
IFBC
4/4
4/4
–
–
4/4
3/4
–
–
–
3/4
–
–
–
–
4
1 Chairman from 17 December 2012.
2 Retired as Chairman 17 December 2012, resigned as Director 31 May 2013.
3 Resigned 18 April 2013.
4 Elected 17 December 2012.
5 Appointed 1 May 2013.
Note: The GRC attendances are not tabulated since members of that committee exercised their role during the year through a number of workshops rather than formal committee meetings.
FONTERRA ANNUAL REVIEW 2013
49
CORPORATE
GOvERNANCE
Diversity & Inclusion Policy
Milk Price Panel
Fonterra established a Diversity &
Inclusion Policy in the latter part of
the 2013 financial year. This policy acts
as a statement of intent rather than
a prescriptive set of instructions or
measures. A diversity and inclusion
strategy and accompanying initiatives
will be developed and prioritised in the
2014 financial year to achieve the desired
impact on diversity. work will progress
through the year and will be reported in
the 2014 Annual Report.
As at 31 July 2013, the gender composition
of the Board comprised 11 male Directors
and one female Director, with one casual
vacancy on the Board. The nine Elected
Directors on the Fonterra Board are elected
by postal ballot of the Shareholders
conducted by the Shareholders’ Council,
and the four Appointed Directors are
appointed by the Board and ratified by
Farmer Shareholders. Of 12 Officers that
reported directly to the Chief Executive at
the Balance Date, two were female.
Securities trading policy
Fonterra has adopted a trading policy that
details the rules for trading in Units and/
or Shares. The policy applies to Directors,
officers, employees and contractors of
Fonterra and members of the Shareholders’
Council and Milk Price Panel, and is
additional to legal prohibitions on insider
trading in New Zealand and Australia.
All Directors comply with the legislative
requirements for disclosing interests and
with the Securities Trading Policy which
regulates both Directors and management
in their personal dealings with Fonterra
securities and those of related companies.
gUIDeLINe 4: SAFegUArD INTegrITY
IN FINANCIAL rePOrTINg
Audit, Finance and Risk Committee
There is an established Audit, Finance and
Risk Committee (AFRC) as described above.
The AFRC comprises of three Appointed
Directors and three Elected Directors.
The committee is chaired by David Jackson,
who is an Independent Director.
The auditor is appointed by the
Shareholders at the Annual Meeting.
Fonterra encourages the rotation of
the lead external audit partner in the
relationship in accordance with best
practice. AFRC approval is required,
under the Group’s auditor independence
policy, for certain activities the auditor
may undertake for the Group. The
AFRC will not approve the auditor
performing any tasks which have the
potential to create a conflict except in
exceptional circumstances and then only
if appropriate safeguards are in place.
50
FONTERRA ANNUAL REVIEW 2013
The Board has created the Milk Price Panel
for the purpose of providing assurances
as to the governance of the Farmgate Milk
Price and the proper application of the
Farmgate Milk Price Manual and the Milk
Price Principles.
The Panel does not determine the
Farmgate Milk Price as this is a decision
for the Board.
The Dairy Industry Restructuring Act
requires that the Chair and a majority of
the members of the Panel (including the
Chair) are independent. The Panel consists
of two Appointed Directors, one Elected
Director and two appropriately qualified
persons nominated by the Shareholders’
Council, at least one of whom must be
independent. The Chair must be one of
the Appointed Director members.
The Panel is currently chaired by John
waller. Other Board members are
David Jackson and David MacLeod. The
Shareholders’ Council appointees are
Richard Punter and Patrick Boyle. The
Board confirms that at Balance Date, John
waller, David Jackson, Richard Punter and
Patrick Boyle are Independent Members
of this panel.
gUIDeLINe 5: mAke TImeLY AND
BALANCeD DISCLOSUre
Continuous disclosure
The Board originally affirmed Fonterra’s
commitment to promoting a well-
informed and efficient market by signing
off a Fonterra Group Disclosure Policy
in December 2010. A major education
programme was run within Fonterra
in 2012 to ensure staff are aware of
Fonterra’s obligations as an equity issuer.
The Policy applies to all Directors and
Officers of Fonterra and its subsidiaries, all
Shareholders’ Councillors, the members
of the Milk Price Panel and all employees
(including contractors, consultants,
advisers or secondees).
The objectives of the Policy are to ensure
Fonterra continues to provide timely and
accurate information and fully comply
with the Fonterra Shareholders’ Market,
NZSX and ASX continuous disclosure
regimes and with the Securities Markets
Act and applicable market rules.
Fonterra and the Manager of the Fonterra
Shareholders’ Fund have entered into
an arrangement to co-operate with
each other and take all steps reasonably
required to ensure that information to
be disclosed by either of them under
the listing rules of the FSM, the NZSX
or the ASX (as the case may be) is
disclosed simultaneously to the Fonterra
Shareholders’ Market, the NZX Main
Board and ASX. It is intended that
where NZX, as market operator of the
Fonterra Shareholders’ Market, receives
information provided by Fonterra for
release under the Fonterra Shareholders’
Market, NZX will simultaneously release
the information under the code relating
to the Fund. This process is intended to
be automatic. Fonterra simultaneously
discloses relevant information on ASX.
gUIDeLINe 6: reSPeCT THe rIgHTS
OF SHAreHOLDerS
Shareholders’ Council
One of the Board’s most important
relationships is with the Shareholders’
Council. The Council, which is established
under the Fonterra Constitution, is
independent of the Board and comprises
35 Shareholder-elected councillors, each
representing a different ward. The
functions of the Council are set out in the
Constitution. The Council reviews the
Board’s statement of intentions for the
performance and operations of the
Group and publishes an Annual Report,
commenting on these matters. The Council
and the Board meet regularly, as do the
Chairs of the Board and the Council and
the Chairs of their respective Committees.
Farmer communications
Fonterra is committed to maintaining and
improving dialogue with our Shareholder
base to ensure that the objectives of
both the Group and the Shareholders
are understood. An extensive Farmer
Shareholder and supplier relations
programme is managed by the Group
Director Co-operative Affairs. Channels for
electronic communication are provided
through the fonterra.com and Fencepost
websites.
Fonterra’s communications with Farmer
Shareholders include a Sky Broadcast, a
monthly Global Dairy Update, Farmlink
and a regular Chairman’s email.
As described above Fonterra will release
to the relevant stock exchanges all
Shareholder-related information, and will
comply with the Fonterra Shareholders’
Market, NZSX and NZDX Listing Rules
and ASX Listing Rules with respect to
Shareholder communications.
Farmer meetings
A schedule of regular meetings with
Shareholders and suppliers is held across
the country each year. Often these are
run in conjunction with the Shareholders’
Council, Area Managers and the Fonterra
Farmer Network.
In addition, the Board consults with
supplying Shareholders on specific issues
as they arise.
Fonterra.com and Fencepost
Presentations on the development of
the business are available on the
fonterra.com website. The Group also
uses email alerts, including regular
updates from the Chairman and monthly
Shareholder updates.
The Fencepost website enables Fonterra
suppliers, their employees and business
partners to transact online with Fonterra
and access information and tools on milk
production and quality, online statements
and up to the minute news and weather.
This site is also used to provide
information on the business to suppliers.
Annual Meeting
The Board views the Annual Meeting of
Shareholders, which is held at a different
venue around New Zealand each year,
as an opportunity to communicate
directly with Shareholders and ensures
that adequate time is provided at these
meetings for Shareholders to raise issues
or ask questions from the floor.
Notices of meetings will be sent to
Shareholders at least 10 working days
before the meeting.
The Constitution describes the process
whereby a Shareholder can raise a
proposal for discussion or resolution at
the next meeting of Shareholders at which
the Shareholder is entitled to vote.
Annual Report
The Group’s Annual Report including
financial statements and Annual Review,
together with the half-year reports and
other material announcements, are
designed to present a balanced and clear
view of Fonterra’s activities and prospects
and are available on the website,
fonterra.com.
Other Disclosures
Information on the Group’s performance
and the expected Cash Payout, annual
and half-year financial results, Director
changes, and other significant matters,
is advised to the market through the
NZX and ASX in accordance with the
Disclosure policy. Shareholders and other
stakeholders receive regular updates on
these and other issues relevant to them.
gUIDeLINe 7: reCOgNISe AND
mANAge rISk
Risk management
Fonterra has a global Group Risk
Management Policy and Practice, the
purpose of which is to embed an
enterprise-wide risk management
capability within Fonterra to provide a
consistent method for the identification,
assessment, control, monitoring and
reporting of risks faced by the
organisation. The policy recognises
that risk represents both opportunity
and threat and that risk is an integral
part of business.
Fonterra’s tolerance for risk is defined in
the Risk Management Framework (RMF),
which requires the reporting of material
risks as appropriate to the Fonterra
Management Team, Audit, Finance and
Risk Committee (AFRC) and the Board
of Directors.
Fonterra’s Group Risk Management
Framework was reviewed by the Board in
2012 and is consistent with the ISO 31000
Risk Management Standard.
The Policy is supported by a detailed
Group Risk Management Standard
and Guidelines which define the
mandatory requirements relating to risk
management for businesses. The Risk
Management Framework provides a
consistent methodology and approach
for the execution of these mandatory
requirements by specifying processes for:
• Identifying existing and potential
risks which may impact upon business
objectives;
• Assessing the consequence and
likelihood of risks identified;
• Identifying key controls in place to
address risks;
• Evaluating the design and operating
effectiveness of controls in mitigating
risks to an acceptable level;
• Generating action plans to improve
controls where required; and,
• Regularly monitoring risks and tracking
progress against action plans.
Fonterra’s Top 20 risks are presented for
independent review to the Board on an
annual basis. This process is supported by
a formal annual evaluation of Top 15 risks
by all material business units.
In addition to the annual risk assessment
process, management performs a
six-monthly self-assessment of the
effectiveness of key controls relied upon
to manage their top risks. A summary
of the results of this assessment of the
effectiveness of Fonterra’s internal control
environment is reported to the AFRC.
Fonterra’s Internal Audit function is
accountable for formally reviewing
the effectiveness of the Group’s risk
management processes, including using
the outputs of risk assessments to compile
its audit plan and performing independent
validation of the control environment.
gUIDeLINe 8: remUNerATe FAIrLY
AND reSPONSIBLY
Remuneration of Directors
The Constitution modifies the discretion of
the Board to set remuneration of Directors.
In accordance with the Constitution,
Shareholders elect an independent
committee of six Shareholders to consider
and make recommendations to the Annual
Meeting on Elected Director remuneration.
The members of the Directors’
Remuneration Committee (DRC) are
Rodney wilson (Chair), David Gascoigne,
Murray holdaway, Scott Montgomerie,
Philip wilson and Gerard wolvers.
The Board has full discretion over the
remuneration of Appointed Directors.
OTHer gOVerNANCe BeST
PrACTICeS
The Board has also reviewed compliance
with the Principles for Corporate
Governance issued by the Financial
Markets Authority. while the Board
believes it complies with the Principles,
there are some points of divergence from
specific Guidelines.
• Audit Committee membership
(Guideline 3.4). The majority of
members are not independent, due
to the proportion of farmer-elected
Directors on the Board.
• Management representation (Guideline
4.4). The Chief Executive and Chief
Financial Officer do not certify in the
published accounts their compliance
with generally accepted accounting
practice in New Zealand. The Board
is directly and legally responsible
for these documents, and obtains all
relevant assurances from management
or other parties.
FSM Waivers
There have been no FSM waivers granted.
FSM Trading Halts
During the reporting period, there
were no trading halts in the Fonterra
Shareholders’ Market imposed by the NZX
as set out in Rule 4.2.2 of the FSM Rules or
requested by Fonterra other than routine
temporary halts following the release of
price-sensitive information to the market
under the Continuous Disclosure policy.
FONTERRA ANNUAL REVIEW 2013
51
BOARD
OF DIRECTORS
JOHN wILSON BeCAme CHAIrmAN
OF THe BOArD IN DeCemBer 2012
FOLLOwINg THe reTIremeNT OF
SIr HeNrY VAN Der HeYDeN.
1. JOHN wILSON
2. BLUe reAD
3. DAVID JACkSON
4. DAVID mACLeOD
5. IAN FArreLLY
6. JIm VAN Der POeL
7. JOHN mONAgHAN
8. JOHN wALLer
9. mALCOLm BAILeY
10. NICOLA SHADBOLT
11. SImON ISrAeL
12. SIr rALPH NOrrIS kNZm
1.
2.
3.
4.
5.
4. DAVID mACLeOD
David MacLeod was elected to the Fonterra Board
in 2011. he is a member of the Audit, Finance and
Risk Committee and the Milk Price Panel. David also
serves on the boards of Port Taranaki Limited and
A.J. Greaves Electrical Limited. he is Chairman of the
Taranaki Regional Council. David lives near hawera
in South Taranaki and is a director of P.K.w. Farms GP
Limited, one of Fonterra’s largest Shareholders.
5. IAN FArreLLY
B. Agr.
Ian Farrelly was elected to the Fonterra Board in
2007. he serves on the Audit, Finance and Risk
Committee, the Appointments, the Remuneration and
Development Committee, the International Farming
Board Committee and the Governance Development
Committee. Prior to this he had a 20-year career in the
banking industry including 15 years as head of ASB’s
Rural Division. Ian is also a director of First Mortgage
Managers Limited, Spectrum Dairies Limited, Fortuna
Group Limited and is an Advisor to waikato Stud.
he also owns and runs a 400-hectare 10,000 animal
calf rearing farm in Te Awamutu, owns a 50 per cent
share in three waikato dairy farms and has ownership
interests in dairy farms in Canterbury.
1. JOHN wILSON
B. Agr.Sc
John wilson joined the Fonterra Board in 2003
and became Chairman in 2012. he is Chairman of
the Appointments, Remuneration and Development
Committee, and is a member of Fonterra’s
International Farming Board Committee, a director
of Turners & Growers Limited and a member of
the Institute of Directors in New Zealand.
John lives on his dairy farm near Te Awamutu
and jointly owns a dairy farming business based
in Geraldine, South Canterbury.
2. BLUe reAD
Blue Read was elected to the Board in 2012. he
sits on the Co-operative Relations Committee and
the Governance & Representation Committee.
he was previously the Chairman of the Fonterra
Shareholders’ Council from 2007 to 2010, having
been a Shareholders’ Councillor since 2001 and
Deputy Chairman from 2003 - 2007. Blue has
previously been Chairman of Cooperative Business
New Zealand, Taranaki Dairy Section of Federated
Farmers and Chairman of the New Zealand
Sharemilkers Association. Blue lives and farms near
Urenui in Northern Taranaki.
3. DAVID JACkSON
M.Com (hons), FCA
David Jackson joined the Fonterra Board in
September 2007 as an Appointed Director. David is
Chairman of the Audit, Finance and Risk Committee,
is a member of the International Farming Board
Committee and serves on the Milk Price Panel.
David also serves on the boards of Nuplex Industries
Limited and Mitre 10 (New Zealand) Limited and is
Chairman of The New Zealand Refining Company
Limited. David spent more than 30 years with
accounting firm Ernst & Young in a variety of roles,
and served as Chairman of the board of management
for the firm in New Zealand from 1999 to 2002.
52
FONTERRA ANNUAL REVIEW 2013
6.
7.
8.
9.
10.
11.
12.
6. JIm VAN Der POeL
Jim van der Poel was elected to the Fonterra
Board in 2002. he serves on the Co-operative
Relations Committee and is Chairman of Fonterra’s
International Farming Board Committee and is on
the Fonterra Shareholders’ Fund Board. Jim has won a
number of industry awards including the AC Cameron
Memorial Award, 2002 New Zealand Nuffield
Farming Scholarship, Sharemilker/Equity Farmer of
the Year and the Dairy Exporter Primary Performer
Award. Jim and his wife Sue live at Ngahinapouri in
the waikato and have farming interests in waikato,
Canterbury and the United States.
7. JOHN mONAgHAN
John Monaghan was elected to the Fonterra Board
in 2008 and is currently Chairman of the Co-
operative Relations Committee and serves on the
Appointments, Remuneration and Development
Committee and the Governance and Representation
Committee. he previously chaired the External
Relations Committee and sat on the Capital Structure
Committee. Prior to joining the Board John was
Chairman of the Shareholders’ Council. he is also
a director of Centre Port Limited and Centre Port
Properties Limited. he has farming interests in the
wairarapa and Canterbury regions.
8. JOHN wALLer
BCom, FCA
John waller joined the Fonterra Board in February
2009 as an Appointed Director. John is Chairman
of the Milk Price Panel and is also a member of the
Audit, Finance and Risk Committee. he is Chairman
of the Bank of New Zealand and the Eden Park Trust.
he is a director of National Australia Bank Limited,
BNZ Investments Limited, haydn & Rollett Limited,
National Equities Limited, Alliance Group Limited,
Sky Network Television Limited, Property for Industry
Limited and Donaghys Limited. John was a partner at
PricewaterhouseCoopers for over 20 years. he was
also a member of their board and led their advisory
practice for many years.
9. mALCOLm BAILeY
B. Agr. Econ
Malcolm Bailey was elected to the Fonterra
Board in 2004. he sits on the Audit, Finance and
Risk Committee and the Co-operative Relations
Committee. Malcolm also represents Fonterra on the
Dairy Companies Association of New Zealand, and is
a member of the International Food and Agricultural
Trade Policy Council. he is a director of westpac New
Zealand Limited, hopkins Farming Group Limited,
Gleneig holdings Limited and Agrico holdings
Limited. he is also the Independent Chair of the Red
Meat Profit Partnership. Malcolm’s dairy farming
interests are as a shareholder in hopkins Farming
Group Limited.
10. NICOLA SHADBOLT
BSc(hons), MAgrSc(hons), FNZIPIM(Reg)
Nicola Shadbolt was elected to the Fonterra Board
in 2009. She serves on the Co-operative Relations
Committee and Fonterra’s International Farming
Board Committee. Nicola is a Professor at Massey
University, Director of the Centre of Excellence
in Farm Business Management, a director of the
International Food and Agribusiness Management
Association, trustee of the Agri-women’s
Development Trust and represents New Zealand
in the International Farm Comparison Network in
Dairying. Nicola is a shareholder and a director of five
farming and forestry equity partnerships that include
two dairy farms in the Manawatu.
11. SImON ISrAeL
Diploma of Business Studies
Simon Israel was appointed to the Fonterra
Co-operative Group Board in 2013. Simon is currently
the Chairman of Singapore Telecommunications
Limited and is a Director of CapitaLand, one of Asia’s
largest real estate companies. he was an Executive
Director of Temasek holdings for six years and
President from 2010 to 2011. Prior to that he was
Chairman for Asia Pacific of the Danone Group.
he was also a director of Fraser & Neave, Neptune
Orient Lines, Asia Pacific Breweries, Griffin Foods
and Frucor Beverage Group. Simon has ten years’
experience in the dairy industry with Danone as a
Senior Vice President and member of the Group
Executive Committee and as Chairman for the Asia
Pacific region. he was conferred Knight in the Legion
of honour by the French Government in 2007 and
awarded the Public Service Medal in Singapore in
2011.
12. SIr rALPH NOrrIS kNZm
FNZIM, FNZCS
Sir Ralph Norris joined the Fonterra Board in 2012
as an Appointed Director and he sits on the
Appointments, Remuneration and Development
Committee and the Audit, Finance and Risk
Committee. Sir Ralph also serves on the Board of the
Fonterra Shareholders’ Fund, Origin Energy Limited
and the New Zealand Treasury, and on the Council
of The University of Auckland. In addition, Sir Ralph
serves on a number of Advisory Boards in both
Australia and New Zealand. Sir Ralph had a 40-year
career in banking and was Chief Executive of the
Commonwealth Bank of Australia until December
2011. Prior to that, he served as Chief Executive
of Air New Zealand Limited and Chief Executive
of ASB Bank Limited. Sir Ralph was made a Knight
Companion of the New Zealand Orderof Merit
in 2009 and a Distinguished Companion of the
New Zealand Order of Merit for services to
business in 2006.
FONTERRA ANNUAL REVIEW 2013
53
SUMMARY
FINANCIAL STATEMENTS
For the year ended 31 July 2013
Contents:
DIRECTORS’ STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
INCOME STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
STATEMENT OF COMPREHENSIVE INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .57
STATEMENT OF FINANCIAL POSITION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
STATEMENT OF CHANGES IN EQUITY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
CASH FLOW STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES . . . . . . . . . . . . . . . . . . . . . 61
NOTES TO THE SUMMARY FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . 62
INDEPENDENT AUDITORS’ REPORT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .77
STATUTORY INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
NON-GAAP MEASURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
FIVE YEAR SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
54
54
FONTERRA ANNUAL REVIEW 2013
FONTERRA ANNUAL REVIEW 2013
DIRECTORS’ STATEMENT
FOR THE YEAR ENDED 31 JULY 2013
The Directors hereby approve and authorise for issue the summary financial statements for the year ended 31 July 2013 presented on pages 56
to 76. For and on behalf of the Board:
JOHN WILSON
Chairman
24 September 2013
DAVID JACKSON
Director
24 September 2013
Fonterra Co-operative Group Limited (Fonterra or the Company) is a co-operative company incorporated and domiciled in New Zealand.
Fonterra is registered under the Companies Act 1993 and the Co-operative Companies Act 1996, and is an issuer for the purposes of the
Financial Reporting Act 1993. Fonterra is also required to comply with the Dairy Industry Restructuring Act 2001.
These summary financial statements are those of Fonterra and its subsidiaries (together referred to as the Group) and the Group’s interest
in its equity accounted investees. They have been prepared in accordance with Financial Reporting Standard No. 43: Summary Financial
Statements and have been extracted from the Group’s full financial statements that have been prepared in accordance with New Zealand
Generally Accepted Accounting Practice. Fonterra’s full financial statements comply with New Zealand Equivalents to International Financial
Reporting Standards (NZ IFRS) and with International Financial Reporting Standards.
The Board has elected to present summary financial statements for the year ended 31 July 2013 as part of the Annual Review sent to
Shareholders. These summary financial statements include notes setting out the key information.
These summary financial statements are presented for the year ended 31 July 2013. The comparative information is for the year ended
31 July 2012.
The full financial statements for the year ended 31 July 2013, approved and authorised for issue by the Board on 24 September 2013,
have been audited by PricewaterhouseCoopers and given an unqualified opinion.
The Group is primarily involved in the collection, manufacture and sale of milk and milk derived products and is a profit-oriented entity.
These summary financial statements are presented in New Zealand dollars ($), which is the Company’s functional and presentation currency,
and rounded to the nearest million.
The summary financial statements cannot be expected to provide as complete an understanding of the financial affairs of the Group as
the full financial statements, which are available from the Company’s registered office at 9 Princes Street, Auckland, New Zealand or on the
Company’s website, www.fonterra.com.
FONTERRA ANNUAL REVIEW 2013
55
INCOME STATEMENT
FOR THE YEAR ENDED 31 JULY 2013
Revenue from sale of goods
Cost of goods sold
Gross profit
Other operating income
Selling and marketing expenses
Distribution expenses
Administrative expenses
Other operating expenses
Net foreign exchange losses
Share of profit of equity accounted investees
Profit before net finance costs and tax
Finance income
Finance costs
Net finance costs
Profit before tax
Tax credit/(expense)
Profit for the year
Profit for the year is attributable to:
Equity holders of the Parent
Non-controlling interests
Profit for the year
Earnings per share:
Basic and diluted earnings per share
1 Restated for impact of the non-cash Bonus issue of shares, issue date 24 April 2013.
GROUP $ MILLION
NOTES
31 JULY 2013
31 JULY 2012
1
2
3
18,643
(15,611)
3,032
105
(622)
(514)
(766)
(354)
(7)
63
937
25
(294)
(269)
668
68
736
718
18
736
19,769
(16,721)
3,048
132
(568)
(501)
(784)
(385)
(7)
52
987
30
(340)
(310)
677
(53)
624
609
15
624
GROUP $
31 JULY 2013
RESTATED1
31 JULY 2012
0.44
0.41
The accompanying notes form part of these summary financial statements.
56
FONTERRA ANNUAL REVIEW 2013
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 JULY 2013
Profit for the year
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges:
– Net fair value gains/(losses)
– Transferred and reported in revenue from sale of goods
– Tax credit on cash flow hedges
Net investment hedges:
– Net fair value losses on hedging instruments
– Tax credit on net investment hedges
Foreign currency translation (losses)/gains attributable to equity holders
Foreign currency translation reserve transferred to income statement
Share of equity accounted investees’ movements in reserves
Total items that may be reclassified subsequently to profit or loss
Items that will not be reclassified subsequently to profit or loss:
Foreign currency translation attributable to non-controlling interests
Total items that will not be reclassified subsequently to profit or loss
Total other comprehensive expense recognised directly in equity
Total comprehensive income for the year
Attributable to:
Equity holders of the Parent
Non-controlling interests
Total comprehensive income for the year
GROUP $ MILLION
31 JULY 2013
31 JULY 2012
736
624
116
(317)
56
(5)
2
(45)
(7)
(1)
(201)
1
1
(200)
536
517
19
536
(229)
(400)
176
(33)
9
37
(7)
1
(446)
1
1
(445)
179
163
16
179
The accompanying notes form part of these summary financial statements.
FONTERRA ANNUAL REVIEW 2013
57
STATEMENT OF FINANCIAl POSITION
AS AT 31 JULY 2013
GROUP $ MILLION
NOTES
31 JULY 2013
31 JULY 2012
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Tax receivable
Derivative financial instruments
Other current assets
Total current assets
Non-current assets
Property, plant and equipment
Equity accounted investments
Intangible assets
Deferred tax asset
Derivative financial instruments
Other non-current assets
Total non-current assets
Total assets
LIABILITIES
Current liabilities
Bank overdraft
Borrowings
Trade and other payables
Owing to suppliers
Tax payable
Derivative financial instruments
Provisions
Other current liabilities
Total current liabilities
Non-current liabilities
Borrowings
Derivative financial instruments
Provisions
Deferred tax liability
Other non-current liabilities
Total non-current liabilities
Total liabilities
Net assets
EQUITY
Subscribed equity
Retained earnings
Foreign currency translation reserve
Cash flow hedge reserve
Total equity attributable to equity holders of the Parent
Non-controlling interests
Total equity
The accompanying notes form part of these summary financial statements.
58
FONTERRA ANNUAL REVIEW 2013
6
7
7
330
2,054
3,078
26
100
58
5,646
4,807
449
2,858
217
127
269
8,727
14,373
1
1,569
1,491
711
23
149
82
52
4,078
3,108
346
76
6
11
3,547
7,625
6,748
5,807
1,249
(266)
(82)
6,708
40
6,748
1,033
2,302
2,981
18
275
83
6,692
4,569
439
2,882
99
198
238
8,425
15,117
42
1,204
1,386
1,083
28
255
83
44
4,125
3,745
413
81
85
13
4,337
8,462
6,655
5,690
1,078
(211)
63
6,620
35
6,655
STATEMENT OF CHANgES IN EQUITy
FOR THE YEAR ENDED 31 JULY 2013
ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
SUBSCRIBED
EQUITY
RETAINED
EARNINGS
GROUP $ MILLION
As at 1 August 2011
Profit for the year
Other comprehensive income/(expense) for the year
Total comprehensive income/(expense) for the year
5,261
–
–
–
Transactions with equity holders in their capacity as equity holders:
Dividends paid to equity holders of the Parent
Equity instruments issued
Equity instruments surrendered
Dividends paid to non-controlling interests
As at 31 July 2012
As at 1 August 2012
Profit for the year
Other comprehensive (expense)/income for the year
Total comprehensive income/(expense) for the year
–
584
(155)
–
5,690
5,690
–
–
–
Transactions with equity holders in their capacity as equity holders:
Dividends paid to equity holders of the Parent
Equity instruments issued
Equity instruments cancelled
Equity instruments surrendered
Equity transaction costs
Dividends paid to non-controlling interests
–
611
(475)
(1)
(18)
–
FOREIGN
CURRENCY
TRANSLATION
RESERVE
(217)
–
6
6
–
–
–
–
(211)
(211)
–
(55)
(55)
–
–
–
–
–
–
CASH FLOW
HEDGE
RESERVE
516
–
(453)
(453)
–
–
–
–
63
63
–
(145)
(145)
–
–
–
–
–
–
TOTAL
6,503
609
(446)
163
(475)
584
(155)
–
6,620
6,620
718
(201)
517
(546)
611
(475)
(1)
(18)
–
943
609
1
610
(475)
–
–
–
1,078
1,078
718
(1)
717
(546)
–
–
–
–
–
NON-
CONTROLLING
INTERESTS
38
15
1
16
–
–
–
(19)
35
35
18
1
19
–
–
–
–
–
(14)
40
TOTAL
EQUITY
6,541
624
(445)
179
(475)
584
(155)
(19)
6,655
6,655
736
(200)
536
(546)
611
(475)
(1)
(18)
(14)
6,748
As at 31 July 2013
5,807
1,249
(266)
(82)
6,708
The accompanying notes form part of these summary financial statements.
FONTERRA ANNUAL REVIEW 2013
59
CASH FlOW STATEMENT
FOR THE YEAR ENDED 31 JULY 2013
Cash flows from operating activities
Profit before net finance costs and tax
Adjustments for:
Foreign exchange losses
Depreciation and amortisation
Movement in provisions
Other
Increase/(decrease) in working capital:
Inventories
Trade and other receivables
Amounts owing to suppliers
Payables and accruals
Other movements
Total
Cash generated from operations
Net taxes paid
Net cash flows from operating activities
Cash flows from investing activities
Cash was provided from:
– Proceeds from disposal of property, plant and equipment
– Proceeds from settlement of net investment hedges
– Proceeds from sale of Group entities and other business operations
– Other cash inflow
Cash was applied to:
– Acquisition of property, plant and equipment
– Acquisition of intangible assets
– Outflows on settlement of net investment hedges
– Acquisition of Group entities and other business operations
– Advances made to equity accounted investees
– Other cash outflow
Net cash flows from investing activities
Cash flows from financing activities
Cash was provided from:
– Proceeds from borrowings
– Proceeds from issue of equity instruments
– Proceeds for equity instruments not yet issued
– Proceeds from settlement of borrowing derivatives
– Interest received
Cash was applied to:
– Interest paid
– Repayment of borrowings
– Settlement of borrowing derivatives
– Surrendered/cancelled equity instruments
– Dividends paid to non-controlling interests
– Dividends paid to equity holders of the Parent
– Equity transaction costs
– Other cash outflow
Net cash flows from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of exchange rate changes on cash balances
Cash and cash equivalents at the end of the year
Reconciliation of closing cash balances to the statement of financial position:
Cash and cash equivalents
Bank overdraft
Closing cash balances
The accompanying notes form part of these summary financial statements.
60
FONTERRA ANNUAL REVIEW 2013
GROUP $ MILLION
31 JULY 2013
31 JULY 2012
937
1
530
(17)
(16)
498
(43)
38
(410)
68
(8)
(355)
1,080
(83)
997
22
–
5
5
(701)
(147)
–
(49)
(2)
(1)
(868)
3,188
653
–
3
26
(334)
(3,268)
–
(475)
(14)
(546)
(18)
(1)
(786)
(657)
991
(5)
329
330
(1)
329
987
16
492
109
(7)
610
307
196
(567)
(64)
(13)
(141)
1,456
(66)
1,390
11
26
–
–
(673)
(184)
(2)
–
(4)
–
(826)
2,215
505
44
13
31
(406)
(2,097)
(5)
(155)
(19)
(475)
–
–
(349)
215
762
14
991
1,033
(42)
991
STATEMENT OF SIgNIFICANT ACCOUNTINg POlICIES
FOR THE YEAR ENDED 31 JULY 2013
These summary financial statements of the Group have been prepared using the same accounting policies and measurement basis as, and should
be read in conjunction with, the Group’s full financial statements for the year ended 31 July 2013. The accounting policies applied by the Group
are consistent with those applied for the year ended 31 July 2012, except for:
a) Change in accounting policy
Cash flow statement
Fonterra adopted the Amendments to various existing New Zealand International Financial Reporting Standards (Harmonisation Amendments)
during the year ended 31 July 2013. One of the changes the Harmonisation Amendments introduced was the option to use the indirect
method of presenting cash flows from operating activities in the cash flow statement. The Board has concluded that the indirect method
provides users of the financial statements with more relevant information on the key factors influencing Fonterra’s operating cash flows and
improves comparability with international peers, and therefore, for the year ended 31 July 2013, Fonterra has changed its accounting policy to
use the indirect method of presenting cash flows from operating activities. This change in accounting policy has been applied retrospectively
and the comparative figures in the Cash Flow Statement have been updated to use the indirect method. This change in accounting policy is
presentational only.
FONTERRA ANNUAL REVIEW 2013
61
NOTES TO THE SUMMARy FINANCIAl STATEMENTS
FOR THE YEAR ENDED 31 JULY 2013
1
COST OF GOODS SOLD
Opening inventory
Cost of Milk:
– New Zealand sourced
– Non-New Zealand sourced
Other purchases
Closing inventory
Total cost of goods sold
2
PROFIT beFORe NeT FINaNCe COSTS aND Tax
The following items have been included in arriving at profit before net finance costs and tax:
Auditors’ remuneration:
– Fees paid for the audit or review of financial statements
– Fees paid for other services1
Operating lease expense
Depreciation of property, plant and equipment
Amortisation of intangible assets
Research and development costs
Net loss on disposal of property, plant and equipment
Net loss on derecognition of software
Donations
Research and development grants received from government
Total employee benefits expense
Included in employee benefits expense are:
– Contributions to defined contribution plans
GROUP $ MILLION
31 JULY 2013
31 JULY 2012
2,981
3,277
8,635
996
6,077
(3,078)
15,611
9,033
1,148
6,244
(2,981)
16,721
GROUP $ MILLION
31 JULY 2013
31 JULY 2012
4
2
72
444
86
94
5
–
2
(4)
1,735
58
4
2
73
410
82
93
2
9
3
(9)
1,704
54
1 Other services include financial reporting, advisory services, financial and information technology controls assurance and other attest services.
62
FONTERRA ANNUAL REVIEW 2013
3
Tax (CReDIT)/exPeNSe
Current tax expense
Prior period adjustments to current tax
Deferred tax movements:
− Origination and reversal of temporary differences
Tax (credit)/expense
Profit before tax
Prima facie tax expense at 28%
Add/(deduct) tax effect of:
− Effect of tax rates in foreign jurisdictions
− Non-deductible expenses/additional assessable income
− Non-assessable income/additional deductible expenses
− Prior year (over)/under provision
Tax expense before distributions and deferred tax
Effective tax rate before distributions and deferred tax
Tax effect of distributions to Shareholder suppliers
Tax expense before deferred tax
Effective tax rate before deferred tax
Add/(deduct) tax effect of:
− Origination and reversal of other temporary differences
− Change in estimate of benefits of tax losses recognised
− Losses of overseas Group entities not recognised
Tax (credit)/expense
Effective tax rate
Imputation credits
Imputation credits available for use in subsequent reporting periods
Tax losses
Gross tax losses available for which no deferred tax asset has been recognised
GROUP $ MILLION
31 JULY 2013
31 JULY 2012
83
(11)
(140)
(68)
668
187
(18)
25
(29)
(11)
154
23.1%
(126)
28
4.2%
(40)
(70)
14
(68)
53
1
(1)
53
677
190
(11)
21
(38)
1
163
24.1%
(128)
35
5.2%
14
–
4
53
(10.2%)
7.8%
20
109
20
63
FONTERRA ANNUAL REVIEW 2013
63
NOTES TO THE SUMMARy FINANCIAl STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2013
4
SeGMeNT RePORTING
The Group operates predominantly in the international dairy industry.
The Group has four reportable segments that are defined by product type and geographic area to reflect how the Group’s operations are managed.
The reportable segments presented reflect the Group’s management and reporting structure as viewed by the Fonterra Management Team,
which is the Group’s chief operating decision maker.
Transactions between segments are based on estimated market prices.
On 1 August 2012, Fonterra’s organisational structure was re-aligned. As a result, certain operations were placed under the control of different
business units. The most significant changes impacting reported segment earnings were:
– RD1 has been moved from NZMP to ANZ;
– International farming ventures has been moved from NZMP to Asia/AME (international farming ventures in China) and Latam (international
farming ventures in South America).
Certain functions within NZMP have also been renamed.
Comparatives have been restated to reflect these changes.
RePORTabLe SeGMeNT
DeSCRIPTION
New Zealand Milk Products (NZMP)
Australia/New Zealand (ANZ)
Asia/Africa and Middle East (Asia/AME)
Latin America (Latam)
Represents the collection, processing and distribution of New Zealand milk, global
sales and marketing of New Zealand and non-New Zealand milk products, Fonterra
Nutrition, Group Strategy & Optimisation, Co-operative Affairs and Group Services.
Represents Fast Moving Consumer Goods (FMCG) operations in New Zealand
(including export to the Pacific Islands) and all FMCG and Ingredients operations
in Australia (including Milk Supply and Manufacturing). It includes foodservice
sales in Australia and New Zealand (except for foodservice sales to Quick Service
Restaurants), and RD1.
Represents FMCG operations in Asia (excluding North Asia), Africa and the Middle
East, and foodservices sales in Asia/AME and China. It includes international farming
ventures in China.
Represents FMCG operations in Chile and equity accounted investments in South
America. It includes international farming ventures in South America.
In April 2013, Fonterra announced a new Asia Pacific Middle East Africa (APMEA) business unit combining ANZ and Asia/AME. No changes
to internal reporting or decision making have occurred during the year ended 31 July 2013, therefore no change has been reflected in the
reportable segments.
64
FONTERRA ANNUAL REVIEW 2013
a) Segment income
Segment income statement
Year ended 31 July 2013
External revenue
Inter-segment revenue
Revenue from sale of goods
Segment gross profit
Selling and marketing expenses
Distribution expenses
Administrative and other operating expenses
Segment operating expenses
Net other operating income
Net foreign exchange losses
Share of profit of equity accounted investees
Segment earnings before net finance costs and tax
Normalisation adjustments
Normalised segment earnings before net finance costs and tax
Normalisation adjustments
Finance income
Finance costs
Profit before tax for the year
Profit before tax for the year includes the following amounts:
Depreciation
Amortisation
Other income from equity accounted investees
Normalisation adjustments consist of the following amounts:
Costs associated with closure of Cororooke plant in Australia
Costs associated with the Group Strategy Right-Sizing
Other
Total normalisation adjustments1
Segment asset information:
As at and for the year ended 31 July 2013
Equity accounted investments
Capital expenditure
GROUP $ MILLION
NZMP
ANZ
ASIA/AME
LATAM ELIMINATIONS TOTAL GROUP
12,358
1,559
13,917
1,251
(89)
(188)
(615)
(892)
69
(7)
59
480
14
494
(320)
(68)
3
–
14
–
14
218
683
3,101
644
3,745
756
(150)
(203)
(324)
(677)
11
–
3
93
49
142
(83)
(13)
2
30
19
–
49
31
144
2,057
2
2,059
702
(324)
(42)
(153)
(519)
24
–
–
207
2
209
(14)
(4)
–
–
5
(3)
2
–
70
1,127
8
1,135
303
(59)
(81)
(51)
(191)
24
–
1
137
–
137
(27)
(1)
24
–
–
–
–
200
29
–
18,643
(2,213)
(2,213)
–
18,643
20
–
–
23
23
(23)
–
–
20
–
20
–
–
–
–
–
–
–
–
–
3,032
(622)
(514)
(1,120)
(2,256)
105
(7)
63
937
65
1,002
(65)
25
(294)
668
(444)
(86)
29
30
38
(3)
65
449
926
1 Of the $65 million normalisation adjustments, $47 million related to operating expenses and $18 million to cost of goods sold.
FONTERRA ANNUAL REVIEW 2013
65
NOTES TO THE SUMMARy FINANCIAl STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2013
4
SeGMeNT RePORTING CONTINUED
a) Segment income CONTINUED
Segment income statement
Year ended 31 July 2012
External revenue
Inter-segment revenue
Revenue from sale of goods
Segment gross profit
Selling and marketing expenses
Distribution expenses
Administrative and other operating expenses
Segment operating expenses
Net other operating income
Net foreign exchange gains/(losses)
Share of profit of equity accounted investees
Segment earnings before net finance costs and tax
Normalisation adjustments
Normalised segment earnings before net finance costs and tax
Normalisation adjustments
Finance income
Finance costs
Profit before tax for the year
Profit before tax for the year includes the following amounts:
Depreciation
Amortisation
Other income from equity accounted investees
Normalisation adjustments consist of the following amounts:
Impairment losses recorded in equity accounted investees
Restructuring costs associated with the Group Strategy Refresh
Other
Total normalisation adjustments1
Segment asset information:
As at and for the year ended 31 July 2012
Equity accounted investments
Capital expenditure
GROUP $ MILLION
NZMP
ANZ
ASIA/AME
LATAM ELIMINATIONS TOTAL GROUP
13,228
1,764
14,992
3,538
761
4,299
1,998
3
2,001
1,005
5
1,010
–
19,769
(2,533)
(2,533)
–
19,769
1,285
(81)
(188)
(665)
(934)
78
8
40
477
24
501
(304)
(66)
1
–
23
1
24
196
586
869
(144)
(215)
(313)
(672)
17
(5)
9
218
9
227
(72)
(12)
–
–
7
2
9
29
192
648
(288)
(37)
(148)
(473)
17
(10)
–
182
–
182
(10)
(3)
–
–
–
–
–
–
57
260
(55)
(61)
(60)
(176)
37
–
3
124
8
132
(24)
(1)
38
8
–
–
8
214
53
(14)
3,048
–
–
17
17
(17)
–
–
(14)
–
(14)
–
–
–
–
–
–
–
–
–
(568)
(501)
(1,169)
(2,238)
132
(7)
52
987
41
1,028
(41)
30
(340)
677
(410)
(82)
39
8
30
3
41
439
888
1 Of the $41 million normalisation adjustment, $19 million related to operating expenses, $14 million to cost of goods sold and the $8 million of impairment losses were
recognised in share of profit of equity accounted investees.
66
FONTERRA ANNUAL REVIEW 2013
b) Revenue
Entity wide products and services:
Consumer goods
Ingredients and other revenue
Revenue from sale of goods
GROUP $ MILLION
31 JULY 2013
31 JULY 2012
4,717
13,926
18,643
4,945
14,824
19,769
EUROPE
CHINA
REST OF
ASIA
AUSTRALIA
NEW
ZEALAND
USA
REST OF
WORLD
TOTAL
GROUP $ MILLION
Geographical segment external revenue:
Year ended 31 July 2013
Year ended 31 July 2012
1,096
1,169
2,500
2,031
5,216
5,676
1,850
2,300
1,986
1,928
1,415
1,445
4,580
5,220
18,643
19,769
Revenue is allocated to geographical segments on the basis of the destination of the goods sold.
c) Non-current assets
NZMP
ANZ
ASIA/AME
LATAM
TOTAL
GROUP $ MILLION
NEW
ZEALAND
REST OF
WORLD
NEW
ZEALAND
AUSTRALIA
Geographical segment reportable non-current assets:
As at 31 July 2013
As at 31 July 2012
4,199
3,950
303
267
1,350
1,394
1,047
1,087
940
858
544
572
8,383
8,128
Reconciliation of geographical segment non-current assets to total non-current assets:
Geographical segment non-current assets
Deferred tax asset
Derivative financial instruments
Total non-current assets
GROUP $ MILLION
aS aT
31 JULY 2013
AS AT
31 JULY 2012
8,383
217
127
8,727
8,128
99
198
8,425
FONTERRA ANNUAL REVIEW 2013
67
NOTES TO THE SUMMARy FINANCIAl STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2013
5
SUbSCRIbeD eqUITY INSTRUMeNTS aND ReSeRveS
Subscribed equity instruments include Co-operative shares and Units in the Fonterra Shareholders’ Fund (the Fund).
Co-operative shares, including shares held within the Group
Balance at 1 August 2011
Shares issued
Shares surrendered
Balance at 31 July 2012
Balance at 1 August 2012
Shares issued prior to the launch of TAF
Shares surrendered prior to the launch of TAF
Total number of shares on issue prior to the launch of TAF
Shares issued on the launch of TAF
Bonus issue1
Shares cancelled2
Balance at 31 July 2013
CO-OPERATIVE SHARES
(THOUSANDS)
1,406,945
129,157
(34,318)
1,501,784
1,501,784
25,886
(99)
1,527,571
89,809
40,427
(59,973)
1,597,834
1 On 27 February 2013, Fonterra announced a non-cash Bonus issue of one share for every 40 shares held. The Bonus issue increased the number of shares on issue
by 40.4 million. The record date for the Bonus issue was 12 April 2013 and the issue date was 24 April 2013.
2 Shares cancelled following the Supply Offer (refer to Fonterra Shareholder suppliers Supply Offer below).
Co-operative shares may only be held by a Shareholder supplying milk to the Company in a season (Shareholder supplier) and Fonterra Farmer
Custodian Limited (the Custodian). Rights attaching to Co-operative shares3 include:
– voting rights when backed by milk supply;
– the right to receive the share-backed milk price on each kilogram of milksolids produced by the Shareholder supplier;
– rights to any distributions declared by the Board; and
– rights to share in any surplus on liquidation of the Company.
Shareholder suppliers
The Company maintains a share standard that requires a Shareholder supplier to hold one Co-operative share for each kilogram of milksolids
supplied to the Company by that Shareholder supplier. This is measured as an average over the three preceding seasons4 production (excluding
milk supplied under contract supply in that season)5. Shareholder suppliers are permitted to hold more or fewer Co-operative shares than required
by the share standard in certain circumstances. Shareholder suppliers supplying under contract must hold at least 1,000 Co-operative shares.
In addition to Co-operative shares held under the share standard, Shareholder suppliers are able to hold further Co-operative shares up to 100%
of production (where production is defined as the minimum number of Co-operative shares a Shareholder supplier is required to hold under the
share standard). No Shareholder supplier (including its related parties) is allowed to hold interests in Co-operative shares, not backed by milk
supply, exceeding 5% of the total number of Co-operative shares on issue.
New Shareholder suppliers have a number of alternatives in meeting the requirements of the share standard. This includes purchasing the
required shares over a three year period, with one third of the required holding of Co-operative shares to be held in the first Season, two thirds
in the second Season, with the share standard to be met in the third Season.
Voting rights in the Company are dependent on milk supply supported by Co-operative shares or vouchers held. A Shareholder supplier is
entitled on a poll or postal vote, to one vote per 1,000 kilograms of milksolids if that Shareholder supplier holds a Co-operative share or a
voucher for each of those kilograms of milksolids. The amount of milksolids that support voting rights are measured at 31 May, the season
end date6. As at the season end date, 31 May 2013, the aggregate milksolids eligible for voting was 1,424,000,000 kilograms of milksolids
(31 May 2012: 1,463,000,000 kilograms of milksolids).
Shareholder suppliers are able to buy and sell Co-operative shares directly on the Fonterra Shareholders’ Market. Shareholders may elect to sell
the economic rights of some of their Co-operative shares to the Fund, subject to an individual limit set by the Board within an overall individual
limit set out in the Company’s constitution. On the sale of an economic right of a Co-operative share to the Fund, a Shareholder supplier
transfers the legal title to the Co-operative share to the Custodian. where the Co-operative share transferred was backed by milk supply, the
Shareholder supplier is issued a voucher by the Custodian (subject to limits).
3 These rights are also attached to vouchers when backed by milk supply (subject to limits).
4 This requirement commences from 1 June 2013. Prior to this date, the requirement is based on kilograms of milksolids supplied for the previous season.
5 The Fonterra Board may permit the share standard to be satisfied through the holding of both Co-operative shares and vouchers.
6 Aggregate milksolids eligible for voting at season end date are adjusted for Shareholder suppliers who have joined the Co-operative or are no longer supplying milk to the
Co-operative in the period between the season end date and the record date for the meeting at which the vote is to be held.
68
FONTERRA ANNUAL REVIEW 2013
Fonterra Shareholder suppliers Supply Offer
In May 2013, Fonterra provided its Shareholder suppliers with an opportunity to sell economic rights of shares backed by milk supply to the
Fund, and to sell to Fonterra the resulting Units (Supply Offer).
Under this Supply Offer, Shareholder suppliers sold the economic rights of 60 million Co-operative shares to the Custodian, resulting in the
issuance of 60 million Units in the Fund. Fonterra acquired the 60 million Units via the New Zealand Stock Exchange (NZX) and immediately
redeemed these, resulting in the transfer of 60 million Co-operative shares to Fonterra by the Custodian. Fonterra subsequently cancelled these
shares. As a result of this redemption, the Supply Offer did not ultimately affect the total number of Units on issue.
The Custodian
The Custodian holds legal title of Co-operative shares of which the economic rights have been sold to the Fund on trusts for the benefit of the
Fund. At 31 July 2013, 107,969,310 Co-operative shares were legally owned by the Custodian, on trusts for the benefit of the Fund.
UNITS
Balance at 31 July 20121
Units issued2
Units surrendered3
Balance at 31 July 2013
1 The Fund commenced issuing Units on 30 November 2012.
2 Includes 60 million Units issued under the Supply Offer.
3 Includes 60 million Units redeemed by Fonterra under the Supply Offer.
UNITS (THOUSANDS)
–
169,470
(61,501)
107,969
Units are issued by the Fund. In respect of the Co-operative shares which it holds, the Custodian is required under trust to pass to the Fund the
following rights of those Co-operative shares:
– the right to receive any dividends declared by the Fonterra Board;
– the right to any other distributions made in respect of Co-operative shares; and
– rights to share in any surplus on liquidation of Fonterra.
The Fund then attaches these rights to Units it issues.
A Shareholder supplier who holds a Unit can require the Fund to effectively exchange it for a Co-operative share held by the Custodian. The
Custodian relinquishes legal ownership of that Co-operative share (provided that completion of this transaction would not put that Shareholder
supplier in breach of the limits on Co-operative share ownership explained above). A Unit is cancelled by the Fund, as all Units in the Fund must
be backed by a Co-operative share held by the Custodian.
Equity transaction costs
During the year, the Group incurred transaction costs of $18 million, which were directly attributable to the issue of shares and Units as a part
of the launch of Trading Among Farmers. These costs have been treated as a deduction against subscribed equity.
Dividends paid
All Co-operative shares, including those held by the Custodian on trusts for the benefit of the Fund, are eligible to receive a dividend if declared
by the Board.
On 25 September 2012, the Board declared a dividend of 20 cents per Co-operative share (totalling $287 million), paid on 20 October 2012 to all
Co-operative shares on issue at 31 May 2012.
On 26 March 2013, the Board declared an interim dividend of 16 cents per share (totalling $256 million), paid on 19 April 2013 to all Co-operative
shares on issue at 12 April 2013.
The dividend declared after balance date is explained in Note 11.
Foreign currency translation reserve
The foreign currency translation reserve comprises all foreign currency differences arising from the translation of the financial statements
of foreign operations as well as from the effective portion of translation or fair value changes of instruments that hedge the Group’s net
investment in foreign operations.
Cash flow hedge reserve
The cash flow hedge reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments
related to hedged transactions that have not yet occurred.
FONTERRA ANNUAL REVIEW 2013
69
NOTES TO THE SUMMARy FINANCIAl STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2013
6
eqUITY aCCOUNTeD INveSTMeNTS
The ownership interest of the following entities is 50% or less and the Group is not considered to exercise a controlling interest.
These entities are therefore accounted for as equity accounted investees.
OVERSEAS EQUITY ACCOUNTED INVESTEES1
DPA Manufacturing Holdings Limited
Dairy Partners Americas Brasil Limitada
Ecuajugos S.A.
DMV Fonterra Excipients GmbH & Co KG
Dairy Industries (Jamaica) Limited
DairiConcepts, L.P.
DairiConcepts Management, L.L.C.
Lacven Corporation
1 All investees have balance dates of 31 December.
NEW ZEALAND EQUITY ACCOUNTED INVESTEES
International Nutritionals Limited
OWNERSHIP INTERESTS (%)
COUNTRY OF
INCORPORATION
aS aT
31 JULY 2013
AS AT
31 JULY 2012
Bermuda
Brazil
Ecuador
Germany
Jamaica
USA
USA
Barbados
50
50
50
50
50
50
50
25
50
50
50
50
50
50
50
25
OWNERSHIP INTERESTS (%)
aS aT
31 JULY 2013
AS AT
31 JULY 2012
50
50
70
FONTERRA ANNUAL REVIEW 2013
7
bORROWINGS
Movements in borrowings
Opening balance
New issues
Bank loans
Finance leases
Commercial paper
Retail bonds
Medium-term notes
Repayments
Bank loans
Finance leases
Commercial paper
Medium-term notes
Other movements
Amortisation of discount
Changes in fair value
Changes due to foreign currency translation
Closing balance
Net interest bearing debt position
Total borrowings
Cash and cash equivalents
Interest bearing advances included in other non-current assets
Bank overdraft
Net interest bearing debt
Value of derivatives used to manage changes in hedged risks and other foreign exchange
movements on debt
Economic net interest bearing debt1
1 Economic net interest bearing debt reflects the effect of debt hedging in place at balance date.
Net interest bearing debt is managed on a Group basis.
Net tangible assets per security2
$ per listed debt security on issue
$ per equity instrument on issue
Listed debt securities on issue (million)
Equity instruments on issue (million)
2 Net tangible assets represents total assets less total liabilities less intangible assets.
GROUP $ MILLION
aS aT
31 JULY 2013
AS AT
31 JULY 2012
4,949
2,386
–
834
–
–
3,220
(1,937)
(4)
(611)
(751)
(3,303)
18
(95)
(112)
(189)
4,677
4,650
1,394
2
626
–
193
2,215
(1,606)
(7)
(480)
(4)
(2,097)
7
62
112
181
4,949
GROUP $ MILLION
aS aT
31 JULY 2013
AS AT
31 JULY 2012
4,677
(330)
(121)
1
4,227
240
4,467
4,949
(1,033)
(125)
42
3,833
396
4,229
GROUP
aS aT
31 JULY 2013
AS AT
31 JULY 2012
3.70
2.43
1,053
1,598
3.58
2.51
1,053
1,502
FONTERRA ANNUAL REVIEW 2013
71
NOTES TO THE SUMMARy FINANCIAl STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2013
8
bUSINeSS COMbINaTIONS
There were no material business combinations during the year ended 31 July 2013 or 31 July 2012.
9
FINaNCIaL RISk MaNaGeMeNT
Overview
Global financial and commodity markets remain volatile. The nature of Fonterra’s business is such that managing risks in the foreign exchange,
interest rate, commodity, credit and liquidity markets is critical to minimising the volatility in returns to equity holders.
The Board has overall responsibility for the establishment and oversight of the Group’s financial risk management framework. The Board:
– has established risk management policies and procedures to identify, analyse and, where appropriate, manage the risks faced by the Group;
– has approved a Treasury Policy that covers appropriate risk limits and controls (including, but not limited to, delegated authority levels and
authorised use of various financial instruments); and
– monitors risks and adherence to approved limits.
The Group’s overall financial risk management programme focuses primarily on maintaining a prudent risk profile that provides flexibility to
implement the Group’s strategies, while ensuring the optimisation of the return on assets. Risk management is predominantly carried out by a
central treasury department (Group Treasury), which ensures compliance with the risk management policies and procedures set by the Board.
During the year in order to manage financial risks, the key risk management activities undertaken by the Group included, but were not limited
to, the following:
Capital structure
Fonterra launched Trading Among Farmers (TAF) in November 2012. A key objective in establishing TAF was to support the establishment of
the Fonterra Shareholders’ Market in order to eliminate redemption risk and provide a permanent capital base for the Co-operative. Equity
instruments comprise Co-operative shares and Units in the Fonterra Shareholders’ Fund. These are classified as subscribed equity. Further detail
is given in Note 5.
Bank facility renewal
Fonterra’s banking facilities are renewed at least annually with the exception of certain facilities where renewals are required at agreed periods
of over one year. On 31 July 2013, Fonterra had $3,289 million (31 July 2012: $3,565 million) of undrawn committed facilities.
Economic debt to debt plus equity ratio
As a result of the above activities and close management of the financial risks faced by Fonterra, the economic debt to debt plus equity ratio has
increased from 39.1% at 31 July 2012 to 39.6% at 31 July 2013.
For more details in respect of financial risks faced by the Group, refer to the Group’s full consolidated financial statements.
10 CONTINGeNT LIabILITIeS
In the normal course of its business, Fonterra, its subsidiaries and equity accounted investees are exposed to claims, legal proceedings and
arbitrations that may in some cases result in costs to the Group.
On 2 August 2013, Fonterra publically announced a potential food safety issue with three batches of whey Protein Concentrate (wPC80)
produced at the hautapu manufacturing site and initiated a precautionary product recall. wPC80 is used as an ingredient in the manufacture
of a number of other products which have been subsequently identified and recalled by Fonterra’s customers.
For the financial year ended 31 July 2013, Fonterra has provided for costs associated with the replacement of the recalled product of $14 million.
No further provision has been included in the financial statements. There is significant uncertainty as regards any future impacts that may
be experienced as a consequence of this precautionary recall. No contingent liability can be reliably quantified in regards to potential market
access, customer claims or reputational consequences.
In October 2012 the purchaser of the Group’s former western Australian dairy business made warranty claims as disclosed in the Fonterra
Shareholders’ Fund Prospectus and Investment Statement, of AUD 103 million. The claimant subsequently revised their total claim and
confirmed it as being AUD 37 million. The claim is in dispute and in May 2013 the claimant lodged a formal statement of claim with the
Australian Court. Based on currently available information and the claims made to date, Fonterra will vigorously defend its position and does
not believe that it is likely these claims will result in a material obligation.
The Directors believe that these claims, legal proceedings and arbitrations have been adequately provided for and disclosed by the Group and
that there are no additional legal proceedings or arbitrations that are pending at the date of these financial statements that require provision
or disclosure.
At 31 July 2013 the Group had no other contingent liabilities (31 July 2012: nil).
72
FONTERRA ANNUAL REVIEW 2013
11
SUbSeqUeNT eveNTS
On 24 September 2013, the Board of Directors declared a final dividend of 16 cents per share to be paid on 18 October 2013 to all Co-operative
shares on issue at 10 October 2013.
There were no other material events subsequent to 31 July 2013 that would impact these financial statements.
12 COMPaRISON TO PROSPeCTIve FINaNCIaL INFORMaTION
In order to facilitate TAF, the Fonterra Shareholders’ Fund Prospectus was issued in October 2012. The prospectus included Prospective
Financial Information (PFI) in relation to Fonterra for the year ended 31 July 2013. The following information summarises the key variances
between Fonterra’s prospective financial information and its actual performance.
Income statement
Revenue from sale of goods
Cost of goods sold
Gross profit
Selling and marketing expenses
Distribution expenses
Administrative and other operating expenses
Net other operating income
Share of profit of equity accounted investees
Profit before net finance costs and tax
Net finance costs
Profit before tax
Tax (expense)/credit
Profit for the year
Profit for the year is attributable to:
Equity holders of the Parent
Non-controlling interests
Profit for the year
Earnings per share
Basic and diluted earnings per share
1 Restated for impact of the non-cash Bonus issue of shares, issue date 24 April 2013.
GROUP $ MILLION
NOTES
31 JULY 2013
PROSPeCTIve
31 JULY 2013
aCTUaL
18,627
(15,319)
3,308
(693)
(526)
(1,183)
76
72
1,054
(328)
726
(36)
690
673
17
690
ReSTaTeD1
$
0.43
18,643
(15,611)
3,032
(622)
(514)
(1,120)
98
63
937
(269)
668
68
736
718
18
736
$
0.44
a
b
c
d
e
Adjusted FY2013 prospective profitability by segment for changes in organisational structure from 1 August 2012
Prospective EBIT1
Adjustments:
Changes in organisational structure
Prospective EBIT – adjusted2
Prospective normalisation adjustment
Prospective normalised EBIT – adjusted2,3
Actual EBIT
Actual normalisation adjustments
Actual normalised EBIT
GROUP $ MILLION
NZMP
ANZ
ASIA/AME
LATAM
517
(17)
500
–
500
480
14
494
201
12
213
25
238
93
49
142
223
(2)
221
–
221
207
2
209
125
6
131
–
131
137
–
137
INTER-
SEGMENTS
TOTAL
(12)
1,054
1
(11)
–
(11)
20
–
20
–
1,054
25
1,079
937
65
1,002
1 EBIT is defined as earnings before net finance costs and tax.
2 As described in the prospectus, Fonterra’s organisational structure was realigned from 1 August 2012. however, the prospective financial information was presented on the
basis of Fonterra’s organisational structure that existed prior to 1 August 2012. The most significant organisational changes were the transfer of the RD1 Group from NZMP
to ANZ, and the transfer of international farming ventures from NZMP to Asia/AME and Latam.
3 Prospective normalised EBIT excluded a forecast of the costs associated with the closure of a plant in Australia.
FONTERRA ANNUAL REVIEW 2013
73
NOTES TO THE SUMMARy FINANCIAl STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2013
12 COMPaRISON TO PROSPeCTIve FINaNCIaL INFORMaTION CONTINUED
a Gross profit was lower than forecast as a result of a number of differences across the respective business units.
Revenue from the NZMP business was higher than forecast, driven by higher sales volumes, dairy commodity prices that were higher
than expectations, along with a product mix that when compared to the prospective assumptions favoured higher priced commodities
such as cheese.
This increase in revenue was more than offset by the increase in cost of goods sold. The prospectus assumed a Farmgate Milk Price of $5.25,
however the increase in dairy commodity prices in the second half of the financial year resulted in a much higher cost of milk for the NZMP
business, and a final Farmgate Milk Price for the Season of $5.84. These rapid and then sustained increases in commodity prices were not
able to be passed on immediately to customers, negatively impacting gross margin. Changes in base commodity prices and changes in the
prices of products that are not included in the calculation of Farmgate Milk Price were highlighted as risks in the prospective information.
Decreased gross profit in the ANZ business, was driven by weaker than expected performance from the consumer business in Australia,
which was highlighted as a significant risk in the preparation of the prospective information. Further, margins in the Australian Ingredients
business were negatively impacted by competitive pricing for raw milk in Australia.
Asia/AME gross profit was lower as a result of lower than forecast sales volumes.
b EBIT was lower than the forecast, due to the impact of lower than expected gross profit, partially offset by operating expense saving achieved.
Administrative and other operating expenses were $63 million lower than forecast as a result of savings made through various initiatives.
Whilst not included in the forecast, this saving programme, including a FY2013 target of $60 million was highlighted in the prospectus.
Selling and marketing expenses were lower as a result of cost control initiatives in ANZ, and a programme to target advertising and
promotion spend in growth markets in Asia/AME.
c Net finance costs are lower as a result of lower average borrowings and interest rates, coupled with better than forecast fair value gains on
interest rates swaps as the Group locked more of its borrowings to fixed rates.
d The tax credit recognised compared to the tax expense forecast was predominately driven by the recognition of deferred tax, resulting from
the change of the applicable tax rate in certain offshore jurisdictions. Lower than forecast profit before tax also contributed to the decrease.
e Earnings per share was ahead of forecast as a result of the higher profit after tax number, partially offset by the dilutive effect of the Bonus
share offer undertaken, which was not included in the forecast numbers.
Statement of comprehensive income
GROUP $ MILLION
notes
31 JULY 2013
PROSPeCTIve
31 JULY 2013
aCTUaL
Profit for the year
Movement in cash flow hedge reserve
Movement in net investment hedges
Movement in foreign currency translation reserve
Share of equity accounted investees' movements in reserves
Foreign currency translation attributable to non-controlling interests
Other comprehensive expense recognised directly in equity
a
Total comprehensive income for the year
Attributable to:
Equity holders of the Parent
Non-controlling interests
Total comprehensive income for the year
690
(128)
–
(4)
–
–
(132)
558
541
17
558
736
(145)
(3)
(52)
(1)
1
(200)
536
517
19
536
a Lower other comprehensive income was a result of the unfavourable impact of the translation of net investments denominated in foreign
currencies, particularly in Australia.
74
FONTERRA ANNUAL REVIEW 2013
Statement of changes in equity
Opening equity as at 1 August
Total comprehensive income attributable to equity holders
Total comprehensive income attributable to non-controlling interests
Total comprehensive income for the year
Transactions with equity holders in their capacity as equity holders:
Dividends paid to equity holders
Dividends paid to non-controlling interests
Equity instruments issued/(cancelled)/(surrendered) net of transaction costs
Total equity
GROUP $ MILLION
notes
31 JULY 2013
PROSPeCTIve
31 JULY 2013
aCTUaL
6,655
541
17
558
(506)
(15)
276
6,968
6,655
517
19
536
(546)
(14)
117
6,748
a
b
a Dividends paid to equity holders were higher than forecast as a result of a higher than forecast interim dividend per share.
b The net proceeds from share transactions were lower than forecast. The funds received from the issue of shares to launch TAF were returned
to Shareholders via the Supply Offer in May 2013, whereas the forecast assumed $150 million remained with Fonterra at 31 July 2013.
Statement of financial position
Cash and cash equivalents
Trade and other receivables
Inventories
Other current assets
Total current assets
Property, plant and equipment
Equity accounted investments
Intangible assets
Other non-current assets
Total non-current assets
Total assets
Bank overdraft and borrowings
Supplier, trade and other payables
Other current liabilities
Total current liabilities
Borrowings
Other non-current liabilities
Total non-current liabilities
Total liabilities
Net assets
Subscribed equity
Retained earnings
Foreign currency translation reserve
Cash flow hedge reserve
Total equity attributable to equity holders of the Parent
Non-controlling interests
Total equity
GROUP $ MILLION
notes
31 JULY 2013
PROSPeCTIve
31 JULY 2013
aCTUaL
a
b
a
c
c
a
a
1,271
2,143
2,660
164
6,238
5,079
497
2,868
626
9,070
15,308
1,066
2,244
241
3,551
4,296
493
4,789
8,340
6,968
5,966
1,245
(215)
(65)
6,931
37
6,968
330
2,054
3,078
184
5,646
4,807
449
2,858
613
8,727
14,373
1,570
2,202
306
4,078
3,108
439
3,547
7,625
6,748
5,807
1,249
(266)
(82)
6,708
40
6,748
a Total current assets are lower as a result of lower than forecast cash holdings. When considered together with borrowings, net interest bearing
debt has increased as a result of the decision to pay out a higher proportion of the cost of milk to Farmer Shareholders earlier in the Season,
than projected in the prospectus.
b
Inventory balances are higher than forecast as a result of higher dairy commodity prices later in the production Season increasing the cost of
milk, a key component of the cost of inventory.
c Total non-current assets are lower as a result of lower than forecast capital spend due to timing of spend on key international growth projects.
FONTERRA ANNUAL REVIEW 2013
75
NOTES TO THE SUMMARy FINANCIAl STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2013
12 COMPaRISON TO PROSPeCTIve FINaNCIaL INFORMaTION CONTINUED
Cash flow statement
GROUP $ MILLION
notes
31 JULY 2013
PROSPeCTIve
31 JULY 2013
aCTUaL
Net cash flows from operating activities
Net cash flows from investing activities
Net cash flows from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Effect of exchange rate changes on cash balances
Cash and cash equivalents at the end of the year
Reconciliation of closing cash balances to the statement of financial position:
Cash and cash equivalents
Bank overdraft
Closing cash balances
a
b
c
c
1,803
(1,138)
(416)
249
991
1
1,241
1,271
(30)
1,241
997
(868)
(786)
(657)
991
(5)
329
330
(1)
329
a Cash flows from operating activities are lower than forecast as a result of the decision to pay a higher proportion of the cost of milk to
Farmer Shareholders earlier in the Season, coupled with lower earnings before interest, tax, depreciation and amortisation.
b The net cash outflow from investing is lower than forecast predominately due to lower than forecast capital spend.
c Net cash outflows from financing activities are higher than forecast primarily due to the Group holding of lower cash balances, and instead
paying down borrowings.
76
FONTERRA ANNUAL REVIEW 2013
INDEPENDENT AUDITORS’ REPORT
TO THE SHAREHOLDERS OF FONTERRA CO-OPERATIVE GROUP LIMITED
Report on the Summary Financial Statements
We have audited the accompanying summary financial statements of Fonterra Co-operative Group Limited (“the Company”) on pages 56 to 76
which comprise the statement of financial position as at 31 July 2013, the income statement, statement of comprehensive income, statement
of changes in equity and cash flow statement for the year then ended, and the notes to the financial statements, which are derived from the
audited financial statements of the Company for the year ended 31 July 2013. The Group comprises the Company and the entities it controlled
at 31 July 2013 or from time to time during the financial year.
The summary financial statements do not contain all the disclosures required for full financial statements under generally accepted accounting
practice in New Zealand. Reading the summary financial statements, therefore, is not a substitute for reading the audited financial statements
of Fonterra Co-operative Group Limited.
Directors’ Responsibility for the Summary Financial Statements
The Directors are responsible for the preparation of the summary financial statements in accordance with FRS-43: Summary Financial
Statements (“FRS-43”).
Auditors’ Responsibility
Our responsibility is to express an opinion on the summary financial statements based on our procedures, which were conducted in accordance
with International Standard on Auditing (New Zealand) 810: Engagements to Report on Summary Financial Statements.
We carry out other assignments on behalf of the Company and the Group in the areas of other audit related services, transaction and other
advisory services. Partners and employees of our firm may deal with the Company and the Group on normal terms within the ordinary course
of trading activities of the Company and the Group. These matters have not impaired our independence as auditors of the Company and the
Group.
Opinion on the Company’s Financial Statements
Our audit of the financial statements for the year ended 31 July 2013 was completed on 24 September 2013 and our unmodified opinion was
issued on that date.
Opinion on the Summary Financial Statements
In our opinion, the summary financial statements have been correctly derived from the audited financial statements of Fonterra Co-operative
Group Limited for the year ended 31 July 2013 and are consistent, in all material respects, with those financial statements, in accordance with
FRS-43.
Restriction on Distribution or Use
This report is made solely to the Company’s shareholders, as a body, in accordance with Section 205(1) of the Companies Act 1993. Our audit
work has been undertaken so that we might state to the Company’s shareholders those matters which we are required to state to them in an
auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other
than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed.
Chartered Accountants, Auckland
24 September 2013
FONTERRA ANNUAL REVIEW 2013
77
STATUTORy INFORMATION
FOR THE YEAR ENDED 31 JULY 2013
CURReNT CReDIT RaTING STaTUS
Standard & Poor’s has rated the Company A+ with a rating outlook of stable. Fitch has rated the Company AA- with a rating outlook of stable.
Retail Bonds have been rated the same as the Company by both Standard & Poor’s and Fitch. Capital Notes which are subordinate to other
Fonterra debt issued are rated A by Standard & Poor’s and A+ by Fitch.
exChaNGe RULINGS aND WaIveRS
NZX Limited (NZX) has ruled that Capital Notes do not constitute “equity securities” under its Listing Rules (Rules). This means that where
Capital Notes are quoted on NZX’s debt market (NZDX), the Company is not required to comply with certain Rules which apply to an issuer of
quoted equity securities.
NZX has granted waivers from NZDX Rule 11.1.1 to enable Fonterra to decline to accept or register transfers of Capital Notes or Retail Bonds
(NZDX listed debt securities FCGHA, FCG010 and FCG020) if such transfer would result in the transferor holding or continuing to hold Capital
Notes or Retail Bonds with a face value or principal amount of less than $5,000 or if such transfer is for an amount of less than $1,000 or
multiple thereof. The effect of these waivers is that the minimum holding amount in respect of the Capital Notes and Retail Bonds will at all
times be $5,000 in aggregate and that Retail Bonds can only be transferred in multiples of $1,000.
NZX has also granted a waiver from NZDX Rule 5.2.3 in respect of Retail Bond FCG020 to enable that Bond to be quoted on the NZDX market
even though it did not meet the requirement that at least 500 members of the public held at least 25% of the Bonds being issued.
78
FONTERRA ANNUAL REVIEW 2013
NON-gAAP MEASURES
Fonterra uses several non-GAAP measures when discussing financial performance. For definitions of non-GAAP measures used by Fonterra,
refer to page 82. These are non-GAAP measures and are not prepared in accordance with NZ IFRS.
Management believes that these measures provide useful information as they provide valuable insight on the underlying performance
of the business.
They are used internally to evaluate the underlying performance of business units and to analyse trends. These measures are not
uniformly defined or utilised by all companies. Accordingly, these measures may not be comparable with similarly titled measures used
by other companies. Non-GAAP financial measures should not be viewed in isolation nor considered as a substitute for measures reported
in accordance with NZ IFRS.
Reconciliations for the NZ IFRS measures to certain non-GAAP measures referred to by Fonterra are detailed below.
Reconciliation from the NZ IFRS measure of profit for the year to Fonterra’s normalised EBITDA
Profit for the year
Add: Depreciation
Add: Amortisation
Add: Net finance costs
(Less)/add: Taxation (credit)/expense
Total EBITDA
Add: Costs associated with closure of Cororooke plant in Australia
Add: Costs associated with Group Strategy Right-Sizing
Add: Costs associated with Group Strategy Refresh
Add: Impairment losses recorded in equity accounted investees
Add: Other
Total normalisation adjustments
Normalised EBITDA
Reconciliation from the NZ IFRS measure of profit for the year to Fonterra’s normalised EBIT
Profit for the year
Add: Net finance costs
(Less)/add: Taxation (credit)/expense
Total EBIT
Add: Normalisation adjustments (as detailed above)
Total normalised EBIT
Reconciliation from the NZ IFRS measure of profit for the year to Fonterra’s normalised earnings per share
Profit for the year
Add: Normalisation adjustments (as detailed above)
(Less)/add: Tax on normalisation adjustments
Total normalised earnings
Less: Share attributable to non-controlling interests
Net normalised earnings attributable to equity holders of the Parent
Weighted average number of Shares (thousands of Shares)
Normalised earnings per share ($)
GROUP $ MILLION
31 JULY 2013
31 JULY 2012
736
444
86
269
(68)
1,467
30
38
–
–
(3)
65
1,532
624
410
82
310
53
1,479
–
–
30
8
3
41
1,520
GROUP $ MILLION
31 JULY 2013
31 JULY 2012
736
269
(68)
937
65
1,002
GROUP $ MILLION
31 JULY 2013
736
65
(17)
784
(20)
764
1,615,311
0.47
624
310
53
987
41
1,028
31 JULY 2012
624
41
(7)
658
(16)
642
1,476,220
0.43
FONTERRA ANNUAL REVIEW 2013
79
FIVE yEAR SUMMARy
SHAREHOLDER SUPPLIER RETURNS
Payout
Farmgate Milk Price (per kgMS)1
Dividend (per Share)2
Cash payout3
Retentions (per Share)4
OPERATING PERFORMANCE
Average commodity prices (US$ per MT FOB)
Whole Milk Powder5
Skim Milk Powder5
Butter5
Cheese6
Average NZD/USD spot exchange rate applying throughout the year7
Fonterra’s average NZD/USD conversion rate8
Revenue ($ million)
Ingredients and other revenue
Consumer revenue
Total revenue
Dairy ingredients manufactured in New Zealand (000s MT)
Total ingredients sales volume (000s MT)
Segment earnings ($ million)9
New Zealand Milk Products
ANZ
Asia/AME
Latam
Eliminations
Segment earnings
Normalisation adjustments
Normalised segment earnings
Profit for the year attributable to Shareholders ($ million)10
Earnings per share11
JULY 2013
JULY 2012
JULY 2011
JULY 2010
JULY 2009
5.84
0.32
6.16
0.14
3,394
3,625
3,550
4,124
0.82
0.80
13,926
4,717
18,643
2,312
2,765
480
93
207
137
20
937
65
1,002
718
0.44
6.08
0.32
6.40
0.10
3,359
3,285
3,546
3,498
0.80
0.77
14,824
4,945
19,769
2,353
2,660
477
218
182
124
(14)
987
41
1,028
609
0.41
7.60
0.30
7.90
0.25
3,606
3,321
4,344
4,285
0.77
0.72
14,623
5,248
19,871
2,143
2,486
419
278
193
121
17
1,028
(23)
1,005
754
0.53
6.10
0.27
6.37
0.23
2,905
2,658
3,033
3,819
0.71
0.67
11,818
4,908
16,726
2,058
2,392
496
299
176
107
–
1,078
(174)
904
669
0.50
4.72
0.48
5.20
0.01
2,446
2,133
1,993
3,114
0.60
0.67
10,987
5,048
16,035
2,021
2,310
584
240
63
106
(3)
990
29
1,019
599
0.48
1 From the beginning of the 2009 Season the Farmgate Milk Price has been determined in accordance with the Farmgate Milk Price Manual and is independently audited.
2 On 18 November 2009, Shareholders approved stages one and two of the capital structure changes. As a result of the changes to the capital structure all Shares are
eligible to receive a dividend if declared by the Board. Previously in addition to the Farmgate Milk Price, returns to Shareholder Suppliers were by way of the Value Return
payment. The Value Return payment was calculated per kgMS. The dividend payment is calculated on a per Share basis using number of Shares at 31 May.
3 Average Payout for a 100% share-backed supplier.
4 Retentions are calculated as net profit after tax attributable to Co-operative Shareholders at 31 July divided by the number of Shares at 31 May, less dividend per Share.
Profit after tax attributable to Shareholders for 2009 has been restated to recognise the tax effects of distributions to Shareholders within tax expense in the income
statement. This was previously recorded directly in equity.
5 Source: Fonterra Farmgate Milk Price Statements (2013-2011) representing the weighted-average United States Dollars (USD) contract prices of Reference Commodity
Products.
6 Source: Oceania Export Series, Agricultural Marketing Service, US Department of Agriculture.
7 Average spot exchange rate is the average of the daily spot rates for the financial period.
8 Fonterra’s average conversion rate is the rate that Fonterra has converted net US dollar receipts into NZ dollars based on the hedge cover in place.
9 Represents segment earnings before unallocated finance income, finance costs and tax. The year ended 31 July 2012 has been restated to reflect changes to the
organisation of business units within reported segments which occurred in the year ended 31 July 2013. The years ended 31 July 2011 and 31 July 2010 have been restated
to reflect changes to the organisation of business units within reported segments which occurred in the year ended 31 July 2012. For 2009, normalisation adjustments
consists of normalisation adjustments as reported in the segment note plus impairment of equity accounted investees.
10 Profit after tax attributable to Shareholders for 2009 has been restated to recognise the tax effects of distributions to Shareholders within tax expense in the income
statement. This was previously recorded directly in equity.
11 On 27 February 2013, Fonterra announced a non-cash bonus issue of one Share for every 40 Shares held. The bonus issue increased the number of Shares on issue by
40.4 million. The record date for the bonus issue was 12 April 2013 and the issue date was 24 April 2013. Earnings per share for the years ended 31 July 2012, 31 July 2011,
31 July 2010 and 31 July 2009 have been restated as if the bonus issue was effective on at the beginning of the periods presented.
80
FONTERRA ANNUAL REVIEW 2013
CAPITAL EMPLOYED ($ million)
Total assets employed
Average net assets12
Total equity
Equity excluding cash flow hedge reserve
Net interest bearing debt
Economic net interest bearing debt13
Return on net assets12
Headline debt to debt plus equity ratio14
Economic debt to debt plus equity ratio14
JULY 2013
JULY 2012
JULY 2011
JULY 2010
JULY 2009
14,373
11,135
6,748
6,830
4,227
4,467
8.4%
38.2%
39.6%
15,117
10,900
6,655
6,592
3,833
4,229
9.4%
36.8%
39.1%
15,530
10,772
6,541
6,025
3,766
4,331
9.3%
38.5%
41.8%
14,169
10,433
5,667
5,526
4,268
4,494
8.7%
43.6%
44.9%
14,117
10,975
4,805
4,635
5,166
5,221
9.2%
52.7%
53.0%
JULY 2013
JULY 2012
JULY 2011
JULY 2010
JULY 2009
STAFF EMPLOYED
Total staff employed (000s, permanent full time equivalents)
New Zealand
Overseas
17.5
11.2
6.3
17.3
11.0
6.3
16.8
10.8
6.0
15.8
9.8
6.0
15.6
9.5
6.1
SEASON STATISTICS15
Total NZ milk collected (million litres)
Highest daily volume collected (million litres)
NZ Shareholder supply milksolids collected (million kgMS)
NZ contract supply milksolids collected (million kgMS)
NZ milksolids collected (million kgMS)
Total number of Shareholders at 31 May
Total number of sharemilkers at 31 May
Total number of Shares at 31 May (million)
JULY 2013
JULY 2012
JULY 2011
JULY 2010
JULY 2009
16,673
84.8
1,424
39
1,463
10,668
3,449
1,598
16,951
81.2
1,463
30
1,493
10,578
3,595
1,433
15,427
76.8
1,320
26
1,346
10,485
3,928
1,377
14,746
72.3
1,256
30
1,286
10,463
3,733
1,343
14,764
73.7
1,227
54
1,281
10,537
3,990
1,216
12 Return on net assets (RONA) is derived by dividing profit before normalisation adjustments, net finance costs and tax (as reported in financial statements) by 13 month
average net assets (excluding net debt and deferred tax).
13 Economic net interest bearing debt reflects the effect of debt hedging in place at balance date.
14 Headline debt to debt plus equity ratio is before taking account of the effect of debt hedging. Economic debt to debt plus equity includes the effect of debt hedging.
15 All Season statistics are based on the 12 month milk Season of 1 June – 31 May.
FONTERRA ANNUAL REVIEW 2013
81
glOSSARy
NON-GaaP MeaSUReS
Fonterra refers to non-GAAP financial measures throughout the Annual Review, and these measures are not prepared in accordance with
NZ IFRS. The definitions below explain how Fonterra calculates the non-GAAP measures referred to throughout the Annual Review.
Average net assets
Constant currency
is calculated as net interest bearing debt and total equity less deferred tax averaged over a rolling
13 month period.
means a measure that eliminates the effect of exchange rate movements. Constant currency variances
are calculated by taking the current year financial measure in local currency less the prior year
financial measure in local currency and dividing this by prior year financial measure in local currency
using the prior year local currency to the New Zealand Dollar exchange rate.
Contribution margin
is calculated as segmental gross profit less distribution, selling and marketing expenses.
EBIT
EBIT margin
EBITDA
means earnings before interest and tax (EBIT) and is calculated as profit for the year before net finance
costs and tax.
is calculated as profit for the year before net finance costs and tax and divided by revenue.
means earnings before interest, tax, depreciation and amortisation and is calculated as profit for the
year before net finance costs, tax, depreciation and amortisation.
Economic debt to debt plus
equity ratio
is calculated as net interest bearing debt divided by net interest bearing debt plus equity. Net interest
bearing debt includes the effect of debt hedging, and equity excludes the cash flow hedge reserve.
Farmgate Milk Price
means the base price that Fonterra pays for milk supplied to it in New Zealand for a season.
The season refers to the 12 month milk season of 1 June to 31 May.
Net tangible assets
means total assets less total liabilities less intangible assets.
Normalisation adjustments
means transactions that are unusual by nature or size so that they materially reduce the ability of
users of the financial results to understand the ongoing performance of the Group or operating
segment to which they relate. Unusual transactions by nature are the result of a specific event or
set of circumstances that are outside the control of the business, or relate to the major acquisitions
or disposals of an asset/group of assets or business. Unusual transactions by size are those that are
unusually large in a particular accounting period that is not expected to repeat regularly to the same
extent in future periods.
Normalised EBIT
means profit for the year before net finance costs, tax and normalisation adjustments.
Normalised EBIT margin
Normalised EBITDA
means profit for the year before net finance costs, tax and normalisation adjustments divided
by revenue.
means profit for the year before net finance costs, tax, depreciation, amortisation and
normalisation adjustments.
Normalised segment earnings
means segmental profit the year before depreciation, amortisation, net finance costs,
taxation expense, and normalisation adjustments.
Payout
Retentions
Return on Capital Employed
means the total cash payment to Shareholder suppliers. It is the sum of the Farmgate Milk Price
(kgMS) and the dividend per Share. Both of these components have established policies and
procedures in place on how these are determined.
means net profit after tax attributable to Shareholder suppliers divided by the number of Shares
at 31 May, less dividend per Share.
means normalised EBIT divided by capital employed. Capital employed is calculated as monthly
average net assets excluding net debt, derivatives, taxes, and investments (other than equity
accounted investments).
Segment earnings
means segmental profit for the year before net finance costs, tax and normalisation adjustments.
82
FONTERRA ANNUAL REVIEW 2013
OTheR TeRMS
ANZ
ASEAN/MENA
Asia/AME
Auditor
CO2e
Co-operative
DIRA
means Fonterra’s reportable segment that operates in Australia and New Zealand.
means Fonterra’s business unit that operates in South East Asia, the Middle East and North Africa.
There are some countries that fall within the ASEAN/MENA business unit that are located outside
these geographical regions such as Sri Lanka and Mauritius. It is part of the Asia/AME reportable segment.
means Fonterra’s current reportable segment that operates in Asia, Africa and the Middle East.
means PricewaterhouseCoopers, the auditor of Fonterra and the Fund.
means greenhouse gas emissions, based upon accepted International Dairy Federation methodology.
means Fonterra.
means the Dairy Industry Restructuring Act 2001 (New Zealand).
Farmer Shareholder
means a Shareholder who is supplying milk to Fonterra.
Fonterra
Fonterra Board
Fonterra Group
FSF or the Fund
Foodservice
FY
GDT™
Greater China
IFRS
Income Tax Act
kgMS
KT
Latam
Milksolids
MT
NZ GAAP
NZ Milk Products
or NZMP™
means Fonterra Co-operative Group Limited and, where relevant, includes the other members
of the Fonterra Group.
means the Board of Directors of Fonterra.
means Fonterra and its subsidiaries.
means the Fonterra Shareholders’ Fund.
means the business of preparing meals for consumption outside of homes.
means financial year.
means GlobalDairyTrade™, the auction platform for internationally-traded commodity dairy products.
means Fonterra’s business unit that operates in China (including Hong Kong), Taiwan and India. It is
part of the Asia/AME reportable segment.
means International Financial Reporting Standards.
means the Income Tax Act 2007 (New Zealand).
means a kilogram of milksolids.
means a kilo tonne (being 1,000 MT).
means Fonterra’s reportable segment that operates in Latin America.
means the valued components of milk which are determined by the Fonterra Board from time to time.
means a metric tonne.
means generally accepted accounting practice in New Zealand.
means Fonterra’s reportable segment which collects and processes milk from New Zealand farmers,
manufactures and markets dairy nutrition products (including specialty dairy ingredients and base
nutrition powders such as whole milk powder and skim milk powder) under the NZMP™ brand.
It also includes Fonterra Nutrition, Group Strategy and Optimisation, Co-operative Affairs and
Group Services.
Parent
means Fonterra Co-operative Group Limited.
RD1 or RD1 Limited
mean Fonterra’s rural supplies retail business that operates in New Zealand.
Season
Share Standard
means a period of 12 months to 31 May (or such other date as the Fonterra Board may specify from
time to time) in each year.
means the number of Shares a Farmer Shareholder is required from time to time to hold as determined
in accordance with the Constitution, one Share for each kilogram of milksolids obtainable from milk
supplied to Fonterra by a Farmer Shareholder in the relevant Season (excluding milk supplied on
contract supply). The Fonterra Board may permit the Share Standard to be satisfied through the
holding of both Shares and Vouchers.
Shareholder
means a holder of Shares.
Trading Among Farmers or TAF
means the Share trading system known as Trading Among Farmers.
UHT
means fresh milk that is sterilised by heating it to very high temperatures. UHT milk does not
require refrigeration.
FONTERRA ANNUAL REVIEW 2013
83
Directory
FONTERRA CO-OPERATIVE GROUP LIMITED
PRIVATE BAG 92032
AUCKLAND 1142
NEw ZEALAND
64 9 374 9000 (PhONE)
64 9 374 9001 (FAX)
ShAREhOLDER AND SUPPLIER SERVICES
FREEPhONE 0800 65 65 68
FOR GLOBAL LOCATIONS VISIT www.FONTERRA.COM
84
FONTERRA ANNUAL REVIEW 2013
This document is printed on an environmentally responsible paper produced
using elemental chlorine free (ECF)FSC® certified mixed source pulp, sourced
from well managed and legally harvested forests, and manufactured under
the strict ISO14001 environmental management system.
GALLAGHER FARM
PATUMAHOE