FROM
THE
SOURCE
FONTERRA ANNUAL REVIEW 2014
FONTERRA CO-OPERATIVE GROUP LIMITED
LETTER FROM THE CHAIRMAN
LETTER FROM THE CHIEF EXECUTIVE
FOOD SAFETY AND QUALITY
GROUP OVERVIEW
BUSINESS REVIEW
SUSTAINABILITY
AND SOCIAL RESPONSIBILITY
CORPORATE GOVERNANCE
BOARD OF DIRECTORS
FONTERRA MANAGEMENT TEAM
SUMMARY FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT
STATUTORY INFORMATION
FIVE YEAR SUMMARY
NON-GAAP MEASURES
GLOSSARY
2
12
26
28
30
42
52
60
62
64
82
83
84
86
87
FONTERRA CO-OPERATIVE GROUP LIMITED ANNUAL REVIEW 2014
This is a defining year for our
Co-operative. We are confident
about our performance and
our direction.
We live by our values. Our
strategic goals are becoming
reality. We have hit all the
targets for global scale in
processing and exporting.
Now is the time to set our sights
even higher.
Next step – a globally relevant
Co-operative, the trusted source
of dairy excellence.
TO
THE
FUTURE
1
North Island
volumes were up
nine per cent while
the South Island
delivered a seven per
cent rise in volumes.
FINAL CASH PAYOUT
$8.50
$8.40KGMS
FARMGATE MILK PRICE
DIVIDEND PER SHARE
10CPS
CHAIRMAN’S LETTER FOR THE YEAR ENDED 31 JULY 2014
LETTER
FROM
THE
CHAIRMAN
Our farmers took advantage of good
conditions to produce 1,584 million
kgMS, eight per cent more than last
season, to make the most of stronger
prevailing prices early in the season.
North Island volumes were up nine per
cent at 969 million kgMS, while the
South Island delivered a seven per cent
rise in volumes to 615 million kgMS.
Our strong Farmgate Milk Price is the
direct result of a determined push to
achieve the highest possible revenue.
Despite it being a demanding year,
we delivered a record $22.3 billion
in revenue.
Our high production, especially around
the extended peak, placed limits on our
options for processing milk into higher
returning products. The relative increase
in the price of Reference Commodity
Products compared to the price of
Non-Reference Commodity Products,
was significant for most of the year and
this had a substantial impact on stream
returns. Over the peak, the ideal would
have been to produce only Reference
Commodity Products, but capacity
constraints limited our ability. For Non-
Reference Commodity Products we
were compelled to produce, the higher
cost of milk at the farmgate meant
margins were squeezed and in some
cases selling prices were below actual
milk costs.
In the second half of the year, this
divergence in prices decreased, but too
late to offset the earlier financial impact.
The true strength of our Co-operative
is measured by our resilience. We have
come through a very demanding year
and continued to stay on track with our
strategy, focusing on securing the best
returns to our farmer shareholders.
It was a year of highs and lows. We saw
prices come off their first-half peaks in
response to growth in supply. Demand
tapered off as a result of a build in
customers’ inventory and the New
Zealand dollar remained at historically
high levels. A very good spring saw
our farmer shareholders achieve record
milk production through an extended
peak, stretching our production
capacity for whole milk and skim milk
powders which inform the Farmgate
Milk Price. This led to early impacts on
stream returns from the less valuable
products we were forced to make.
We also rebuilt consumer, customer
and market confidence following the
precautionary recall of Whey Protein
Concentrate (WPC80).
Our final Cash Payout for the 2013/14
season of $8.50 for a fully shared up
farmer comprises a Farmgate Milk Price
of $8.40 per kilogram of milk solids
(kgMS) and a dividend of 10 cents per
share. It is our highest Cash Payout
to date, with the Farmgate Milk Price
on its own representing a $13.3 billion
distribution to farmers. We know from
our 2010 New Zealand Institute of
Economic Research (NZIER) study
that the average dairy farmer spends
over half of their income on goods
and services to support on-farm
operations, benefiting both rural and
urban communities.
2
FONTERRA ANNUAL REVIEW 2014
FONTERRA ANNUAL REVIEW 2014
3
CHAIRMAN’S LETTER FOR THE YEAR ENDED 31 JULY 2014
Our farmers’ milk
is the starting point
for our supply chain
and it completely
underpins our volume
and value strategy.
In February 2014, we announced that
we would accelerate investment in new
capacity so we have the manufacturing
flexibility to take the best advantage
of relative market prices, including
during the peak. Post balance date, we
announced $555 million of investments
to continue our capacity expansion.
Our result and final Cash
Payout for the year has been
very good given the volatile
market conditions.
We can expect volatility to remain
through the coming season, given
the downward trend in prices and
the geopolitical events which are
unsettling the market. What is
important, however, is to look beyond
these cyclical events to see the overall
positive outlook for demand.
4
FONTERRA ANNUAL REVIEW 2014
0.30
0.10
0.27
0.32
0.32
6.10
7.60
6.08
5.84
8.40
2010
2011
2012
2013
2014
CASH PAYOUT
Dividend ($ per share)
Farmgate Milk Price ($ per kgMS)
Higher milk volumes support higher
sales volumes, and we have grown
revenue from $13.9 billion in 2002
to today’s $22.3 billion in the face of
Fonterra’s NZD/USD average conversion
rate that has gone from an average
44 cents in 2002 to 81 cents in 2014.
This revenue growth represents a
compound annual growth rate of
four per cent.
In simple terms we have grown
revenue by 60 per cent since 2002.
Adjusted for 2014 prices, the growth
is still a very credible 20 per cent
over the same period. Included in this
revenue is a growing contribution
from our consumer and foodservice
businesses. They achieved $6.3 billion
in revenue this year compared to the
$4.6 billion earned in 2002/03.
The total Cash Payout, adjusted for
inflation, has grown at an annual
compound rate of five per cent while
the payout per kilogram of milk solids
has a compound annual growth rate of
four per cent.
This global dairy demand is forecast by
market commentators to grow by 100
billion litres by 2020. We are investing
ahead of this growth demand, ensuring
we have the capacity in place to capture
the opportunities it represents. The
more competitive our costs, from
the farm onwards, the better our
prospective returns.
The tighter budgets farmers will need
to work within in the 2014/15 season
will be a real challenge, reinforcing the
need to use and adapt farming systems
designed to protect our low-cost,
predominantly pastured-based industry.
We need to stay focused on our global
competitiveness both within and from
the farmgate and right across our supply
chain to ensure we can capitalise on the
positive view of global demand.
THE BENEFITS OF BELONGING
Our farmers’ milk is the starting point
for our supply chain and it completely
underpins our volume and value
strategy. We have leveraged it to create
the global presence that takes their milk
to market and it has won us our place as
the world’s largest dairy exporter.
Our farmers’ efforts have built our global
scale. Since 2002, Fonterra farmer
shareholders have achieved an average
annual compound growth of three per
cent in milk solids. This means we have
over 40 per cent more milk than we did
in the first year of Fonterra.
INDEPENDENT REVIEW BUILT CONFIDENCE
The decision of the Board to undertake a robust, independent and open inquiry was fundamental to our recovery from the WPC80
precautionary recall. The independent and impartial review, shared publicly, confirmed we have robust food safety and quality
systems and standards but was frank about what we could have done better.
We did what was right when faced with the evidence we had at the outset of the recall. We make no apology for putting customer
and consumer safety first. While we ultimately received the all clear on the safety of the product recalled, we did not use this as a
signal to relax. Instead, we have taken the opportunity to identify how we can further improve our food safety and quality systems
and ensure full compliance with them. All the learnings from the experience have gone into the development of an extensive
programme aimed at creating a new benchmark in food safety and quality.
The Board has oversight of the work to implement the recommendations set down by the Independent Inquiry Committee and
Fonterra’s own internal review. The work needed to address the recommendations is now well underway.
A follow-up review by the Independent Inquiry Committee has both confirmed progress and complimented Fonterra on taking the opportunity
to further lift standards. This open approach has been a clear factor in the confidence that our farmer shareholders, regulators, customers
and consumers continue to have in Fonterra. It is this confidence in our integrity that supports our continued progress with our strategy.
It is important for New Zealand as a whole that producers and regulators work closely together to safeguard New Zealand’s
reputation for high-quality food. It is critical that together we ensure industry and government resources are in place to stay ahead
of the rapidly evolving demands of customers, consumers and regulators in all of our global markets.
OUR GLOBAL MILK POOLS WILL CREATE FULLY INTEGRATED
SUPPLY CHAINS FROM FARMGATE TO THE CONSUMER.
MILK
POOLS
R&D,
QUALITY
& SAFETY
PROCESS
& PACK
SALES &
DISTRIBUTION
EXPORT
& SHIP
CONSUMER
The Fonterra Milk
Collection smartphone
farmer app was
introduced in 2014.
FONTERRA ANNUAL REVIEW 2014
5
CHAIRMAN’S LETTER FOR THE YEAR ENDED 31 JULY 2014
Farmers are always
the first to roll
their sleeves up
when something
needs doing in the
neighbourhood, on
their own or through
their Co-operative.
THE BENEFITS OF BELONGING
(CONTINUED)
Our consistent performance to date is
important to our future as it gives our
farmer shareholders the confidence
to grow supply. We aim to get better
year-on-year to deliver sustainable
returns. But it is just as important for
our farmer shareholders to feel more
than a financial connection to their
Co-operative, especially given that there
are competitors keen to secure their
supply. They should be able to look to us
to help them grow if they want to, and
to run profitable businesses through the
different phases of their farming careers.
Our farmer shareholders can
expect a lot more from us in the
new financial year as we support
them to be more cost competitive
through using our Co-operative’s
collective strength and bringing
them better ways to manage
their business with us.
CO-OPERATIVE SPIRIT IN ACTION
There are two sides to Co-operative
Spirit – one of our core values. One side
is the idea of the collective strength that
comes from working together to a single
purpose. The other side is who we are as
a community of people.
Our collective strength is well
known, but our scale can sometimes
overshadow our Co-operative’s
contribution as a community of people.
The work Fonterra is doing here in New
Zealand is a good example. Farmers are
always the first to roll their sleeves up
when something needs doing in the
neighbourhood, on their own or through
their Co-operative. People have pitched
in for generations, which is why we have
such good networks of local community
centres, sport and service clubs in rural
New Zealand.
Thanks to Fonterra’s scale this
tradition of pitching in has been able
to grow from informal local efforts to
more organised national or regional
programmes. Our farmers are solidly
behind these programmes as funders
and, in many cases, leading or helping
on these projects. Catchment Care,
which looked after local water quality
initiatives, has evolved to become
our Living Water partnership with the
Department of Conservation. Our
KickStart Breakfast partnership with
Sanitarium began running two days a
week in low-decile schools in 2009. In
the 2014 financial year, it was extended
to five days a week and was offered to
all schools following financial support
from Government.
Farmer shareholders have turned out
to every rollout event of Fonterra
Milk for Schools across New Zealand.
It’s their milk that is the backbone
of this very worthwhile programme
that provides milk to around 170,000
children. They are also out there
supporting local causes through our
Grass Roots Programme, which funds
local projects near our sites and in our
farmers’ communities.
As community people, our farmer
shareholders have also stepped up to
the challenge of sustainable farming.
They led by example in the rollout of
the Clean Streams Accord of 2003 and
have been working on water quality
improvements since then. We have seen
significant capital and hours of work
invested in crossings, culverts, new
effluent systems and riparian planting.
This translates into tangible and
measurable results, such as the 23,300
kilometres of significant waterways that
now have stock excluded from them.
A further 9,000 km of smaller streams
and wetlands are also stock excluded.
This outstanding achievement more
than underlines their commitment to
sustainable dairying and improved
water quality.
It is also important to acknowledge the
many Fonterra employees around New
Zealand and around the world who also
give their time and talent to countless
charities and community causes. They
are quick to volunteer, to fundraise and
to step up with big and small projects.
We are a richer Co-operative because of
this spirit.
6
FONTERRA ANNUAL REVIEW 2014
MILK PRICE MATHS
The final Farmgate Milk Price is 53 cents per kgMS lower than the price calculated under the Farmgate Milk Price Manual.
It is a 17 cent reduction on the 70 cents gap in the forecast by the Board in December 2013 and reflects the improved relative
stream returns between powders and other products in the second half of the year.
The Board exercised its discretion under the Constitution in order to protect the Co-operative by paying a lower Farmgate
Milk Price than the price calculated under the Farmgate Milk Price Manual which would have required borrowing. Our
decision to use our discretionary power this season should not be taken as an indication we will do so again in the future.
We will always act in the best interests of the Co-operative.
The reason for the gap is straightforward. The Farmgate Milk Price Manual calculation is based on a notional and efficient
competitor processing only milk powder and related product streams such as butter and Anhydrous Milk Fat (AMF)1. It
effectively sets high efficiency benchmarks as the notional competitor has no capacity constraints. Fonterra, this season,
had capacity constraints, which meant not all of the high milk flows supplied during the extended peak could be converted
into the higher returning Reference Commodity Products which inform the Farmgate Milk Price Manual calculation.
Reference Commodity Products are milk powder and related streams. These products are chosen because powders account
for more than half the global trade in dairy products, most new investment in New Zealand has been in milk powder plants
and because in the medium term, the highest returns are expected to come from powders.
SETTING SIGHTS ON
GOVERNANCE
It is important to sincerely thank
Jim van der Poel, who is retiring as a
director after 12 years of very dedicated
and thoughtful service. Jim has been
conscientious and hard-working,
bringing his deep knowledge of dairying
and business to the Board table.
Our strength as a Co-operative relies on
farmers having the opportunity to move
from the cowshed to the boardroom.
Our scale requires the next generation
of farmers to set their sights on local
leadership and ultimately a Fonterra
directorship, and to understand what
is required to get there.
They need to take advantage of our
Governance Development Programme
which is a good stepping stone
to gaining the wider governance
experience on other commercial boards
that potential directors should have.
Our farmers are encouraged to look at
the skills matrix published by the Board
each year. These encourage younger
leaders in their communities to build
relevant experience to equip themselves
for leadership roles in our Co-operative.
DEVELOPMENTS
Post balance date we announced
significant progress with our strategy
to build volume and value, especially in
our key strategic market of China. Our
Beingmate development opens the door
to higher sales of our branded Anmum™
product, as well as higher sales of
ingredients from New Zealand, Australia
and our milk pool in Europe.
This is a further example of Fonterra’s
ability to form strategic partnerships
that grow volume and value and
leverage international milk pools.
It follows on from our alliance with
A-Ware in the Netherlands, which
provides us access to high-quality
whey protein and lactose for advanced
nutrition applications, and our Dairy
Crest alliance to market and sell
products for the fast-growing infant
food market.
We also continue to invest in growing
capacity in New Zealand to increase our
product flexibility and to accommodate
increases in milk growth. Our new drier
at Pahiatua comes on stream in the
2016 financial year adding 2.4 million
litres per day of additional capacity in
the lower North Island. We are keeping
pace with foodservice demand through
the new UHT plant at Waitoa, additional
cream cheese production capacity at
Te Rapa and projects expanding
mozzarella and slice-on-slice cheese
production at Clandeboye and Eltham.
The mix of powders and specialty
products capacity enables us to meet
demand that is growing across a range
of products, maintain flexibility in what
we make and ultimately ensure our
farmers’ milk flows into the highest-
returning products.
Each of these projects adds
employment in rural economies, with
Fonterra creating 570 jobs in the past
three years. This includes 110 roles at
Darfield, 44 at Studholme and 90 in
the Waikato for our UHT plant. We
have increased the number of tanker
operators by 120 over the same period.
The figures exclude temporary seasonal
employment opportunities and they
reinforce the value of the dairy sector
as an employer.
NZIER’s 2010 study estimated that the
dairy sector employs around 35,000
workers, excluding those who are
self-employed, which could be up to
10,000 people. The study determined
dairy provides more jobs than each
of the finance and accommodation
sectors, around 65 per cent more than
the sheep and beef farming sector, 75
per cent more than the fruit growing
sector and double the jobs in the wood
processing sector. While Fonterra does
not represent the sector entirely, our
position as the sector’s largest business
reinforces our view that the growth
of our farmer shareholders and our
own growth supports a healthy rural
economy, and ultimately a vibrant
New Zealand.
1 Milk is processed into groups of products within one ‘stream’, for example, when Skim Milk Powder is made, the downstream products are butter and buttermilk powder.
Combined these products form the stream covered in stream returns for Skim Milk Powder.
FONTERRA ANNUAL REVIEW 2014
7
8
FONTERRA ANNUAL REVIEW 2014
CHAIRMAN’S LETTER FOR THE YEAR ENDED 31 JULY 2014
Investment
and innovation
have carved out
our place as the
leading supplier to
the globally traded
market for milk.
We keep seeing calls for Fonterra to
produce fewer commodities and instead
make more products that command a
premium. Those comments miss the
point that our strategy emphasises both
volume and value for good reason.
The raw milk that goes into farm vats
is highly perishable, which is why
generations of investments by farmers
have built up the processing assets
which enable that milk to be exported
around the world. That is how
New Zealand earned its reputation for
high-quality dairy exports. Investment
and innovation have carved out our
place as the leading supplier to the
globally traded market for milk.
Our volume and value strategy
works for Fonterra and it works for
the economy. Commodities might
not be fashionable, but they are the
foundations of our economy with
dairying, bringing $13.3 billion back to
the economy for the season through
Fonterra’s Farmgate Milk Price and
another $160 million through the
dividend on our Fonterra shares and
units, made possible from profits by
our higher margin operations.
We should not forget that our economic
contribution goes beyond our payout.
We are a substantial employer with
more than 11,000 people in New
Zealand taking a pay packet home to
their families, and we employ more
than 6,000 people offshore. We are also
a significant purchaser of goods and
services including packaging, energy,
transport, telecommunications and
other business needs, sourcing most of
these in New Zealand.
Given our economic contribution,
it is important our strategy is more
clearly understood. Our ingredients
operations drive cash for Fonterra and
the economy as a whole. Investing
in ingredients capacity enables us to
accommodate both growth and ensure
that more of our shareholders’ milk is
processed into the highest returning
ingredients products. But this is only
half the story.
Our investment strategy also sees us
creating capacity in foodservice and
consumer, both areas that command
premiums. Ultimately the aim is to
move more milk into those products.
This is all part of turning the wheel
towards higher returns from milk.
As we invest in our future, it is crucial
that we continue to invest as a country
in the research and development to
support a highly productive agricultural
sector. It is equally crucial we work
together to ensure we have food
safety and quality systems which
safeguard New Zealand’s reputation
as a trustworthy source of food for
the discerning consumer.
The new season will be demanding.
Strong global supply, geopolitical
turmoil and a lower forecast Farmgate
Milk Price are all factors to be dealt
with, but as we have shown this
financial year, the best approach in
volatile markets is to stay focused
on strategy. Its overarching aim is to
sustainably maximise our Farmgate
Milk Price, our profitability and
ultimately the highest payout
to our farmers.
I want to thank our farmer shareholders
for their support this year, especially
during the first quarter. On their
behalf I also want to acknowledge
our management team, who are
strengthening our Co-operative, setting
a new benchmark for food safety and
quality and aiming for an ambitious but
achievable goal of global relevance.
JOHN WILSON
CHAIRMAN OF THE BOARD
FONTERRA ANNUAL REVIEW 2014
9
FROM
A STRONG
FOUNDATION
This is what ambition looks like.
It is a powerful story of growth for
Fonterra and shows our volume
and value strategy at work.
It shows more milk steadily
flowing into higher-returning
products. It shows the global
milk pools strategy at work as
we move from a single source
in New Zealand to draw on
30 billion litres across five
geographies by 2025. It shows
us growing returns and share
value for our farmers. It’s a
story of building on a strong
foundation to become a globally
relevant Co-operative.
Formation
REVENUE1
INGREDIENTS2
CASH
PAYOUT
MILK POOLS
(LITRES)
SHARE VALUE
(NZD)
$7.9B
$5.33
13B
$4B
1 Revenue represents external revenue.
2 For the 31 May 2003 financial year.
CONSUMER AND
FOODSERVICE2
$4.6B
37% discount to
UK mIlk price
NEW ZEALAND
MILK VOLUME ONLY
Based on $3.85 Fair
Value Share2. This was
within the range of
$3.65–$4.25 determined
by Standard & Poor’s
Ratings Services (‘S&P’)
10
FONTERRA ANNUAL REVIEW 2014
TO
A GLOBALLY RELEVANT
CO-OPERATIVE
Today
INGREDIENTS
$16B
$8.50
21B
$10B
CONSUMER AND
FOODSERVICE3
$6.3B
No discount to
UK milk price
NEW ZEALAND
AUSTRALIA
CHINA
CHILE
Market value as at
September 2014
3 Oceania, Asia and Latin America business units, excluding inter-segment revenue.
Ambition by 2025
INGREDIENTS, CONSUMER AND FOODSERVICE
$35B
DELIVER HIGH SUSTAINABLE FARMGATE
MILK PRICE AND DIVIDEND PER SHARE
30B
NEW ZEALAND
AUSTRALIA
EUROPE
CHINA
CHILE
USA
GROWING
VALUE BY
TURNING THE
WHEEL
FONTERRA ANNUAL REVIEW 2014
11
It has been a tough
year, but we are
off to a flying start
with a game changer
that really defines the
‘value’ part of our
V3 Strategy.
REVENUE
$22B
GLOBAL INGREDIENTS AND
OPERATIONS REVENUE
30%
CHIEF EXECUTIVE’S LETTER FOR THE YEAR ENDED 31 JULY 2014
LETTER
FROM
THE CHIEF
EXECUTIVE
Establishing our Global Ingredients
and Global Operations business units,
operational from 1 August 2014, brings a
more integrated approach to ingredients
manufacturing around the world. This
global grouping recognises that while
our operations are predominantly
New Zealand-based, we cannot be
New Zealand-centric, especially as we
grow our global milk pools.
The toughest challenge of all was our
precautionary recall of Whey Protein
Concentrate (WPC80) right at the start
of the financial year. Our response was
to renew our focus on food safety and
quality and seize the chance to create
and resource a four-year plan to achieve
a global benchmark in food safety and
quality. This benchmark will not be
defined by us, but by our customers
and consumers.
A benchmark based on respect for
what we do will always be stronger
than one we define ourselves. We know
the expectations of our customers
and consumers are high and we are
determined to meet them.
It has been a tough year, but it has
redefined us and we have a new year
ahead. We are off to a flying start with
a game changer that really defines the
‘value’ part of our V3 Strategy.
It has been a testing and defining year for
our Co-operative. Pressure can push you
down or propel you forward. We choose
the latter, setting us up for the future.
High milk powder prices are good
for farmers, but in our consumer and
foodservice businesses they put margins
under pressure so we focused on building
volume and value in our key markets,
especially Asia and Latin America.
Very strong milk flows and an extended
peak season stretched our powders
capacity and forced us to make
lower-returning products. We fast-
tracked investments to expand our
New Zealand capacity and undertook
immediate projects to maximise output
from existing plant. As these have come
on stream we have announced further
investments to keep us ahead of the
milk curve and provide more options
for the most profitable end use of our
farmer shareholders’ milk.
We are firmly on track with
a global view of our milk
processing and manufacturing
capacity, forming strategic
partnerships that capitalise
on the competitive advantages
of different geographies.
This gives us more flexibility with what
we make and where we make it and
lifts our operational efficiency. We can
meet customer demand and keep our
Farmgate Milk Price competitive by
having New Zealand sites focus as much
as possible on products with higher
stream returns.
12
FONTERRA ANNUAL REVIEW 2014
FONTERRA ANNUAL REVIEW 2014
13
CHIEF EXECUTIVE’S LETTER FOR THE YEAR ENDED 31 JULY 2014
We have kept
turning the volume
and value wheel,
even in more
challenging market
conditions.
Post balance date we announced that
we are establishing a global partnership
with Beingmate, a leading infant food
manufacturer in China and a long-
standing customer. Our partnership
represents a major step forward in terms
of our strategy and will increase the
volume and value of our ingredients and
branded products exported to China.
Together we will create a fully integrated
global supply chain from the farmgate to
China’s consumers, using Fonterra’s milk
pools and manufacturing sites in New
Zealand, Australia and Europe.
This global, integrated supply chain will
see more of our high-quality Anmum™
infant formula exported from here in
New Zealand. It will see more high-
value infant formula products made in
Australia for China at our Darnum plant
– a second milk pool. And it includes
a third milk pool in Europe, where
ingredients will be manufactured at our
new plant in the Netherlands in a joint
venture with A-Ware, and through an
alliance with Dairy Crest in the United
Kingdom. We will ultimately work
with Beingmate to evaluate mutual
investments in dairy farms in China.
That’s the volume side of the
partnership. Value will come from
gaining a direct line into the infant
formula market in China, which is the
biggest growth story in paediatric
nutrition in the world. It is worth around
$18 billion today and is expected to
nearly double to $33 billion1 by 2017.
Our partnership will take our relationship
with China and its consumers to a
whole new level. It will benefit Fonterra,
Beingmate and all our stakeholders and
is part of our drive to increase returns
to our farmer shareholders.
RESULTS
We have a final Cash Payout of $8.50
comprising the Farmgate Milk Price
of $8.40 per kgMS and a dividend of
10 cents per share.
For our farmer shareholders, the
Farmgate Milk Price is their best to
date. It directly reflects the very strong
dairy commodity prices for most of
the year. The total Farmgate Milk Price
distribution of $13.3 billion will be paid
out on eight per cent more milk, with
collections for the season totalling 1,584
million kgMS. The dividend will see a
further $160 million in the hands of our
farmer shareholders and unitholders.
These record milk volumes enabled
us to meet high demand and to ship
record volumes in the second and fourth
quarters of the financial year. They also
enabled a rebuild of inventory, run
low by the previous season’s drought.
With carryover stocks low, total sales
volume growth in ingredients was up
by only one per cent over the prior year
to 2.8 million MT.
Record milk volumes also meant not all
of the volume could be turned into the
most profitable products. We had no
choice but to manufacture cheese and
casein over the extended peak when
powder capacity was full. Over that
period 24 per cent of our production
was in Non-Reference Commodity
Products. In some cases, stream returns
for these products were lower and
more than the cost of the milk used
to make them. Global Ingredients and
Operations’ revenue increased by 30 per
cent to $18 billion and normalised EBIT
was down 46 per cent to $269 million.
Our Co-operative achieved record
revenue of $22.3 billion for the year.
This is a direct result of our focus on
achieving the highest possible revenue
line that is good for the Farmgate
Milk Price. A 27 per cent rise in the
cost of goods sold to $19.8 billion
constrained margins in our consumer
and foodservice businesses and on
Non-Reference Commodity Products.
This together with higher interest and
taxation resulted in net profit after tax
being 76 per cent lower, at $179 million.
Overall, our consumer and foodservice
businesses continued to achieve volume
growth despite head winds, but with
value growth eroded by tight margins,
EBIT fell in all regions. Earnings per
share, at 10 cents, were 34 cents down
on the prior year.
We have kept turning the volume and
value wheel, even in more challenging
market conditions. Foodservice growth
across Asia and China was good, growth
in Indonesia has been delivered after
our moves to unblock the supply chain,
and volume and value has grown in
Latin America. Our Oceania businesses
both struggled with high input costs,
but Australia and New Zealand are on a
firmer footing to lift their performance
in the new financial year.
1 Baby Food In China Euromonitor International report, November 2013.
14
FONTERRA ANNUAL REVIEW 2014
FONTERRA ANNUAL REVIEW 2014
15
CHIEF EXECUTIVE’S LETTER FOR THE YEAR ENDED 31 JULY 2014
How do we define
global relevance?
It means making a
difference in the lives
of two billion people
by 2025.
STRATEGY UPDATE: BECOMING
GLOBALLY RELEVANT
Looking back over the past three years,
we have packed a lot in. We have a
secure base in our capital structure, we
have locked down our growth choices
and we have made excellent progress
with our V3 Strategy, growing volume
and value.
We are confident about what we
stand for. We live by our values.
Our determination to establish
a new global benchmark in food
safety and quality, as defined by
our customers and consumers,
gives us a real sense of purpose
every day.
There is no doubt that we have hit
the milestones for scale. We are the
world’s biggest dairy processor and the
world’s largest dairy exporter. But scale
is not the limit of our ambition. Our next
step is to become a globally relevant
Co-operative.
How do we define global relevance?
It means making a difference in the
lives of two billion people by 2025
– ‘difference’ as defined by them.
Getting there means listening to them,
understanding what they want, and
delivering the innovative high-quality,
safe dairy nutrition they expect from us.
Relevance means accessing 30 billion
litres of milk from five or six high-
quality and secure milk pools in key
geographies in the world by 2025. We
have to complement our New Zealand
milk to keep growing. Our farmer
shareholders in New Zealand have
achieved average annual compound
growth of three per cent in milk solids
since 2002. That’s impressive, and
their milk completely anchors our
Co-operative’s performance. But our
New Zealand volumes are not enough
to take advantage of the predicted
global demand growth.
Relevance means aiming for $35 billion
in turnover by 2025. It’s a stretch, but we
have achieved four per cent compound
annual growth in revenue since 2002
and we hit $22.3 billion this year. It is
important to keep aiming high, to keep
turning the wheel.
Relevance means leadership in dairy
ingredients, our cash engine. We do not
take our current leadership position
in export markets for granted. Market
dynamics are changing. Ultimately,
leadership in ingredients is all about
growing returns for our farmer
shareholders by being the most efficient
milk processor in the world with the
optionality to make the most valuable
products at our peak.
Relevance is being number one or
number two in our eight core strategic
markets. We already lead in New Zealand,
Australia, Sri Lanka, Malaysia and Chile,
and in China, Brazil and Indonesia we
are focused on building scale operations.
We will grow our consumer positions,
continue to maximise our foodservice
potential and really back a lean and
focused portfolio of five brands – the
Anlene™, Anmum™, Anchor™ and
NZMP™ brands as well as our Fonterra
brand, supported by some strong regional
brands such as Soprole, Mainland™,
Fernleaf™ and Western Star™.
Relevance is our customers, consumers,
peers and stakeholders ranking us in the
top tier for reputation.
16
FONTERRA ANNUAL REVIEW 2014
GLOBAL
MILK POOLS
Our global milk pools will
allow us to reach 30 billion
litres of milk from five or six
high-quality and secure milk
pools by 2025.
50
40
30
20
10
0
48%
41%
17%
15%
8%
TOTAL
MARKET
SHARE
WHOLE
MILK
POWDER
SKIM
MILK
POWDER
BUTTER
REST OF
PRODUCTS
FONTERRA’S SHARE OF GLOBAL DAIRY EXPORTS
Figures are for the 2013/14 season. Global Dairy Exports means
the market for the cross-border trade of dairy products but
excludes trade among countries within the European Union.
CHILE
CURRENT:
0.5 B LITRES
EUROPE
TARGETING:
1.0 B LITRES
AUSTRALIA
CURRENT:
1.5 B LITRES
CHINA
TARGETING:
1.0 B LITRES
NEW ZEALAND
CURRENT:
18 B LITRES
FONTERRA ANNUAL REVIEW 2014
17
CHIEF EXECUTIVE’S LETTER FOR THE YEAR ENDED 31 JULY 2014
Strategy Update:
More progress, more to come.
We have made good progress
on our V3 Strategy this year.
It is important for our momentum
that we hit our goals, so we can
keep looking forward to the
next level.
OPTIMISING NEW ZEALAND
MILK
Millions of litres of milk produced by
our New Zealand farmers arrive at our
sites every year. Our goal is to allocate
it to the highest-returning ingredients,
foodservice or consumer products.
This year, capacity constraints over
the extended peak meant record milk
volumes could not all go into the
products earning the higher returns.
Since 2011, we have invested $658
million to increase our processing
capacity and now have a further
$946 million being invested in either
fast-tracked expansion projects or
new projects to build capacity in
powders as well as premium products.
Of this investment, $262 million is in
capacity to support foodservice and
consumer brands through growing our
mozzarella, cream cheese, slice-on-slice
cheese and UHT production.
18
FONTERRA ANNUAL REVIEW 2014
In Latin America we revised our 10-year-
old Dairy Partners Americas (DPA) joint
venture with Nestlé to better reflect
both companies’ strategies. Fonterra
now has a 51 per cent controlling stake
in DPA Brazil, with Nestlé holding the
balance. Together with a local partner,
Fonterra has taken over Nestlé’s share
of DPA Venezuela.
We are looking forward to continuing
our strong relationship with Nestlé,
while taking advantage of the new
arrangement to further drive our
volume and value growth focusing on
everyday nutrition. The changes we
have made will make our businesses
in Brazil and Venezuela even stronger.
The other changes to the DPA alliance,
including Nestlé taking control of DPA
Ecuador and the DPA milk powder
manufacturing businesses, are still
subject to regulatory approval and
due to be completed by the end of the
calendar year.
Our global partnership with Beingmate
puts our Anmum™ brand and our
high-quality dairy ingredients in a
strong position to capitalise on the
growth opportunity in China’s rapidly
growing infant formula market with a
respected local partner. It is a major
step forward in our strategy to become
a globally relevant Co-operative and
will significantly expand the availability
of high-quality dairy products to
Chinese consumers.
Having this balance of investment
between powders capacity and more
specialised products, such as those
intended for foodservice, ultimately
improves the stability of our return on
investment as well as our returns
to farmer shareholders.
All of these investments are a clear
signal to our farmer shareholders that
their milk is our top priority and we
will always aim to process it into the
most profitable products in any season.
Investments at Lichfield, Edendale and
Pahiatua alone add an additional 8.2
million litres of processing capacity per
day, coming on stream in 2015 and 2016.
TURNING THE WHEEL
Our strategic priorities in consumer
and foodservice are designed to drive
growth in value-add earnings.
To hit our goal to have 40 per cent
of volumes generated by consumer
and foodservice, we’re sharpening our
focus. Our strategy has always been
about picking where we can win. In
consumer and foodservice, this means
concentrating our focus on eight
strategic markets and going for a top
one or two position in all of them.
This means shifting from a portfolio
of more than 60 brands to putting
our innovation, marketing and sales
resources behind a tightly focused
portfolio of our proven performers
in the Anchor™, Anlene™, Anmum™,
NZMP™ and Fonterra brands. It means
playing to our strengths in dairy
nutrition so we continue to match
consumer trends with the products
consumers want in order to support
mobility, growth and development,
cognition and sustained energy.
Our partnership is intended to come
together in two phases:
• A partial tender offer to gain a stake of
up to 20 per cent in Beingmate subject
to regulatory approval. Depending
on the response to the tender
offer, Fonterra’s total investment
in the global partnership will be
approximately $615 million (including
proceeds from the joint venture in
Australia), funded through debt.
•
After the tender has been concluded
and gained regulatory approvals,
we will set up a joint venture with
Beingmate to purchase Fonterra’s
Darnum plant in Australia and we will
establish a distribution and licensing
agreement to sell our Anmum™
brand in China.
Under the joint venture, Darnum will
manufacture nutritional powders,
including infant formula and growing-
up milk powder for Beingmate as well
as Fonterra and other customers. The
Darnum joint venture will prioritise
supply to the Chinese market and also
provide supply to the rest of the world.
Fonterra will continue to run Darnum’s
day-to-day operations under a formal
management agreement. We will
also manage the supply of raw milk
to Darnum, and milk collection
agreements between Fonterra and
dairy farmers in Australia will remain
as they are today.
Beingmate, which has 80,000 retail
outlets, 30 branches across China and
20,000 maternal service consultants,
will distribute Anmum™ products
on our behalf. As a New Zealand-
made branded product, Anmum™
infant formula represents a premium
extension to Beingmate’s respected
paediatric range.
This development represents
further measurable progress
towards our Co-operative’s global
relevance. It is a game-changer
for volume, for value and for our
connection with customers and
consumers in the Chinese market.
The global partnership will enable both
partners to drive their global growth
ambitions and deliver on our shared
aim to develop a safe, secure, integrated
global dairy supply chain to meet the
needs of consumers in China.
Our farmers’ milk
will be targeted
to the highest-
returning products
in New Zealand,
where we have
significant powder
expertise and global
market share.
EXPANDING OUR MILK POOLS
It is clear that even with the consistent
milk growth achieved by our farmer
shareholders, we cannot meet global
demand from New Zealand production
alone. We are complementing
New Zealand supply with milk pools
offshore, protecting our scale so we
can be truly globally relevant.
Our farmers’ milk will be targeted
to the highest-returning products in
New Zealand, where we have significant
powder expertise and global market
share. At the same time we are tactically
expanding sources of supply to capture
the best share of market demand.
We have made positive steps forward
this year. We formed an exclusive
partnership with UK-based Dairy Crest
to market and sell two products for
the fast-growing global infant formula
market. Galacto-oligosaccharide and
demineralised whey powder, both used
in the manufacture of infant formula,
will be manufactured by Dairy Crest.
Fonterra will be the dedicated and
exclusive sales channel for the infant
formula ingredients produced.
This agreement directly aligns with our
strategy to develop leading positions
in infant formula and growing-up milk
powders and to extend and grow our
infant formula business-to-business
ingredient business in China, Europe
and other international markets
identified in our strategy.
FONTERRA ANNUAL REVIEW 2014
19
CHIEF EXECUTIVE’S LETTER FOR THE YEAR ENDED 31 JULY 2014
Having an integrated
business in China
strengthens our place
in the local market by
demonstrating our
commitment to the
local industry and
its success.
Infant formula is currently the fastest-
growing dairy category in the world and
demand is expected to remain strong,
especially in Asia. This development is a
win-win for us and for Dairy Crest.
Our alliance with Dairy Crest in the
United Kingdom also has a direct
connection to our partnership with
Beingmate. Infant formula ingredients,
along with the whey specialty
ingredients that will be manufactured
at our new plant in Heerenveen in the
Netherlands, will contribute volume
and value from our European milk pool,
complementing the Australian and New
Zealand milk pools that are so pivotal to
this development.
Our farming hubs in China are also
important to our milk pool strategy.
Our Yutian hub of four farms in the
Hebei province is fully operational,
contributing to the increased volumes
and higher prices being achieved for
our locally produced milk. To progress
development of our more integrated
dairy business in China, work is
underway at the second farm hub in
the Shanxi province.
A highlight this year was the agreement
between Fonterra and Abbott to
develop a proposed third dairy farm hub
in China. The strategic alliance, which is
subject to Chinese regulatory approval,
will leverage Fonterra’s expertise in
dairy nutrition and farming in China
and Abbott’s continued commitment
to business development in China. If
approved by authorities, it will represent
a combined investment of $342 million
and comprise up to five farms, more
than 16,000 cows and up to 160 million
litres of annual milk production by 2019.
By 2020, Fonterra aims to produce one
billion litres of milk in China. Around
one third will supply customers such
as Abbott and the remainder will flow
into our own consumer and foodservice
products. Having an integrated business
in China strengthens our place in the
local market by demonstrating our
commitment to the local industry
and its success.
Establishing global multi-hubs to
support our growth goals is not simply
about securing more milk. It is about
matching demand with the best source
of supply, drawing on competitive
advantages in each milk hub. Our
Dairy Crest agreement is one example.
Another is our A-Ware joint venture
in the Netherlands, which taps into
Europe’s natural advantage in cheese
and gives us access to high-quality
whey protein and lactose for advanced
nutrition applications.
The addition of the A-Ware joint venture
gives Fonterra access to close to one
billion litres of milk in the European
market and the plant is expected to be
ready by the end of the calendar year.
ALIGNING OUR BUSINESS
TO STRATEGY
We made some further changes to
ensure our group structure supports our
strategic platforms. Going from more of
a New Zealand focus to achieving global
relevance requires a significant shift
from an organisational perspective.
We have made that shift, with Global
Operations and Global Ingredients
established during the financial year
and operational from 1 August 2014. The
change supports our business priority to
optimise our global ingredients sales and
operations footprint.
From 1 August 2014, Global Ingredients
will manage sales of all ingredients
globally, own the relationships with our
valued ingredients customers and drive
our global sourcing strategy and delivery.
Global Operations, integrating our New
Zealand and offshore operations, will
play a pivotal role in planning production
to optimise what we make and where
we make it. It is closely aligned to our
multi-hub strategy.
We have appointed Kelvin Wickham as
Managing Director Global Ingredients
and Robert Spurway as Managing
Director Global Operations. Both are
very experienced and capable leaders.
Johan Priem succeeds Kelvin Wickham
as President Greater China from
1 August 2014. He has held two senior
Fonterra leadership positions in Asia.
More recently, he has contributed
to developing our approach to food
safety and quality, and corporate social
responsibility and sustainability.
20 FONTERRA ANNUAL REVIEW 2014
11,443
NEW ZEALAND
3,173
ASIA
1,827
LATIN AMERICA
1,551
AUSTRALIA
18,195
201
REST OF THE WORLD
TOTAL STAFF EMPLOYED1
1 Permanent full-time equivalent.
We are encouraging
performance by showing how
it can be achieved through
working together as one tight
team, reflecting our belief that
all of us together make one
strong Fonterra.
FONTERRA ANNUAL REVIEW 2014
21
I am proud of what our people have
achieved this year. They have been
resilient and open to learning and very
committed to bringing our strategic
goals to life.
We are creating a climate for them to
succeed through a capability strategy to
define how we should develop our people
so we are equipped to deliver on strategy.
We are taking a global perspective on
talent and culture which is open to ideas
and opportunities from all corners. We
are growing strong leaders, encouraging
them to develop their individual strengths
and to use those strengths for the good
of the Co-operative.
BRINGING OUR PEOPLE WITH US
We are establishing a global benchmark
for food safety and quality, one everyone
trusts because we are looking after
what matters most to our customers
and our consumers.
Our Food Safety and Quality Framework
makes it clear food safety and quality
is everyone’s responsibility. We want
everyone fully engaged with this
obligation and to see the world through
our customers’ and consumers’ eyes.
Our leaders in the business, from me
down, know it is up to us to lead by
example, so all of our people are clear
about what is expected of them.
Our values stress collaboration, honesty,
living up to the promises we make and
above all, doing what is right. Our aim is
to create a climate where everyone can
succeed, because that makes our
Co-operative succeed too.
My leadership team has signed up
to really bringing our values to life
in our everyday actions. We have a
great team with a global perspective
and considerable individual strengths.
Brought together, we’re even stronger.
Working collaboratively, respecting one
another, keeping promises and forming
lasting partnerships are all powerful
signals to our people that this is the
right way to work. By bringing them
with us, we are creating a Co-operative
that earns respect and trust through
our actions.
CHIEF EXECUTIVE’S LETTER FOR THE YEAR ENDED 31 JULY 2014
Social and
environmental
considerations
must be taken into
account in the way
we do business at
every step in the
value chain.
SUSTAINABILITY AND
SOCIAL RESPONSIBILITY
Social responsibility is an an area
where the dairy sector globally can lead.
We want to be part of demonstrating
that leadership.
All businesses depend on healthy
ecosystems and the support of society.
Fonterra is no different. Natural
resources underpin our ability to
produce milk, and we rely on the
support of our farmer shareholders
and customers, consumers and
communities wherever we operate.
We have a responsibility to our farmer
shareholders and all other stakeholders
for the impacts of our decisions. Social
and environmental considerations
must be taken into account in the way
we do business at every step in the
value chain.
For Fonterra, this means sharing
what we do best to make a difference
wherever we are in the world. We
are committed to dairy excellence
and global leadership in dairy safety
and quality, responsible dairying,
championing the health of our
environment, making dairy nutrition
accessible and delivering superior
products to improve health at
all life stages.
This year we reached a significant
milestone we’ve been working towards
for more than a decade. Our farmer
shareholders in New Zealand have
achieved stock exclusion from 95 per
cent1 of waterways on their farms. They
have ensured more than 23,300 km
of significant waterways are stock
excluded. Not only that, they have
also excluded stock from more than
another 9,000 km of smaller streams
and wetlands.
To put it in context, that’s enough
fencing to stretch from New Zealand
to the North Pole and back.
Our farmer shareholders have made
milk more accessible through the
Fonterra Milk for Schools™ programme
and around 170,000 children now get
free milk every day of the school term.
We also received support from the
New Zealand Government to extend
our KickStart Breakfast programme to
five days a week. These programmes
are making a real difference every day
to children’s nutrition and their ability
to learn.
Globally, we’re developing dairy
expertise in Sri Lanka, Indonesia and
China to share our skills and knowledge
of dairying excellence with local
farmers. Everyone gains when local
farmers improve production. Working
with them to support their growth also
supports local communities.
STOCK EXCLUSION FROM
WATERWAYS ACHIEVED ON
NEW ZEALAND FARMS
951
%
These are achievements any
company would be proud of and
we are not stopping there. There
is still much more we want to do.
Not all the challenges we face have clear-
cut solutions. Protecting our freshwater
ecosystems and mitigating greenhouse
gas emissions are essential priorities, not
only on-farm but also across our entire
supply chain. We are working with our
farmer shareholders to better understand
their environmental footprint and to
ensure that their farms are well equipped
to face increasing expectations from
communities, consumers and customers.
There is no question that the capacity
of our natural environment is finite.
We want to ensure that the resources
we depend on are maintained and
enhanced wherever we operate –
both for our good and that of the
community. I am absolutely confident
that with sound science and economics
we can find solutions that promote
innovation and good practice, and
enable farmers to continue farming
profitably and sustainably.
1 This excludes approximately 450 kilometres of waterways with dispensations, most of which have management plans requiring temporary stock exclusion measures until
permanent fencing is constructed. In some cases, the dispensations relate to areas not accessed by dairy animals.
22 FONTERRA ANNUAL REVIEW 2014
The momentum we
have achieved over
the past three years
is an indication of
what we can do with
focus, clear priorities
and a will to win.
OUR JOURNEY TO BECOMING A GLOBALLY RELEVANT CO-OP
Trading
Among
Farmers
2010
2012
2012
2013
A PROUD
NZ CO-OP
VALUES
STORY
CAPITAL
STRUCTURE
STRATEGY
REFRESH
TURNING
THE WHEEL
2014
THIS IS
FONTERRA
2015 &
BEYOND
A GLOBALLY
RELEVANT
CO-OP
We will keep sharing our progress as
we go – the successes as well as the
setbacks – and we will keep working
with our farmer shareholders, our
customers, consumers and communities
around the world to make a difference.
Not just because it’s good business,
but because it’s part of who we are.
VELOCITY
Our V3 Strategy has supported our
performance in a demanding and
defining year. It has kept us on track,
motivated and confident about our
future goals and our ambition to become
globally relevant.
The momentum we have achieved over
the past three years is an indication
of what we can do with focus, clear
priorities and a will to win. We have
started a new financial year with a
confident step up in terms of increasing
the volume and value of our ingredients
and branded products exported to China
through our partnership with Beingmate.
This partnership includes the potential
for farm developments in China.
The partnership with Beingmate is one
of several we now have in place to keep
our strategy progressing at pace.
Our alliance with Dairy Crest in the
UK, A-Ware in the Netherlands and
our agreement with Abbott to develop
a third dairy farm hub in China all
demonstrate our ambition to create
global milk pools that match
demand with strategic sources of supply.
We have realigned our DPA alliance with
Nestlé for mutual benefit and expect to
drive more volume and value.
At home in New Zealand, our continued
investment in processing capacity
and a compelling new Co-operative
proposition to support our farmers
to grow and prosper reaffirm that
New Zealand will always be our
number one milk pool.
We have always said ambition has
to be supported by action. Global
relevance is our ambition. The action
is well underway.
THEO SPIERINGS
CHIEF EXECUTIVE
FONTERRA ANNUAL REVIEW 2014
23
KEY PARTNERSHIPS AND INVESTMENTS IN 2014
KEY PARTNERSHIPS
AND INVESTMENTS
IN 2014
EUROPE
A-Ware joint venture
Dairy Crest partnership
24 FONTERRA ANNUAL REVIEW 2014
LATIN AMERICA
Fonterra and Nestlé’s
Dairy Partners of America
reshape
Our strategic
priorities are designed
to drive growth in
value-add earnings.
CHINA
Fonterra and Beingmate
proposed global
partnership
Fonterra and Abbott
farming hub joint venture
NEW ZEALAND
$1.6b invested/approved
since 2011
> Ingredients:
Lichfield, Edendale,
Pahiatua, Darfield
> Foodservice:
Waitoa, Clandeboye,
Te Rapa, Eltham
FONTERRA ANNUAL REVIEW 2014
25
AUSTRALIA
Nine per cent investment
in Bega Cheese
Acquisition of Tamar
Valley Dairy
Fonterra selected as
preferred supplier to
process Woolworths’
own brand milk in Victoria
for next 10 years
FOOD SAFETY AND QUALITY
FOOD
SAFETY
AND
QUALITY
BUILDING
TRUST IN
SOURCE
OUR FOOD SAFETY
AND QUALITY
ROADMAP
DEVELOPING A
CONSUMER-FOCUSED
CENTRE FOR
DAIRY
EXCELLENCE
26 FONTERRA ANNUAL REVIEW 2014
BECOMING THE BENCHMARK,
GAINING TRUST
What would it take to become the
global benchmark for food safety and
quality? We have asked ourselves,
our customers and stakeholders that
question this year and come up with
more than the answer. What we have
is a four-year programme of work to
achieve this goal.
Setting a new benchmark is an
ambitious goal. To achieve it, we have
to bring our people, our customers
and consumers with us. Where today
we can say there is awareness of our
commitment to making safe, high-
quality food, we want to move to a point
where trust is implicit and squarely
earned, because we have set the new
benchmark. It will not be us who
determines when the benchmark is set.
It will be the customers and consumers
who use our products.
Our programme starts with a very
strong base. Our Fonterra Quality
System is already set at world standards
and applies globally. These standards
are based on FSSC22000, which
aligns to the International Standards
Organisation’s (ISO) global standards
for food safety management and is fully
recognised by the Global Food Safety
Initiative (GFSI), the world-leading
standard of food safety and quality. Our
standards apply to joint ventures and
all supply chain partners, as well as to
our operations. Full compliance with our
quality system is not optional and there
is a clear expectation that financial
targets relating to the cost of quality
failures will be met.
From year one in our four-year
programme, we keep raising the
bar. Short-term incentives in our
remuneration schemes will reflect
Right First Time performance.
Our manufacturing sites, then our
warehouses, then our farms will
achieve 100 per cent compliance with
the Global Food Safety Initiative’s
certification schemes. Regulatory
compliance will be 100 per cent. As
we reach milestones customers and
ultimately consumers will be able to
check against our audited performance.
2014
FOCUS
MAKING A CLEAR
COMMITMENT TO
BE ACCOUNTABLE
2015
DRIVE
MAKING PURPOSEFUL
PROGRESS AND
EARNING TRUST
✓ Audited global operations. 75 per cent
complete and 95 per cent compliance
with quality standards
• Right First Time Quality metric
launched and captured in short-term
incentive for staff
• Participation in global food standards
organisations and CODEX setting
• Launch Food Safety and Quality rewards
and recognition programme
• Fonterra Quality System reflected in
employee contracts
• Deploy traceability architecture
• Full compliance with GFSI certification
(manufacturing)
✓ Protocol in place for engagement
of external scientific and diagnostic
resources, including appropriate
engagement of experts
✓ Food Safety and Quality (FSQ)
written into all senior management
employment contracts
✓ Established fully functioning Incident
Management Team
✓ Creation of Food Safety and
Quality Council
✓ Appointment of Head of Food Safety
and Quality
✓
Implementation of a quality hotline
✓ Built traceability architecture capability
Similar milestones are set out for
traceability where we intend to move
from today’s 48 hour timeframe to just
a few hours by 2016. Ultimately we will
have full, open traceability accessible by
consumers anywhere.
We supply a world where food security
is becoming increasingly important.
As demand for quality protein grows,
so too do the opportunities for
counterfeits, food fraud and other
crimes against consumers.
Full traceability and proof of origin,
sound science and open access
through digital and social media to
accurate information are consumers’
best protections. That is where we
are heading. We are benchmarking
our underlying systems against the
GFSI global benchmark in product
identification systems, ensuring we
provide world-class protections.
A significant cultural change programme
is also underway to make thinking,
acting on and living quality embedded
in the way we work. We are making
the significant mental shift from being
capable makers of product to become
people who are looking after what
matters most to our customers and
consumers. ‘Do What’s Right’ is a core
value for us.
To connect ourselves and our people
with our customers we’re developing
social media command centres to
enable consumers and customers
around the clock and around the
world to tell us what matters most to
them. This is part of our Dairy Centre
of Excellence, focused on food safety
science, nutrition, dairy innovation and
technology, understanding consumers
and connecting with them. We will
share our knowledge of dairy and they
will tell us how we should be using
that know-how to meet their needs.
Open access will keep us constantly
abreast of what they expect from us
and how their needs are changing.
Genuine and lasting change takes
time. Year one (2014) has us making
a clear commitment to be completely
accountable for thinking, acting on
and living quality. Year two (2015)
sees us making purposeful progress
2016
ACHIEVE
BUILDING ABSOLUTE
CREDIBILITY AND DELIVERING
LEADING PERFORMANCE
2017 AND BEYOND
LEAD
TAKING THE INITIATIVE
WITH GLOBAL
LEADERSHIP
• Full accountability from every
member of the Co-operative to
uphold highest standards of FSQ
• Full compliance and customer
visibility of Right First Time
Quality metric
• Benchmark data provided internally
• Full compliance with GFSI
certification (warehouses)
• Lead global continuous
improvement of food standards
• Benchmark data
provided externally
• Full compliance with GFSI
certification (farms)
towards clearly defined goals. In year
three (2016) we’ll be building absolute
credibility and delivering leading
performance. Achieve all of this and by
year four (2017) we will have the global
benchmark the world looks to for food
safety and quality.
By shaping the way food quality
systems and practices develop
today, we are opening up the way
the world will see food tomorrow.
As we head down this road, the
everyday actions of our people
will be the defining factor.
We have focused, committed
people and they are taking it
personally and accountably,
seeing our world through
customers’ and consumers’ eyes.
OPENING UP THE
WAY THE WORLD SEES
FOOD TOMORROW,
BY SHAPING THE WAY
FOOD QUALITY,
SYSTEMS AND
PRACTICES DEVELOP
TODAY.
FONTERRA ANNUAL REVIEW 2014
27
GROUP OVERVIEW FOR THE YEAR ENDED 31 JULY 2014
GROUP
OVERVIEW
NORMALISED EBIT (NZD)
REVENUE (NZD BILLION)
$269M
GLOBAL INGREDIENTS & OPERATIONS
$31M
OCEANIA
$91M
ASIA
$111M
LATIN AMERICA
$1M
INTER-SEGMENT
503M
22.3
19.9
19.8
18.6
25
20
15
10
5
0
FY11
FY12
FY13
FY14
VOLUME (‘000 MT)
REVENUE (NZD)
3,965MT
$22.3B
NET PROFIT AFTER TAX (NZD)
$179M
FINAL CASH PAYOUT (NZD)
EARNINGS PER SHARE (NZD)
DIVIDEND PER SHARE (NZD)
$8.50
10CPS
10CPS
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 86 for the reconciliation of the NZ IFRS measures to the non-GAAP measures and to page 87 for definitions of the non-GAAP measures used by Fonterra.
28 FONTERRA ANNUAL REVIEW 2014
A sharper focus
on costs resulted in
operating expenses
being $46 million
lower for the year.
This was driven by a
lower cost base in
Australia as the reshape
programme is being
progressively implemented.
VOLUME
Group volumes were in line with last
year, with volume growth in China
offsetting lower volumes in Australia
and Sri Lanka. Volume growth in China
was driven primarily by the farms,
supported by foodservice, while volumes
in Sri Lanka were impacted by the
temporary suspension of our operations.
VALUE
Revenue increased 19 per cent over the
comparative period, driven by higher
prices for dairy products globally. Revenue
was up in every market except Australia
and Sri Lanka where the volume impact
was greater than price increases achieved.
The largest increase was in Global
Ingredients and Operations (formerly
known as NZ Milk Products), reflecting
the increase in market prices.
Gross margin was 19 per cent lower,
due to an inventory value adjustment in
our Global Ingredients and Operations
business as a result of softening
commodity prices and the impact of high
commodity prices on the margins of our
consumer and foodservice businesses.
In Global Ingredients and Operations,
margins were negatively impacted by
the relative increase in the price of
Reference Commodity Products (RCPs),
which inform the Farmgate Milk Price
compared to the increase in the price
of Non-Reference Commodity Products
(Non-RCPs). In addition, milk collection
grew eight per cent which had an
unfavourable impact across the peak
due to capacity constraints.
The impact of these together resulted in
earnings being $653 million lower than
last year and both these asset constraint
issues have been largely offset by the
milk price adjustment of $642 million.
KEY FINANCIALS
NZD MILLION
Volume (’000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
EBIT
Normalised EBIT
Normalised EBIT percentage
Net profit after tax
Earnings per share (cents per share)
Milk collected 2013/14 season (million kgMS)
Operating cash flows
Investing cash flows
Economic debt to debt plus equity ratio
Return on capital employed
A sharper focus on costs resulted in
operating expenses being $46 million
lower for the year. This was driven
by a lower cost base in Australia as
the reshape programme is being
progressively implemented.
Net finance costs were $97 million higher
than last year mainly due to increased
borrowings and unfavourable fair value
movements on interest rate swaps.
The higher finance costs and lower tax
credit contributed to net profit after tax
being 76 per cent lower at $179 million,
with earnings per share of 10 cents.
Operating cash flow improved by $370
million as advance rate payments for
milk to our farmers returned to more
normal terms. In the previous period
advance rates were accelerated to
farmers during the nationwide drought.
YEAR ENDED
31 JULY 2014
YEAR ENDED
31 JULY 2013
CHANGE
3,965
22,275
2,462
11.1%
(2,210)
503
503
2.3%
179
10
1,584
1,367
(1,009)
42.3%
4.5%
3,958
18,643
3,032
16.3%
(2,256)
937
1,002
5.4%
736
44
1,463
997
(868)
39.6%
8.8%
19%
(19%)
(2%)
(46%)
(50%)
(76%)
(77%)
8%
37%
16%
While this had no significant impact on
earnings, it did have a material impact
on cash flow.
Our gearing ratio is 42.3 per cent, up
from 39.6 per cent last year. The change
is a result of lower earnings, higher
capital expenditure and increased
business funding requirements
compared to last year.
During the year we increased our
holding in Bega to nine per cent
resulting in a cash outflow of $78
million, investment in Fonterra’s China
farms increased with the expansion of
the farms, including net livestock spend
of $75 million. However, capital spend
across the rest of the business was
lower than last year’s which included
Darfield Two and the acquisition of the
Studholme plant.
FONTERRA ANNUAL REVIEW 2014
29
BUSINESS REVIEW FOR THE YEAR ENDED 31 JULY 2014
GLOBAL
INGREDIENTS AND
OPERATIONS
Global Ingredients and Operations (formerly 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.
MILK COLLECTION ACROSS
NEW ZEALAND
1.6B KGMS
GLOBAL INGREDIENTS AND
OPERATIONS REVENUE
30%
30 FONTERRA ANNUAL REVIEW 2014
VOLUME
Milk collection across New Zealand
for the 2013/14 season to 31 May 2014
reached 1,584 million kgMS, eight per
cent higher than last season.
Farmers experienced varied conditions
across the country last season.
However, a mild winter and spring
ensured that the season started well.
The North Island faced dry conditions
through summer, but returned to more
favourable conditions in autumn.
North Island collection for the full
2013/14 season reached 969m kgMS,
nine per cent ahead of the 2012/13
season, while South Island collection
reached 615m kgMS, seven per cent
ahead of the previous season.
The record milk volumes for the season
did not fully translate into significantly
higher sales volume, as Global
Ingredients and Operations began the
year with low inventory levels as a
result of the previous season’s drought.
As a result total sales volume was up
only one per cent.
Strong demand from China made the
largest impact on volumes during the
year. Maximising prices achieved via
this market resulted in lower volumes
to most other markets. It also drove
a substantial change in product mix
compared to the prior year, with Whole
Milk Powder (WMP), which makes up
the majority of our exports to China,
up 18 per cent.
Butter volumes were also up, driven by
the Middle East and Africa region.
Sales volumes of cheese and casein
were down across all key product
categories as we maximised production
of higher returning milk powder
products in the current season.
VALUE
Revenue in our Global Ingredients
and Operations business was up 30
per cent as a result of strong dairy
commodity prices. Revenue per MT of
Reference Commodity Products (RCPs)
which inform the Farmgate Milk Price
was up 40 per cent, while revenue
per MT of Non-Reference Commodity
Products (Non-RCPs) was up 20 per cent
compared to last year. The softening
of RCP prices and the relative increase
in Non-RCP prices towards the end of
the financial year has not been fully
reflected in revenue due to the lag
between contract and shipment of
product.
Normalised EBIT was 46 per cent lower
than last year, at $269 million. The
largest impact on earnings of our Global
Ingredients and Operations business
was asset capacity, which resulted in
significantly lower earnings than last
year. However, this was largely offset by
the milk price adjustment.
Asset Capacity Impacts
Stream Returns
The relative increase in the price of RCPs
compared to the increase in the price
of Non-RCPs was significant for most
of the year and this had a substantial
impact on stream returns. The extent of
these differences was unprecedented
and our asset footprint limited our ability
to fully respond by switching production
to higher-returning milk powders.
This was exacerbated by the fact that the
relative stream returns strongly favoured
RCPs during our peak milk collection
period in October and November,
when we have limited product mix
flexibility. As a result our ability to switch
production from Non-RCPs to RCPs was
substantially constrained.
This resulted in significant margin
pressure for Non-RCPs, with milk input
costs rising disproportionately against
the sales price and selling prices below
the input cost in some product streams.
In the second half of the year, the
divergence in prices between RCPs and
Non-RCPs decreased and then reversed.
However, the timing of the decrease in
commodity prices and the weighting
of milk purchasing to the first half of
the year, was insufficient to offset the
impact on earnings.
Peak Production Costs
Strong milk production and capacity
constraints over the peak milk collection
period resulted in inefficiencies and
higher wastage. This included additional
cost to transport milk to other plants
and inefficient processing, reducing the
returns on those products. The additional
cost was $75 million higher than last year.
Together, the earnings from asset
capacity impacts were $653 million
lower than last year.
Milk Price Adjustment
The Milk Price adjustment of 53 cents
per kgMS partially offset the impact of
the significantly lower asset capacity
impacts, increasing normalised EBIT
by $642 million due to lower cost of
goods sold.
KEY FINANCIALS
NZD MILLION
Total volume1 (’000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
Normalised EBIT
Normalised EBIT percentage
Return on capital employed
YEAR ENDED
31 JULY 2014
YEAR ENDED
31 JULY 2013
CHANGE
2,848
18,041
1,030
5.7%
(960)
269
1.5%
4.2%
2,824
13,917
1,251
9.0%
(892)
494
3.5%
7.4%
1%
30%
(18%)
8%
(46%)
1 Total volume includes intercompany volumes.
NORMALISED EBIT: KEY PERFORMANCE DRIVERS
NZD MILLION
600
494
(653)
642
29
(156)
(74)
(13)
269
500
400
300
200
100
0
(100)
(200)
FY13
NORMALISED
EBIT
ASSET
CAPACITY
IMPACTS
MILK PRICE
ADJUSTMENT
PRICE
PREMIUMS
INVENTORY
VALUE
PROVISION
GLOBAL
SOURCING
OTHER
FY14
NORMALISED
EBIT
NEW ZEALAND SOURCED REVENUE AND VOLUME
SALES VOLUME (’000 MT)1
Reference Commodity Products2
Non-Reference Commodity Products
PRODUCTION VOLUME (’000 MT)
Reference Commodity Products2
Non-Reference Commodity Products
REVENUE PER MT NZD
Reference Commodity Products2
Non-Reference Commodity Products
FY2014
1,970
596
2,037
593
5,836
7,171
FY2013
1,815
692
1,779
626
4,154
5,983
CHANGE
9%
(14%)
15%
(5%)
40%
20%
1 Sales volume includes unprocessed liquid milk, which is not included in the production volumes.
2 Manufacture of the Reference Commodity Products comprised around 77 per cent of Fonterra’s total New Zealand
ingredients production in the 2014 financial year.
FONTERRA ANNUAL REVIEW 2014
31
BUSINESS REVIEW FOR THE YEAR ENDED 31 JULY 2014
INVESTING IN BRANDS AND
FOODSERVICE CAPACITY
$262M
Fonterra’s Te Rapa site is one of the Co-operative’s largest manufacturing sites, producing more than 290,000
tonnes of milk powders and cream products every year.
The Global Ingredients and Operations
business unit includes corporate costs.
Operating costs were eight per cent
higher than last year, mainly due to
higher investment in global Corporate
Social Responsibility initiatives and
higher technology costs, with the
increase in spend on information
technology being an investment to
improve efficiency and productivity.
Working capital days for Global
Ingredients and Operations were 1.4
days higher than last year due to higher
inventory holdings driven by the sharp
increase in both milk solids collected
and the cost of that milk. However, part
of this impact was offset by improved
credit management and accounts
receivable days as a result of change
of sales mix to regions and customers
where payments are more efficient.
Softening commodity prices towards
the year end also had an impact on the
valuation of inventory. This meant that
the value of some of our products held
in inventory at year end was higher
than their expected future selling price.
As a result, additional provisioning
has been taken in this financial year
of $156 million mainly due to pricing.
Earnings from global sourcing were
$74 million lower than last year mainly
due to lower exports of high-value
infant formula from Australia. However,
price premiums and liquid milk
contributed positively to normalised
EBIT. Price premiums achieved above
dairy commodity prices for ingredients
and services were $29 million higher
than last year, which was a good result
in an environment of strong dairy prices.
The contribution from liquid milk
was higher than last year. Liquid
milk earnings were modest but
significantly improved compared
to the loss in the previous year.
32 FONTERRA ANNUAL REVIEW 2014
32 FONTERRA ANNUAL REVIEW 2014
CAPACITY AND
OPTIONALITY
Increased milk volumes are welcome and reflect farmer
confidence in Fonterra’s future. Since 2011, we have invested
$658 million to increase our processing capacity and now have
a further $946 million being invested in either fast-tracked
expansion projects or new projects to build capacity in powders
as well as premium products. Of this investment, $262 million
is in capacity to support foodservice and consumer brands
through growing our mozzarella, cream cheese, slice-on-slice
cheese and UHT production.
TE RAPA
$32 MILLION INVESTMENT
Cream cheese capacity doubled in September 2013.
WMP, SMP, butter, AMF, cream cheese, frozen cream.
LICHFIELD
$398 MILLION INVESTMENT
The new high efficiency milk powder drier will process
an additional 4.4 million litres per day. Produces cheese,
WMP, WPI and will be completed in 2016.
PAHIATUA
$235 MILLION INVESTMENT
New milk powder drier and distribution
centre produces an additional
2.4 million litres per day.
Completion September 2015.
DARFIELD TWO
$290 MILLION INVESTMENT
New milk powder drier and distribution
centre produces an additional
4.4 million litres per day.
Completed August 2013.
EDENDALE
$157 MILLION INVESTMENT
Three new plants, including an
MPC plant, a Reverse Osmosis
Plant and an AMF plant. Will
process an additional 1.4m litres
per day. Commissioned by 2015.
WAITOA UHT
$126 MILLION INVESTMENT
Waitoa is a new UHT milk processing
site. Waitoa can produce more than
100 million litres a year. The first
shipment of UHT to China was in
July 2014. Range of products to be
processed, including Anchor™ UHT
White Milk and UHT Cream.
ELTHAM
$32 MILLION INVESTMENT
Processes specialty cheese and will be
completed mid 2015.
CLANDEBOYE
$72 MILLION INVESTMENT
This investment increased production of
individual quick frozen (IQF) mozzarella
capacity across New Zealand to over
50,000 MT per year. Produces IQF
grated mozzarella, WMP, SMP, cheese,
butter, AMF, MPC, WPC, lactose.
Fully implemented by September 2015.
KEY
AMF: Anhydrous Milkfat/butter oil/ghee
MPC: Milk Protein Concentrate
SMP: Skim Milk Powder
UHT: Ultra High Temperature
WMP: Whole Milk Powder
WPC: Whey Protein Concentrate
WPI: Whey Protein Isolate
FONTERRA ANNUAL REVIEW 2014
FONTERRA ANNUAL REVIEW 2014
33
33
BUSINESS REVIEW FOR THE YEAR ENDED 31 JULY 2014
OCEANIA
Oceania encompasses consumer and out-of-home
foodservice businesses in Australia and New Zealand,
and a dairy processing and manufacturing business.
It also includes RD1, a rural supplies retailer in New Zealand.
VOLUME
Total sales volume of 832,000 MT was
down six per cent on the previous year.
This was in part due to the sale of the
Norco liquid distribution business last
year. Excluding that impact, volumes are
down four per cent due to decreased
infant formula volumes from the
Australian ingredients business and
reduced yoghurt volumes in Australia.
The New Zealand business held volumes
despite challenging market conditions,
with growth in the route channel offset
by lower grocery volumes.
VALUE
Oceania normalised EBIT was 78
per cent lower than the prior year at
$31 million. Both the New Zealand
and Australian markets have been
challenging for our consumer
businesses this year, with higher
input costs difficult to recover in very
competitive environments. The earnings
contribution from the ingredients
business in Australia improved, as a
result of higher commodity prices.
AUSTRALIA
Normalised EBIT in Australia was $37
million lower than last year as a result
of margin squeeze in the consumer
brands business. This was due to
significantly higher input costs
driven by high global commodity
prices and competitive pressure that
constrained our ability to pass these
on. Competition in private label has
intensified with increased industry
capacity in spreads. Lower volumes in
the yoghurt and dairy dessert category
also contributed to lower earnings.
The yoghurt category remains
challenging and is a key part of our
turnaround plan. The advanced
production facilities that were acquired
with the purchase of the Tamar Valley
Dairy business give us the opportunity
to create value from better meeting
customer needs through innovation and
more efficient production. Plans are well
progressed to broaden the distribution
of the Tamar Valley Dairy brand within
the high growth ‘premium’ segment of
the category.
The business continues to focus
on building long-term partnerships
with retailers, and in April 2014
announced that it had been selected
as the preferred supplier to process
Woolworths’ own brand milk in Victoria
for the next 10 years. The proposed
long-term arrangement will see Fonterra
invest more than AU$30 million into a
state-of-the-art milk processing plant at
its Cobden site in South West Victoria.
The Australian dairy industry contracted
for the majority of the year primarily
due to seasonal variations. However,
excluding milk recruitment, our existing
supply base grew production by two per
cent year on year. This was supported
by our commitment to ensuring our
suppliers are profitable. We have done
this by maintaining cash flow leadership
for farmers and ensuring they have
innovative, industry-leading support
services to manage risk and grow their
farm businesses.
OPERATING EXPENSES
15%
34 FONTERRA ANNUAL REVIEW 2014
FONTERRA IS PROUD TO SUPPORT
INDUSTRY INITIATIVES
Fonterra’s Foodservice ‘Proud to be a Chef’ programme
continues to be a success story celebrating 15 years of grass-roots
industry support in 2014. In the last six years, 190 trainees have
gone through the programme with many going on to pursue
successful careers in foodservice.
Fonterra proudly supports the best and brightest Australian
chefs, and through this programme hopes to encourage them
to stay with their culinary passion and inspire the future leaders
of the industry.
Higher global dairy commodity prices
enabled the Australian ingredients
business to grow earnings compared
to the previous year, which more than
offset the impact of decreased infant
formula product sales.
In the first half, we acquired a strategic
nine per cent stake in Bega, a company
with which Fonterra has a long-standing
partnership.
The transformation of the Australian
business continues to plan and
significant progress has been made on
lowering operating costs, with operating
expenses down 26 per cent (down 16
per cent in constant currency) and
streamlining our brands portfolio to
align with Fonterra’s V3 Strategy. Strong
momentum has also been built in
spreads, where the Western Star™ brand
has achieved record share over the past
12 months, growing at almost 16 per
cent in a flat but competitive category.
The new Australian leadership team is
focused on milk growth to better utilise
the asset base, and on turning the wheel
through the V3 themes of value in retail,
volume in foodservice, and volume and
value in ingredients exports.
NEW ZEALAND
Normalised EBIT in our New Zealand
business fell 61 per cent. This was
primarily due to margin pressure in
our consumer brands business,
which was impacted by the higher
input costs as a result of the increase
in commodity prices, and a highly
competitive market that made it
difficult to recover those increases.
We have started to leverage our global
propositions in our home market with
the launch of Mainland™ Noble Cheese
from Australia and Uno from Soprole,
the first kids’ yoghurt from Anchor™,
with extra vitamins, minerals and a
probiotic to help boost kids’ immunity.
Our farm retailer, RD1, has delivered a
strong performance with 13 per cent
revenue growth as the record Milk Price
boosted farmer spending. This was
driven by retail store expansion and
market share growth with the opening
of three new stores this year, combined
with strong demand for supplements
and blends.
Tip Top™ normalised EBIT fell one per
cent as this business was also negatively
impacted by rising commodity costs
and a decrease in export sales, but
recovered most of the lost gross
margin through cost saving initiatives.
Our recent innovation of all natural
preservative-free products has been
very well received by customers with
Tip Top™ continuing to be the market
leader in ice cream in New Zealand.
A strong focus on cost savings and
efficiencies this year has delivered
significant results including ongoing
improvements through a review of
our brand architecture and product
line rationalisation combined with
the sale of the Pastry House business.
This, combined with the integration
of the Tip Top™ and consumer brands
operations, including a reduction in
head count, has resulted in overall
operating cost savings of $17 million.
The New Zealand business continues
to win awards with the Anchor™ Light
Proof bottle winning Best Product from
New Zealand at the World Tour By
SIAL product awards in Paris in May
and Kapiti™ winning 17 medals and four
champion prizes at the New Zealand
Champions of Cheese Awards, with our
Kikorangi once again taking the people’s
choice award.
KEY FINANCIALS
NZD MILLION
Total volume1 (’000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
Normalised EBIT
Normalised EBIT percentage
Return on capital employed
1 Total volume includes intercompany volumes.
YEAR ENDED
31 JULY 2014
YEAR ENDED
31 JULY 2013
CHANGE
832
3,600
583
16.2%
(574)
31
0.9%
1.1%
884
3,745
756
20.2%
(677)
142
3.8%
4.7%
(6%)
(4%)
(23%)
(15%)
(78%)
FONTERRA ANNUAL REVIEW 2014
35
BUSINESS REVIEW FOR THE YEAR ENDED 31 JULY 2014
ASIA
Asia comprises Fonterra’s consumer and foodservice businesses
in Asia, Africa, the Middle East and Greater China. Asia 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
Asia includes a number of Fonterra’s
key leadership and strategic markets,
and success in this region represents
a critical part of delivering Fonterra’s
V3 Strategy. The focus in the current
year has been to increase volume by
taking a long-term view on global dairy
pricing dynamics.
Our key leadership and strategic
markets in Asia are Malaysia, Sri Lanka,
Indonesia and China. These make up 80
per cent of volume across Asia.
Volume growth of 12 per cent to
419,000 MT was driven primarily by
excellent performance across China.
Sales volume from our farming business
was up 65 per cent as a result of the
continued expansion of our operations,
with the first hub in the Yutian province
now complete. Foodservice across
Asia was up 11 per cent with continued
demand for our chef-led approach,
organic market growth in Indonesia and
further market penetration in bakery
chains in Malaysia and China.
Foodservice growth exceeded capacity
available from New Zealand to fully
deliver on customer needs. The
investments in mozzarella capacity at
Clandeboye, UHT capacity at Waitoa
and cream cheese capacity at Te Rapa
aim to address these constraints and
support further foodservice expansion.
In Indonesia, volumes were up 20 per
cent, driven by market share growth
in foodservice, our premium brands,
Anlene™, Anmum™ and Anchor™
Boneeto, and further expansion of our
foodservice business. Indonesia is a key
strategic market, with a large population
and rapidly growing middle class. The
current year’s performance was driven
by improved supply and distribution
execution, after supply chain challenges
around reaching customers in the
previous year.
Volumes were down 20 per cent in
Sri Lanka. This is a leadership market
for Fonterra, where the Anchor™ brand
holds the number one market share
position in Full Cream Milk Powder, the
largest dairy category in Sri Lanka. In
the first half of the year, the temporary
suspension of our operations resulted
in a large short-term decline in volumes
and a temporary loss of the market
leadership position. Through the hard
work of staff and the success of the
‘We Believe in Anchor™’ campaign,
market share has rebounded strongly to
previous levels. However, the short-term
challenges had a considerable impact
on volumes compared to the prior year.
Excluding Sri Lanka, volumes across Asia
increased 18 per cent.
VOLUME GROWTH
12%
36 FONTERRA ANNUAL REVIEW 2014
Fonterra remains
committed to the
Sri Lanka market and
is supporting the local
dairy industry through
partnering with
farmers to help bring
New Zealand farming
best practice to this
part of the world.
VALUE
Normalised EBIT for the year was
$91 million, 56 per cent lower than
last year and 53 per cent lower on a
constant currency basis. Across the
Asia region, significantly higher input
costs as a result of the high dairy
commodity prices have been the key
driver of the decrease in earnings, along
with the challenging market conditions
experienced in Sri Lanka in the first half
of the year.
Given the significance of the Asia
region to our V3 Strategy, it is
important to maintain our focus
on market share and volume
growth, which turns the wheel to
higher-value products from our
farmers’ milk.
Price increases were taken in line with
individual market conditions, while
ensuring that the Co-operative was
positioned for future earnings growth.
This approach, along with the strength
of our Anlene™, Anmum™ and Anchor™
global brands allowed us to continue to
grow our volumes in a challenging year.
In Sri Lanka, earnings were impacted
by the temporary suspension of our
operations in August 2013. The recovery
in market share back to previous levels
was a significant achievement for the
team in Sri Lanka given the challenging
environment and reflects the strength
of the Anchor™ brand in that market.
Fonterra remains committed to the
Sri Lanka market, and is supporting
the local dairy industry through
partnering with farmers to help bring
New Zealand farming best practice to
this part of the world.
Challenges in Malaysia’s economic
environment resulted in a lower take-up
in the premium milk powder category,
translating into lower sales of our
premium segment of Anlene™ and
Anmum™. On the positive side, market
share of key segments of everyday
nutrition expanded and our foodservice
business grew volume by 14 per cent.
Indonesia had good top line growth
with constant currency revenue growth
of 34 per cent driven by volume growth
of 20 per cent and price increases.
The currency had a negative impact
resulting in revenue growth of 10 per
cent. Despite good growth in sales,
EBIT was significantly lower than last
year due to higher input costs and
the significant devaluation of the
Indonesian rupiah.
KEY FINANCIALS
NZD MILLION
Total volume1 (‘000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
Normalised EBIT
Normalised EBIT percentage
Return on capital employed
1 Total volume includes intercompany volumes.
YEAR ENDED
31 JULY 2014
YEAR ENDED
31 JULY 2013
CHANGE
419
2,168
581
26.8%
(505)
91
4.2%
8.5%
375
2,059
702
34.1%
(519)
209
10.2%
22.3%
12%
5%
(17%)
(3%)
(56%)
FONTERRA ANNUAL REVIEW 2014
37
Demand for
foodservice
products continues
to grow thanks to
our chef-led strategy.
GREATER CHINA
In Greater China, there has been
continued growth in a number of
strategically important areas. Normalised
EBIT grew 38 per cent, driven by our
farming business and foodservice,
which performed well despite supply
constraints of UHT products.
Our farming operations benefited from
increased volumes and higher per litre
prices achieved for our milk. This was
driven by supply shortages in China and
the desire of our customers to secure a
high-quality source of milk. Our Yutian
hub of four farms in the Hebei province
is complete, with work underway at the
second hub in the Shanxi province.
Fonterra and Abbott have
signed an agreement to develop
a proposed third dairy farm
hub in China. The strategic
alliance, which is subject to
Chinese regulatory approval, will
leverage Fonterra’s expertise in
dairy nutrition and farming in
China and Abbott’s continued
commitment to business
development in China.
BUSINESS REVIEW FOR THE YEAR ENDED 31 JULY 2014
Construction of the new packing and
blending facility is underway in West
Java and will be operational by the end
of March 2015. We have invested $36
million in this plant, which is our first
manufacturing facility in the country.
Once complete, the plant will have
the capacity to blend and pack 12,000
MT of advanced and base nutrition
milk powders annually, which is the
equivalent of 87,000 packs of Anlene™,
Anmum™ and Anchor™ Boneeto
every day.
In the Middle East, volumes were
slightly lower due to exiting a co-
packing partnership in Saudi Arabia.
Adjusting for this, volume growth was
higher than last year by three per cent,
driven by jar cheese and butter.
ASIA FOODSERVICE GROWTH
(EXCLUDING GREATER CHINA)
Excluding Greater China, demand for
foodservice was strong across Asia,
with volumes 11 per cent higher and
revenue up 21 per cent in constant
currency reflecting continued strong
delivery from our chef-led strategy.
However, gross margins fell due to
higher input costs.
Excluding Greater China, operating
costs across Asia decreased eight per
cent, including a favourable impact
on translation from the strong New
Zealand dollar. In constant currency, the
reduction of one per cent was the result
of better management of advertising
and promotion across all markets.
This was driven by the need to ensure
the effectiveness of spend given the
environment of increased prices, and
finding value from more lower cost
non-traditional marketing methods,
including social media.
11%
38 FONTERRA ANNUAL REVIEW 2014
We increased our China farms’ production volumes and secured higher per litre prices.
Farming hubs are a key part of our
strategy to be a more integrated
dairy business in China, contribute to
the growth and development of the
local Chinese dairy industry and help
meet local consumers’ needs for safe,
nutritious dairy products.
A pilot of the full range of Anmum™
infant formula (Anmum™) was launched
in the cities of Chengdu and Guangzhou
late last year. The team has adopted an
integrated sales strategy to introduce
Anmum™ both online and in store in
China enabling it to have a greater reach.
The foodservice business in Greater
China delivered growth in volume and
revenue, however higher input costs
put pressure on margins. The rollout
into seven new Chinese cities and the
development of new products as well as
new applications for existing ingredients
continues to support growth in this
business. Foodservice is now in 26 cities
in China, up from 19 cities last year.
In August last year, our China business
successfully launched Anchor™ UHT
and it is now available in 1,900 stores
and 18 cities across the Yangtze River
Delta with a market share of five per
cent, as well as 14 cities outside the
Yangtze River Delta.
Anmum™ is now available in eight
cities, while Anmum™ Materna has
been rolled out to an additional 20
cities reaching 64 cities and covering
most of the cities where Anlene™ has
a presence. All our consumer brands,
including Anchor™ UHT, are also
available nationwide through the top
e-retailers T-mall, Yihaodin and JD.
The China foodservice and consumer
businesses suffered supply constraints
from UHT being shipped from
New Zealand. However, both Anchor™
UHT and the continued foodservice
growth will be supported through
increased investment in production
capacity, including the recently
commissioned Waitoa UHT plant
where commercial production has
commenced. The new mozzarella
capacity at Clandeboye, the cream
cheese facility at Te Rapa and the slice-
on-slice investment at Eltham, will help
to support foodservice expansion.
Farming hubs
are a key part
of our strategy
to be a more
integrated dairy
business in China.
FONTERRA ANNUAL REVIEW 2014
39
BUSINESS REVIEW FOR THE YEAR ENDED 31 JULY 2014
LATIN AMERICA
As at 31 July 2014, Latin America encompasses Soprole, the
market-leading integrated dairy business in Chile and an
investment in Dairy Partners Americas, a 50/50 joint venture
with Nestlé covering several markets in Latin America including
Brazil, Venezuela, Ecuador, Colombia and Argentina. Latin
America also includes an in-market ingredients sourcing and
sales business, a foodservice business in the Caribbean and an
investment in Dairy Industries (Jamaica) Limited, a 50/50 joint
venture with GraceKennedy Group.
VOLUME
Latin America grew volumes by three
per cent to 387,000 MT, driven mainly
by our Soprole business in Chile.
Consumer volumes in Soprole were
up two per cent, driven by growth
in liquid milk, mature cheese and
powdered milk, while milk powder
sales to the Government Health
Programme also increased.
Soprole continues to grow
volumes through new product
development. The cheese
category in Chile is relatively
small when compared to other
parts of South America but the
Soprole team has used innovation
in serving size and packaging to
expand beyond the traditional
products to help grow the
category by nine per cent on
the prior year.
VALUE
Our business across Latin America was
also impacted by higher input costs,
with the Farmgate Milk Price up on
average by 13 per cent. Normalised EBIT
decreased 19 per cent to $111 million.
Excluding the impact of the strong New
Zealand dollar, earnings fell 12 per cent.
The key driver of lower normalised
EBIT was Soprole, where earnings fell
40 per cent, or 31 per cent in constant
currency. The higher milk price, along
with increased costs in packaging,
raw materials, energy and transport,
principally as a result of the weaker
Chilean peso, resulted in a lower margin
as these increased input costs could
not be fully passed on to customers,
especially as economic conditions in
Chile were weaker than the prior year.
The business has maintained its strong
market share position and is well placed
for long-term success.
Storage and distribution expenses were
also higher, as the business transitioned
to a new centralised distribution centre,
creating some duplication over the
transition period. The change means that
Soprole is well positioned to improve
service levels and drive efficiencies in
this area as the business grows.
Soprole has positioned the business
for the more challenging economic
environment ahead with a review and
realignment of its structure.
SOPROLE CHEESE CATEGORY
GROWTH
9%
40 FONTERRA ANNUAL REVIEW 2014
This year, around
20 new product
innovations were
launched to the
market including
Zero Lacto (family
of products for the
lactose intolerant)
and Soprole Light.
Innovation has a fundamental role in
maintaining the relationship with our
consumers and driving volume and
earnings growth. This year, around 20
new product innovations were launched
to the market including Zero Lacto
(family of products for the lactose
intolerant) and Soprole Light.
The DPA Brazil chilled and liquids
business EBIT declined from the
previous year as higher milk costs have
only been partially recovered through
retail pricing due to a competitive
pricing environment. The Caribbean
foodservice business also experienced
lower earnings due to milk cost
increases that could not be recovered.
Earnings increased for the DPA Venezuela
liquid and chilled joint venture. In part this
was a result of some one-offs, including
a hyperinflationary accounting gain and
a land sale. This remains a challenging
market and the underlying business
performance was constantly reviewed
to meet market demands.
The Southern Cone ingredients business
benefited from improved pricing for
dairy ingredients and the conclusion of
some spot contractual sales, resulting in
a return to profitability.
Together with Nestlé, we have revised
our 10-year-old Dairy Partners Americas
(DPA) joint venture to better reflect
each company’s respective strategies.
From August 2014, Fonterra now has
a 51 per cent controlling stake in DPA
Brazil, with Nestlé holding the balance.
We have taken over Nestlé’s share of
DPA Venezuela together with a local
partner, and increased our share to
Soprole’s new distribution centre will ensure a more efficient supply chain.
KEY FINANCIALS
NZD MILLION
Total volume1 (’000 MT)
Revenue
Gross margin
Gross margin percentage
Operating expenses
Normalised EBIT
Normalised EBIT percentage
Return on capital employed
YEAR ENDED
31 JULY 2014
YEAR ENDED
31 JULY 2013
CHANGE
387
1,161
267
23.0%
(198)
111
9.6%
15.1%
377
1,135
303
26.7%
(191)
137
12.1%
18.2%
3%
2%
(12%)
4%
(19%)
1 Total volume includes intercompany volumes.
60 per cent. The other announced
changes to the DPA alliance include
Nestlé buying Fonterra’s share of DPA
Ecuador and the DPA milk powder
manufacturing businesses with
settlement due to be completed later
in the year.
The restructuring of the DPA agreement
opens the way to develop the foodservice
and everyday nutrition strategy across
all dairy categories in Latin America
including cheese and butter while
maintaining Nestlé as a joint venture
partner in Brazil.
FONTERRA ANNUAL REVIEW 2014
41
SUSTAINABILITY AND SOCIAL RESPONSIBILITY FOR THE YEAR ENDED 31 JULY 2014
SUSTAINABILITY
AND SOCIAL
RESPONSIBILITY
A healthy environment and society means a healthy business.
Our contribution to environmental health, community wellbeing
and economic prosperity is key to our overall success and our
ability to operate effectively.
SUSTAINABLE
DAIRYING
Fonterra farmers continue
to take the lead in adopting
sustainable farming practices.
NEW ZEALAND
In New Zealand our farmers are focused
on building a sustainable, resilient
dairy industry which is supported by
New Zealanders. We are supporting
our farmers’ activities with our Supply
Fonterra programme which sets out
environmental, animal health and
food safety requirements and assists
our farmers to meet regulatory
requirements and build sustainable
farming operations. Our Supply
Fonterra commitments include:
Annual Farm Dairy and
Environmental Assessments
Every farm supplying Fonterra in
New Zealand is visited annually through
our Farm Dairy and Environmental
Assessments. This ensures each
Fonterra farm meets specific milk
quality and environmental standards.
If improvements are needed, plans
are developed with our farmers
to help them achieve these within
agreed timeframes.
Roger Madson, farmer; Angus Woods, Area Manager;
and Food Safety Manager, Lance Pepper – Waihi.
Effluent Management
Thanks to the investments by our
farmers, good progress continues
towards our aim to have effluent systems
and management practices capable of
meeting regional council regulations 365
days a year. These systems are checked
as part of the annual Farm Dairy and
Environmental Assessments.
In the 2013/14 season, the
progress made by our farmers
was clear with a 50 per cent
reduction in the number of farms
referred to our Sustainable Dairy
Advisors and total identified risks
reduced by 35 per cent.
STOCK EXCLUSION FROM WATERWAYS
ACHIEVED ON NEW ZEALAND FARMS
951
%
Animal Health and Welfare
The Fonterra Animal Health and
Welfare booklet provides information
to support our farmers including
regulations and codes of welfare,
reference materials and toolsets.
Compliance with a number of animal
health and welfare aspects is mandatory,
including humane slaughter practices,
fitness for transport and humane
management of painful procedures.
Waterway Management
This year, the mapping of waterways
on more than 8,670 Fonterra farms was
completed, and the significant efforts
of our farmers saw 95 per cent1 (23,300
kilometres) of defined waterways stock
excluded. In addition, 99 per cent of
regular stock crossing points now have
bridges or culverts installed.
1 This excludes approximately 450 kilometres of waterways with dispensations, most of which have management plans requiring temporary stock exclusion measures until
permanent fencing is constructed. In some cases, the dispensations relate to areas not accessed by dairy animals.
42 FONTERRA ANNUAL REVIEW 2014
42 FONTERRA ANNUAL REVIEW 2014
GREENHOUSE GAS EMISSIONS TRENDS – NZ MILK PRODUCTION
kg CO2 e per kg of FPCM
1.0
0.8
0.6
0.65
0.64
0.63
0.64
0.4
0.2
0.0
0.11
0.12
2009/10
0.05
0.12
0.12
0.07
0.11
0.11
0.06
0.12
0.12
0.07
2010/11
2011/12
2012/13
Animal Emissions
Other On-farm
Land Use Change
Brought-in Feeds
Fonterra is a signatory to the
Sustainable Dairying: Water Accord,
a pan-industry commitment to
New Zealand to enhance the overall
contribution of dairying to water
quality improvements.
AUSTRALIA
In Australia, Fonterra’s milk is supplied
by around 1,200 farmers. They are
always looking to identify opportunities
for them to increase profitability and
reduce their environmental impacts.
The accord has targets focused on
effluent management, nutrient
management, water use efficiency and
waterway management, including stock
exclusion and riparian management.
Nitrogen Management
Our Nitrogen Management Programme
targets nutrient use efficiency. Farm data
provided by our farmers is used to create
farm specific reports showing modeled
nitrogen conversion efficiency and
nitrogen loss risk. Regional comparisons
are included so our farmers can compare
performance. This information collection
and modelling process was underway
in the 2013/14 season and addresses
Fonterra’s commitments under the
Sustainable Dairying: Water Accord.
The Fonterra SupportCrew™
programme provides farmers in
Australia with access to a team
of highly skilled specialists, with
expertise and skill sets in the
areas of finance, nutrition and
agronomy, human resource
management, quality and
sustainability. The aim is to
improve farm profitability and
production and the efficient use
of natural resources.
The programme has now completed
182 on-farm environmental projects,
with a further 64 still in progress.
Once these projects are completed,
more than 20 per cent of our suppliers
in Australia will have participated
in an on-farm environmental project.
To deliver these projects farmers’
own investments on-farm have
been supported by the Australian
Government’s Carbon Farming
Futures programme and NRM North2
in Tasmania.
Nick Dawson, farmer, and Tony Haslett, Fonterra Area
Manager – Pakatoa.
CARBON FOOTPRINT OF MILK
New Zealand
The 2012/13 full lifecycle estimate of
greenhouse gas emissions for New
Zealand milk at the farm gate is 0.95kg
CO2e per kg of fat and protein corrected
milk (FPCM). This has increased from
0.90 in 2011/12 due to a number of
factors. A revision in the Ministry for
the Environment (MfE) methodology
accounting for land use change has
increased reported emissions3. There
has also been an increase in the use
of supplementary feed, influenced by
widespread back-to-back droughts
across New Zealand, which have
significantly impacted pasture growth.
China
Quantifying the emissions of the
China farms is an important first step
in identifying opportunities to reduce
our footprint. The 2012/13 full lifecycle
estimate of greenhouse gas emissions
for milk at the farmgate was calculated
as an average of 1.31kg CO2e per kg fat
and protein corrected milk (FPCM) for
the Yutian 1 farm.
2 NRM North is a non-profit organisation working with the North Tasmanian community on Natural Resource Management (NRM) issues.
3 An update in the Ministry for the Environment (MfE) methodology accounting for land use change includes a revision in the estimates of deforested land using satellite
imagery and aerial photography. Official confirmations of deforested land are received from forest land under the Emissions Trading Scheme. As forest land owners have
four years to report deforestation under the Emissions Trading Scheme, the amount of land use conversion for previous years could still be revised upwards. The final figure
can only be officially confirmed after four years. Uncertainty also remains in relation to the contribution of land use change directly to dairying land. There is no primary
data available in regards to the amount of forest land converted to dairying land. An assumption has been made using a Deforestation Intentions Survey produced by the
University of Canterbury, taking the average value for the intended use of deforested land from forest owners surveyed between 2006 and 2013 (70 per cent conversion to
dairying land, Deforestation Intentions Survey, Manly, (2006-2013)). Fonterra will update these figures annually, based on the latest data available.
FONTERRA ANNUAL REVIEW 2014
FONTERRA ANNUAL REVIEW 2014
43
43
SUSTAINABILITY AND SOCIAL RESPONSIBILITY FOR THE YEAR ENDED 31 JULY 2014
MANUFACTURING ENERGY USE
PER TONNE OF PROUDCTION ( GJ/T)
8.41
8.40
8.49
8.40
8.37
10
8
6
4
2
0
New Zealand manufacturing site, Darfield.
SUSTAINABLE
MANUFACTURING
Fonterra is the world’s largest
dairy processor and the scale
of our operations is significant.
The majority of our operations
are based in New Zealand,
where we collect 84 per cent of
our global milk supply4. Australia
is our second largest milk pool
and asset base.
We aim to operate sustainably and
efficiently with a focus on reducing
emissions and waste, and improving
water and energy efficiency. We take
social and environmental considerations
into account in our operations today
and when we plan for tomorrow.
Investments in new plant, for example,
aim to include the most resource-
efficient technologies.
NEW ZEALAND AND AUSTRALIA
Emissions
Our greenhouse gas emission intensity
has decreased from 0.63 tonnes to 0.62
tonnes CO2e per tonne of production
from 2012/13 to 2013/14, representing
a two per cent reduction.
While energy and emission intensity
performance of our New Zealand
operations overall is similar to last
year, less adverse weather conditions
this year have led to fuller plants and
increased production volumes, which
assisted our energy and emissions
intensity performance. A number of
factors negatively impacted energy and
emission intensity results.
We experienced unexpected energy
supply issues that lowered boiler
efficiencies in some instances, with a
number of utility failures resulting in site
downtimes and increased energy use.
In Australia we achieved a six per cent
reduction in emissions intensity for
the year, a trend of carbon intensity
reduction across our Australian
operations. Our last operational coal-
fired facility at Cororooke was closed in
October 2013, leading to the elimination
of more than 20,000 tonnes of coal-
related greenhouse gas emissions
per annum.
Energy
The efficient use of energy remains a
key contributor towards our goal of
reducing emissions. Energy use per
tonne of production in New Zealand
and Australia decreased from 8.405
GJ/tonne in the 2013 financial year
to 8.37 GJ/tonne in the 2014 financial
year. While parts of the business saw
greater reductions in energy intensity,
significantly higher milk flows in
New Zealand in the year led to
product mix being weighted more
heavily towards the higher-intensity
ingredients products.
Fonterra has one of the largest energy
efficiency programmes in New Zealand
which is currently in its eleventh year of
operation. The programme is designed
to reduce the energy intensity per tonne
2010
2011
2012
2013
2014
ENERGY USE PER TONNE IN NEW ZEALAND AND
AUSTRALIA MANUFACTURING OPERATIONS
REDUCTION IN MANUFACTURING
ENERGY INTENSITY SINCE 2003
15%
of product manufactured and since 2003
has achieved a 15 per cent reduction in
manufacturing energy intensity.
This year, we commissioned the next
stage of investment in our new energy-
efficient Darfield site. We are recording
lower energy use as a result of the
stage one investment, with efficiency
improvements of up to 12 per cent
in comparison to older technologies.
Further improvements have been made
in our overall energy and emission
performance through the closure
of the Plains site in Christchurch,
with milk diverted to more efficient
manufacturing sites.
Energy efficiency initiatives continue to
be developed and implemented across
our manufacturing sites. A focus on
energy efficiency at our Edendale and
Stirling sites since 2011 has achieved an
approximate three per cent reduction
in energy use and reduced emissions at
these sites by more than 8,800 tonnes
of CO2e per annum.
4 Of Fonterra’s global milk collections by business ownership, 84 per cent for the 2013-2014 production season (1 June 2013 – 31 May 2014) was collected in New Zealand.
5 This was reported as 8.38 GJ/tonne in the 2013 Annual Report but this has increased slightly as the data for July 2013 which was used in the calculation of the prior
year number was based on an estimate when the 2013 Annual Report was published.
44 FONTERRA ANNUAL REVIEW 2014
Takapuna Grammar students in Auckland, New Zealand with Paper4Trees recycling crates, each made from 36
recycled Anchor™ Light Proof bottles.
In September 2013, Fonterra Australia
completed an upgrade to energy-efficient
cheese making technology at the
Wynyard, Tasmania site. The upgraded
vats can now be heated by surplus hot
water already available on site.
This initiative leverages low-emissions
energy already generated by Wynyard’s
cogeneration system, reducing carbon
emissions from the essential milk-
warming portion of the cheese making
process by 90 per cent.
Water
Our New Zealand operations used
42 million cubic metres of water and
recycled or reused six per cent of total
use. This is an increase of two million
cubic metres on the prior year, mainly as
the result of more milk being processed
and a new processing plant coming on
stream. Water use per tonne decreased
by over two per cent. As Fonterra builds
new capacity we are committed to
investing in resource efficient plants.
The Pahiatua site expansion
will set a new water efficiency
benchmark with all evaporator
condensate from the new drier
to be reused.
This allows the milk processing capacity
of the site to be increased, without any
additional water being required, over
and above the water volume already
consented for use by the site.
Our Australian operations used 3.2
million cubic metres of water in the
period 1 July 2013 to 30 June 2014,
compared to 3.7 million cubic metres of
water in the prior period. The water use
was reduced per tonne of production by
eight per cent, primarily due to product
mix decisions. Our Darnum site is water
efficient and can harvest and reuse
water when manufacturing skim and
whole milk powders.
Waste
In our New Zealand operations,
including our consumer businesses,
94 per cent of solid waste was reused or
recycled. This is the fourth consecutive
year we have surpassed our target to
reuse or recycle at least 90 per cent of
our solid waste.
We have partnered with Envirofert to
divert food waste from landfill. We are
converting dairy products that are past
their ‘best before’ date, damaged or
out of specification into stock food or
compost. A de-packaging plant recovers
product packaging for recycling and
rebates are donated to local not-for-
profit organisations.
Overall, our eco-efficiency programme
continues to reduce the environmental
impact of manufacturing through
refining, reusing and recycling.
In 2011, we established the Recycle
Lab, an innovative recycling and waste
minimisation programme that has
reduced waste to landfill by more than
8,400 tonnes since 2011.
Our Recycle Lab
has cut waste to
landfill by more than
8,400 MT since 2011.
NEW ZEALAND OPERATIONS REUSED
OR RECYCLED SOLID WASTE
94%
TRANSPORT
Milk Collection Fleet Efficiency
We are continuing to upgrade our
tanker fleet to high efficiency trucks.
Changes to our milk collection
scheduling processes have improved
diesel consumption by 10 per cent for
every 100 kilometres travelled since
the 2010 financial year. The changes
focused on collection routes, tanker
loads and driver performance and have
delivered an improvement in energy
and emission intensity.
FONTERRA ANNUAL REVIEW 2014
45
SUSTAINABILITY AND SOCIAL RESPONSIBILITY FOR THE YEAR ENDED 31 JULY 2014
Maungaturoto Primary, celebrating the completion of the national rollout of Fonterra Milk for Schools.
SUPPORTING
COMMUNITIES
Fonterra is committed to working
on initiatives that are important
to our communities and to
our people. We make the most
valuable difference when we
share what we do best – our dairy
ingenuity and knowledge and the
nutritional benefits of dairy.
NEW ZEALAND
Fonterra Milk for Schools
Our Fonterra Milk for Schools
programme is helping to improve the
health of future generations of New
Zealanders. In May 2014, the national
rollout of Fonterra Milk for Schools was
completed. More than 1,490 schools
are now participating, which means
approximately 170,000 children, more
than 70 per cent of all primary schools,
can now drink milk every day of the
school term.
With high satisfaction and participation
rates from schools, drinking milk is
being established as a normal part
of the school day. Our Fonterra Milk
for Schools programme has enabled
Fonterra farmers to connect with Kiwi
kids and has demonstrated our farmers’
commitment to their communities by
providing and promoting dairy nutrition.
46 FONTERRA ANNUAL REVIEW 2014
KickStart Breakfast
Our KickStart Breakfast programme
has been running since 2009 as a
partnership between Fonterra and
Sanitarium. The programme was
expanded in the year, with additional
support from the Government enabling
the programme to be made available
from two to five days a week, across
all school deciles.
The programme works in partnership
with schools and their communities,
supports 761 schools’ KickStart Breakfast
clubs across the country and serves
more than 100,000 breakfasts per week.
Enjoying KickStart Breakfast at Te Ara Whanui school
in Alicetown, Wellington.
The Fonterra Grass Roots Fund
For seven years, our Fonterra Grass
Roots Fund has supported school
groups, educational groups, charitable
trusts, sports clubs and local emergency
services to help clever initiatives happen
in our rural communities. Community
groups can apply for grants of up to
$5,000 to get their projects underway.
This year, approximately $600,000
was provided to 261 New Zealand
community organisations and projects.
More than 70
per cent of all
New Zealand
primary schools
can now drink milk
every day of the
school term.
KICKSTART BREAKFASTS
PER WEEK, MORE THAN
100,000
Living Water Partnership with the
Department of Conservation
In March 2013, we began a 10-year,
$20 million partnership agreement
with the Department of Conservation
(DOC) with an aim to work together
to help improve the health of New
Zealand’s waterways. Our Living Water
programme is initially focused on five
sensitive water bodies including
Kaipara Harbour, Tikapa Moana/
Firth of Thames, Waikato Peat Lakes,
Te Waihora/Lake Ellesmere and
Awarua/Waituna Lagoon. DOC’s
conservation expertise, with our on-
farm environmental programme and
the support of farmers, iwi, councils and
environmental care groups, will help
achieve our joint vision of a sustainable
dairy industry as part of healthy
functioning ecosystems.
We have developed catchment specific
operational plans for our programme
sites and 16 diverse start-up projects
are currently underway.
Sri Lanka early childhood development centre.
CHINA
The Fonterra Rural Maternity
and Infant Healthcare
Community Programme
The Fonterra Rural Maternity and Infant
Healthcare Community programme was
established in 2009 in partnership with
the China Soong Ching Ling Foundation
to provide medical care and advice to
pregnant women, mothers of infants
and children in rural communities. This
programme has touched the lives of
more than 10 million people in rural
communities across China.
In the 2014 financial year, the
programme was expanded to multiple
provinces simultaneously. Twelve fully
equipped ambulances were donated
to Hu’nan, Yunnan, Jiangxi, Jiangsu,
Sichuan and Chongqing provinces.
Maternity and child healthcare training
was delivered to 2,091 medical workers
from 1,591 hospitals and medicare
centres across Hu’nan province.
In co-operation with the Beijing Union
Medical College Hospital, a national
prenatal diagnostic techniques training
programme was launched as part of the
programme’s vision for improved rural
infant and maternal healthcare.
Fonterra Farmer Training Programme
Fonterra established a Farmer Training
Programme in 2012 in partnership with
China’s Ministry of Agriculture. It is part
of our commitment to work alongside
the Chinese Government to develop
the local dairy industry. The programme
includes courses on prevention and
control of animal disease as well as
management of animal health.
In the past two years, the programme
has trained nearly 2,000 local farmers
to improve their farming skills.
SOUTHEAST ASIA
ChildFund – Indonesia, the
Philippines and Sri Lanka
Our joint programme with ChildFund
supports children’s nutrition, health and
education activities at early childhood
development centres and community
based programmes in Indonesia, the
Philippines and Sri Lanka.
Through our partnership with
ChildFund, more than 1,500
children have received nutritious
food, medical check-ups and
access to multivitamins and
de-worming medication. We have
constructed or upgraded 49 early
childhood development centres
and organised 54 home-based
programmes.
Since 2011, we
have been in
partnership with
ChildFund, with the
aim of improving the
overall development
of some of the most
deprived and vulnerable
pre-school children
in Southeast Asia.
More than 4,000 mothers, fathers and
caregivers have learned about maternal
health and childcare, and more than
900 families have received seeds to
plant home gardens for better child
nutrition. We have also trained 461
daycare workers, pre-school teachers
and community health workers to
improve their knowledge, behaviour and
practices in childcare and development.
Indonesia Dairy Development
Fonterra works in partnership with the
Indonesian Government to improve the
capability and capacity of the local dairy
industry. Our industry support includes
a comprehensive Fonterra Dairy
Scholarship training programme. The
programme scholarships are awarded
to dairy farmers, dairy extension officers
and dairy service providers, to enable
them to improve their dairy knowledge.
The Indonesian Directorate General of
Livestock and Animal Health, Massey
University and Taratahi Agricultural
Training Centre, are valued partners in
the delivery of this programme.
FONTERRA ANNUAL REVIEW 2014
47
SUSTAINABILITY AND SOCIAL RESPONSIBILITY FOR THE YEAR ENDED 31 JULY 2014
Soprole’s school
sports programme
supports the health
and wellbeing of
Chilean children.
Soprole school sports programme.
Sri Lanka Dairy Development
Fonterra continues to support dairy
development in Sri Lanka, with a focus
on developing a network of farms to
operate as training hubs for local staff
and farmers, seeking to demonstrate
best-practice, sustainable dairy farming.
Since 2013, a pilot group of
10 farmers has completed
several training modules.
Increases in fodder production,
milk volume, animal growth
rates and income have been
recorded from farms participating
in our pilot programme.
Milk volumes increased by around
42 per cent during the pilot, and
dairy derived incomes improved by
up to 37 per cent. Poor herd nutrition
was addressed as a major barrier
to improved farm productivity and
profitability. Reproduction in herds has
improved, along with calf growth rates,
and training to identify mastitis led to
improved milk quality on all farms.
LATIN AMERICA
Chile – Soprole school
sports programme
Soprole’s school sports programme
attracts thousands of participants, along
with the involvement of families and
local communities to support the health
and wellbeing of Chilean children.
Our Soprole school sports programme
works with local sports clubs and
organisations that manage sporting
events. Over the past 13 years we have
expanded to many different regions,
organising sports events throughout the
year from Arica to Punta Arenas. During
this time, more than 1,800 educational
organisations have participated in
sporting events or tournaments
in chess, athletics, swimming and
volleyball, and nearly 4,000 football,
basketball and volleyball matches were
organised, with an estimated 55,000
regular participants over the year.
TAKING CARE
Dairy products are part of a
healthy diet in virtually every
culture in the world. We have
an unrelenting commitment to
our customers and consumers in
more than 100 countries that the
products we make for them will
meet the highest standards for
food safety and quality. We also
take our duty of care seriously
with our own people. Their skills
and experience contribute to our
success. Our health and safety
policies are aimed at minimising
harm at work and encouraging
balanced lifestyles.
FOOD SAFETY AND QUALITY
The Fonterra Quality System ensures
that wherever we are located in the
world, we have a clear, consistent
framework to deliver quality products
and services. Quality is everyone’s
responsibility and our quality framework
includes policies, processes and training
so that this responsibility can be met.
Cumbres vs Everest, Soprole sports programme.
48 FONTERRA ANNUAL REVIEW 2014
Our overall product
performance was
again assessed
by Fonterra’s
customers, via
the 2014 customer
value management
survey where we
achieved a score
of 8.1 for the year.
•
•
We have continued to carry out milk
quality audits and improvement
programmes across the 16 countries
where we source milk, thereby raising
the standard of the milk we source
across the globe. This has not only
provided benefit to Fonterra, but also
to the numerous dairy farmers we
source from.
A Quality Leadership Team has been
established at senior management
level to drive Fonterra’s quality
strategy and culture. This senior
team oversees policies, standards
and positions in food safety and
quality, will monitor compliance and
ensure emerging risks are understood
and managed.
Our overall product performance
was again assessed by Fonterra’s
customers, via the 2014 customer value
management survey where we achieved
a score of 8.1 for the year.
For the fifth consecutive year
we have achieved a value of
above 8.0, which is considered
best in class.
FONTERRA ANNUAL REVIEW 2014
49
Sally Tatopau and Marie Marshall from our Bulk Take Home department at Tip Top™ ice cream factory in Auckland.
This system ensures control of product
quality from farm to customer. It
includes a rigorous testing regime that
starts at the point of milk collection
and runs through the supply chain.
In addition to our own testing,
independent and external tests provide
further reassurance on the quality and
safety of our products.
Our system undergoes regular
scrutiny with audits on our plants
and processes. These audits are
undertaken by us, regulators and our
customers. The robustness of our
system was recognised in the internal
and independent reviews following the
precautionary recall last year. We also
had this robustness acknowledged in
customer audits this year.
The Fonterra Quality System
is guided by four principles:
think and live quality, deliver on
our promises, right first time,
every time, and continuous
improvement.
This year, initiatives aimed at
continuous improvement included
benchmarking our system with other
companies to reconfirm it is world
class. We also added further food
quality and safety standards and
increasing food safety requirements
of suppliers for ingredients, packaging
material and raw milk supply. We
strengthened our compliance audit
processes and improved our group
regulatory standards framework to
ensure consistent compliance with
country of origin and importing
country regulations.
The Fonterra Quality System
spans the full global supply chain
from milk sourcing to customer
satisfaction and is supported by
quality standards and quality reference
documents, and performance and
compliance measurement.
Food quality and safety are always a
priority for Fonterra as a producer of
consumer dairy products and dairy
ingredients. We have a robust system,
but we are the first to acknowledge it
can always be made even stronger.
2014 Financial Year Performance
Achievements
•
A full food safety and quality audit of
all our manufacturing facilities in New
Zealand and internationally is due for
completion by the end of 2014. This
audit builds on the annual Controlled
Self Assessment (CSA) against the
Fonterra Quality Standards. Once
completed, a compliance score will be
assigned to each site and to Fonterra
as a whole. The CSA in the prior year
achieved a score of 95 per cent.
•
Further supplier audits were
undertaken through our Fonterra
Approved Supplier Programme. The
programme ensures we operate a
robust and safe approval process for
procured ingredients, packaging and
third party-sourced dairy products.
SUSTAINABILITY AND SOCIAL RESPONSIBILITY FOR THE YEAR ENDED 31 JULY 2014
2014 FINANCIAL YEAR KEY HEALTH AND SAFETY FOCUS AREAS
• Zero fatal incidents and a reduction in serious harm injuries. Greater
focus on the risk of fatalities and serious harm and increased targeted
management around our highest critical risks.
• Reduction of harm overall Shift the focus from systems to leadership,
care and engagement to reduce minor injuries and harm and to support
improved wellbeing.
• Engagement and Health and Wellbeing We have clarified and
strengthened our vision and commitment in the areas of health and
wellbeing. Associated with this we have developed a comprehensive
wellbeing strategy and are connecting global health and wellbeing
programmes with our overall people and business strategy.
Precautionary Recall
The all-clear after the precautionary
recall followed a period of considerable
concern for Fonterra, our customers and
consumers regarding products made
using WPC80. Our management internal
review and an independent review
commissioned by the Board examined
the incident fully to identify what went
wrong and to recommend actions. Both
reports have been widely publicised.
The immediate actions, completed
during late 2013, focused on operational
improvements at plants, including
a review of standards and product
specifications, upgrading cleaning
regimes and reviewing and updating
the approach to non-standard testing.
Specific food quality and safety
requirements were included in new
and senior level employment contracts
from February 2014, with senior level
performance agreements also reflecting
these expectations.
By the end of July 2014, the majority of
short- to medium-term actions were
completed, with a full global audit of
all manufacturing facilities on track for
completion by the end of 2014. Progress
was acknowledged and commended
by the Board’s Independent Inquiry
Committee at its nine-month
assessment in July 2014.
Governance and Risk Management
Fonterra has introduced the Fonterra
Food Safety Risk Management
Framework to complement the
Fonterra Quality System.
It is overseen by the Risk Committee
established by the Board. While the
Board had oversight of risk via the
Audit, Finance and Risk Committee,
having a separate committee has added
weight to that oversight and created
a specific governance link to risk
management at Fonterra.
Fonterra’s Food Safety and Quality
Council has been strengthened and
has extended its mandate to provide
long-term strategic direction of food
safety, quality and regulatory affairs.
The Council has oversight of the
Risk Management Framework and
the Food Safety Quality Strategic
Plan, and provides governance
across Fonterra. This includes the
establishment and monitoring of
group-wide quality measurements.
The Food Safety Quality Council reports
regularly to the Risk Committee.
Fonterra has also established a cross-
disciplinary Incident Management Team
to manage events that could impact
the health and safety of any of our
stakeholders. It is structured to enable
tight and rapid escalation, assessment
and management of issues.
People make
the difference
and caring for our
people is a key
foundation to the
way we operate.
DECREASE IN SERIOUS
HARM INJURIES
63%
HEALTH, SAFETY AND WELLBEING
At Fonterra we believe that sustainable
success can be achieved through our
people. People make the difference and
caring for our people is a key foundation
to the way we operate. In the last few
years we have made great progress
in reducing harm and supporting our
people’s health and wellbeing.
During the year we built upon
previous programmes and success
in order to support our mission
that our people are healthy, live
with balance, and go home from
work safely every day.
Performance against focus areas
We made progress in reducing the events
and injuries that have the most significant
impact on our people. During the year
we had no employee or contractor
deaths and we achieved a 63 per cent
decrease in serious harm injuries
compared to the previous year. Serious
harm injuries are those injuries that
cause permanent or long-term harm.
50 FONTERRA ANNUAL REVIEW 2014
TOTAL RECORDABLE INJURY FREQUENCY RATE
TRIFR (PER MILLION WORK HOURS)
25
20
15
10
5
0
23.7
18.2
14.3
12.7
8.8
9.8
2009
2010
2011
2012
2013
2014
Fonterra employee, Tanya Venema, preparing for a run
as part of the 10,000 Steps Challenge, a Corporate and
Global Sales-wide Health, Safety and Wellbeing initiative.
During the year, 358 Fonterra employees
were injured (requiring medical
treatment, restricted work duties or
time off work), which is a negative
trend compared to the previous year.
We define this number as our total
recordable injuries (TRI). The increase in
injuries shows a plateau in performance
after seeing consecutive decreases since
the 2009 financial year.
Despite the number of higher TRIs,
there was a significant reduction in
the severity of injuries sustained. This
change was reflected in a 10 per cent
reduction in lost time injuries (LTI) and
29 per cent fewer days off work for our
LTIs compared to the previous year.
Reducing the TRI number overall
continues to be a focus. The TRI number
drives the Total Recordable Injury
Frequency Rate (TRIFR).
We continued to see improving scores
on our Safe Home audits, which cover
25 per cent of sites globally on an
annual basis. They measure our
performance against key critical risks
as well as core health, safety and
wellbeing practices (captured in our
Core Safe Home Standard 1).
Better Health, Better Safety,
Better You is our new global
communication platform. It is
designed to bring all the elements of
health, safety and wellbeing together,
connecting our people on a personal
level and enabling a sense of personal
ownership. This new way of thinking
was launched in November 2013
and has been embedded into the
business globally.
REDUCTION IN SERIOUS HARM OF OUR PEOPLE AND CONTRACTORS
FROM THE PREVIOUS YEAR
80
60
40
20
0
60
2013
Employee
Contractor
22
2014
PEOPLE
HEALTH &
WELLNESS
INJURY
MANAGEMENT
LEADERSHIP
CULTURE &
ENGAGEMENT
CORE
STANDARDS
LIFE
SAVERS
PLANT &
EQUIPMENT
PROCUREMENT
DESIGN
CAPITAL
DECISIONS
CRITICAL
RISK
SAFE HOME
AUDIT
PROCESS
Fonterra Life Savers has been
introduced as a set of global behavioural
expectations for our people, that bring
focus to our highest critical risks.
There are six behaviours which have
been identified as having the greatest
potential for reducing harm and raising
our people’s awareness of the risks that
they are faced with each day:
1. Always work free of impairment
from alcohol and drugs
2. Always wear and use Personal
Protective Equipment (PPE)
3. Always drive safely
4. Always work with a valid permit
to work, where required
5. Always operate equipment with
guards and safety systems in place
6. Always follow access rules.
FONTERRA ANNUAL REVIEW 2014
51
CORPORATE GOVERNANCE FOR THE YEAR ENDED 31 JULY 2014
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.
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:
• determining the Farmgate Milk Price
and shareholder returns
• 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
• approval and reporting of the
Group’s financial performance to
shareholders.
THEO SPIERINGS
CHIEF EXECUTIVE
JOHN WILSON
CHAIRMAN OF THE BOARD
IAN BROWN
SHAREHOLDERS’ COUNCIL CHAIRMAN
CHANGES TO THE
FONTERRA BOARD
There was one change to the
Fonterra Board during the
financial year ending 31 July
2014. Michael Spaans was
elected as a Farmer Director
in November 2013.
52
FONTERRA ANNUAL REVIEW 2014
COMPLIANCE WITH BEST
PRACTICE GOVERNANCE
STANDARDS
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
Corporate Governance Best Practice
Code issued by NZX Limited (NZX)
for the Fonterra Shareholders’ Market
(FSM) and the ASX Limited (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.
WE FOCUS ON GOVERNANCE IN A WAY THAT PROMOTES:
• the interests of our farmer shareholders
• Fonterra’s Co-operative philosophy, which is largely expressed through our Co-operative Principles
• transparency, giving our farmer shareholders, Fonterra Shareholders’ Fund (FSF) unitholders
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, unitholders, debt investors, governments and the communities Fonterra works in.
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
• 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 People, Culture and Safety
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 in relation to the
appointment of Appointed Directors.
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.
Director independence
The rules of the Fonterra Shareholders’
Market require Fonterra to have a
minimum of two Independent Directors.
In order to be an Independent Director,
a director must not be an executive
officer of Fonterra, or have a
‘disqualifying relationship’.
A director has a disqualifying
relationship where he or she has a direct
or indirect interest or relationship that
could reasonably influence, in a material
way, the director’s decisions in relation
to Fonterra. The FSM Rules contain
specific examples of what may give rise
to a disqualifying relationship. Appointed
Directors cannot be shareholders and
are expected to maintain independence
for the length of their term.
At 31 July 2014, Simon Israel, David
Jackson, Sir Ralph Norris and John Waller
each did not have (and continue not to
have) any disqualifying relationship in
relation to Fonterra and are therefore
Independent Directors.
The Board has determined that Simon
Israel, David Jackson, Sir Ralph Norris
and John Waller (being the directors
appointed by the Board in accordance
with Fonterra’s Constitution) are
Independent Directors under the FSM
Rules as at 31 July 2014.
John Wilson, who is an Elected Director,
is the Board-elected Chairperson.
Following good governance, the
Chairperson and Chief Executive roles
at Fonterra are not exercised by the
same individual.
FONTERRA ANNUAL REVIEW 2014
53
CORPORATE GOVERNANCE FOR THE YEAR ENDED 31 JULY 2014
CORPORATE
GOVERNANCE
CONTINUED
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
2014 financial year, 33 calls were raised
globally with the hotline.
All were fully investigated and
appropriate action taken, including
managing issues through other HR
processes.
Directors are expected to keep
themselves abreast of changes and
trends in the business and in Fonterra’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.
Nomination Committee
The People, Culture and Safety
Committee oversees the process for
appointments to the Board. To the
extent the Board is responsible for
appointing directors, the People, Culture
and Safety Committee satisfies the role
of a nomination committee.
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. The Shareholders’ Council
reviews the Board’s Statement of
Intentions against the performance and
operation of the Group and reports on
this to shareholders annually. The Board
is 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 Fonterra or
to his or her other responsibilities
as a director. Fonterra will pay the
reasonable cost of independent
professional advice.
Board meetings
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
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, including through
meetings with key executives
• the Fonterra Constitution and other
governance systems.
54 FONTERRA ANNUAL REVIEW 2014
BOARD COMMITTEES
COMMITTEE OR GROUP
MEMBERSHIP AS AT 31 JULY 2014
PURPOSE
Audit and Finance
Committee (AFC)
People, Culture
and Safety
Committee (PCS)
Co-operative Relations
Committee (CRC)
Risk Committee (RC)
David Jackson (Chair)
David MacLeod
Ian Farrelly
John Wilson (Chair)
David Jackson (observer)
Ian Farrelly
John Monaghan
John Monaghan (Chair)
Ian (Blue) Read
Michael Spaans
Malcolm Bailey
Malcolm Bailey (Chair)
David Jackson
John Monaghan
John Waller
Nicola Shadbolt
Sir Ralph Norris
Simon Israel
Sir Ralph Norris
David MacLeod
Jim van der Poel
John Waller
To assist the Board in fulfilling its governance responsibilities in
relation to Fonterra’s financial reporting, audit activities, treasury
matters, financial 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.
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.
To assist the Board in fulfilling its corporate governance
responsibilities relating to Fonterra’s management of key enterprise
wide risks. This includes strategic and operational risks, through
Fonterra’s enterprise-wide risk management framework, the
behaviours required of its people and its guidelines, policies and
processes for monitoring and mitigating enterprise-wide risks.
BOARD AND COMMITTEE ATTENDANCE
John Wilson
Malcolm Bailey
Ian Farrelly
Simon Israel
David Jackson
David MacLeod
John Monaghan
Sir Ralph Norris
Blue Read
Nicola Shadbolt
Jim van der Poel
John Waller
Michael Spaans (elected 27 November 2013 – 9 meetings)
Total Meetings
BOARD
REGULAR
SPECIAL
12/12
12/12
12/12
12/12
12/12
12/12
12/12
12/12
11/12
12/12
12/12
12/12
9/12
12
10/10
8/10
10/10
7/10
8/10
9/10
8/10
10/10
10/10
10/10
10/10
7/10
2/10
10
AFC
–
2/6
5/6
–
6/6
5/6
–
3/6
–
4/6
–
5/6
–
6
PCS
7/7
–
7/7
6/7
7/7
–
7/7
7/7
–
–
–
–
–
7
CRC
–
5/5
–
–
–
2/5
5/5
–
5/5
2/5
2/5
–
2/5
5
RC
–
4/4
–
–
4/4
–
3/4
–
–
–
4/4
4/4
–
4
Committee membership was reviewed when the Risk Committee was established and memberships changed. Directors’
attendances may reflect serving on committees for only part of the year.
FONTERRA ANNUAL REVIEW 2014
55
CORPORATE GOVERNANCE FOR THE YEAR ENDED 31 JULY 2014
CORPORATE
GOVERNANCE
CONTINUED
Securities Trading Policy
Fonterra has adopted a Securities
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 and Finance Committee
There is an established Audit and Finance
Committee (AFC) as described above.
The AFC comprises 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. Fonterra has a Group
Audit Independence Policy, for certain
activities the auditor may undertake for
the Group. This policy is prescriptive as
to the types of activities that the auditor
may undertake, those the auditor may
only undertake with the approval of the
AFC, and the types of activities that are
not permitted. The AFC will not approve
the auditor performing any tasks that
have the potential to create a conflict
except in exceptional circumstances
and then only if appropriate safeguards
are in place.
Diversity and Inclusion Policy
The Fonterra Board has recently
approved an updated Group People
Management Policy that encompasses
the Diversity and Inclusion Policy
requirements. Fonterra is committed
to creating and maintaining an
environment where people with
diverse experiences and ways of
thinking are encouraged and enabled.
Fonterra recognises that diversity is
not solely a matter of compliance;
it means respecting differences and
making those differences count. The
Group People Management Policy
requires that all policies, standards
and guidelines support the intent
of diversity and inclusion. Fonterra
proactively identifies and maximises
local talent pools to improve
participation. This includes increasing
gender ratios in leadership, and access
for people with disabilities, and those
representing different cultures
and ethnicities.
As at 31 July 2014, the gender
composition of the Board comprised
12 male directors and one female
director (2013: 1 of 12). 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 who
reported directly to the Chief Executive
at the Balance Date, three were female
(2013: 2 of 12).
56 FONTERRA ANNUAL REVIEW 2014
Milk Price Panel
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
2001 (New Zealand) 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 Michael Spaans.
The Shareholders’ Council appointees
are Richard Punter and Patrick Boyle.
Richard Punter retires by rotation at the
end of September 2014 and is replaced
by Bill Donaldson. The Board confirms
that at Balance Date, John Waller, David
Jackson, Richard Punter and Patrick
Boyle are considered to be Independent
Members of this panel.
GUIDELINE 5: MAKE TIMELY AND
BALANCED DISCLOSURE
Continuous disclosure
In order to affirm Fonterra’s
commitment to promoting a well
informed and efficient market, Fonterra
has a Group Disclosure Policy. Ongoing
education programmes are run within
Fonterra 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 and 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, NZX and ASX
continuous disclosure regimes and with
the Securities Markets Act (1988) 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.
In June 2014, the NZ Markets
Disciplinary Tribunal approved a
settlement agreement between NZX
and Fonterra in respect of FSM Rule
9.1.1. NZX Regulation considered that
Fonterra breached Rule 9.1.1 by failing
to release Material Information to NZX
on concerns that some of Fonterra’s
WPC80 product may have been
contaminated with clostridium capable
of causing botulism, immediately
after coming into possession of that
information. While Fonterra did not
accept NZX Regulation’s view, Fonterra
did acknowledge that view and agreed
to make a payment of $150,000 to the
NZX Discipline Fund and pay the costs
of the Tribunal.
Since the events regarding the WPC80
precautionary recall, Fonterra has
taken significant steps to enhance
and improve governance and
communications around emerging
issues to ensure compliance with
continuous disclosure obligations.
These include:
• Establishing a permanent, multi-
disciplinary group Incident
Management Team (IMT), whose
role is to assess emerging issues for
their potential to develop into critical
incidents, and in such scenarios,
address, among other matters,
stakeholder engagement. One of
the key functions of the IMT is to
ensure that information in relation
to critical incidents is escalated
promptly to ensure all regulatory
and other requirements are analysed
and met appropriately. This team
works seamlessly with Fonterra’s
Disclosure Committee.
• Ensuring that senior management’s
employment contracts include an
express commitment to meeting
all applicable Fonterra policies and
standards in relation to disclosure
of material information and escalation
of issues.
• Instigating detailed e-learning
modules (and testing) for employees
in relation to all policies and standards
including Fonterra’s disclosure
policy and standards. Compliance is
monitored through the Office of the
Chief Financial Officer.
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 37 shareholder-
elected councillors, representing 35
wards. 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 ANNUAL REVIEW 2014
57
CORPORATE GOVERNANCE FOR THE YEAR ENDED 31 JULY 2014
CORPORATE
GOVERNANCE
CONTINUED
Fonterra’s communications with farmer
shareholders include Sky Broadcasts, a
regular Global Dairy Update, Farmlink
and a regular Chairman’s email. As
described above, Fonterra releases
to the relevant stock exchanges
all shareholder-related material
information, and will comply with the
Fonterra Shareholders’ Market, NZX
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 at least twice each
year. Often these are run in conjunction
with the Shareholders’ Council,
Area Managers and the Fonterra
Farmer Network.
As well, directors attend other
farmer meetings during the year on
specific topics.
In addition, the Board consults with
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 regular
shareholder updates.
The Fencepost website enables Fonterra
shareholders, 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 farmer shareholders.
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 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
In early 2014, the Fonterra Board
established a Risk Committee, as
described on page 55. Previously
enterprise-wide risk management
had been overseen by the Audit,
Finance and Risk Committee. With the
advent of the Risk Committee, the risk
management scope of the Audit and
Finance Committee was amended to
financial risk management. The Risk
Committee covers all other aspects of
risk including ensuring a strong risk
management culture in Fonterra.
The Risk Committee comprises two
Appointed Directors and three Elected
Directors. The Committee is chaired
by Malcolm Bailey, who is an Elected
Director. It is a requirement that the
Chairman of the Audit and Finance
Committee is also a member of the
Risk Committee.
Fonterra has a global Risk Management
Policy, 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
which requires the reporting of material
risks as appropriate to the Fonterra
Management Team, the Risk Committee
and the Board.
58
FONTERRA ANNUAL REVIEW 2014
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 are Rodney
Wilson (Chair), David Gasquoine,
Murray Holdaway, Scott Montgomerie,
Philip Wilson and Gerard Wolvers.
The Board has full discretion over the
remuneration of Appointed Directors.
Fonterra’s Risk Management Policy
was reviewed by the Board in 2014
and is aligned with the ISO31000 Risk
Management Standard. The Policy is
supported by a detailed Group Risk
Management Standard and Guidelines
that define the mandatory requirements
relating to risk management for
businesses. The Risk Management Policy
provides a consistent methodology and
approach for the execution of these
mandatory requirements by specifying
processes for:
• identifying existing and potential
risks that 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
• regularly monitoring risks and
tracking progress against action plans.
Risk reporting to the Board for review
occurs on a regular basis. This includes
Fonterra’s Top 20 risks, and changes
in risks and emerging risk areas. This
process is supported by a formal
annual evaluation of the top risks by
all material business units along with
a six-monthly review and update of
this risk assessment material. The six-
monthly review process also includes
Management’s self-assessment of the
effectiveness of key controls relied upon
to manage the top risks. A summary
of the results of this assessment is
reported to Risk Committee.
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 two 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.
Exercise of NZX Disciplinary Powers
NZX did not exercise its powers under
FSM Rule 4.2.2 to halt or suspend the
quotation of Fonterra’s shares during the
financial year.
An agreement was reached between
Fonterra and NZ Markets Disciplinary
Tribunal on 5 June 2014 in relation to an
allegation that Fonterra failed to disclose
information relating to a suspected
contamination of some of Fonterra’s
product. Please refer to Guideline 5 for
more information in relation to the steps
Fonterra has put in place in response to
these events.
FONTERRA ANNUAL REVIEW 2014
59
BOARD OF DIRECTORS FOR THE YEAR ENDED 31 JULY 2014
BOARD OF
DIRECTORS
1. JOHN WILSON
B. Agr.Sc
John Wilson joined the Fonterra Board in 2003 as a
farmer-elected Director and became Chairman in
2012. He is Chairman of the People, Culture and Safety
Committee and served as the inaugural Chairman of
the Fonterra Shareholders’ Council. He is director of
Turners & Growers Limited and is a chartered 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 near Geraldine,
South Canterbury. He is on the Executive Board of
the New Zealand China Council.
2. MALCOLM BAILEY
B. Agr. Econ
Malcolm Bailey was elected to the Fonterra Board in
2004. He is Chairman of the Risk Committee and sits
on 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.
3. IAN FARRELLY
B. Agr.
Ian Farrelly was elected to the Fonterra Board in
2007. He serves on the Audit and Finance Committee
and the People, Culture and Safety Committee
and represents the Board on the Governance
Development Programme. Ian 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 owns and runs a 400-hectare
10,000 animal calf rearing farm in Te Awamutu,
owns a 700 cow dairy farm in the Waikato and has
ownership interests in dairy farms in Canterbury.
4. SIMON ISRAEL
Diploma of Business Studies
Simon Israel was appointed to the Board in 2013
as an Appointed Director. Simon currently chairs
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. Simon was a director of Fraser & Neave,
Neptune Orient Lines, Asia Pacific Breweries, Griffin
Foods and Frucor Beverage Group. He had 10 years’
experience in the dairy industry with Danone as a
Senior Vice President and member of the Group
Executive Committee. He was conferred Knight in the
Legion of Honour by the French Government in 2007.
5. DAVID JACKSON
M.Com (Hons), FCA, FInstD
David Jackson joined the Fonterra Board in September
2007 as an Appointed Director. David is Chairman of
the Audit and Finance Committee and serves on the
Milk Price Panel and the Risk Committee. 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. David is a Fellow of the
New Zealand Institute of Chartered Accountants.
6. DAVID MACLEOD
David MacLeod was elected to the Fonterra Board
in 2011 and is a member of the Audit and Finance
Committee and the Co-operative Relations
Committee. 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, and is a shareholder of Far South
Farms Limited, which owns a dairy farm in Southland.
4
5
6
7
1. JOHN WILSON
2. MALCOLM BAILEY
3. IAN FARRELLY
4. SIMON ISRAEL
5. DAVID JACKSON
6. DAVID MACLEOD
7. JOHN MONAGHAN
8. SIR RALPH NORRIS KNZM
9. BLUE READ
10. NICOLA SHADBOLT
11. MICHAEL SPAANS
12. JIM VAN DER POEL
13. JOHN WALLER
1
2
3
60 FONTERRA ANNUAL REVIEW 2014
7. JOHN MONAGHAN
John Monaghan was elected to the Fonterra Board in
2008 and is Chairman of the Co-operative Relations
Committee and serves on the People, Culture and
Safety Committee and the Risk Committee. Prior to
joining the Board John was Chairman of the Fonterra
Shareholders’ Council for a three-year period. He is
also a director of Centre Port Limited and Centre Port
Properties Limited, and is a trustee of the Wairarapa
Irrigation Trust and the Eketahuna Charitable Trust.
John has dairy farming interests in the Wairarapa,
Canterbury and Otago regions and beef farming
interests in the Wairarapa.
8. SIR RALPH NORRIS KNZM
FNZIM, FNZCS
Sir Ralph Norris joined the Fonterra Board in 2012 as
an Appointed Director. He sits on the People, Culture
and Safety Committee and the Audit and Finance
Committee. Sir Ralph also serves on the boards of the
Manager of the Fonterra Shareholders’ Fund, Origin
Energy Limited and Fletcher Building Limited (where
he is the Chairman-elect) and is a member of the
University of Auckland Council and the New Zealand
Treasury Advisory Board. He was Chief Executive of
the Commonwealth Bank of Australia for six years
until 2011 and prior to that served as Chief Executive
and Managing Director of Air New Zealand Limited
from 2002 to 2005. Sir Ralph had a 40-year career
in banking and served as the Managing Director
and Chief Executive of ASB Bank Limited from 1991
to 2001. Sir Ralph was made a Knight Companion
of the New Zealand Order of Merit in 2009 and a
Distinguished Companion of the New Zealand Order
of Merit for services to business in 2006. In 2012,
he had conferred on him an Honorary Doctorate of
Business by the University of New South Wales.
9. BLUE READ
Blue Read was elected to the Board in 2012. He sits
on the Co-operative Relations Committee and he
led a Water Policy Project Team reporting through to
the Co-operative Relations Committee. Blue was the
Chairman of the Fonterra Shareholders’ Council from
2007 to 2010, having been a Shareholders’ Councillor
since 2001 and Deputy Chairman from 2003 to 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 has interests in two
dairy equity partnerships in the lower Waikato, and he
lives and farms near Urenui in Northern Taranaki.
10. NICOLA SHADBOLT
BSc(Hons), MAgrSc(Hons), DipBusStud (Accountancy),
FNZIPIM(Reg)
Nicola Shadbolt was elected to the Fonterra Board
in 2009 and serves on the Audit and Finance
Committee. Nicola is a Professor of Farm and
Agribusiness Management at Massey University,
Director of the Centre of Excellence in Farm Business
Management, a Director of the International Food
and Agribusiness Management Association, and
represents New Zealand in the International Farm
Comparison Network in Dairying. Nicola and
her husband live in the Pohangina Valley in the
Manawatu, which is the base for the five farming and
forestry equity partnerships they run, which include
two dairy farms.
11. MICHAEL SPAANS
Graduate Diploma Finance
Elected to the Board in 2013, Michael Spaans serves
on the Milk Price Panel and Co-operative Relations
Committee. He was a member of the Fonterra
Shareholders’ Council since its formation in 2001 until
2008. Michael is Chairman of Waikato Innovation
Park, a director of DairyNZ, is a director and
shareholder of Manuka SA (Chile) which supplies milk
to Fonterra’s subsidiary Soprole SA and is a director
of Shoof International Limited. Michael’s family farm
is in the Waikato near Te Aroha where he milks a
500-cow herd.
12. JIM VAN DER POEL
Jim van der Poel was elected to the Fonterra Board
in 2002 and had previously served on the Board
of the New Zealand Dairy Group. He serves on the
Risk Committee and has Board responsibility for
International Farming. Jim is also a director of the
Manager of Fonterra Shareholders’ Fund. Jim has
won a number of industry awards including the
AC Cameron Memorial Award, 2002 New Zealand
Nuffield Farming Scholarship, Sharemilker 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.
13. 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
and Finance Committee and the Risk Committee.
He is Chairman of the Bank of New Zealand and
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 more than 20 years.
He was also a member of their board and led their
advisory practice for many years.
8
9
10
11
12
13
FONTERRA ANNUAL REVIEW 2014
61
MANAGEMENT TEAM FOR THE YEAR ENDED 31 JULY 2014
FONTERRA
MANAGEMENT
TEAM
1. THEO SPIERINGS
2. LUKAS PARAVICINI
3. JACQUELINE CHOW
4. PASCAL DE PETRINI
5. MAURY LEYLAND
6. JOHAN PRIEM
7. ROBERT SPURWAY
8. ALEX TURNBULL
9. KELVIN WICKHAM
1. THEO SPIERINGS
Chief Executive
Theo Spierings sets Fonterra’s overall direction
and leads the Fonterra Management team. He is
focused on building on Fonterra’s strengths and
securing future growth for the Co-operative. Theo
joined Fonterra in 2011, bringing with him extensive
experience from across the dairy industry, particularly
in Asia, Latin America, the Middle East and Europe.
Theo has 25 years’ experience in the global dairy
industry in a variety of roles including general
management, operations and supply chain, and
sales and marketing positions. He was previously
the acting CEO of Royal Friesland Foods, a Dutch
dairy co-operative and, in 2008, led the Dutch dairy
co-operative through a merger with Campina. Before
taking up his leadership role at Fonterra, Theo ran
his own company in the Netherlands focusing on
corporate strategy, and mergers and acquisitions, in
Fast-Moving Consumer Goods (FMCG). Theo has a
Bachelor of Arts in Food Technology/Biotechnology
and a Master of Business Administration.
2. LUKAS PARAVICINI
Chief Financial Officer
Lukas Paravicini joined Fonterra as CFO in 2013
after 22 years with Nestlé. Most recently Lukas was
General Manager for Nestlé Professional Europe.
Before this role he held a number of senior finance
positions including CFO of Nestlé Brazil, Nestlé’s
fourth largest market, Vice President of Global
Business Services and CFO of Nestlé Professional,
and Nestlé’s globally managed Out-of-Home
business. He has an in-depth understanding
of dairy and has lived and worked in some of
Fonterra’s most strategically important markets.
Lukas holds a Business and Administration degree
from the University of Zurich, Switzerland,
and speaks five languages.
3. JACQUELINE CHOW
Managing Director Global Brands and Nutrition
As Managing Director Fonterra Global Brands and
Nutrition, Jacqueline Chow is responsible for Fonterra
Group’s customer and consumer brands portfolio.
Her remit includes global strategic leadership for the
Co-operative’s nutritional platforms ensuring group-
wide alignment on strategies, brands, marketing and
innovation for Fonterra products. She has executive
leadership for the company’s Food Safety and
Quality agenda, Fonterra brand stewardship, global
planning and insights, research and development,
and science and technology. Prior to joining Fonterra
in 2013, Jacqueline was Australia and New Zealand
General Manager for Arnott’s, one of Asia Pacific’s
largest food companies. She has also held executive
marketing and innovation roles at Campbell’s and
the Kellogg Company. She has extensive FMCG and
marketing experience garnered from a 20-year career
in global blue-chip multinationals. Jacqueline holds
a Bachelor of Science (First Class Honours) and an
MBA in International Business Strategy and Finance.
She is also a graduate of the Australian Institute of
Company Directors.
1
2
3
62 FONTERRA ANNUAL REVIEW 2014
4. PASCAL DE PETRINI
Managing Director Asia Pacific, Middle East
and Africa (APMEA)
Pascal de Petrini joined Fonterra in 2013 as Managing
Director of Asia Pacific, Middle East And Africa
(APMEA) following a 30-year career in Europe and
Asia Pacific. Pascal has a proven track record as
a strategic people leader and an ability to deliver
significant growth as well as turnarounds in FMCG.
His experience will greatly benefit Fonterra’s
consumer, nutritional and foodservice growth
strategy in Asia. He has top-tier FMCG credentials
from a 27-year career with Danone, where he spent
four years leadings its baby nutrition unit in Asia.
He also headed up their Water Business in Indonesia
and was General Manager in China for the Biscuits
Business. Prior to joining Fonterra Pascal was the
Chief Executive Officer of Food and Beverages at
Fraser and Neave Limited. Pascal holds a Master
of Science in Management (ESSEC Business School
Paris), and a Master of Science in Engineering
(ENSMIM, France). Pascal is based in Singapore.
5. MAURY LEYLAND
Managing Director People, Culture and Strategy
Maury Leyland leads an integrated function
comprising Fonterra’s People and Culture and Group
Strategy functions. Maury has been with the Co-
operative since 2005, most recently as the Group
Director of Strategy at Fonterra. She has worked
across the supply chain and played an integral part in
Trading Among Farmers and Fonterra’s Value Stream
Optimisation programme. Prior to joining Fonterra,
she spent nine years with The Boston Consulting
Group. Originally an engineer, Maury was a member
of Team New Zealand during the successful 1995
America’s Cup campaign. Maury is also on the board
of Spark New Zealand Limited. Maury holds a First
Class Honours Degree in Engineering Science, is a
Fellow of the Institution of Professional Engineers
New Zealand and a member of the Institute of
Directors in New Zealand.
6. JOHAN PRIEM
President Greater China
As President Greater China Johan Priem directs the
development of Fonterra’s business in this priority
market. Johan has a strong background in the global
dairy industry. He has held senior leadership positions
with Fonterra in the Asia Pacific, Middle East and
Africa (APMEA) region where he was focused on
driving growth across key strategic markets. His
most recent role focused on enhancing Fonterra’s
approach to food safety and quality, corporate social
responsibility and sustainability. Before joining the
Co-operative in 2013, Johan was on the Board of
Management at Royal Friesland Foods (which later
became Royal FrieslandCampina). At various times
he was responsible for branded consumer businesses
in Europe, Asia, the Middle East and West Africa, as
well as the Corporate Marketing and Research and
Development functions. Johan holds a Diploma of
Marketing. Johan is based in Shanghai, China.
7. ROBERT SPURWAY
Managing Director Global Operations
Robert Spurway joined Fonterra in 2011. As Managing
Director Global Operations, Robert leads Fonterra’s
global operations business, responsible for the
Co-operative’s manufacturing and supply logistics
operations in New Zealand and around the world. In
his previous role he was responsible for overseeing
milk collection, manufacturing and logistics for the
Co-operative’s New Zealand milk supply. Prior to that,
he was Fonterra’s South Island Regional Operations
Manager. In this role, he oversaw the greenfield
development of the Co-operative’s Darfield site.
Robert has more than 20 years’ experience in the
food and dairy industries. After managing the
Northland Dairy Company’s Dargaville site, he moved
to Australia in 1999, where he held various roles in
Goodman Fielder Australia. From 2008 to 2011 he
led two Australian food companies before returning
to New Zealand. Robert holds a Bachelor of
Engineering (Chemical and Materials).
8. ALEX TURNBULL
Managing Director Latin America
Alex Turnbull leads Fonterra’s business in the fast-
growing markets of Argentina, Brazil, the Caribbean,
Chile, Columbia, Ecuador, Mexico and Venezuela.
Alex has more than 20 years’ experience in the dairy
industry, having joined one of the Co-operative’s
predecessors in 1990. Alex has extensive experience
in key senior sales and general management roles
within Latin America and New Zealand, and also
in the leadership of Fonterra’s global paediatrics
business. He is fluent in Portuguese, having spent
almost a decade living in Brazil. Alex holds a Diploma
of Dairy Science and Technology and a Chemical
and Materials Engineering Degree.
9. KELVIN WICKHAM
Managing Director Global Ingredients
Kelvin Wickham leads the sale of all Fonterra
ingredients globally, delivering solutions to our
global accounts, ensuring tactical optimisation
of demand and supply (S&OP), and managing the
NZMP™ brand. Kelvin has more than 25 years’
experience in the dairy industry and has played a
key role in furthering overseas markets, customer
relationships and partnerships. His previous role
of President Greater China and India focused on
directing the development of Fonterra’s business
in these expanding markets. He has a deep
knowledge of the China operating environment
and oversaw a period of rapid growth in this market.
Prior to that, he led Fonterra’s Supplier and External
Relations team, and was Managing Director of
Fonterra’s Global Trade overseeing the launch of
GlobalDairyTrade. From 2005 to 2007 he was the
Director of Sales and Operations Planning. Kelvin
holds a Chemical and Materials Engineering Degree,
a Master of Management and a Diploma of Dairy
Science and Technology.
4
7
5
8
6
9
FONTERRA ANNUAL REVIEW 2014
63
SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014
SUMMARY
FINANCIAL
STATEMENTS
FOR THE YEAR ENDED 31 JULY 2014
CONTENTS
DIRECTORS’ STATEMENT
INCOME STATEMENT
STATEMENT OF COMPREHENSIVE INCOME
STATEMENT OF FINANCIAL POSITION
STATEMENT OF CHANGES IN EQUITY
CASH FLOW STATEMENT
NOTES TO THE SUMMARY FINANCIAL STATEMENTS
INDEPENDENT AUDITORS’ REPORT
65
66
67
68
69
70
71
82
64 FONTERRA ANNUAL REVIEW 2014
DIRECTORS’ STATEMENT
FOR THE YEAR ENDED 31 JULY 2014
The Directors hereby approve and authorise for issue the summary financial statements for the year ended 31 July 2014 presented on pages 66
to 81. For and on behalf of the Board:
JOHN WILSON
CHAIRMAN
23 September 2014
DAVID JACKSON
DIRECTOR
23 September 2014
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 and with International Financial Reporting Standards.
The Board has elected to present summary financial statements for the year ended 31 July 2014 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 2014. The comparative information is 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 the
Group’s full financial statements for the year ended 31 July 2014.
The full financial statements for the year ended 31 July 2014, approved and authorised for issue by the Board on 23 September 2014, 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 2014
65
GROUP $ MILLION
NOTES
31 JULY 2014
31 JULY 2013
1
2
3
22,275
(19,813)
2,462
139
(593)
(499)
(762)
(356)
39
73
503
13
(379)
(366)
137
42
179
157
22
179
18,643
(15,611)
3,032
105
(622)
(514)
(766)
(354)
(7)
63
937
25
(294)
(269)
668
68
736
718
18
736
GROUP $
31 JULY 2014
31 JULY 2013
0.10
0.44
SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014
INCOME STATEMENT
FOR THE YEAR ENDED 31 JULY 2014
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 gains/(losses)
Share of profit of equity accounted investees
Profit before net finance costs and tax
Finance income
Finance costs
Net finance (costs)/income
Profit before tax
Tax credit
Profit after tax
Profit after tax is attributable to:
Equity holders of the Parent
Non-controlling interests
Profit after tax
Earnings per share:
Basic and diluted earnings per share
The accompanying notes form part of these summary financial statements.
66 FONTERRA ANNUAL REVIEW 2014
STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 JULY 2014
Profit after tax
Items that may be reclassified subsequently to profit or loss:
Cash flow hedges:
– Net fair value gains
– Transferred and reported in revenue from sale of goods
– Tax (expense)/credit on cash flow hedges
Net investment hedges:
– Net fair value gains/(losses) on hedging instruments
– Tax (expense)/credit on net investment hedges
Available-for-sale investments:
– Net fair value losses on available-for-sale investments
Foreign currency translation losses 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 (losses)/gains attributable to non-controlling interests
Total items that will not be reclassified subsequently to profit or loss
Total other comprehensive (expense)/income recognised directly in equity
Total comprehensive income
Total comprehensive income is attributable to:
Equity holders of the Parent
Non-controlling interests
Total comprehensive income
GROUP $ MILLION
31 JULY 2014
31 JULY 2013
179
736
732
(505)
(63)
25
(7)
(1)
(207)
–
(11)
(37)
(4)
(4)
(41)
138
120
18
138
116
(317)
56
(5)
2
–
(45)
(7)
(1)
(201)
1
1
(200)
536
517
19
536
The accompanying notes form part of these summary financial statements.
FONTERRA ANNUAL REVIEW 2014
67
SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014
STATEMENT OF FINANCIAL POSITION
AS AT 31 JULY 2014
GROUP $ MILLION
NOTES
31 JULY 2014
31 JULY 2013
ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Tax receivable
Derivative financial instruments
Assets held for sale
Other current assets
Total current assets
Non-current assets
Property, plant and equipment
Equity accounted investments
Intangible assets
Deferred tax assets
Available-for-sale investments
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
Available-for-sale 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.
68 FONTERRA ANNUAL REVIEW 2014
340
1,950
3,701
20
303
58
112
6,484
5,091
388
2,791
231
74
154
316
9,045
15,529
21
1,534
1,638
1,771
18
30
47
74
5,133
3,364
415
65
5
13
3,862
8,995
6,534
5,807
1,059
(455)
82
(1)
6,492
42
6,534
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
7
7
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 JULY 2014
ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
FOREIGN
CURRENCY
TRANSLATION
RESERVE
CASH FLOW
HEDGE
RESERVE
AVAILABLE-
FOR-SALE
RESERVE
GROUP $ MILLION
As at 1 August 2013
Profit after tax
Other comprehensive (expense)/income
Total comprehensive income/(expense)
SUBSCRIBED
EQUITY
RETAINED
EARNINGS
5,807
1,249
–
–
–
157
(11)
146
Transactions with equity holders in their capacity as equity holders:
Dividend paid to equity holders of the Parent
Dividend paid to non-controlling interests
–
–
(336)
–
As at 31 July 2014
As at 1 August 2012
Profit after tax
Other comprehensive (expense)/income
Total comprehensive income/(expense)
5,807
1,059
(455)
5,690
1,078
–
–
–
718
(1)
717
Transactions with equity holders in their capacity as equity holders:
Dividend paid to equity holders of the Parent
Equity instruments issued
Equity instruments cancelled
Equity instruments surrendered
Equity transaction costs
Dividend paid to non-controlling interests
–
611
(475)
(1)
(18)
–
(546)
–
–
–
–
–
(266)
–
(189)
(189)
–
–
(211)
–
(55)
(55)
–
–
–
–
–
–
(82)
–
164
164
–
–
82
63
–
(145)
(145)
–
–
–
–
–
–
As at 31 July 2013
5,807
1,249
(266)
(82)
TOTAL
6,708
157
(37)
120
(336)
–
–
–
(1)
(1)
–
–
(1)
6,492
–
–
–
–
–
–
–
–
–
–
–
6,620
718
(201)
517
(546)
611
(475)
(1)
(18)
–
6,708
NON-
CONTROLLING
INTERESTS
40
22
(4)
18
–
(16)
42
35
18
1
19
–
–
–
–
–
(14)
40
TOTAL
EQUITY
6,748
179
(41)
138
(336)
(16)
6,534
6,655
736
(200)
536
(546)
611
(475)
(1)
(18)
(14)
6,748
The accompanying notes form part of these summary financial statements.
FONTERRA ANNUAL REVIEW 2014
69
SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014
CASH FLOW STATEMENT
FOR THE YEAR ENDED 31 JULY 2014
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 sale of Group entities and other business operations
– Proceeds from disposal of property, plant and equipment
– Other cash inflow
Cash was applied to:
– Acquisition of Group entities and other business operations
– Acquisition of available-for-sale investments
– Acquisition of property, plant and equipment
– Acquisition of intangible assets
– 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
– Interest received
– Other cash inflows
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 outflows
Net cash flows from financing activities
Net increase/(decrease) 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.
70 FONTERRA ANNUAL REVIEW 2014
GROUP $ MILLION
31 JULY 2014
31 JULY 2013
503
11
538
132
(41)
640
(757)
(111)
1,060
111
(28)
275
1,418
(51)
1,367
46
12
21
(18)
(78)
(791)
(102)
(99)
(1,009)
4,241
–
13
8
(332)
(3,894)
(24)
–
(16)
(336)
–
–
(340)
18
329
(28)
319
340
(21)
319
937
1
530
(17)
(16)
498
(43)
38
(410)
68
(8)
(355)
1,080
(83)
997
5
22
5
(49)
–
(701)
(147)
(3)
(868)
3,188
653
26
3
(334)
(3,268)
–
(475)
(14)
(546)
(18)
(1)
(786)
(657)
991
(5)
329
330
(1)
329
NOTES TO THE SUMMARY FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 JULY 2014
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 the 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
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 2014
31 JULY 2013
3,078
2,981
13,226
1,192
6,018
(3,701)
19,813
8,635
996
6,077
(3,078)
15,611
GROUP $ MILLION
31 JULY 2014
31 JULY 2013
5
1
66
437
101
87
1
1
(5)
1,717
61
4
2
72
444
86
94
5
2
(4)
1,735
58
1 The Group uses the services of PricewaterhouseCoopers on assignments additional to their statutory audit duties where their expertise and experience with the Group
are important and auditor independence is not impaired. Other services include advisory services $0.3 million (31 July 2013: $0.6 million) and other assurance and
attestation services $0.2 million (31 July 2013: $1.4 million).
FONTERRA ANNUAL REVIEW 2014
71
SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014
NOTES TO THE SUMMARY FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2014
3
TAX CREDIT
Current tax expense
Prior period adjustments to current tax
Deferred tax movements:
− Origination and reversal of temporary differences
Tax credit
Profit before tax
Prima facie tax expense at 28%
(Deduct)/add 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 provision
Tax expense before distributions and deferred tax
Effective tax rate before distributions and deferred tax
Tax effect of distributions to farmer shareholders
Tax (credit)/expense before deferred tax
Effective tax rate before deferred tax
(Deduct)/add 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
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 2014
31 JULY 2013
54
(2)
(94)
(42)
137
38
(13)
31
(36)
(2)
18
13.1%
(38)
(20)
(14.6)%
(45)
–
23
(42)
83
(11)
(140)
(68)
668
187
(18)
25
(29)
(11)
154
23.1%
(126)
28
4.2%
(40)
(70)
14
(68)
(30.7)%
(10.2)%
20
201
20
109
72 FONTERRA ANNUAL REVIEW 2014
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.
During the year ended 31 July 2013, transactions between segments were based on estimated market prices. During the year ended 31 July 2014,
transactions between segments were based on estimated market prices adjusted for the difference between the Farmgate Milk Price calculated
in accordance with the Farmgate Milk Price Manual and that determined by the Board.
REPORTABLE SEGMENT
DESCRIPTION
New Zealand Milk Products (NZMP)
Oceania (formerly ANZ)
Asia (formerly 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 (including
North Asia), Global Brands & Nutrition, Co-operative Affairs and Group Services.
Represents Fast Moving Consumer Goods (FMCG) businesses in New Zealand
(including export to the Pacific Islands) and all FMCG and ingredients businesses
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 and foodservice businesses in Asia (excluding North Asia), Africa
and the Middle East and China. It includes international farming ventures in China.
Represents FMCG businesses in Chile and equity accounted investments in South
America. It includes international farming ventures in South America.
FONTERRA ANNUAL REVIEW 2014
73
SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014
NOTES TO THE SUMMARY FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2014
4
SEGMENT REPORTING CONTINUED
a) Segment income
Segment income statement
Year ended 31 July 2014
External revenue
Inter-segment revenue
Revenue from sale of goods
Cost of goods sold
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
Finance income
Finance costs
Profit before tax
Profit before tax includes the following amounts:
Depreciation
Amortisation
Other income from equity accounted investees
Segment asset information:
As at and for the year ended 31 July 2014
Equity accounted investments
Capital expenditure
NZMP
OCEANIA
ASIA
LATAM ELIMINATIONS TOTAL GROUP
GROUP $ MILLION
16,044
1,997
18,041
(17,011)
1,030
(105)
(184)
(671)
(960)
95
50
54
269
(323)
(75)
–
218
602
2,979
621
3,600
(3,017)
583
(137)
(182)
(255)
(574)
18
(1)
5
31
(72)
(22)
2
36
93
2,149
19
2,168
(1,587)
581
(299)
(38)
(168)
(505)
27
(12)
–
91
(16)
(3)
–
–
153
1,103
58
1,161
(894)
267
(52)
(95)
(51)
(198)
26
2
14
111
(26)
(1)
24
134
44
–
22,275
(2,695)
(2,695)
2,696
1
–
–
27
27
(27)
–
–
1
–
–
–
–
–
–
22,275
(19,813)
2,462
(593)
(499)
(1,118)
(2,210)
139
39
73
503
13
(379)
137
(437)
(101)
26
388
892
74
FONTERRA ANNUAL REVIEW 2014
a) Segment income CONTINUED
Segment income statement
Year ended 31 July 2013
External revenue
Inter-segment revenue
Revenue from sale of goods
Cost of goods sold
Segment gross profit
Selling and marketing expenses
Distribution expenses
Administrative and other operating expenses
Segment operating expenses
Net other operating income
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
Profit before tax 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
Restructuring 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
OCEANIA
ASIA
LATAM
ELIMINA-
TIONS
TOTAL
GROUP
12,358
1,559
13,917
3,101
644
3,745
(12,666)
(2,989)
1,251
(89)
(188)
(615)
(892)
69
(7)
59
480
14
494
(320)
(68)
3
–
14
–
14
218
683
756
(150)
(203)
(324)
(677)
11
–
3
93
49
142
(83)
(13)
2
30
19
–
49
31
144
2,057
2
2,059
(1,357)
702
(324)
(42)
(153)
(519)
24
–
–
207
2
209
(14)
(4)
–
–
5
(3)
2
–
70
1,127
8
1,135
(832)
303
(59)
(81)
(51)
(191)
24
–
1
137
–
137
(27)
(1)
24
–
–
–
–
200
29
–
18,643
(2,213)
(2,213)
2,233
20
–
–
23
23
(23)
–
–
20
–
20
–
–
–
–
–
–
–
–
–
–
18,643
(15,611)
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 2014
75
SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014
NOTES TO THE SUMMARY FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2014
4
SEGMENT REPORTING CONTINUED
b) Revenue
Entity wide products and services:
Consumer goods
Ingredients and other revenue
Revenue from sale of goods
GROUP $ MILLION
31 JULY 2014
31 JULY 2013
4,527
17,748
22,275
4,717
13,926
18,643
EUROPE
CHINA
ASIA AUSTRALIA
REST OF
NEW
ZEALAND
USA
LATAM
REST OF
WORLD
TOTAL
GROUP $ MILLION
Geographical segment external revenue:
Year ended 31 July 2014
Year ended 31 July 2013
946
1,096
5,537
2,500
5,787
5,216
1,666
1,850
2,162
1,986
1,014
1,415
1,802
1,984
3,361
2,596
22,275
18,643
Revenue is allocated to geographical segments on the basis of the destination of the goods sold.
c) Non-current assets
GROUP $ MILLION
NZMP
OCEANIA
ASIA
LATAM
TOTAL
NEW
ZEALAND
REST OF
WORLD
NEW
ZEALAND
AUSTRALIA
Geographical segment reportable non-current assets:
As at 31 July 2014
As at 31 July 2013
4,300
4,199
383
303
1,387
1,350
1,022
1,047
1,123
940
445
544
8,660
8,383
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 2014
AS AT
31 JULY 2013
8,660
231
154
9,045
8,383
217
127
8,727
76
FONTERRA ANNUAL REVIEW 2014
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 2013
Shares issued
Shares surrendered
Balance at 31 July 2014
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)
1,597,834
–
–
1,597,834
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 farmer shareholders Supply Offer below).
Co-operative shares may only be held by a shareholder supplying milk to the Company in a season (farmer shareholder) and Fonterra Farmer
Custodian Limited (the Custodian). Rights attaching to Co-operative shares include:
– voting rights when backed by milk supply3;
– the right to receive the share-backed milk price on each kilogram of milksolids produced by the farmer shareholder3;
– rights to any distributions declared by the Board; and
– rights to share in any surplus on liquidation of the Company.
Farmer shareholders
The Company maintains a Share Standard that requires a farmer shareholder to hold one Co-operative share4 for each kilogram of milksolids
supplied to the Company by that farmer shareholder. This is measured as an average over the three preceding seasons5 production (excluding
milk supplied under contract supply in that season). Farmer shareholders are permitted to hold more or fewer Co-operative shares than required
by the Share Standard in certain circumstances4. Farmer shareholders supplying under contract must hold at least 1,000 Co-operative shares.
In addition to Co-operative shares held under the Share Standard, farmer shareholders are able to hold further Co-operative shares up to 100 per
cent of production (where production is defined as the minimum number of Co-operative shares a farmer shareholder is required to hold under
the Share Standard). No farmer shareholder (including its related parties) is allowed to hold interests in Co-operative shares, not backed by milk
supply, exceeding five per cent of the total number of Co-operative shares on issue.
Farmer shareholders have a number of alternatives in meeting the requirements of the Share Standard4. These include purchasing the required
shares over a three year period, along with other flexible arrangements provided by the Co-operative.
Voting rights in the Company are dependent on milk supply supported by Co-operative shares3. A farmer shareholder is entitled on a poll or
postal vote, to one vote per 1,000 kilograms of milksolids if that farmer shareholder holds a Co-operative share3 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, the
aggregate milksolids eligible for voting was 1,537,000,000 kilograms of milksolids (31 May 2013: 1,424,000,000 kilograms of milksolids).
Farmer shareholders 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 farmer shareholder transfers
the legal title to the Co-operative share to the Custodian. Where the Co-operative share transferred was backed by milk supply, the farmer
shareholder 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 The Fonterra Board may permit the Share Standard to be satisfied through the holding of both Co-operative shares and vouchers.
5 This requirement commenced from 1 June 2013. Prior to this date, the requirement was based on kilograms of milksolids supplied for the previous season.
6 Aggregate milksolids eligible for voting at season end date are adjusted for farmer shareholders who have joined the Company or are no longer supplying milk to the
Company in the period between the season end date and the record date for the meeting at which the vote is to be held.
FONTERRA ANNUAL REVIEW 2014
77
SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014
NOTES TO THE SUMMARY FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2014
5
SUBSCRIBED EQUITY INSTRUMENTS AND RESERVES CONTINUED
Fonterra farmer shareholder Supply Offer
In May 2013, Fonterra provided its farmer shareholders 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, farmer shareholders 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 trust for the benefit of the Fund.
At 31 July 2014, 109,777,717 Co-operative shares (31 July 2013: 107,969,310) were legally owned by the Custodian, on trust for the benefit of the Fund.
Balance at 1 August 2013
Units issued
Units surrendered
Balance at 31 July 2014
Balance at 1 August 2012¹
Units issued²
Units surrendered³
Balance at 31 July 2013
UNITS (THOUSANDS)
107,969
13,116
(11,307)
109,778
–
169,470
(61,501)
107,969
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 are issued by the Fund. In respect of the Co-operative shares that 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 farmer shareholder 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 farmer
shareholder 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 ended 31 July 2013, 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 were treated as a deduction against subscribed equity.
Dividends paid
All Co-operative shares, including those held by the Custodian on trust for the benefit of the Fund, are eligible to receive a dividend if declared
by the Board.
On 24 September 2013, the Board of Directors declared a final dividend of 16.0 cents per share (totalling $256 million), paid on 18 October 2013
to all Co-operative shares on issue at 10 October 2013.
On 25 March 2014, the Board of Directors declared an interim dividend of 5.0 cents per share (totalling $80 million), paid on 17 April 2014 to all
Co-operative shares on issue at 10 April 2014.
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.
78
FONTERRA ANNUAL REVIEW 2014
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
COUNTRY OF INCORPORATION2
Brazil
Germany
Jamaica
USA
USA
Barbados
Dairy Partners Americas Brasil Limitada
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.
2 This is also the principal place of business.
NEW ZEALAND EQUITY ACCOUNTED INVESTEES
International Nutritionals Limited
7
BORROWINGS
Movements in borrowings
Opening balance
New issues
Bank loans
Finance leases
Commercial paper
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
OWNERSHIP INTERESTS (%)
AS AT
31 JULY 2014
AS AT
31 JULY 2013
50
50
50
50
50
25
50
50
50
50
50
25
OWNERSHIP INTERESTS (%)
AS AT
31 JULY 2014
AS AT
31 JULY 2013
50
50
GROUP $ MILLION
31 JULY 2014
31 JULY 2013
4,677
1,764
18
1,344
1,115
4,241
(1,999)
(9)
(1,311)
(575)
(3,894)
12
(30)
(108)
(126)
4,898
4,949
2,386
–
834
–
3,220
(1,937)
(4)
(611)
(751)
(3,303)
18
(95)
(112)
(189)
4,677
FONTERRA ANNUAL REVIEW 2014
79
SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2014
NOTES TO THE SUMMARY FINANCIAL STATEMENTS CONTINUED
FOR THE YEAR ENDED 31 JULY 2014
7
BORROWINGS CONTINUED
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 instruments 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.
8
BUSINESS COMBINATIONS
There were no material business combinations during the year ended 31 July 2014 or 31 July 2013.
9
FINANCIAL RISK MANAGEMENT
GROUP $ MILLION
AS AT
31 JULY 2014
AS AT
31 JULY 2013
4,898
(340)
(81)
21
4,498
234
4,732
4,677
(330)
(121)
1
4,227
240
4,467
GROUP
AS AT
31 JULY 2014
AS AT
31 JULY 2013
3.55
2.34
1,053
1,598
3.70
2.43
1,053
1,598
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 financial risk management policies and procedures to identify, analyse and, where appropriate, manage the financial risks
faced by the Group;
– has approved a Treasury Policy that covers appropriate financial risk limits and controls (including, but not limited to, delegated authority
levels and authorised use of various financial instruments); and
– monitors financial risks and adherence to approved limits.
The Group’s overall financial risk management programme focuses primarily on maintaining a prudent financial risk profile that provides
flexibility to implement the Group’s strategies, while ensuring the optimisation of the return on assets. Financial risk management is
centralised, which ensures compliance with the financial risk management policies and procedures set by the Board. The Office of the Chief
Financial Officer manages financial risk, including foreign exchange risk, interest rate risk, credit risk, liquidity risk and commodity price risk.
During the year, in order to manage financial risks, the key financial 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.
80 FONTERRA ANNUAL REVIEW 2014
9
FINANCIAL RISK MANAGEMENT CONTINUED
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 more than one year. On 31 July 2014, Fonterra had $3,215 million (31 July 2013: $3,289 million) of undrawn committed facilities.
Economic debt to debt plus equity ratio
The economic debt to debt plus equity ratio at 31 July 2014 is 42.3% (31 July 2013: 39.6%).
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 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.
In early 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.
In late August 2013, the New Zealand Government confirmed that the Clostridium samples found in WPC80 were not Clostridium botulinum
and were not toxigenic, meaning the consumers of products containing the relevant batches of WPC80 were never in danger from Clostridium
botulinum.
In January 2014, Danone formally initiated legal proceedings against Fonterra in relation to the WPC80 precautionary recall.
Fonterra is working through the detail of Danone’s claims. Based on current information available and the claims made to date, Fonterra will
vigorously defend its position. Uncertainty exists regarding the outcome of the proceedings. Fonterra has provided $11 million which represents
the maximum contractual liability to Danone.
The warranty claims made by the purchaser of the Group’s former Western Australia dairy business are no longer outstanding, as at 31 July 2014.
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.
The Group has no other contingent liabilities as at 31 July 2014 (31 July 2013: nil).
11
SUBSEQUENT EVENTS
On 23 September 2014, the Board declared a final dividend of 5.0 cents per share, to be paid on 20 October 2014 to all Co-operative shares on
issue at 9 October 2014.
On 27 May 2014 the Group entered into agreements to realign Latam segment’s Dairy Partners Americas (DPA) joint venture arrangements.
In late 2014, the Group’s equity accounted investments in Ecuador (Ecuajugos S.A.) and DPA’s milk powder manufacturing business (DPA
Manufacturing Holdings Limited) will be sold to Nestlé.
On 1 August 2014, the Group purchased additional voting equity interests in DPA Brazil (Dairy Partners Americas Brasil Limitada – from 50% to
51%, with Nestlé holding the balance) and DPA Venezuela (Lacven Corporation – from 25% to 60%, with the local partner holding the balance).
These equity accounted investments became consolidated subsidiaries from that date.
The accounting for these business combinations has not yet been finalised, and therefore detailed disclosures for these business combinations
is not presented in these financial statements.
There were no other material events subsequent to 31 July 2014 that would impact these financial statements.
FONTERRA ANNUAL REVIEW 2014
81
INDEPENDENT AUDITORS’ REPORT FOR THE YEAR ENDED 31 JULY 2014
INDEPENDENT AUDITORS’ REPORT
FOR THE YEAR ENDED 31 JULY 2014
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 66 to 81
which comprise the statement of financial position as at 31 July 2014, 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 2014. The Group comprises the Company and the entities it controlled
at 31 July 2014 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 and Group’s Financial Statements
Our audit of the financial statements for the year ended 31 July 2014 was completed on 23 September 2014 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 2014 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
23 September 2014
82 FONTERRA ANNUAL REVIEW 2014
STATUTORY INFORMATION FOR THE YEAR ENDED 31 JULY 2014
STATUTORY INFORMATION
FOR THE YEAR ENDED 31 JULY 2014
CURRENT CREDIT RATING STATUS
Standard & Poor’s long term rating for Fonterra is A with a rating outlook of stable. Fitch’s long and short term default rating is AA- with a rating
outlook of stable. Retail Bonds have been rated the same as the Company’s long term rating 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 $1,000.
NZX has also granted a waiver from NZDX Rule 5.2.3 in respect of Retail Bond FCG020 to enable that Bond to be quoted on the NZDX market
even though it did not meet the requirement that at least 500 members of the public held at least 25% of the Bonds being issued.
FONTERRA ANNUAL REVIEW 2014
83
FIVE YEAR SUMMARY
FIVE YEAR SUMMARY
SHAREHOLDER SUPPLIER RETURNS
Payout
Farmgate Milk Price (per kgMS)1
Dividend (per share)
Cash payout2
Retentions (per share)3
OPERATING PERFORMANCE
Average commodity prices (US$ per MT FOB)
Whole Milk Powder4
Skim Milk Powder4
Butter4
Cheese5
Average NZD/USD spot exchange rate applying throughout the year 6
Fonterra’s average NZD/USD conversion rate7
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)8
New Zealand Milk Products
Oceania
Asia
Latin America
Eliminations
Segment earnings
Normalisation adjustments
Normalised segment earnings
Profit after tax attributable to shareholders ($ million)
Earnings per share9
JULY 2014
JULY 2013
JULY 2012
JULY 2011
JULY 2010
8.40
0.10
8.50
–
4,827
4,509
3,920
4,706
0.84
0.81
17,748
4,527
22,275
2,519
2,800
269
31
91
111
1
503
–
503
157
0.10
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
1 From the beginning of the 2009 season the Farmgate Milk Price has been determined by the Board. In making that determination, the Board takes into account the
Farmgate Milk Price calculated in accordance with the principles set out in the Farmgate Milk Price Manual which is independently audited.
2 Average Payout for a 100% share-backed supplier.
3 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.
4 Source: Fonterra Farmgate Milk Price Statement representing the weighted-average United States Dollars (USD) contract prices of Reference Commodity Products.
5 Source: Oceania Export Series, Agricultural Marketing Service, US Department of Agriculture.
6 Average spot exchange rate is the average of the daily spot rates for the financial period.
7 Fonterra’s average conversion rate is the rate that Fonterra has converted net United States dollar receipts into New Zealand dollars based on the hedge cover in place.
8 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.
9 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
and 31 July 2010 have been restated as if the bonus issue was effective at the beginning of the periods presented.
84 FONTERRA ANNUAL REVIEW 2014
CAPITAL EMPLOYED ($ million)
Total assets employed
Average net assets10
Total equity
Equity excluding cash flow hedge reserve
Net interest bearing debt
Economic net interest bearing debt11
Return on net assets10
Headline debt to debt plus equity ratio12
Economic debt to debt plus equity ratio12
JULY 2014
JULY 2013
JULY 2012
JULY 2011
JULY 2010
15,529
10,860
6,534
6,452
4,498
4,732
4.6%
41.1%
42.3%
14,373
11,135
6,748
6,830
4,227
4,467
9.0%
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%
JULY 2014
JULY 2013
JULY 2012
JULY 2011
JULY 2010
STAFF EMPLOYED
Total staff employed (000s, permanent full time equivalents)
New Zealand
Overseas
18.2
11.4
6.8
17.5
11.2
6.3
17.3
11.0
6.3
16.8
10.8
6.0
15.8
9.8
6.0
SEASON STATISTICS13
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 2014
JULY 2013
JULY 2012
JULY 2011
JULY 2010
17,932
87.1
1,533
51
1,584
10,721
3,398
1,598
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
10 Return on net assets (RONA) is derived by dividing normalised EBIT (as reported in financial statements) by 13 month average net assets (excluding net debt
and deferred tax).
11 Economic net interest bearing debt reflects the effect of debt hedging in place at balance date.
12 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.
13 All season statistics are based on the 12 month milk season of 1 June – 31 May.
FONTERRA ANNUAL REVIEW 2014
85
NON-GAAP MEASURES
NON-GAAP MEASURES
Fonterra uses several non-GAAP measures when discussing financial performance. For further details and definitions of non-GAAP measures
used by Fonterra, refer to the glossary on page 87. 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 may be 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 period to Fonterra’s normalised EBITDA
Profit for the period
Add: Depreciation
Add: Amortisation
Add: Net finance costs
Less: Taxation credit
Total EBITDA
Add: Costs associated with closure of Cororooke plant in Australia
Add: Costs associated with Group Strategy Right-Sizing
Less: Other
Total normalisation adjustments
Normalised EBITDA
Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised EBIT
Profit for the period
Add: Net finance costs
Less: Taxation credit
Total EBIT
Add: Normalisation adjustments (as detailed above)
Total normalised EBIT
GROUP $ MILLION
31 JULY 2014
31 JULY 2013
179
437
101
366
(42)
1,041
–
–
–
–
1,041
736
444
86
269
(68)
1,467
30
38
(3)
65
1,532
GROUP $ MILLION
31 JULY 2014
31 JULY 2013
179
366
(42)
503
–
503
736
269
(68)
937
65
1,002
Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised earnings per share
Profit for the period
Add: Normalisation adjustments (as detailed above)
Less: 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 2014
31 JULY 2013
179
–
–
179
(22)
157
1,597,834
0.10
736
65
(17)
784
(20)
764
1,615,311
0.47
86 FONTERRA ANNUAL REVIEW 2014
GLOSSARY
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 period financial measure in local currency less the prior period financial
measure in local currency and dividing this by prior period financial measure in local currency using the prior
period local currency to the New Zealand Dollar exchange rate.
Contribution margin
is calculated as segmental gross profit less distribution, selling and marketing expenses.
EBIT
means earnings before interest and tax (EBIT) and is calculated as profit for the period before net finance costs
and tax.
EBIT margin %
is calculated as profit for the period before net finance costs and tax and divided by revenue.
EBITDA
means earnings before interest, tax, depreciation and amortisation and is calculated as profit for the period
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 and size. Excluding these transactions can assist users with
forming a view of the underlying performance of the business. 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. It may also include certain fair value
movements created by required accounting treatments, in particular if they are non-cash movements, and
will have no impact on profit over time. Unusual transactions by size are those that are unusually large in a
particular accounting period. Unusually large is defined as greater than $30 million.
Normalised EBIT
means profit for the period before net finance costs, tax and normalisation adjustments.
Normalised EBIT margin %
means profit for the period before net finance costs, tax and normalisation adjustments divided by revenue.
Normalised EBITDA
means profit for the period before net finance costs, tax, depreciation, amortisation and normalisation
adjustments.
Normalised segment earnings means segmental profit for the period before depreciation, amortisation, net finance costs, taxation expense,
and normalisation adjustments.
Payout
Retentions
means the total cash payment to farmer shareholders. 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 farmer shareholders divided by the number of shares at 31 May, less
dividend per share.
Return on Capital Employed
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 period before net finance costs, tax and normalisation adjustments.
FONTERRA ANNUAL REVIEW 2014
87
GLOSSARY
GLOSSARY
CONTINUED
OTHER TERMS
Auditor
CO2e
Co-operative
DIRA
Dry shares
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).
means any shares held by a farmer shareholder in excess of the number of shares required to be held by that
farmer shareholder in accordance with the Minimum Shareholding requirement for a season.
Economic Rights
means the interest in Shares held by the Fonterra Farmer Custodian for the benefit of the Trustee in its
capacity as the trustee of the Fund as set out in the Custody Trust Deed.
Farmer shareholder
means a Shareholder who is supplying milk to Fonterra.
Farmgate Milk Price Manual
means Fonterra’s Farmgate Milk Price Manual dated 1 August 2013.
Farmgate Milk Price Statement means the milk price statement with respect to the Farmgate Milk Price for a season, which Fonterra
discloses pursuant to the Farmgate Milk Price Manual on or around the date that Fonterra releases its
financial results for a financial year.
Fonterra
Fonterra Board
Fonterra Group
FSF or the Fund
Foodservice
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.
FSM or Fonterra Shareholders’
Market
means the exchange or trading facility selected by Fonterra which provides a facility for the trading of shares
among Permitted Persons.
FSM Rules
means the listing rules of the Fonterra Shareholders’ Market.
Fonterra Shareholders’ Council means the councillors whose number is not less than the required quorum set out in the Constitution, acting
together as the Shareholders’ Council.
FY
means Fonterra’s financial year which runs from 1 August to the following 31 July.
Greater China
means Fonterra’s business in China (including Hong Kong), Taiwan and India.
IFRS
means International Financial Reporting Standards.
Income Tax Act
means the Income Tax Act 2007 (New Zealand).
kgMS
means a kilogram of milk solids.
Milk Price Panel
means the Milk Price Panel established and maintained by Fonterra in accordance with section 150D of DIRA.
Milk solids
MT
NZ GAAP
Parent
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 Co-operative Group Limited.
RD1 or RD1 Limited
mean Fonterra’s rural supplies retail business that operates in New Zealand.
Reference Commodity
Products
means the commodity dairy products used in the calculation of the Farmgate Milk Price, which are currently
Whole Milk Powder, Skim Milk Powder, Butter Milk Powder, Butter and Anhydrous Milk Fat.
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 milk solids 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.
88 FONTERRA ANNUAL REVIEW 2014
Shareholder
Stream returns
means a holder of shares.
means the different variable contribution margins that can be achieved by the different combinations of
products and by-products that can be made from the available milk. These are usually calculated on a fixed
‘bucket’ of milk for comparative purposes.
Trading Among Farmers or TAF means the share trading system known as Trading Among Farmers.
Trust Deed
Trustee
Unit
Unitholder
UHT
V3
Voucher
Wet shares
means the trust deed dated 23 October 2012 constituting the Fonterra Shareholders’ Fund between Fonterra,
the Trustee and the Manager.
means the trustee for the Fund, being The New Zealand Guardian Trust Company Limited and Trustees
Executors Limited.
means a unit issued by the Manager of the Fund.
means a holder of units.
means fresh milk that is sterilised by heating it to very high temperatures. UHT milk does not require
refrigeration.
means Fonterra’s growth strategy based on accelerating volume, value and velocity.
means a certificate that is provided to a farmer shareholder upon transfer of the Economic Rights of a wet
share to the Fonterra Shareholders’ Fund in accordance with the Trust Deed.
means any shares held by a farmer shareholder which are required to be held in accordance with the
Minimum Shareholding requirement for a season.
FONTERRA ANNUAL REVIEW 2014
89
REGISTERED OFFICE
Fonterra Co-operative Group Limited
Private Bag 92032
Auckland 1010
New Zealand
Fonterra Centre
9 Princes Street
Auckland Central
Auckland 1010
New Zealand
Phone +64 9 374 9000
Fax +64 9 374 9001
AUDITORS
PricewaterhouseCoopers
Level 22, PwC Tower
188 Quay Street
Auckland 1142
New Zealand
FARMER SHAREHOLDER AND
SUPPLIER SERVICES
Freephone 0800 65 65 68
FONTERRA SHARES AND
FSF UNITS REGISTRY
Computershare Investor Services
Limited
Private Bag 92119
Auckland 1142
New Zealand
Level 2, 159 Hurstmere Road
Takapuna
Auckland 0622
New Zealand
CAPITAL NOTES REGISTRY
Link Market Services Limited
PO Box 91976
Auckland 1142
New Zealand
Level 7, Zurich House
21 Queen Street
Auckland Central 1010
New Zealand
INVESTOR RELATIONS ENQUIRIES
Phone +64 9 374 9000
investor.relations@fonterra.com
www.fonterra.com
DIRECTORY
DIRECTORY
FONTERRA BOARD
OF DIRECTORS
John Wilson
Malcolm Bailey
Ian Farrelly
Simon Israel
David Jackson
David MacLeod
John Monaghan
Sir Ralph Norris
Blue Read
Nicola Shadbolt
Michael Spaans
Jim van der Poel
John Waller
FONTERRA
MANAGEMENT TEAM
Theo Spierings
Lukas Paravicini
Jacqueline Chow
Pascal De Petrini
Maury Leyland
Johan Priem
Robert Spurway
Alex Turnbull
Kelvin Wickham
90 FONTERRA ANNUAL REVIEW 2014
This document is printed on an environmentally
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and manufactured under the strict ISO14001
environmental management system.