Fonterra
Annual Report 2018

Plain-text annual report

FONTERRA ANNUAL REPORT 2018 THE YEAR AT A GLANCE 2018 NZ Milk Collection for the 2017/18 season 1,505 million kgMS Farmgate Milk Price $6.69 kgMS per Normalised EBIT $902 million Return on Capital1 6.3% Normalised Earnings Per Share 24 cents Free Cash Flow $600 million 1 Includes Intangibles and Equity Accounted Investments CONTENTS 02 Day in the life of our Co-operative Page 02 26 Healthy environments and strong communities Page 26 Nutrition – what we sell Page 28 Environment Page 30 Community Page 32 34 Co-operative solutions Page 34 Working for our farmers Page 36 Farmer spotlight Page 38 Honour Roll for Milk Quality Excellence Page 40 14 Letter from our Chairman Page 14 Letter from our CEO Page 16 Making change, with purpose Page 18 Our Ambition Page 20 Where they know us Page 22 Our year in review Page 24 e v i t a r e p o - o C r u O y t i l i b a n i a t s u S r u O s r e m r a F r u O s e i r o t S r u O 70 Corporate Governance Page 70 84 Summary Financial Statements Page 84 108 Directory Page 108 42 Employee spotlight Page 42 Our Board Page 44 Our Management Team Page 46 48 Group fi nancial metrics Page 48 Group Overview Page 50 Ingredients Page 54 Consumer and Foodservice Page 56 China Farms Page 60 Historical Financial Summary Page 62 e c n a n r e v o G e t a r o p r o C r u O y r a m m u S l a i c n a n i F r u O y r o t c e r i D r u O e c n a m r o f r e P r u O e l p o e P r u O P A A G - n o n e h t o t s e r u s a e m S R F I Z N e h t f o n o i t a i l i c n o c e r e h t r o f 6 0 1 e g a p o t r e f e r e s a e P l . a r r e t n o F y b d e s u s e r u s a e m P A A G - n o n e h t f o s n o i t i n fi e d r o f 7 0 1 e g a p d n a s e r u s a e m . s d n e r t e s y l a n a o t d n a s t i n u s s e n i s u b f o e c n a m r o f r e p g n i y l r e d n u e h t e t a u l a v e o t y l l a n r e t n i e s e h t , i y l g n d r o c c A . s e i n a p m o c l l a y b d e s i l i t u r o d e n fi e d y l m r o f i n u t o n e r a s e r u s a e m e s e h T d e s u e r a y e h T . s s e n i s u b e h t f o e c n a m r o f r e p g n i y l r e d n u e h t n o t h g i s n l i e b a u l a v e d i v o r p . s t n e m e t a t s l a i c n a n fi ’ l a u n n a s a r r e t n o F n i d e d u l c n i e r a y e h t s s e n u t i d u a o t l j t c e b u s t o n e r a y e h t s a n o i t a m r o f n i l u f e s u e d i v o r p s e r u s a e m e s e h t t a h t s e v e i l e b t n e m e g a n a M S R F I Z N . s e r u s a e m P A A G - n o n e s e h T . S R F I Z N h t i w e c n a d r o c c a n i d e t r o p e r s e r u s a e m r o f e t u t i t s b u s y b d e n fi e d t o n e r a d n a s e r u s a e m l a i c n a n fi P A A G - n o n e r a e s e h T . t u o y a p d n a s t n e m t s u d a j a s a d e r e d i s n o c r o n n o i t a l o s i n i d e w e i v e b t o n d u o h s s e r u s a e m l l a i c n a n fi P A A G - n o N I n o i t a s i l a m r o n T, B E T, B E d e s i l a m r o n I i , s g n n r a e t n e m g e s d e s i l a m r o n e d u l c n i s e r u s a e m e s e h T . s e i n a p m o c r e h t o y b d e s u s e r u s a e m d e l t i t y l r a l i m i s h t i l w e b a r a p m o c e b t o n y a m s e r u s a e m . e c n a m r o f r e p l a i c n a n fi g n i s s u c s i d n e h w s e r u s a e m P A A G - n o n l a r e v e s s e s u a r r e t n o F OUR STORY STARTS HERE T A R A N A K I S T R A T F O R D , F A R M 4 0 9 3 1 F a r m e r o w n e r s s i n c e 2 0 0 8 M a t t a n d K a t h r y n R o b e r t s Our home is New Zealand, where we’ve been dairy farming for almost 150 years. Our location makes us unique. We’re the first country to see the sunrise every morning and we’re one of the best places to produce dairy in the world. Our grass fed farming model puts New Zealand dairy in high demand around the world. This year, our 10,000 farming families produced 1,505 million kilograms of milk solids (kgMS). P R O D U C T I O N 1,505m kgMS 02 03 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018 S O U T H E R N S O U T H L A N D F A R M 3 4 4 1 0 F a r m e r o w n e r s s i n c e J u l y 2 0 0 8 S c o t t , M c K e n z i e G r e e n b u s h F a r m R E P O R O A F A R M 7 9 1 4 9 L u a n a a n d A J A x t e n s F a r m e r o w n e r s s i n c e 1 9 9 9 P U K E K O H E F A R M 7 1 2 8 4 f a r m e r o w n e r s s i n c e 2 0 1 2 , S t e v e a n d C a t h e r i n e L i e f t i n g , t h e i r s o n D r e w i s p i c t u r e d h e r e H E L P I N G T H E C O M M U N I T Y 46cents About half of every dollar a farmer earns is spent in their local community. F A R M G A T E M I L K P R I C E $6.69 kgMS per Our farmers’ hard work makes a significant contribution to regional New Zealand and to the national economy. This year, our farmers earned $6.69 for every kilogram of milk solids they produced. 04 05 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018 N o w e l l ’ s L a k e s i n T a r a n a k i a r e a a j i o n t F o n t e r r a / C o m m u n i t y p r o e c t j i s i g n fi c a n t w e t l a n d o n o n e o f o u r W h a r e r o a f a r m s a n d a r e m a n a g e d a s % O F F O N T E R R A F A R M E R S W H O R E P O R T O N N I T R O G E N 5 9 7 9 6 8 6 7 9 5 4 3 3 1 0 2 4 1 0 2 5 1 0 2 6 1 0 2 7 1 0 2 8 1 0 2 Our country’s environment is precious and a big part of our national identity. Along with our farmers, Fonterra wants to leave things better than we found them for generations to come. That’s why we’ve signed a pledge, committing to make New Zealand rivers swimmable for our children and grandchildren. It’s also why we have a pathway mapped out with the New Zealand Government to achieve net zero emissions across our manufacturing sites by 2050 and climate neutral growth for on-farm emissions in New Zealand by 2030 from a 2015 baseline. T A R A N A K I L I V I N G W A T E R N i c k D a w s o n F a r m e r o w n e r s i n c e 2 0 0 4 F A R M 4 7 8 7 0 P A T O K A , H A W K E S B A Y 06 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 07 C A N T E R B U R Y D A R F I E L D P L A N T , 2 4 0 0 0 M T o f c r e a m c h e e s e a n n u a l l y O u r a d v a n c e d p l a n t a t D a r fi e d s t a r t e d l p r o d u c t i o n t h i s y e a r a n d i s s e t t o m a n u f a c t u r e We add the most value possible to our farmers’ milk. Since the 2016 fi nancial year, we’ve invested in nine new, resource-effi cient plants and lines that have increased our ability to process more volumes of milk into consumer and foodservice products. C O M M I S S I O N E D / D U E T O B E C O M M I S S I O N E D FY16 New sliced cheese at Eltham FY17 New UHT line at Waitoa FY18 New cream cheese and mini dish butter at Te Rapa Two new UHT lines at Waitoa FY19 New cream cheese plant at Darfi eld Third mozzarella line at Clandeboye New butter line commissioned at Edgecumbe to meet global demand T a i w a n a n d t h e P h i l i i p p n e s p e r d a y w h i c h a r e s h p p e d t o C h n a i i , W A I K A T O W A I T O A U H T P L A N T W a i t o a U H T c a n p a c k 1 4 c o n t a i n e r s 08 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 09 We provide great nutrition through well-known brands like AnchorTM and MainlandTM. At Fonterra we really do believe that dairy makes a diff erence to people’s lives. F O N T E R R A M I L K F O R S C H O O L S 70% Our Fonterra Milk for Schools programme operates in more than 70% of all New Zealand primary schools. F o n t e r r a M i l k f o r S c h o o l s p a c k s R i c h i e M c C a w h e p n g w i l i t h r e c y c l i n g H A M I L T O N T A U W H A R E S C H O O L 10 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 11 M I L K E X P O R T S 95% About 95% of our farmers’ milk is exported from New Zealand. It’s used by customers and consumers in so many ways. By taking New Zealand milk to the world our farmers are helping contribute about $8 billion back into the New Zealand economy every year. n u t r i t i o n a l d r i n k i n C h n a i S H A N G H A I i s a p o p u l a r e v e r y d a y O u r A n c h o r T M U H T m i l k a ff o r d a b i l i t y i s p a r a m o u n t f o r m a r k e t s s u c h a s N g e r i a i w h e r e d a i l y i n c o m e i s l o w a n d N I G E R I A O u r a ff o r d a b e l , v i t a m n - i e n r i c h e d m i l k p o w d e r i s i d e a l 12 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 13 LETTER FROM THE CHAIRMAN Meeting our commitments J o h n M o n a g h a n C h a i r m a n There’s a saying in sport that you’re only as good as your last game. This year’s result tells us we have plenty to work on to make the grade. We haven’t met all of the commitments we’ve made to our farmers and unit holders this year. It’s not the fi rst time, but we’re determined to make sure it is the last. Before we talk about the future, let’s look at the commitments we have met. The $6.79 total payout is the third highest in the last decade. It represents more than $10 billion paid to our farmers and a much-needed cash injection into our rural communities. Our Consumer business in China broke even for the fi rst time, two years ahead of expectation. This year, 45% of our farmers’ milk went into higher-value products, such as medical nutrition products, cooking creams and fl avoured milk with 40% less added sugar. With the support of our Co-op’s Sustainable Dairying Advisors, 1,011 farms now have a Farm Environment Plan to help improve environmental outcomes. Our Global Operations business has committed to net zero emissions across our manufacturing sites by 2050 to help New Zealand meet its climate change commitments. More than 140,000 primary school children received free milk through our Milk for Schools programme every school day this year. We can be proud of those achievements, while acknowledging that we didn’t get everything right. The previously reported $232 million in payments related to our arbitration with Danone, following the 2013 WPC80 precautionary recall, took 10 cents off our earnings guidance. 14 FONTERRA ANNUAL REPORT 2018 Beingmate’s unacceptable performance over the year has been frustrating. The value of our Beingmate investment is now $204 million. Beingmate has recently appointed a new, independent General Manager and announced a modest net profi t at its half year fi nancial result. We know our farmers and unit holders expect a return on capital on every investment and we continue to work closely with the team in China to get the best possible result for the Co-op. Our farmers rely on accurate forecasting when planning within their own businesses. Our decision to update our earnings guidance and reduce our 2017/18 forecast Farmgate Milk Price late in the year was frustrating but necessary to protect the balance sheet. In hindsight, our second half year earnings forecast was too bullish. We had just completed one of our best single quarter performances and your Board and senior management pushed the business to repeat that eff ort in the last two quarters. We simply didn’t deliver across almost every part of the business. Better accuracy in our earnings forecasts is an obvious priority for us in 2019. Leadership changes In March, we announced that CEO Theo Spierings would leave the Co-op. It’s a conversation that the Board had been having with Theo for a few months and we agreed that after seven years it was the right time for Theo to move on. Theo leaves us as a friend of Fonterra. Under his leadership we have a built a China business with an annual revenue of $4 billion, our Foodservice business - which was in its infancy when Theo took over - is now in total a $2 billion a year operation, and we have new partnerships with the world’s biggest online sellers, including Alibaba. John Wilson’s decision to stand down as Chairman after a health scare and to retire from the Board in November was unexpected, but ultimately the right decision for John, Belinda and their family. John has made an important contribution to the New Zealand dairy industry over more than 20 years. He’s worked tirelessly on behalf of his fellow farmers within the Co-op and defended our corner on regular trade missions and policy discussions across the fi elds of science, innovation, and environmental sustainability. Looking ahead to FY19 These changes in leadership have given us cause to take stock of where we are as a Co-op. At its core, our business is in good heart. But we can always do better and it’s time for a refresh in a number of areas. We are taking a close look at the Co-op’s current portfolio and direction to see where change is needed to do things faster, reduce costs, and deliver higher returns on our capital investments. This includes an assessment of all of the Co-op’s investments, major assets and partnerships against our strategy and target return on capital. An investment we are currently looking at all options on is Beingmate in China. We have reduced the number of Board working groups to focus our eff ort on guiding, challenging and mentoring the senior management team. They in turn will be taking more accountability for the day-to-day delivery of performance. Our $6.75 per kgMS forecast Farmgate Milk Price for the 2018/19 season is the third consecutive year of strong milk prices. That’s good for farmers and for rural economies where farmers spend 46 cents of every dollar they earn. For our business, it means another year of higher input costs and that is refl ected in our FY19 earnings guidance of 25 – 35 cents. We will continue to focus on our strategy of moving more milk into higher value products. You can also expect to see strict discipline around cost control and more respect for our farmers’ and unit holders’ invested capital. Our Co-op has a proud history. It’s built off the back of the hard graft and quality milk of the farming families that own it, and by the team of people that turns up to work each day to do its best by those families, maximising the value of their milk. Your Board and Management know that we need to do a better job at holding up our end. That’s our priority. John Monaghan This year's key results Total cash payout for 2017/18 season $6.79 per kgMS 1,505 million kgMS New Zealand milk collection for 2017/18 season $43m Fonterra Farm SourceTM rewards and benefi ts 1,011 Farms have Environment Plans 45% Value-added products 45% of our farmers’ milk went into value-added products this year. FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 15 15 LETTER FROM THE CEO Improving our performance C h i e f E x e c u t i v e O ffi c e r M i l e s H u r r e l l I’m going to get straight to the point, we have not delivered on the commitments we made to farmers and unit holders in the 2018 fi nancial year (FY18). The headline fi nancial numbers speak for themselves. There’s no two ways about it, these results are disappointing and they simply don’t meet the promise we made. I would like to briefl y answer three questions to help explain what went wrong, highlight where things are going well and, most importantly, step through what we will be doing diff erently in FY19. If we hadn’t had these one-off events our performance would still have been down on last year but not by as much. It’s for this reason we look at our normalised EBIT of $902 million – it gives us a more meaningful comparison of our operating performance to compare one year to another. Where did we get it wrong? We entered the second half of this year expecting our performance to be weighted to the second half. The reality is, for this to have happened we needed to deliver an outstanding third and fourth quarter after what had been an extremely strong second quarter for sales and earnings. Unfortunately, this didn’t eventuate. Forecasting is never easy, but ours wasn’t on the mark and proved to be optimistic. Butter prices didn’t come down as we anticipated, which impacted our sales volumes and margins. The increase in the forecast Farmgate Milk Price late in the season, while good for farmers, put pressure on our margins. And our operating costs went up because of higher costs in our Ingredients business, including some one-off s. We also had additional costs for new category growth and higher costs in Australia as we expanded our business. In addition, we had higher IT and R&D expenditure to support future development. While we had planned for these costs to be up in FY18, we had also planned for our earnings to be higher. All of this happened in a year which was already challenging because of the $232 million payment to Danone and the $439 million write down of our investment in Beingmate. Where did we get it right? When we look at our normalised EBIT and the underlying performance of our business we can see progress has been made in putting more of our farmers' milk into higher value products. Not as much as we wanted but still defi nite progress. Sales volumes were down 3% in FY18 but what is promising is that a larger proportion was sold in Consumer, Foodservice and Advanced Ingredients – our value-add businesses where we get higher gross margins. In fact, 45% of the milk we sold was through these businesses and this is up from 42% in FY17. Consumer volumes were broadly fl at, but Foodservice volumes were up 6% and across the two we added an additional 131 million litres of Liquid Milk Equivalent (LME). The slowdown in growth we saw in FY18 was mainly due to higher prices, selling less butter and more cream in Foodservice and the underperformance of our New Zealand Consumer business. We grew our businesses in all other regions with our strongest growth in Greater China. In fact, our Consumer business in China broke even this year, two years ahead of our original seven-year target. Key performance metrics Net Loss After Tax $196 million Normalised EBIT $902 million 22% Normalised gross margin 15.4% down from 16.9% Return on Capital 6.3% down from 8.3% Normalised operating expenses $2,496 million 7% Net Debt/EBITDA ratio 4.5 up from 3.5 China Consumer broke even this year, two years ahead of original seven-year plan. A big contributor to this success is the sheer popularity of AnchorTM, both online and offl ine, as a trusted brand of premium dairy. Higher ingredient prices saw Consumer and Foodservice’s input costs increase by $626 million. Through our pricing strategies and brand strength we were able to pass through $551 million of these costs in our products’ prices – so, while it was not the full amount, it was still signifi cant. We always need to be mindful in our pricing that there is a limit to what customers and consumers are prepared to pay before they start looking at cheaper alternatives to dairy and other supply sources. What’s next? I’ve had a hard look at our performance from the last fi ve years. While our Farmgate Milk Price has improved, many of our measures are not tracking in the right direction. You can see this on page 48 and 49 in this report. One of the reasons I took on this job is because I understand these results aren’t just numbers – they’re the livelihoods of our farmers and their families. There are people depending on us and I want to contribute to their lives. I’m committed and energised to turn these results around – and so too is my team. I’ve set out a clear plan for how we are going to lift our performance. It relies on us doing the following: 1. Taking stock of the business – We will re-evaluate all investments, major assets and partnerships, including our Beingmate investment, to ensure they still meet the Co-operative’s needs today. This will involve a thorough analysis of whether they directly support the strategy, are hitting their target return on capital and whether we can scale them up and grow more value over the next two to three years. 2. Getting the basics right – We have already begun getting on and fi xing the businesses that are not performing. The level of fi nancial discipline will be lifted throughout the Co-operative so debt can be reduced and return on capital improved. 3. Ensuring more accurate forecasting – The business will be run on realistic forecasts with a clear line of sight on potential opportunities as well as the risks. We will also be more transparent in our assumptions so farmers and unit holders know exactly where they stand and can make the decisions that are right for them and their businesses. We have a lot of work ahead of us and a lot of ground to make up. But that is my job for 2019 and I, along with my team, will do everything in my control to make that happen. Miles Hurrell 16 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 17 OUR CO-OPERATIVE Making change, with purpose From many angles – shareholder, council, board and management – it became clear we needed to take stock on the future direction of our Co-op. So we have been working hard, together, to define our purpose and vision for Fonterra’s next stage, focussing on a simple challenge: “ We do not have a purpose statement that expresses our reason for being and the diff erence we make. We need a true north that connects and provides a sense of belonging and inspiration for the diverse people that make up our Co-operative.” – Duncan Coull Questions we asked What gets you up in the morning? What makes you feel inspired? What makes you feel you belong somewhere or to something? What is the legacy that you want Fonterra to create? Top answers we heard We exist to: 1. 2. 3. Support our farmers and rural communities. Create a sustainable dairy industry. Contribute to a better world for myself, my family, my children. Be part of successfully taking New Zealand dairy to the world. 4. Who’s making this happen for us Farmer Shareholders Richard Cookson, Waikato Paul Marshall, Fiordland Richard Stalker, North Canterbury Judy Garshaw, Pukekohe Sheree Ditchfield, Southland Rachel Haddrell, Maungaturoto (also a Fonterra employee) Fonterra Employees Tui Williams, Team Leader, Farm Source™ Stores Rachel Irwin, Farmer Engagement Specialist Teresa Smyth, Group Marketing Manger, Identity Wendy Paul, Director, Advocacy Tom Newitt, Manager, Sustainable Transformation Alison Brewer, General Manager, Shareholders' Council We heard our new Purpose must refl ect • Togetherness • People • Land • Care • Future 18 Who we have spoken to People we have engaged with to gain insights into "why we exist". Over 2,000 farmers via: • Understanding Your Co-operative • Dairy Women's Network (SI) • Ma-ori shareholders • My Connect Conference • Online survey • 200+ regional meetings all around the country • Young Farmers Forum Governance: • Shareholders' Council • Board • Fonterra Management Team Over 3,300 global employees via: • An online global survey Plus previous insights from: 160+ customers 700+ NZ public via RepZ + industry bodies and other key stakeholders Process and key milestones from here • We have tested our initial six Purpose Themes with 235 diverse people • We have narrowed down to a few options • These will be tested widely in September and October • We plan to launch our new Purpose before the end of 2018 FONTERRA ANNUAL REPORT 2018 19 OUR CO-OPERATIVE Focussed on achieving our ambition We do this through our strategy of converting more milk into higher returning products. We are working towards three horizons and have made progress on all three this year. H T W O R G Sustainable Co-op Improving health and nutrition, creating prosperity for our farmers and communities, and achieving a healthy environment. Innovative Co-op Preparing to lead in the face of fast-moving trends, sudden swings in customer behaviour and unprecedented changes in technology. 19.3% Energy effi ciency improved by 19.3% in NZ manufacturing sites since FY03. Launch of a dedicated medical nutrition division focussed on selling advanced ingredient solutions to help people suff ering from malnutrition and other diseases, as well as helping people age in good health. Manufacturing emissions target 30% Reduction 2015 2030 Net Zero 2050 20% New target to increase ethnic diversity in senior leadership to 20% by 2022. Launched the Disrupt 10-Day Challenge to focus our brightest talent on some of our biggest business problems. 3 Communities of Expertise established in Robotic Process Automation, Advanced Analytics and Digital Activation to grow capabilities, improve process and capture value in new ways. 68% Building on indicative fi ndings that one of our probiotic strains reduces gestational diabetes by 68% and postnatal depression by 50%, we’re exploring with New Zealand universities their impact on pre-diabetes. Disrupt helped us win the Diversity and Inclusion Award at the 2017 Deloitte Top 200 Awards. Investing in foodspringTM, one of Europe’s fastest growing sports nutrition companies. Strong Co-op Continuing our eff orts to remain a Strong Co-op. This earns us the right and means to invest for our future. $10.3 billion paid to farmers for the 2017/18 season, includes Farmgate Milk Price and Dividend. Volume to higher value 45% of the milk sold in FY18 was in Consumer, Foodservice and Advanced Ingredients. Return on Capital 6.3% 902m Normalised EBIT 99.6% Stock excluded from 99.6% of permanent waterways on our dairy farms in New Zealand. FONTERRA ANNUAL REPORT 2018 21 20 FONTERRA ANNUAL REPORT 2018 OUR CO-OPERATIVE Where they know us From the South Pacifi c, we sell dairy products and ingredients to 138 markets around the world. To stay ahead on the global stage we need our farmers' high quality milk, kiwi ingenuity, breakthroughs in dairy nutrition, a great team and the scale to punch above our weight. It can be tricky from New Zealand to make it internationally but we’ve managed to do it and this means we can take our farmers’ milk to the world and bring the value back home. Total Revenue $20.4b Total Employees 22,358 Markets we export to. 22 FONTERRA ANNUAL REPORT 2018 United States 92 Employees $793 Million Revenue $793m Europe 136 Employees $681 Million Revenue 1 Manufacturing Site China 1,697 Employees $3.98 Billion Revenue 7 Farms New Zealand 12,298 Employees $2.08 Billion Revenue 30 Manufacturing Sites $681m $3.98b $2.27b 5.68 $5.68b Latin America (Chile, Brazil, Venezuela) 4,003 Employees $2.27 Billion Revenue 7 Manufacturing Sites Rest of Asia 2,392 Employees $5.68 Billion Revenue 4 Manufacturing Sites Australia 1,432 Employees $1.84 Billion Revenue 7 Manufacturing Sites $2.08b $1.84b Rest of World 308 Employees $3.12 Billion Revenue 2 Manufacturing Sites $3.12b FONTERRA ANNUAL REPORT 2018 23 OUR CO-OPERATIVE Our year in review Looking back at some of the big moments across our business over the last year. August 2017 Tiaki, our Sustainable Dairying Programme, launches July 2017 2017/18 forecast Farmgate Milk Price announced at $6.75 per kgMS September 2017 Our Australian fl agship cheese plant in Stanhope re-opens after a fi re in 2014 November 2017 New UHT line in Waitoa opens Joint venture establishes Columbia River Technologies in the US to meet growing demand for whey protein Three new fi nancial tools for farmers launch December 2017 Danone arbitration result Farmers participate in Open Gates event and our fi rst Sustainability Report launches 2017/18 forecast Farmgate Milk Price revised down to $6.40 per kgMS Foodservice business tops $2 billion in annual revenue to become New Zealand’s sixth biggest export business March 2018 Investment in Beingmate downgrade and 10 cent interim dividend announced 100m Fonterra Milk for Schools celebrates its fi fth year and 100 million packs of milk enjoyed July 2018 New butter line at Edgecumbe to meet global consumer demand February 2018 May 2018 Number of properties impacted by the spread of Mycoplasma bovis increases Construction begins on new Brightwater co-fi red wood biomass burner 2017/18 forecast Farmgate Milk Price raised to $6.75 per kgMS Hema Dairy Fresh Milk hits the shelves of Alibaba’s retail stores in China to meet rising demand for premium fresh products Partnership with the a2 Milk Company forms the basis of our fi rst commercial production of a2 milk™ August 2018 2017/18 forecast Farmgate Milk Price revised down to $6.70 per kgMS and indicated full year dividend likely to be the 10 cents already paid Spring Summer Autumn Wet conditions impact NZ milk production volumes Dry summer in some regions Good autumn leads to a surge in production at the end of the season 24 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 25 OUR SUSTAINABILITY Healthy environments and strong communities This is what sustainable dairy farming is all about and why sustainability is core to our strategy. We want to be a sustainable business. That’s why we’re facing up to our challenges as a food producer. Many of the world’s sustainability challenges are around food. With a billion more people to feed by 2030, we need to take urgent action. The growing, making and distribution of food across the world has a massive environmental, social and economic footprint. Globally, food represents 30% of Greenhouse Gas (GHG) emissions, 40% of employment and 10% of consumer spending. Fonterra supports the United Nations’ Sustainable Development Goals and we work with others to make signifi cant positive changes. We have prioritised ten goals – these are the ones where we believe we can make the most diff erence. Our portfolio of products can help reduce hunger, obesity and defi ciencies of key vitamins, thanks to specifi c and improved formulations, aff ordable options and nutritional guidance. But we also know we need to improve our productivity, reduce our impact on waterways and lower GHG emissions. This sees us continuing to focus on resource effi ciency, minimising waste right across the supply chain and protecting and restoring freshwater ecosystems. At the same time we contribute to decent and fair work and economic growth for communities and reducing poverty. We do this by providing good employment opportunities along our value chain, paying a good income to our farmers and sharing expertise with countries in the early stages of developing their dairy industry. Last year we published our fi rst annual Sustainability Report covering our economic, social and environmental impacts in accordance with the Global Reporting Initiative Standards: Core Option. We will continue to include summary information in our Annual Report but if you are interested in fi nding out more please read our full Sustainability Report. I S U S T A N A B I L I T Y R E P O R T F O N T E R R A 2 0 1 7 26 FONTERRA ANNUAL REPORT 2018 Nutrition Improving health and wellbeing through the products and services we deliver Launched AnmumTM Materna No added sugars formulation in Malaysia Environment Achieving a healthy environment for farming and society Improved water effi ciency at Pahiatua by 64% since FY15 (see page 30) 64% Eliminated single-use plastic bags From Farm SourceTM stores (see page 34) Community Delivering prosperity for our farmers and wider communities New diversity targets, 50% women in senior leadership by 2022 Developing a diverse, skilled and agile workforce (see page 72) Promoting a healthy and safe working environment Total recordable injury frequency rate (TRIFR) is 6.1 per million hours worked (see page 81) FONTERRA ANNUAL REPORT 2018 27 OUR SUSTAINABILITY Nutrition – What we sell Dairy is packed full of goodness. It provides energy and high-quality protein which helps grow and repair muscles. It also helps meet the body’s needs for calcium, phosphorus, potassium and vitamin B2, B12 and Vitamin A. Our farmers’ milk is helping improve health and wellbeing for people around the world. Here’s a snapshot of how we helped this year. 55m litres AnchorTM Blue Top milk continues to be New Zealand’s favourite branded milk – with Kiwis drinking around 55 million litres in the last year. 8 NZMP was awarded eight medals at the International Cheese Awards, one of the world’s most prestigious cheese competitions. Gold medals went to NZMP’s Epicure cheese, made at Lichfi eld and its Mild Cheddar, made at Wynyard in Tasmania. NZMP also won two silver and four bronze awards. Bodiology Our new All-In-One Supplement helps support, rebuild and repair joints, muscles and bones together as one system to help keep adult bodies active. 310 The number of experts we employ at our world class Research and Development Centre to make the best and most innovative products possible. Anmum MaternaTM Launched no added sugars formulation in Malaysia. It is the only maternal milk to be fortifi ed with probiotic DR10TM to support good gut health. AnchorTM Anchor Life AnchorTM Fortifi ed Low Fat Milk Powder First specialised milk powder in Sri Lanka with added plant sterols to focus on blood cholesterol reduction. More Choice a2 Milk™ by AnchorTM is giving consumers more choice. Going Digital In the spirit of going digital, AnchorTM Full Cream Milk Powder was launched in conjunction with World Milk Day as our fi rst AnchorTM milk off ering for consumers in Indonesia in an exclusive partnership with Lazada, Southeast Asia’s number one e-commerce marketplace. Launched our Red Cow Rasa Padama in Sri Lanka, an aff ordable skimmed milk mix. 88% Our AnchorTM Protein+ increased AnchorTM yoghurt sales by 88% in New Zealand. Movemax ready-to-drink. Our total AnleneTM brand relaunched in Thailand with upgraded formulation for bones, joints and muscle health. Malaysia has launched a new Anlene with MoveMaxTM and MFGM-ActiveTM for bone, joints and muscle health. Now with no added sugars and more protein. 28 FONTERRA ANNUAL REPORT 2018 40% less added sugar Primo’s new formula is helping Kiwis consume less added sugar. Our innovative SureProteinTM Fast Milk Protein is an advanced milk protein that helps maximise the benefi ts of exercise to keep people active and healthy. FONTERRA ANNUAL REPORT 2018 29 OUR SUSTAINABILITY Environment Water Healthy freshwater and ecosystems are essential to the long-term success of our business, and to the communities where we live, work and farm. Farming In New Zealand our commitment to keep cows out of waterways on dairy farms has been delivered. 99.6% Our farmers have fenced 99.6% of permanent waterways and installed bridges or culverts at 99.9% of regular crossings Our focus now is on Farm Environment Plans (FEPs) and at the end of FY18 there were 1,011 Fonterra farms with an FEP. Read more about our Tiaki Sustainable Dairying programme in the Our Co-op section. Manufacturing Our Pahiatua site is in a sensitive water zone, both for the availability of groundwater and the discharge of wastewater. By capturing the water evaporated as steam from milk as it is dried into powder, we can condense it and use it instead of using ground water. Since FY15 we have improved water effi ciency at Pahiatua by 64%. With changes made this year, we expect savings of about 500,000 litres per day during the peak season for FY19. Sustainable Catchments Our Living Water partnership with the Department of Conservation is focussed on fi ve catchments to identify game-changing and scalable solutions that demonstrate dairying and freshwater can thrive together. Living Water is currently working with 39 other groups and organisations and 92 Fonterra dairy farms. 5,823ha enhanced through protection, restoration and pest control We are now extending our involvement to support farmer and community action across a further 50 catchments in New Zealand. 30 FONTERRA ANNUAL REPORT 2018 Climate change Fonterra recognises climate change as a signifi cant environmental, economic and social challenge and we support a transition to a low emissions global economy. Farming Achieve climate neutral growth for on-farm GHG emissions in New Zealand by 2030 from a 2015 baseline Based on recently completed analysis, the average carbon footprint of our New Zealand milk (excluding land-use change) has been trending down since the 2010/11 season. This improvement has been driven primarily by increased cow productivity and supported by a reduction in supplementary feed imported onto farm. This year, as part of the New Zealand Dairy Action for Climate Change Plan, in conjunction with Dairy NZ, we have also completed a pilot with more than 100 farmers to provide them with individual GHG reports. This will allow them to monitor their own progress over time. Manufacturing Achieve net zero emissions for our global manufacturing operations by 2050 Through our long-running focus on energy effi ciency in New Zealand we have achieved a 19.3% reduction in energy intensity since 2003, against a target of 20% by 2020. That is equivalent this year to saving enough energy to power over 220,000 households in New Zealand. We are also progressing changes to alternative energy sources and we have committed to divesting any coal mining interests by 2025. Renewable alternatives are not readily available but we are investigating a combination of wood biomass and more use of electricity. At our Brightwater site, we are converting the boiler to co-fi re wood biomass with coal, due to go live in October 2018. The co-fi ring is estimated to reduce factory emissions by about 2,400 tonnes CO2-e per year or the equivalent of taking about 530 cars off the road. FONTERRA ANNUAL REPORT 2018 31 OUR SUSTAINABILITY Community Dairy Development We are supporting farmers in key markets around the world to produce dairy more sustainably, by improving feed production, animal health and milk quality, and facilitating demand. Indonesia In addition to our dairy scholarship programme, we have launched a dairy cluster in West Sumatra. Supported by local government and working in partnership with the local dairy co-operative, we are training farmers on good practices and training local catering staff on using fresh milk as an alternative ingredient. Chile Sri Lanka Our fi rst group of nine young Chilean farmers have completed one year of paid, hands-on experience in New Zealand, learning skills from leading farmers. In addition to providing development support for farmers we launched exciting variants to our fl avoured milk and yoghurts range to increase demand for their local milk. Farmers open their gates to New Zealanders In December, nearly 40 Fonterra farmers opened their gates so New Zealanders had the opportunity to learn about how Fonterra farmers care for waterways and what happens on a dairy farm. Over 4,000 New Zealanders came and got a fi rst-hand look at how a dairy farm operates. In-school Programmes Fonterra Milk for Schools With more than 1,420 schools and 140,000 children taking part, we had a lot of fun this year celebrating our fi fth birthday and our 100 millionth serve. 32 FONTERRA ANNUAL REPORT 2018 KickStart Breakfast This year, KickStart Breakfast grew to 976 clubs and served more than 125,000 breakfasts every school week. 1. Fonterra Grass Roots Fund and other community development To help create vibrant communities around the world, we provide fi nancial support through the Fonterra Grass Roots Fund and other activities in the countries where we operate. This year in New Zealand, Australia and Sri Lanka, the Fonterra Grass Roots Fund helped 696 initiatives, contributing $770,000 through grants and equipment donations. In New Zealand, we have provided fi nancial grants, and by buying in bulk, we have also been able to provide at lower cost more than 10,000 high visibility vests and 25 defi brillators directly to local communities. 2. 3. 1. Children at Moragahahena Maha Vidyalaya school celebrate the upgrade of clean water facilities in Sri Lanka. 2. Paeroa Land Search and Rescue in New Zealand used their grant to buy rescue equipment including 10 torches with a 350-metre range. 4. Kamo Volunteer Fire Brigade in New Zealand used their grant to buy more powerful saws. 5. Laga Haitong, manager of our Cowbell Farm, in China, presents scholarships to the fi rst successful applicants at the farm. 3. Top participant in volleyball, 6. The Fonterra Australia 4. Camila Gómez receives SoproleTM educational scholarship from Gustavo Rencoret, Senior Corporate Counsel, Soprole, in Chile. team helping at FareShare food kitchen. 5. 6. Since 2017 in Australia, we have supported 95 initiatives across Victoria and Tasmania. This year recipients included primary schools, volunteer fi re brigades, surf lifesaving and sports clubs. Helping provide access to clean water and sanitation has remained our focus in Sri Lanka. This year it is estimated that more than 8,500 people, mainly children, have benefi ted from upgraded infrastructure. In Greater China, we have introduced a new scholarship scheme to help with the further education of children of workers at our China farms. This year 14 scholarships were awarded. For 18 years, SoproleTM has supported school sports across the full length of Chile. An estimated 1.5 million people benefi t from the support and a further education scholarship is also awarded for the top participant in each discipline. In Australia, we support Foodbank, Australia’s largest hunger relief organisation and in 2017 we donated over 260,000 meals. We also support other similar food bank initiatives throughout the world. FONTERRA ANNUAL REPORT 2018 33 OUR FARMERS Co-operative solutions There’s lots of competition for milk off farms and we never take our farmers’ loyalty for granted. We work hard every day to deliver them more value beyond the milk cheque. We all want a strong and enduring Co-op, for us and future generations. To achieve that, we must all have a stronger sense of belonging to our Co-op and a clearer direction for the future. Farmers have told us this is what they want. More than 5,300 of our farmers and employees have provided their thoughts to a working group of the Fonterra Shareholders’ Council, with support from the Board, to review Fonterra’s purpose. This spring, the Co-op will review that feedback and test some new concepts so a renewed purpose can be introduced across the Co-op before the end of the year. We have asked our farmers how can we make things better. We've heard that it’s important we provide fl exible supply options for young farmers, growth farmers and farmers nearing retirement who are working towards succession. This work falls under three main areas: supporting farm fi nancial performance, connecting people with our Co-op, and on-farm advice and support. We have good progress to report. Farm Source™ Every year we aim to provide the most competitive pricing for farming supplies and reward farmers for their loyalty to our Farm Source™ stores through deals and discounts. This year our farmers earned $12.6 million Farm Source™ Rewards Dollars. We provided $19.3 million in discounts for everyday farming supplies and used our buying power to save farmers $6.7 million on fuel and another $1.5 million on power. A deal with Mazda saw 208 vehicles purchased with a combined discount of $2.9 million. Our stores are working to become more sustainable, eliminating the use of approximately 365,000 plastic bags annually and are looking at other initiatives such as selling fence posts made from recycled plastic. New fi nancial tools Flexible fi nancial tools are one way we encourage new farmers into our Co-op and provide fi nancial fl exibility for our existing farmer owners. We made more progress this year, introducing four new fi nancial tools to help make it easier for farmers to share- up and run their farms. These include providing fi nancing to help with compliance which frees up other money for purchasing shares. These new tools are in addition to Invest as you Earn, Dividend Reinvestment Plan and Share-up Over Time. 34 FONTERRA ANNUAL REPORT 2018 Farm Source™ $19.3m Provided in discounts for everyday farming supplies. Our buying power is making savings for farmers $6.7m Saved on fuel $1.5m Saved on power Financial fl exibility We have four new fi nancial tools to help our farmers The Strike Price Contract Allows farmers to buy more shares only when the Farmgate Milk Price goes over the Strike Price. Rewards Dollars for Shares Will allow farmers to use their Rewards Dollars accrued at the Farm Source™ store to purchase shares. Smart Finance Provides low-interest fi nancing to farmers wanting to make their farms more sustainable. Contract Fee for Units Recognises that farmers supplying under a Share-up Over Time contract are on their way to becoming shareholders and defers the contract fee to a Trust. The Trust will invest in Units and these will be returned to the farmer when they transition to a shareholder. FONTERRA ANNUAL REPORT 2018 35 OUR FARMERS Working for our farmers Supporting sustainable dairying Milk is the life blood of our Co-op. It is vital we maintain our farmers’ ability to operate profi table, productive farms which meet rising community expectations and more demanding regulations. Through our Tiaki programme, Fonterra farmers have access to world-class technology, reporting and a range of services to support sustainable farming. This includes our Sustainable Dairying Advisors (SDAs) who support our farmers in implementing good environment practice on farm. This year we have grown our number of SDAs to 23, with a goal to expanding the number to 29 by 2020. This growth is driven by demand, as our SDAs work closely with farmers and support their environmental sustainability. At the end of FY18, 1,011 farms had Farm Environmental Plans (FEPs). These plans assess the environmental eff ects and risks associated with farming activities and provide strategies to help individual farms meet their regional requirements, and business and sustainability goals. The FEPs delivered by our SDAs are at no additional cost to Fonterra farmers, saving each an average of $3,500. Regional councils have recognised the value of the Co-op’s FEP template. For example, Environment Canterbury (ECan) approved it for farmers to use to meet the requirements of the Canterbury Land & Water Regional Plan (LWRP). Sustainable Dairying Advisors 23 1,011 $3.3m Farm Environment Plans Saved on service fees Our tanker on the barge heading for Golden Bay When the going got tough Among other on-farm challenges this year, farmers faced fl oods, droughts, Cyclone Gita and Mycoplasma bovis (M.bovis). Our regional teams rolled up their sleeves to help our farmers and local communities. Here are a few examples: • After major slips on Takaka Hill cut off access to Golden Bay, the Co-op organised an emergency barge to get additional tankers to the Takaka site to transport cream out and bring in emergency food, fuel, and essential supplies. • When fl ood waters rose in the Lower South Island at the end of winter, our Emergency Response Team (ERT), crews from the Edendale site and the Farm SourceTM team pitched in to help farmers clean up and get ready for calving which was rapidly approaching. • The ERT was deployed in Taranaki to ensure farms had water and helped to clear farm races, remove fallen trees and repair sheds after Cyclone Gita brought gale-force winds. • While M.bovis poses no risk to milk quality or food safety, the Co-op worked with Government, sector groups, and other dairy companies to minimise the serious animal and farmer welfare implications. With signifi cant eff ort by the Farm Source™ network and tanker operators, the Co-op coordinated the testing of every herd supplying milk and organised more than 60 farmer meetings. We placed a number of employees directly into the national response and we also lead an Industry Working Group to coordinate and support industry eff orts to help farmers. Face to face with farmers Our regional network is designed to ensure we have face to face contact with our farmers 850 Events, including Interim Results meetings, M.bovis town halls, nitrogen pages drop-in days and Farm Source™ store supplier nights More than 70 farmers participated in our off shore study programmes to China 50 Site tours attended by farmers and our neighbours from rural communities Webinars viewed over 3,300 times: Water Fat Evaluation Index Grading System On-farm technology Interim results 1,200 Farmers visited the Fonterra head offi ce Connecting with our farmers 630 Farmers attended the inaugural My Connect Conference More digital, more convenient Our farmers are fast digital adopters with our smartphone apps being used to help run operations on more than 90% of our farms. We continue to enhance the off ering and this year launched the digital version of the Dairy Diary farmers use to help track food safety and quality compliance. More than 2,500 Fonterra farms have already downloaded the app, opting for the digital version instead of the paper-based system. The digital version, available in the hand and on the spot, makes compliance easier. 90% Of our farmers use our smartphone apps On average, farmers that access our apps or website on their mobile device do so fi ve days a week 36 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 37 29 of 33 Regional New Zealand Dairy Industry Awards won by Fonterra farmers 6 of 11 Regional Ballance Farm Environment Awards won by Fonterra farmers Our farmers have outdone themselves, winning two of three national titles of the NZ Dairy Industry Awards. OUR FARMERS Farmer spotlight Our Co-op takes huge pride in the achievements of our farmers New Zealand Share Farmer of the Year Dan and Gina Duncan Northland’s Dan and Gina Duncan were declared NZ Share Farmer of the Year. New Zealand Dairy Manager of the Year Gerard Boerjan Gerard Boerjan from Takapau was named NZ Dairy Manager of the Year. Responsible Dairying Award Wynn and Tracy Brown Wynn and Tracy Brown from Matamata took home the new “Responsible Dairying Award” which recognises dairy farmers who are demonstrating leadership in their approach to dairying, have proven results and are respected by their farming peers and their community. 38 FONTERRA ANNUAL REPORT 2018 Dairy Woman of the Year Loshni Manikam All three fi nalists in the Dairy Woman of the Year Award were Fonterra farmers and the title was taken home by Southland farmer and dairy leadership coach Loshni Manikam. Other fi nalists were Tracey Collis from Eketahuna and Rachel Baker from Hawke’s Bay. Māori Excellence in Farming Award Onuku Māori Lands Trust Bay of Plenty-based Onuku Māori Lands Trust won the 2018 Ahuwhenua Trophy for Māori Excellence in Farming — Moyra Bramley, Chairwoman, was on hand to accept the award. Young Māori Farmer Award Harepaora Ngahea Farm Manager Harepaora Ngahea from Te Teko won the Ahuwhenua Young Māori Farmer Award. FONTERRA ANNUAL REPORT 2018 39 OUR FARMERS Honour Roll for Milk Quality Excellence Legend Gold Farming entities that achieved grade free for at least the last ten seasons. A M Flanagan B L & Estate R J Mohring B S & P J Strang C & H Mabey C J & K L Ladd C M & K M O’Donoghue C R & A K Spence Est of M F Blake & M Blake F A & R C M Smits Ltd G B & J S Coulter Golden Mile Farms Ltd Inishbulfi n Farm Ltd J A & Estate of KJ Jolly K & S MacKenzie Farms Limited K F Wallace Kemra Farm Ltd L J & L M Still Lakeland Farms Ltd M J & L M Van Tiel Miroc Limited Owhango Farms Limited P T & V M Youngman R & P Woods Farms Ltd R J & E F Madsen R S & R D Gordon Romill Partners Rye Downs Ltd Schorn Trust Serendipity Trust Takitimu Trust Thomag Ltd Willowbank Estate Ltd Achievement Top 10 farming entities with the lowest somatic cell count. 1 G L & G F Bell 2 Le Emari Trust T/A Willowbridge Dairies 3 K J & H Chalmers Ltd 4 B G & S L A Butler Family Trust 5 M C & J P Fisher 6 J C & F M Henchman 7 Kydz Contracting Ltd 8 M A & S A Anderson 9 Owen & Robyn Ruddell Partnership 10 Ruthe Farms Ltd/L A Ruthe Farming entities that achieved grade free for at least the last four seasons. 5 M Trust A & D Milne A & G Martelli Family Trust A & N Harvey Family Trust A A & L J Edward Trust A H & A C Webster A Holten & N Brown A J & K L Murdoch A J & K M West A J Dodds & Sons Ltd A K & M E Tyler A M Flanagan A P & C Knibbs A R Mills Abacus Dairy Ltd Abbey Farm Partnership Abbott Brothers Abbott Trusts Partnership ABH Trust AGC Farms Ltd Ahipaipa Farms Ltd Airlie Lodge (Walton) Ltd Allison Family Farms Ltd Alton Pastures Ltd Amberhay Ltd Ararata Holdings Ltd Armer Farms (N I) Ltd Arnold Farming Ltd Ashgrove Dairy Farms Ltd Avon Downs Ltd Awapuketea Farming Company Ltd B & D Dodunski B & E V Blake B & J Kelly P/Ship B C & K A Keller B D Mead B J & P Brisco B J Laing B L & D J Haylock B M & B C & JH Geddes B N & P A Jones B P & P N Kennedy B R Dinnington Ltd Barmac Dairies Ltd Barneyco Trust Partnership Barriball Farms Ltd Beechbank Dairies Ltd Bell Farm 2008 Ltd Bellevue Enterprises Ltd Bent River Farms Benvale Ltd Berkhout Holdings Ltd Berwick Holdings Ltd Bibberne Farms Ltd Birchland Partnerhip Black & White Cow Company Ltd 40 FONTERRA ANNUAL REPORT 2018 BM & GI Watson Ltd Bogaard Farms NZ Ltd Borrowdale Trust Boswell Dairy Ltd Bothwell Farms Ltd Bremna Farms Ltd Briley Farm Trust Bullot Family Trust Burnside Farms Ltd Burton Trust C & B Jensen Family Trust C & D Padrutt Trust C & M Tippett C & R M Moir C B Farms Ltd C E & D L Rogers C F & M T Muller C J & C J McKenzie Ltd C T & K M A McLean C W & J Redshaw C W & M Y Matthews Family Trust C.D. Farms Ltd Carnarvon Farms Ltd Casey Coxhead Ltd Caskey Farms Chislehurst Farms Ltd Claremont Trusts Partnership Clinton & Pamela Smeath Clutha Lea Ltd CM Farming Ltd Colhaven Ltd Collins Family Trust Cotlands Ltd Cowley Dairies Ltd CPX Ltd Cranief Clifton Ltd Creekside Pastures Ltd Cross Dairies Ltd D & D Alexander Trust D & E Cole D & I Edward Ltd D & S Farms D A & M A Mullan D C & V F Frew D Crofskey D E & M E Hines D J & E A Turner D J & G M Hooper D J & J A Veen D J & R E G Goodwin D J & S A McMillin D L & S J Deeming D P & T G Schumacher D P & T M Stephens D R & E M Henman D R & L M Locke Ltd D S & L R Wilson Ltd D T & K L Picard D W & M E Kidd Dacre Milk Ltd Dacre Milk Partnership DairyNZ Ltd Dawn Dairies Ltd DDB Dairy Enterprises Ltd Derrys Farm Ltd DR & PJ Hannah Ltd Drumblade Farm Ltd Drylands Trust Drysdale Holdings Ltd Dugald McKenzie Family Trust E F & J A Allcock E J & S M Smeath E L & D J Brook Eichler Farms Ltd England Trusts Partnership Estate E A Bonner Estate of Elizabeth Paretuarangi Ormsby Euro Land Ltd Excel Dairying Ltd F B Bonenkamp & J B Cunningham F W G & J P Stanbridge Fairview Trust Falcon Farms Trust Far South Farms Ltd Fardale Dairies Ltd Farmer Fred Ltd Farming Tee Jay Ltd Farview Farms Ltd Fonterra - O’Brien Farm Forest Hill Downs Ltd Four Roads Farms Ltd Fowler Family Prosperity Trust Frisia Farm Trust G & C Came Ltd G & M Gloyn G A & J M Fox G A & K T Lynch G A & V M Weir G A Knight G B & D G Hodges Trust G C & J M Knowles G E & J Porteous G E & V E Cooper G E Sutherland Trust G J Farms Ltd G K & D J Landon Family Trust G L & G F Bell G P & C A Whiteman G R J & R J Saddleton Garn Farms Ltd Gee ‘N’ Tee Ltd Given Family Trust Glen Eden Otago Ltd Glen Oroua Dairies Ltd Glengarry (Dvke) Farming Co Ltd Golden Key Trust Grat Farms Ltd GRC Farms Ltd Gregory Farms Ltd Gydeland Farm Ltd H G & C K Meijer Hall Family Farms Ltd Haresfi eld Farms Ltd Hayden and Korina Brown Partnership Hayley Buckman Family Trust Henderson Partnership Farm Heyland Farms Ltd Highpines Ltd Hillcrest at Fairfax Ltd Hillcrest Farms Ltd Hillgrove Trust Our farmers are committed to milk quality excellence, year-after-year, ensuring that we collect the best possible milk. In addition to the honour roll below, we also acknowledge the eff ort of all Grade Free, Merit and Achievement recipients. Our farmers are our greatest assets. Hines Family Trust Hoogeveen Farms Ltd Howard Farm Ltd Huntly Road Dairies Ltd Hutton Farm Holdings Ltd I Hampton & A Golvin I J Sutherland Partnership Interlaken Farms Ltd J & J Anderson Family Trust Partnership J & LM Van Burgsteden J A & J H Hine J B & L M Suisted Ltd J B & S M Duynhoven J E & C T Brien J E & D M Cooper J H & H R Smyth J L & H M Coatsworth J L & K S Gwerder Family Trust J L & M A Cooke J L Hooper & A L Robertson J M & T M Van Hout J M De Renzy J P & M J Horgan J R & A T M Hale J W & A M Steeghs J W Prictor James Lyttle James Martelli Janssen NZ Ltd Jascas Trust Jaska Farm Trust Jayland Partnership JC Beattie Trust JDQ Ltd Jerzey Rock Farm Ltd JJ & AB Roskam Ltd JM Cross & LA Hazelton Johnson Farm Co. Ltd K B & K R Whiteman K B Olesen & R J Stephens K J & H Chalmers Ltd K J & J B Argyle K J & M T Dwyer Trusts P/S K R & S M Rooney K W & D M Blackstock K W & D R Lowe Family Trust Kaimai Dairy Ltd Kainui Peatlands Ltd Kaipara View Farming Ltd Kalman Farms Trusts P/Ship Kauri Falls Investments Ltd Kerenui Ltd Kevin Fleming Ltd Kieran McErlean Trust Kim Steff ert Family Trust King’s Junction Ltd Knockinnon Farm Trust Kywaybre Farms Ltd L J & M Prictor L J Hodges L.G. & J.M. Morris Ltd Laing Dairy Ltd Lawson Road Farm Ltd Lesdale Friesians Ltd Lizlyn Dairies Ltd Lockerbie Farms 2001 Ltd Longacre Properties Ltd Lord & Veltman Ltd Ludell Ltd Ludimac Dairying Ltd Lutz Farming Company Ltd Lynton Dairy Ltd M & A Schrader Family Trust M & C O’Grady Ltd M & J Barker Trust M C & J P Fisher M E Hunt & Son Ltd M G & A M Hurley M I & P M Stevenson Family Trusts P/ship M J & A S Taylor Family Trust M J & S D Hopson M J & T M Davies M J & W P Van Veen M J Diprose Ltd M J McDowall M J Murray & Estate of A B Murray Maken Milk Ltd Malandra Downs Ltd Manuka Ridge Ltd Mark A Mullan Trust Marua Partnership Mary Allen Farm Ltd Matricksen Ag Holdings Ltd Mattajude Family Trust Maude Peak Farm Trust Mavora Farms Ltd Maxlands Farms Ltd McCullough Family 2008 Ltd McFetridge Farms Ltd McGee Partnership McGowan-Weake Partnership Mead Family Farm Ltd Membury Oak Farm Ltd Meyer Family Trust Milestone Trust Milkwell Ltd Mitchells Milky Way Ltd MJ & KL Family Trust Molehill Farm Ltd Morrison Farms Ltd MR & TJ Frost Ltd Mu Kau Ltd Mudspring Farms Ltd N A & K M McColl N R & K L Gaskin N R & L A Fox NB & LJ Crosbie Ltd Ngahape Valley Farm Ltd Ngutunui Dairies Ltd North Star Farming Ltd NR Ensor Ltd Ohtawa Farms Ltd Okapua Farming Company Ltd O’Reilly Family Trust Otira Farm Ltd Otu Creek Farm Ltd P & T & S & Y Thompson P A Hoogeveen P D & J M Bish P D & S S Sharpe P G & D J Collins P G & D M Dombroski P H & W F Iorns P H S & P C Byford P J & M L Cotter P L & R E Berryman P R & V P Dawson P V & P G Mullin Trust Parkhill Farms Ltd Perlow Dairies Ltd Pharlee Trust Phimister Farming Ltd Piwakawaka Farm Trust PJ Nelson Farming Ltd Placement Services Ltd Port Molyneux Dairies Ltd Puketi Farming Enterprises Ltd Puniho 606 Partnership Quirke Family Trust R & A Tait T/A Black Cow Dairies R & K Houghton Family Trust R & S Singh R A & J L Hamilton R A F & J R Clubb R F & C L Lansdaal Ltd R J Troughton R N Cornes R T & E A Brown Ltd R W & R R O’Brien R W & W J Cudby Family Trust R.L. Mathis Ltd Rainbowcreek Farms Ltd Relyt Farm Ltd Rich Feet Ltd River Heights Ltd Riverside Farms (Taranaki) Ltd Riverview Farms 2001 Ltd Riverview Trust RK & A Hines Ltd RKW Partnership Rodney G & S J Joblin Rogers Farming Ltd RV & LH Kokich Farms Ltd Ryelands Farm Company Ltd S & S Iorns S A & J L England S B & Y M Thompson S England & P Walker S G & B L Thirkell S G McKenzie S L & J P Vincent S M Shead Sabin & Co Ltd Sean McErlean Trust Seven of Nine Ltd Shabict Ltd Shawlink Ltd Shenandoah Trust Silvacrest Farms Ltd Silverdene Farms (2000) Ltd Sim Brothers Ltd Sim Family Farms Ltd Sisley Farms Ltd Slatz Trust Somerset Trust Springpark Farms 2008 Ltd Steff ert Farms Ltd Stephen Zink Steven Bennett Family Trust Stoneyburn Dairy Ltd T & C Brown Ltd T & K Rae Family Trust T D & J A Rhind T R D Reesby Tamatea Farms Ltd Tawa Land Company Ltd Tayco Farm Ltd Te Ngutu Land Holding Co Ltd Te Repo Farms Ltd Teaghlach Trust Telesis Trust The Adare Company Ltd The D & A Roberts Family Trust The Goble 2000 Trust The Herewahine Trust The Hyjinks Trust The Red Cow Company Ltd The Taieri Dairy Company Ltd Trimor Ltd Trinity Lands Ltd Trustees Kokako Station Tuki Tuki Awa Ltd TW Langford Family Trust Two Name Farming Ltd Up At 5 Ltd V E & D M Grant Vale Green Services Ltd Van Rossum Ltd VBI Ltd Ventura Dairies Ltd W & C Candy Trust W B Scott Family Trust W B Wouters W Dreadon & K Barnett-Dreadon W G & M D Orr W J & J G Pile Family Trust W R & Z W Kite W.A & H.R Simpson Farming Ltd Waicola Holdings Ltd Wainui Dairies Waiotu Farms Ltd Waiparu Farm Ltd Waiparu Holdings Ltd Waipiata Trust Waituna Investments Ltd Wallace Johnstone Ltd Walters Holdings (2008) Ltd Wards Schrader Trusts Partnership Webber & Maxwell Partnership Webber Farm Ltd West Mains Farm Ltd Westmeath Trust Whakahora Farm Ltd Whakanui Farms Ltd Whakanui Stud Ltd Whenuakura Farm Ltd Wichland Farms Ltd Willcox Farms Ltd Willowfi elds Ltd Willowhaugh Enterprises Ltd Windy Ridge (Fleming) Ltd WP & A Moore Wylam Dene Farms Ltd To qualify, farms must have supplied 45 days or more in each season. FONTERRA ANNUAL REPORT 2018 41 OUR PEOPLE Employee spotlight Palatasa Havea Principal Research Scientist Fonterra Research and Development Centre, Palmerston North As a 17-year-old student attempting to pass Year 10 for the third year in a row, Palatasa (Tasa) Havea never imagined that one day he’d be granted one of New Zealand’s top honours. Fast forward a few decades and Tasa’s work, both as a scientist and as a leader in his community, was recognised when he was made a member of the New Zealand Order of Merit for his services to the Pacifi c community and the dairy industry. It’s believed Tasa is Tonga’s fi rst food science PhD. His work as a principal research scientist at Fonterra’s Research and Development Centre has resulted in ten patents for the Co-op. He’s played a vital role in pioneering the use of whey protein in a range of products that is returning hundreds of millions of dollars to the New Zealand economy. Deeply involved in his local community, Tasa has also worked alongside the New Zealand Government for many years bringing about policies and funding to support Pacifi c Island people to reach their potential. 42 FONTERRA ANNUAL REPORT 2018 Tasa is now a member of the New Zealand Order of Merit. It is believed Tasa is Tonga’s fi rst food science PhD. Tasa’s work with whey protein is returning hundreds of millions of dollars to the New Zealand economy. Tasa’s research has resulted in ten patents for the Co-op. 10 Hema Daily Fresh Milk team China Staying ahead of the curve is a tough challenge in fast-changing China. But the launch of Hema Daily Fresh Milk in Shanghai has put our Co-op at the forefront of product innovation. One step ahead, teams from our Consumer and Foodservice business in China and Food Safety Quality and Technical teams in New Zealand partnered with Alibaba’s innovative retailer Hema Fresh to launch our Co-op’s fi rst fresh milk product in China. From concept to launch in just over three months, the product was developed with incredible speed and relentless focus on food safety and quality. Each bottle is on sale for just a day and delivered to the consumer within 30 minutes of an order. Hema Daily Fresh is the fi rst step in our Co-op selling fresh milk in China. Sourced directly from the Co-op’s farm hub in Hebei province, the range capitalises on rising domestic demand for higher-quality fresh products, as part of the ‘premiumisation’ of China’s consumer market. Stirling team South Otago A site at the bottom of the South Island but on top of their game, Stirling is focussed on being the most productive site in the country. The 110-person South Otago team has been working hard to deliver sustainable change over many years across all parts of the site, from transport and health and safety to people and customers. Stirling is one of the most effi cient and productive sites in the country. The team has put every part of its business under a spotlight to deliver increased value. The results are impressive – the site is running for longer, breakdowns are reduced and 1.8 million litres of milk each day during the peak of the season is being turned into some of the world’s most-loved cheeses. The site boasts a state-of-the-art biological treatment plant which uses natural organisms to treat waste water – the only one of its kind in the Southern Hemisphere. Stirling will also transition from coal to renewable energy as part of our goal to achieve net zero emissions across our sites by 2050. In light of the team’s hard-won gains, Stirling was awarded two prestigious awards at our 2018 Best Site Cup Awards. These awards recognise the team’s long-term commitment to excellence and creating sustainable change over many years. They also won a silver award with a score of 99.15 out of 100 at the Wisconsin Cheese Awards. FONTERRA ANNUAL REPORT 2018 43 9 10 11 OUR PEOPLE Board of Directors 1 2 3 4 5 6 7 8 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. J o h n M o n a g h a n C l i n t o n i D n e s B r e n t G o l d s a c k S i m o n I s r a e l B r u c e H a s s a l l N i c o l a S h a d b o l t A n d r e w M a c f a r l a n e D o n n a S m i t J o h n W i l s o n S c o t t S t J o h n A s h l e y W a u g h 44 FONTERRA ANNUAL REPORT 2018 5. Simon Israel Board Responsibilities Appointed Director, Member of the People, Culture and Safety Committee Term of Offi ce Appointed 2013 Simon Israel was appointed to the Fonterra Board in 2013. Simon currently chairs the Boards of Singapore Telecommunications Limited and Singapore Post Limited and is a member of the Westpac Asia Advisory Board. 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 Pacifi c Breweries, Griffi n Foods, CapitaLand 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. DipBusStud 6. Andrew Macfarlane Board Responsibilities Farmer-elected Director, Member of the Audit and Finance Committee, Co-operative Relations Committee and the Nominations Committee. Term of Offi ce Elected 2017 Andy Macfarlane was elected to the Fonterra Board in 2017. Andy was a farm management consultant for 38 years. He is a Councillor of Lincoln University and a Director of Ngai Tahu Farming and ANZCO. Andy is an active member of the International Farm Management Association (IFMA), Global Dairy Farmers and New Zealand Institute of Primary Industry Management (NZIPIM). He is the Past President of the NZIPIM and chaired Deer Industry New Zealand for seven years. Andy began farming in 1989 and lives near Ashburton. Andy has shareholding interests in the South Island. Andy has a strong understanding of the governance of research and development and innovation, and has a particular interest in the strategic use of technology in the dairy industry. B.Agr.Sc 7. Nicola Shadbolt ONZM Board Responsibilities Farmer-elected Director, Member of the Audit and Finance Committee and the Risk Committee Term of Offi ce Elected 2009, last re-elected 2015 Nicola Shadbolt was elected to the Fonterra Board in 2009 and serves on the Board of the Manager of the Fonterra Shareholders’ Fund. Nicola has worked in government, agribusiness, consultancy and academia and is now a Professor of Farm and Agribusiness Management. She serves on the Board of the International Food & Agribusiness Association and, as Chair, on a large dairy farming business. Nicola was made an Offi cer of the New Zealand Order of Merit for services to agribusiness in 2018. Nicola lives in the Manawatu, the base for her four farming and forestry equity partnerships, which include two dairy farms. Nicola’s expertise across international agribusiness sectors includes a strong focus on the crucial role that science and sustainability play in creating enduring value for Fonterra, its owners and New Zealand. B.Sc(Hons), M.AgrSc(Hons), DipBusStud (Accountancy), FNZIPIM (Reg), FAICD, INSEAD IDP-C 1. John Monaghan Board Responsibilities Farmer-elected Director, Chairman, Chair of the Co-operative Relations Committee, Member of the People, Culture and Safety Committee and the Nominations Committee Term of Offi ce Elected 2008, last re-elected 2017 John Monaghan was elected to the Fonterra Board in 2008 and became Chairman in 2018. Prior to joining the Fonterra Board John was Chairman of the Fonterra Shareholders’ Council and the inaugural Chair of the Governance Development Programme. He is also a director of Centre Port Limited and Centre Port Properties Limited. He holds a number of farming directorships and is a trustee of the Wairarapa Irrigation Trust. John has dairy farming interests in the Wairarapa and Otago regions. John has taken a lead role in representing Fonterra’s interests on global trade issues and has strong networks domestically and internationally with key stakeholders. 2. Clinton Dines Board Responsibilities Appointed Director, Member of the People, Culture and Safety Committee, Risk Committee and the Nominations Committee Term of Offi ce Appointed 2015 Clinton was appointed to the Fonterra Board in 2015. Clinton lived and worked in China for 36 years, 21 of which as President of BHP Billiton’s China business. He has extensive experience as an executive in China and Asia businesses and has had an active career as a Non-Executive Director, currently serving on the Boards of North Queensland Airports and Zanaga Iron Ore. He was Executive Chairman of Caledonia Asia from 2010 to 2013, an investment group in Asia, and is a Partner in Moreton Bay Partners, a strategic advisory fi rm based in Brisbane. He is an Adjunct Professor at Griffi th University’s Asia Institute and is a Member of the Griffi th University Council. Clinton has extensive experience as a senior executive in China and Asia businesses, including global manufacturing and commodity businesses. BA (Modern Asian Studies, Griffi th), CIM, INSEAD 3. Brent Goldsack Board Responsibilities Farmer-elected Director, Member of the Co-operative Relations Committee, the Risk Committee and the Milk Price Panel. Term of Offi ce Elected 2017 Brent Goldsack was elected to the Fonterra Board in 2017. Brent had a 25-year career in both New Zealand and abroad in various corporate advisory roles, including being a Partner at PwC for more than 12 years. Brent is a Chartered Accountant. Brent serves on the Boards of Canterbury Grasslands Limited, Waitomo Petroleum Group Limited and its subsidiaries and The New Zealand Fieldays Society. Brent is actively involved as a shareholder of three dairy operations in the Waikato and has shareholding interests in two other dairy farms with operations in both New Zealand and the United States. Brent is also the General Manager of a 3,000 cow dairy operation. In addition to his strong fi nancial skills and knowledge, Brent has particular expertise in Fonterra’s Farmgate Milk Price and the drivers of the Co-operative’s earnings. BCA, CA 4. Bruce Hassall Board Responsibilites Appointed Director, Chair of the Audit and Finance Committee and the Nominations Committee, Member of the Risk Committee and the Milk Price Panel and is an observer on the People, Culture and Safety Committee. Term of Offi ce Appointed 2017 Bruce Hassall was appointed to the Fonterra Board in 2017. Bruce is a Chartered Accountant and has had a 35-year career at PwC, including holding the position of Chief Executive Offi cer of the New Zealand practice from 2009 to 2016. Bruce is Chairman of The Farmers Trading Company Limited, Prolife Foods Limited and Fletcher Building Limited (with eff ect 1 September 2018) and serves as a director on the Board of Bank of New Zealand. He is a member of the University of Auckland Business School Advisory Board and was a founding Board Member of the New Zealand China Council. Bruce has extensive experience in fi nancial reporting information system processes, risk management, business acquisitions, capital raising and IPOs across listed and private companies. BCom, FCA (CAANZ) 8. Donna Smit Board Responsibilities Farmer-elected Director, Member of the Audit and Finance Committee and the Co-operative Relations Committee Term of Offi ce Elected 2016 Donna Smit was elected to the Fonterra Board in December 2016. Donna lives and farms at Edgecumbe, and has built and owns seven dairy farms in Eastern Bay of Plenty and Oamaru. Donna is a Director of Ballance Agri Nutrients and Kiwifruit Equities Limited and a Trustee of the Dairy Women’s Network. Donna is a Chartered Accountant and was a company administrator at kiwifruit co-operative EastPack for 24 years. Donna’s strong focus on fi nancial and risk management has been built through her extensive business experience and fi nancial background, and complements her deep dairy farming experience. CA 9. Scott St John Board Responsibilities Appointed Director, Chair of the Milk Price Panel and Member of the Audit and Finance Committee Term of Offi ce Appointed 2016 Scott St John was appointed to the Fonterra Board in 2016 and serves on the Board of the Manager of the Fonterra Shareholders’ Fund. He was the CEO of First NZ Capital (FNZC) for 15 years, stepping down from that role in early 2017. Scott has served on the Council of the University of Auckland since 2009 and was appointed Chancellor in 2017. He is a Director of Fisher and Paykel Healthcare and chairs their Audit and Risk Committee. Scott also serves on the Board of Mercury NZ Limited and NEXT Foundation. Previous roles have included Chairman of the Securities Industries Association, and membership of both the Capital Markets Development Taskforce, and the Financial Markets Authority Establishment Board. B.Com, Diploma of Business 10. Ashley Waugh Board Responsibilities Farmer-elected Director, Chair of the Risk Committee, Member of the Audit and Finance Committee and the People Culture and Safety Committee Term of Offi ce Elected 2015 Ashley Waugh was elected to the Fonterra Board in 2015. Ashley serves on the Board of Seeka Limited and the Colonial Motor Company Limited. He previously chaired the Board of Moa Group Limited. Ashley spent ten years with The New Zealand Dairy Board followed by eight years with National Foods in Australia including the last four years as Chief Executive Offi cer. Ashley lives on his dairy farm near Te Awamutu and has shareholding interests in Puke Roha Limited in Pokuru. Ashley has had hands-on experience as a leader of a consumer brands business and a track record of value creation, which underpins his expertise and interest in fi nancial discipline and risk management. BBS 11. John Wilson Board Responsibilities Farmer-elected Director, Chair of the People, Culture and Safety Committee Term of Offi ce Elected 2003, last re-elected 2015 John Wilson was elected to the Fonterra Board in 2003 and became Chairman in 2012, stepping down in July 2018. Previously he served as the inaugural Chairman of the Fonterra Shareholders’ Council. John is a director of Turners & Growers Limited and the Hugh Green Group and its subsidiary companies. John also serves on the Executive Board of the New Zealand China Council. He 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. John’s governance and leadership experience of diverse and complex businesses, includes co-operatives, extensive family and farming businesses, business councils and global industry bodies. B.Agr.Sc FONTERRA ANNUAL REPORT 2018 45 OUR PEOPLE Management Team 1 2 23 4 5 6 5 7 8 1. 2. 3. 4. 5. 6. 7. 8. M a r c R i v e r s M i l e s H u r r e l l L u k a s P a r a v i c i n i R o b e r t S p u r w a y J u d i t h S w a l e s K e l v i n W i c k h a m M i k e C r o n i n M a r k V a n Z o n 46 FONTERRA ANNUAL REPORT 2018 7. Mike Cronin Managing Director Corporate Aff airs Mike is the Managing Director Corporate Aff airs, where he oversees Health, Safety, Resilience and Risk; Legal; Social Responsibility; Governance; Food Safety, Quality and Regulatory Aff airs; Global Stakeholder Aff airs; Communications; Advocacy and Fonterra Brand teams. Mike is also responsible for co-ordinating the CEO’s offi ce, the Fonterra Management Team, and the Fonterra Board. After joining Fonterra in 2002 Mike has worked on many of Fonterra’s most signifi cant projects, including the buyback of the Anchor brand in New Zealand, Trading Among Farmers and the Governance and Representation Review. Prior to 2014, Mike was the General Manager of Strategy Deployment. He was appointed Group Director Governance and Legal before taking on his current role in 2014. Mike has a Bachelor of Laws and Bachelor of Arts from the University of Auckland. 8. Mark Van Zon Managing Director of People and Culture Mark Van Zon was appointed Acting Managing Director of People and Culture in 2018 after Joanne Fair took up a secondment to lead Fonterra Brands New Zealand. Mark oversees the delivery of Fonterra’s people strategy, which includes innovative solutions to attract, develop and retain global talent, and to improve staff engagement across our 22,000 employees. Prior to joining Fonterra in 2017, Mark was based in Seattle and led Starbucks’ international reward team. His overseas experience also includes various Human Resources roles in the Netherlands and UK. Mark is a well- rounded Human Resources leader having worked across a range of industries including logistics, IT and consulting, retail and fast-moving consumer goods. Mark holds a Master of Commerce (Hons) from the University of Auckland. 1. Miles Hurrell Chief Executive Offi cer In August 2018, Miles Hurrell was appointed as Chief Executive Offi cer. In Miles’ most recent position as Chief Operating Offi cer, Farm Source,™ he led Fonterra’s global Co-operative farming strategy which includes farmer services and engagement, milk sourcing and the chain of 70 Farm Source™ rural retail stores throughout New Zealand. Miles’ 19 years of experience in the dairy industry has spanned four continents. From 2010 to 2014, Miles was General Manager Middle East, Africa, Eastern Europe and Russia. In this position he led a period of sustained growth during a time of political unrest across these regions. He reset the African sales strategy and was a Director of Fonterra’s joint venture with Africa’s largest dairy company, Clover Industries Limited. From 2006 to 2008, Miles oversaw the streamlining of the Co-operative’s European operations before moving to the United States to establish new off shore partnerships. In 2014, Miles was appointed the Co-operative Aff airs Group Director and in 2016 he took up his role with Farm Source.TM Miles has completed management programmes at INSEAD (International Executive Development), London Business School (Finance), Kellogg’s North Western University (Global Sales) and IMD (marketing). He has also had governance roles with Prolesur, Falcon (China Farms), MyMilk and Global Dairy Platform. 2. Marc Rivers Chief Financial Offi cer Marc Rivers joined Fonterra in February 2018 as the Chief Financial Offi cer, responsible for the Co-operative’s fi nances, procurement and information systems. Marc is an experienced global fi nance executive with strong strategic leadership capability. Prior to joining Fonterra, Marc was the CFO at Roche Pharmaceuticals Division in Switzerland, with oversight of NZ$54 billion in sales including 14 manufacturing sites around the world. His division was responsible for product distribution for 140 countries, focussing on the innovation pipeline and customer and market development. Marc has worked in both emerging and established markets, including China, Japan, Thailand, Europe and the US. Marc has a strong track record and is known for his commitment to leading and developing his people while building diverse and inclusive teams. He has a Bachelor of Arts in International Studies and an International Masters of Business Administration, Finance and German from the University of South Carolina, Columbia USA. 3. Lukas Paravicini Chief Operating Offi cer, Global Consumer and Foodservice Lukas Paravicini heads Fonterra’s Global Consumer & Foodservice business whose 11,000 people are committed to bringing dairy nutrition to 80 countries across the world. He fi rst joined Fonterra as CFO in 2013 after a long career with Nestlé where he held a number of senior positions including General Manager for Nestlé Professional Europe, CFO of Nestlé Brazil, Vice President of Global Business Services and CFO of Nestlé Professional, and Nestlé’s globally managed Out- of-Home business. Lukas’ extensive experience in dairy provides him with an in-depth understanding of how dairy can deliver people’s needs for delicious nutritious food. He has lived and worked in some of Fonterra’s most strategically important markets. He holds a Business and Administration degree from the University of Zurich, Switzerland, and speaks fi ve languages. 4. Robert Spurway Chief Operating Offi cer, Global Operations Robert Spurway joined Fonterra in 2011. As Chief Operating Offi cer, Global Operations, Robert leads Fonterra’s global operations business and is responsible for the Co-operative’s manufacturing and supply chain 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 greenfi eld development of the Co-operative’s Darfi eld site. Robert has more than 25 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, Robert led two Australian food companies before returning to New Zealand. Robert holds a Bachelor of Engineering (Chemical and Materials). 5. Judith Swales Chief Operating Offi cer, Velocity and Innovation Judith Swales shapes the future of Fonterra by harnessing innovation, emerging technologies, game changing business models and new ways of working, while embedding a performance driven culture. She joined the Co-operative in 2013 as Managing Director Fonterra Oceania, where she led the successful turnaround of the Australian business and oversaw Fonterra Brands New Zealand. The daughter of a milkman, Judith grew up helping her father on his daily milk run. She has extensive experience in senior management and business turnarounds, and prior to joining Fonterra was the Managing Director of Heinz Australia, and CEO and Managing Director of Goodyear Dunlop, Australia and New Zealand. Before coming to Australia in 2001, Judith worked for a number of UK retailers which culminated in her move to Australia as the Managing Director of Angus and Robertson. She has served as a Non-Executive Director on the DuluxGroup Board since April 2011 and is a Director on the Global Dairy Platform Board. Judith has a degree in Microbiology and Virology. 6. Kelvin Wickham Chief Operating Offi cer, NZMPTM Kelvin Wickham leads the sales and marketing of all Fonterra ingredients globally, delivering solutions to our global customers, ensuring optimisation of supply and demand, commodity price risk management, and championing the NZMP™ brand. Kelvin has more than 29 years’ experience in the dairy industry and has played a key role in building markets, customer relationships and partnerships. His previous role of President Greater China and India focussed on directing the development of Fonterra’s business in these expanding markets, during which he oversaw a period of rapid growth. Prior to that, Kelvin 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. FONTERRA ANNUAL REPORT 2018 47 Milk Collection kgMS (millions) 1,584 1,614 1,566 1,526 1,505 Normalised Gross Margin $ GM (millions) $ GM/LME 3,636 3,332 3,246 3,152 0.15 0.15 0.14 0.14 2,462 0.11 CAPEX6 $ Capex (millions) 1,531 969 944 851 861 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 OUR PERFORMANCE Group financial metrics These charts have been selected to represent the fi nancial metrics for Fonterra. We have provided an historical summary of our performance which we intend to include in our annual results on an ongoing basis. Total Cash Payout $ Farmgate Milk Price $ Dividend 8.50 0.10 8.40 2014 4.65 0.25 4.40 2015 4.30 0.40 3.90 2016 6.52 0.40 6.79 0.10 6.12 2017 6.69 2018 Sales Volume (LME bn)1 Ingredients Consumer and Foodservice 22.2 3.9 22.8 4.5 23.7 4.9 22.9 5.5 22.2 5.6 21.7 2014 21.5 2015 22.4 2016 21.3 2017 20.5 2018 Additional Volume to Higher Value2 Cummulative Advanced Ingredients (LME m) Cummulative Consumer and Foodservice (LME m) Higher value products3 as % of total LMEs 42% 45% n/a 2014 600 2015 980 2016 473 1,556 807 1,687 2017 2018 1 Does not add to total due to inter-group eliminations. Ingredients include China Farms. 2 Advanced ingredients split only from 2017. 3 Comprises Advanced Ingredients and Consumer and Foodservices products. 48 FONTERRA ANNUAL REPORT 2018 Normalised EBIT $ EBIT (millions) $ EBIT/LME 1,358 0.06 1,155 0.05 902 0.04 974 0.04 503 0.02 Working Capital Days 103 87 77 75 83 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 Normalised EPS and Dividend Yield4 Leverage EPS (cents) Dividend Yield Gearing % Debt/EBITDA 49 49 29 7.3% 4.4% 6.7% 24 2015 2016 2017 1.7% 2018 10 1.6% 2014 49.7 4.7x 42.3 4.9x 48.4 4.5x 44.3 44.3 3.5x 2.8x 2014 2015 2016 2017 2018 Return on Capital (including intangibles and EAI5) 9.2% 8.3% 6.9% 6.3% 4.1% Free Cash Flow $ Free Cash Flow (millions) 2,184 358 670 600 2014 2015 2016 2017 2018 2014 2015 2016 2017 2018 –1,372 4 FY18 divided over volume weighted average FCG price of $5.84 across the year. 5 Equity accounted investments. 6 Calculated on the accrual basis. FONTERRA ANNUAL REPORT 2018 49 OUR PERFORMANCE Group Overview It was a mixed year for us. On one hand we saw a 9% uplift in the Farmgate Milk Price to $6.69 per kgMS. On the other, our earnings performance was disappointing and well below our targets. We continued to shift more volume to higher value products but we had less volume to sell due to record low opening inventories and lower milk collections in New Zealand. Our normalised earnings before interest and tax (EBIT) were down 22% to $902 million, including a downward adjustment to the Farmgate Milk Price of 5 cents per kgMS. The lower EBIT was due to the lower sales volumes, tighter margins due to the higher Farmgate Milk Price, especially the increase late in the season, and higher operating costs. We also had two large one off items, the payment for the Danone arbitration award and Beingmate write-down, that signifi cantly impacted our reported EBIT, which was down 77% to $262 million. Our return on capital was unsatisfactory at 6.3%, down 2% compared to last year. As a result of this disappointing fi nancial performance, we decided to limit our dividend to just the 10 cents paid in April and reduce the Farmgate Milk Price to strengthen our balance sheet and protect the long-term interests of the Co-operative. 1 This includes the normalisation of Beingmate investment and the Danone arbitration decision. 2 Ratio is economic net interest bearing debt divided by earnings before interest, tax, depreciation and amortisation (EBITDA). Both debt and EBITDA are adjusted for the impact of operating leases. 3 Gearing ratio is economic net interest bearing debt divided by total capital. Total capital is equity excluding the hedge reserves, plus economic net interest bearing debt. 4 Return on capital is calculated as normalised EBIT, less a notional tax charge divided by capital employed. Capital employed includes brands, goodwill and equity-accounted investments. Return on capital, excluding brands, goodwill and equity-accounted investments was 8.0% (31 July 2017: 11.1%). 50 FONTERRA ANNUAL REPORT 2018 NZD MILLION 31 JULY 2018 31 JULY 2017 CHANGE FOR THE YEAR ENDED Volume (LME, billion) Volume (000 MT) 22.2 4,123 Normalised sales revenue 20,431 Normalised gross margin 3,152 Normalised gross margin percentage Normalised operating expenses Reported EBIT Normalised EBIT1 (2,496) 262 902 15.4% Net fi nance costs Tax (expense)/credit Net (loss)/profi t after tax Earnings per share (cents) Normalised earnings per share (cents) Dividend per share (cents) Adjusted debt to EBITDA2 (ratio) Gearing ratio3 Return on capital4 Free cash fl ow Capital expenditure (416) (42) (196) (14) 24 10 4.5X 48.4% 6.3% 600 861 22.9 4,180 19,214 3,246 (3%) (1%) 6% (3%) 16.9% – (2,335) 1,120 1,155 (355) (20) 745 7% (77%) (22%) 17% 115% (126%) 46 (130%) 49 40 3.5X 44.3% 8.3% 670 851 (51%) (75%) – – – (10%) 1% Net Loss After Tax $196 m Normalised EBIT $902 m Return on Capital 22% 2% 6.3% Normalised Earnings Per Share 51% 24 cents FONTERRA ANNUAL REPORT 2018 51 OUR PERFORMANCE Group Overview CONTINUED China Farms recorded a direct loss of $9 million for the year. Production, and consequently sales volumes, were down due to some changes in the herd to better match the annual highs and lows in customer demand for milk. We also had to make an unbudgeted investment in our effl uent management to meet discharge standards. Next year we expect volumes to increase and on-farm productivity to improve. Our Ingredients business is responsible for purchasing the raw milk from the farms and capturing the highest value for this milk, and this resulted in an additional $30 million loss. We are progressing our strategy of moving this milk up the value curve through partnerships with the likes of Hema Fresh, Starbucks, McDonald’s and other Quick Service Restaurants (QSR) channels. At less than 5% of our milk from China Farms, these are still small volumes but our plan is to continue to grow them over time. Normalised Gross Margin $ GM (millions) $ GM/LME 3,636 3,332 3,246 3,152 0.15 0.15 0.14 0.14 2,462 0.11 2014 2015 2016 2017 2018 Normalised EBIT $ EBIT (millions) $ EBIT/LME 1,358 0.06 1,155 0.05 902 0.04 974 0.04 503 0.02 2014 2015 2016 2017 2018 In the 2018 fi nancial year, Fonterra grew total normalised revenue by 6% where higher product pricing off set the decline in overall sales volumes of Liquid Milk Equivalents (LMEs). Our overall sales volumes of LMEs were down 3% mainly due to the lower sales volumes in our Ingredients business where we had lower opening inventory and lower collections in New Zealand. We continued to sell increased volumes of higher value products with sales of Advanced Ingredients increasing by 334 million LMEs and we also shifted 131 million more LMEs into Consumer and Foodservice. This increased sales volumes in Consumer and Foodservice by 2%, which was below our targets and mainly due to customer demand being impacted by higher prices and increased competition. Our group normalised gross margin per LME of $0.14 was in line with the previous year. However, the lower sales volumes and higher group operating costs meant normalised EBIT decreased by $253 million to $902 million. After two years of reducing our costs, normalised group operating costs were 7% higher than last year with Ingredients and centrally held costs making up the majority of the increase. In Ingredients we had higher operating costs across the business, including some one-off s. We also had costs for new category growth and higher costs in Australia as we expanded our business. In addition, we had higher IT and R&D expenditure to support the future development of our Co-operative. In Ingredients, normalised EBIT decreased by 7% to $879 million. Gross margin in New Zealand Ingredients improved on last year but was off set by other parts of Ingredients and as a result normalised gross margin was stable. The higher operating costs resulted in the lower EBIT. Normalised EBIT for Consumer and Foodservice was down 9% on last year to $525 million1. Higher prices for ingredients, especially for fat products, impacted demand and while we increased prices through our pricing and marketing strategies we were not able to fully recover the higher input costs. 1 Normalised EBIT has been restated for FY17 from $614 million to $576 million as we reallocated some group overhead costs to markets. 52 FONTERRA ANNUAL REPORT 2018 Net fi nance costs were $61 million higher than last year due to higher average borrowings and the one-off $26 million interest payment made to Danone. Our gearing ratio increased to 48.4% from 44.3% last year. This included the result of the Danone arbitration and impairment of Beingmate, which collectively accounted for 3.2% of the decline. Our working capital days went up by eight days from 75 to 83 because of higher carrying values of inventory and receivables, due to the late season increase in the Farmgate Milk Price. Free cash fl ow, being the cashfl ow that is available to pay interest and dividends, and to reduce debt, decreased by $70 million to $600 million. This was because of lower earnings, and higher working capital and capital expenditure for the year. Our capital expenditure went up to $861 million compared to $851 million last year and included a number of big projects such as construction of a third mozzarella plant at our Clandeboye site, a cream cheese plant at our Darfi eld site and the expansion of our Stanhope plant, which will increase its cheese production capacity by 35,000 metric tonnes. This was a year of challenging operating performance and we are focussed on improving the business performance of all assets. This combined with strong fi nancial discipline will strengthen the balance sheet and improve the return on invested capital. Normalised Operating Expenses $2,496 m 7% Free Cash Flow $600 m 10% Gearing Ratio 4.1% 48.4% FONTERRA ANNUAL REPORT 2018 53 OUR PERFORMANCE Ingredients In our Ingredients business normalised sales revenue increased by 7% where higher sales prices more than off set the lower sales volumes due to record low opening inventory and lower collections. Our total normalised gross margin was in line with last year – however, increased operating costs to achieve these gross margins meant our EBIT declined by 7% to $879 million. Volume Milk collection across New Zealand for the 2017/18 season was 1,505 million kgMS, down 1% compared to the previous season. Diffi cult weather conditions were the prevailing theme this season with some regions hit harder than others. Many North Island and upper South Island farmers experienced extremely wet conditions in spring causing damage to their pasture, stunting both grass growth and supplementary feed production. This was followed, in some regions, by diffi cult dry conditions which aff ected pasture growth across the rest of the season. In Australia, milk collection for the 2017/2018 season reached 153 million kgMS, 30 million kgMS higher than the 2016/17 season. Strong volume growth in Australia was predominantly due to increased market share as we gained supply from competitors. Ingredients’ sales volumes were down 4% for the year, driven by the lower opening inventories and the lower collections in New Zealand. This year we increased sales of Advanced Ingredients by 334 million LMEs, which is consistent with our strategy of shifting more of our farmers’ milk into higher value products. The main products that contributed to the increased sales of Advanced Ingredients were premium consumer powders into the Middle East and South East Asia. Summary Financials NZD MILLION 31 JULY 2018 31 JULY 2017 CHANGE FOR THE YEAR ENDED Volume (LME, billion) Volume (’000 MT) 20.5 2,986 Normalised sales revenue 16,306 21.3 3,019 15,266 (4%) (1%) 7% 0% 9% 30% (2%) (1%) (59%) (7%) 1,472 1,346 555 791 77 (30) 79 879 1,473 1,239 428 811 78 (38) 194 943 309 232 33% 1,275 1,165 8.3% 9.8% 9% – Normalised total gross margin – New Zealand ingredients Reference products Non-reference products – Australia ingredients – China raw milk1 – Other gross margin Normalised EBIT2 Gross margin ($ per MT) – New Zealand Ingredients Reference products ($ per MT) Non-reference products ($ per MT) Return on capital3 1 China raw milk gross margin represents the net benefi t/(loss) from the external sale of milk produced by China Farms and sold to the Ingredients business in China at an internal raw milk price. 2 Normalised EBIT for Ingredients excludes unallocated costs. 3 Return on capital is calculated as normalised EBIT, less a notional tax divided by capital employed. Capital employed includes brands, goodwill and equity-accounted investments. Return on capital, excluding brands, goodwill and equity-accounted investments was 8.2% (31 July 2017: 10.3%). 54 FONTERRA ANNUAL REPORT 2018 Value Ingredients’ revenues were up 7% on last year due to higher commodity prices and higher sales volumes in Australia, off setting the lower opening inventory and milk collections in New Zealand. Our New Zealand Ingredients business manufactures fi ve ingredient products that inform the Farmgate Milk Price. These are referred to as reference products, while all other products are referred to as non-reference products. Revenue per metric tonne for reference products was up 14% and remained largely fl at for non-reference products. Total Ingredients’ normalised gross margin was in line with last year, and includes the adjustment to the milk price of 5 cents per kgMS, benefi tting gross margin by $74 million. This was achieved on a lower sales volume and therefore represents an improved gross margin per LME. New Zealand Ingredients’ gross margin increased 9% to $1,346 million. Gross margins for reference products were $555 million, or $309 on a per metric tonne basis, which represents an increase of 33%. This included recovering pricing lags from the previous year and is in line with the margin per metric tonne for FY16. The gross margins for non-reference products were $791 million, down 2% on last year because of lower sales volumes. Gross margin per metric tonne for non-reference products was 9% higher at $1,275. Australian Ingredients' gross margin was in line with last year including a planned 40 cents per kgMS payment to suppliers. EBIT decreased by 44% because last year included some one-off benefi ts that were not repeated this year. The overall Ingredients’ gross margin was also impacted by a $30 million loss representing the diff erence between the domestic milk price and the internal raw milk price paid to China Farms. Last year this loss was $38 million. We include the China Farms’ volumes and earnings in Ingredients as we use our sales expertise to maximise sales revenue of the raw milk. The improved gross margin for New Zealand Ingredients was off -set by lower margins in “Other gross margin”. This included a reduction in profi tability from globally sourced products and last year we had a number of one-off benefi ts that were not repeated this year. Overall, normalised gross margin was in line with last year but our operating costs were higher and there were some one-off s. In addition, we had costs for new category growth and higher costs in Australia as we expanded our business. This resulted in normalised EBIT of $879 million, down 7% on last year. Added 334 million LMEs to Advanced Ingredients Normalised Total Gross Margin $1,472 m in line with 2017 New Zealand Ingredients’ Revenue and Volume1 FOR THE YEAR ENDED NZD MILLION 31 JULY 2018 31 JULY 2017 CHANGE Production Volume (’000 MT) Reference products Non-reference products 1,849 1,837 762 749 1% 2% Sales Volume (’000 MT)2 Reference products Non-reference products Revenue Per MT (NZD)2 Reference products Non-reference products 1,794 1,841 (3%) 620 696 (11%) 4,851 4,262 14% 5,637 5,567 1% 1 Table excludes bulk liquid milk. The bulk liquid milk volume for the year ended 31 July 2018 was 68,000 MT of kgMS equivalent (year ended 31 July 2017 was 76,000 MT of kgMS equivalent). 2 Revenue and sales volume exclude Foodservice volumes to China, Latin America and Quick Service Restaurant channels. This volume for the year ended 31 July 2018 was 198,000 MT (year ended 31 July 2017 was 143,000 MT). FONTERRA ANNUAL REPORT 2018 55 55 FONTERRA ANNUAL REPORT 2018 OUR PERFORMANCE Consumer and Foodservice We continued to move more volume into our higher value Consumer and Foodservice business where our sales volumes grew by 131 million LMEs, 2% up on last year. This was less than our targeted growth and was mainly due to higher prices, product mix changes and the underperformance of our New Zealand business. We achieved volume growth in all other regions with the strongest growth from our Greater China business. Higher ingredient prices meant signifi cantly higher input prices in both our Consumer and Foodservice businesses. Through our pricing strategies and brand strength our increased prices contributed an additional $551 million to earnings but this was not suffi cient to cover the additional $626 million of costs we incurred from the higher input costs. As a result, our normalised EBIT was down 9% on last year to $525 million1. Summary Financials Normalised EBIT: key performance drivers $ MILLION 31 JULY 2018 31 JULY 2017 CHANGE $ MILLION FOR THE YEAR ENDED Volume (LME, billion) – Consumer – Foodservice Volume (’000 MT) Normalised sales revenue Normalised gross margin Gross margin (%) – Consumer – Foodservice Normalised EBIT Return on capital2 5.6 3.2 2.4 1,798 7,122 1,683 24% 28% 16% 525 8.3% 5.5 3.1 2.3 1,783 6,517 1,744 2% 0% 6% 1% 9% Normalised EBIT prior year Volume Price Cost of goods sold Operating expenses and other3 (3%) Normalised EBIT 27% 29% 22% – – – 576 (9%) 9.3% – FOR THE YEAR ENDED 31 JULY 2018 31 JULY 2017 576 14 551 (626) 10 525 580 (16) 278 (329) 63 576 1 Normalised EBIT has been restated for FY17 from $614 million to $576 million as we reallocated some group overhead costs to markets. 2 Return on capital is calculated as normalised EBIT, less notional tax charge divided by capital employed. Capital employed includes brands, goodwill and equity-accounted investments. Return on capital, excluding brands, goodwill and equity-accounted investments was 35.1% (31 July 2017: 42.7%). 3 Includes net other operating income, net foreign exchange gains/losses and share of profi t/loss of equity-accounted investees. 56 FONTERRA ANNUAL REPORT 2018 Volume by region Greater China In Greater China our volumes went up 11% driven by strong growth in Mainland China. Consumer volumes increased 24% on last year with strong growth in all Anchor™ products. Based on market share, Anchor™ UHT milk is now the number one imported milk in Mainland China, in both e-commerce and offl ine channels. Foodservice volumes increased 9% on last year with continued momentum in UHT culinary cream through expansion into new cities and our launch of a beverage house channel which includes tea houses that sell tea macchiatos. In Greater China Foodservice there was a signifi cant shift in product mix from butter to culinary UHT creams due to the increase in butter prices. Butter has a high ratio of LMEs per metric tonne so this shift in our product mix was one of the key reasons our LME growth in Greater China was not as high as the previous year. Latin America Latin America delivered 12 million more LMEs than last year. SoproleTM had another strong year with its volumes up 31 million LMEs which is 7% up on last year. We had lower sales in Venezuela as the socio-economic situation impacted consumer demand and there were also diffi culties accessing the raw ingredients and packaging materials to run the factories at optimal levels. In Brazil there were also diffi cult economic conditions but we were able to keep volumes in line with last year. We were able to extend our leadership positions in the children’s category and in the northeast of Brazil. Asia We had consistent growth across all Asian, Middle East and African markets. Volumes were up by 71 million LMEs, a 4% increase on last year – this includes growth in both Consumer and Foodservice. We achieved our strongest growth in Consumer in Malaysia and Sri Lanka. In Foodservice, the Middle East, Vietnam and Thailand had strong performances with volume growth from butter in the Middle East and cream in Vietnam and Thailand. In Consumer, growth was driven by Fernleaf powders in Malaysia, the launch of our Red Cow brand in Sri Lanka and the Middle East and the re-launch of Anlene™ across the Asian region. Oceania Volumes were down 5% because of challenges in our New Zealand business and marginally lower volumes in Australia. New Zealand’s volumes were down 70 million LMEs, 9% lower than last year. This was due to the issues with our move to a new distribution centre, which we highlighted in our interim results, combined with higher prices and changes in consumer preferences. We have now put in place a plan for turning around New Zealand’s performance. In Australia, Foodservice volumes were fl at. Excluding the Wagga Wagga Route business divested in October 2016, Consumer achieved a volume increase versus 2017. This was primarily due to liquid milk, Western Star butter sales and recently launched Western Star cream. Content for this page in progress Greater China LME 1,413 million 11% Latin America LME 747million 2% Asia LME 1,773 million 4% Oceania LME 5% 1,656 million FONTERRA ANNUAL REPORT 2018 57 OUR PERFORMANCE Consumer and Foodservice CONTINUED Consumer and Foodservice Performance LME (BILLION) NORMALISED EBIT ($M) YEAR ENDED 31 JULY 2018 YEAR ENDED 31 JULY 2017 CHANGE YEAR ENDED 31 JULY 2018 YEAR ENDED 31 JULY 2017 CHANGE 1.41 0.75 1.77 1.66 5.59 1.28 0.74 1.70 1.74 5.46 11% 2% 4% (5%) 2% 165 117 176 67 525 204 91 194 87 576 (19%) 29% (10%) (23%) (9%) Greater China Latin America Asia Oceania Consumer and Foodservice Value by region Greater China In Greater China, we delivered normalised EBIT of $165 million, down 19% on last year’s $204 million. Foodservice margins declined to 15.2% compared to 23.7% last year. The main reason was an increase in input costs as fat prices rose signifi cantly and impacted the profi tability of butter. In addition, there was also increased competition in UHT cream from Europe. Our pricing strategy was set to maintain our market share so we can benefi t from future product price increases. Consumer gross margins were steady, and combined with increased volumes, this business broke even two years ahead of our business plan. This was achieved through the popularity of Anchor™ UHT milk which holds the number one market share in the imported UHT milk category, for both the online and offl ine channels. In addition, the launch of Anchor™ ambient yoghurt and the Daily Fresh milk range into Alibaba’s new premium food stores, Hema Fresh, contributed to this result. Latin America Latin America increased EBIT by 29% from $91 million in 2017 to $117 million in 2018. This was driven by another year of solid performance from SoproleTM in the mature cheese and yogurt categories. In addition, Brazil turned around its performance and went from a loss position to break even in a challenging economic environment. In Brazil’s children’s category, we grew our market share ahead of our competitors and now hold 32% market share by value. There was a one-off benefi t of around $14 million from restructuring our USD obligations in Venezuela. 58 FONTERRA ANNUAL REPORT 2018 Asia Asia delivered EBIT of $176 million compared to last year’s $194 million, down 10%. In Consumer, our pricing strategies and marketing initiatives enabled us to keep our gross margin percentage in line with last year. However, price controls in some local markets did impact our profi tability because we were not able to fully pass through higher input costs. This impacted us most signifi cantly in Sri Lanka. We launched our Red Cow brand in Sri Lanka and the Middle East to support growth in these regions. The lower price point makes it attractive to customers and contributes to our margin. In Foodservice, we increased our sales volumes by 7% but the higher input costs meant our margins and profi tability were down on last year. Oceania Oceania delivered EBIT of $67 million, 23% less than last year. This lower profi tability was due to operational challenges in New Zealand which experienced lower margins from the higher than expected costs involved in moving to and starting up our new distribution centre. This also impacted customer service levels and sales volumes, which were down 9% on last year. In addition, butter sales declined because of higher prices. However, in Australia, we were able to maintain our number one market share position in cheese and spreads. Added 131 million LMEs to Consumer and Foodservice Latin America EBIT $117 m Oceania EBIT $67 m 29% 23% FONTERRA ANNUAL REPORT 2018 59 OUR PERFORMANCE China Farms Our farming operations in China are comprised of seven farms across two hubs, producing high quality fresh milk. Volume Value Yutian is our most established hub with around 17,000 milking cows. Our second hub, Ying, is our newest hub with around 14,000 milking cows. Excluding one-off milk powder sales in FY17, sales volumes decreased by 12% to 273 million LMEs this year. This was predominantly due to lower production as changes are made to the herd profi le to improve its future productivity. As these changes take eff ect, we expect volumes to increase 10% per annum to reach 370 million LMEs by 2021. Our strategy for China Farms is to deliver the highest value through integrating them into our Ingredients and Consumer and Foodservice businesses in Greater China. China Farms' partnerships with Hema Fresh, Starbucks, McDonald’s and other QSR channels continue to build positive momentum, as its raw milk goes into higher value channels. At less than 5% of our milk from China Farms these are still small but our plan is to continue to grow them over time. We also aim to reduce our cost base on an ongoing basis. However, this year several one-off costs to meet discharge standards combined with higher feed costs due to tariff s and higher commodity prices have impacted earnings, resulting in a direct normalised EBIT loss of $9 million. Excluding these one-off s, China Farms have reduced their costs by 6% since 2016 and will continue to focus on improving their cost base through operational and procurement effi ciencies. Our Ingredients business is responsible for purchasing the raw milk from the farms and capturing the highest value for this milk, and this resulted in an additional $30 million loss. Launched the Daily Fresh milk range into Alibaba’s new premium food stores, Hema Fresh Sales volumes 12%1 273 million LMEs Costs down 6% since 2016 FOR THE YEAR ENDED NZD MILLION 31 JULY 2018 31 JULY 2017 CHANGE Volume (LME, billion) Volume (000 MT) Sales revenue Normalised EBIT 0.3 22 0.3 (19%) 26 (15%) 262 269 (3%) (9) 1 (1,734%) 1 Excluding one-off milk powder sales in FY17. 60 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 61 OUR PERFORMANCE Historical Financial Summary Market Statistics Group Overview JULY 2018 JULY 2017 JULY 2016 JULY 2015 JULY 2014 JULY 2018 JULY 2017 JULY 2016 JULY 2015 JULY 2014 Fonterra Seasonal Statistics Total New Zealand milk collected (million litres) Highest daily volume collected (million litres) New Zealand shareholder supply milk solids collected (million kgMS) New Zealand contract supply milk solids collected (million kgMS) New Zealand milk solids collected (million kgMS) Total number of shareholders at 31 May Total number of sharemilkers at 31 May Total number of shares on issue at 31 May (million) Shareholder Supplier Returns Payout Farmgate Milk Price (per kgMS)2 Dividend (per share) Dividend yield (%) 3 Cash payout (per share)4 Retentions (per share)5 Weighted average share price ($ NZD)6 Ingredient Price Weighted average commodity prices ($ USD per MT FOB) Whole Milk Powder 7 Skim Milk Powder7 Butter7 Cheese8 Fonterra’s average NZD/USD conversion rate9 Staff Employed Total staff employed (000s, permanent full-time equivalents) New Zealand Overseas 16,932 82.0 17,051 80.1 17,585 86.9 18,143 89.7 17,932 87.1 1,404 1,417 1,453 1,520 1,533 101 1,505 10,162 2,712 1,612 109 1,526 10,267 2,722 1,607 113 1,566 10,579 3,098 1,602 6.69 0.10 1.7 6.79 – 5.84 3,091 1,968 5,575 3,853 0.71 21.5 11.9 9.6 6.12 0.40 6.7 6.52 0.06 5.96 2,855 2,216 4,221 3,763 0.70 21.4 11.7 9.7 3.90 0.40 7.3 4.30 0.11 5.48 2,111 1,803 2,830 2,766 0.71 21.3 11.4 9.9 94 1,614 10,753 3,379 1,599 4.40 0.25 4.4 4.65 0.04 5.60 2,639 2,552 3,027 3,477 0.79 22.0 11.9 10.1 51 1,584 10,721 3,398 1,598 8.40 0.10 1.6 8.50 – 6.26 4,824 4,504 3,920 4,706 0.81 18.2 11.4 6.8 Income Volume (liquid milk equivalents, billion) 10 Volume (000s MT)10 Sales revenue ($ million) Normalised EBITDA ($ million)11 Normalised EBIT ($ million)12 Normalised NPAT ($ million)13 Reported earnings per share Normalised earnings per share Revenue Margin Analysis (Normalised) EBITDA14 EBIT15 NPAT16 Cash fl ow ($ million) Operating cash fl ow17 Free cash fl ow Net working capital18 Capital Measures Equity excluding hedge reserve ($ million) Economic net interest-bearing debt ($ million)19 22.2 4,123 22.9 4,180 20,438 19,232 1,446 902 382 (0.14) 0.24 1,681 1,155 781 0.46 0.49 23.7 4,313 17,199 1,928 1,358 789 0.51 0.49 22.8 4,303 18,845 1,535 974 456 0.29 0.29 22.2 3,965 22,275 1,041 503 157 0.10 0.10 7.1% 4.4% 1.9% 8.7% 6.0% 4.1% 11.2% 7.9% 4.6% 8.1% 5.2% 2.4% 4.7% 2.3% 0.7% 1,548 600 3,156 6,616 6,199 1,376 670 2,779 7,056 5,601 3,278 2,184 1,857 6,883 5,473 668 (1,372) 3,363 7,196 7,120 1,367 358 4,013 6,452 4,732 Economic debt to debt plus equity ratio20 48.4% 44.3% 44.3% 49.7% 42.3% Net debt/EBITDA21 Capital employed ($ million)22 Capital expenditure ($ million)23 Return on capital (including intangibles and EAI)24 Return on capital (excluding intangibles and EAI)25 4.5x 9,552 861 6.3% 8.0% 3.5x 9,093 851 8.3% 11.1% 2.8x 9,392 944 9.2% 12.4% 4.7x 4.9x 9,487 1,531 6.9% 8.9% 8,493 969 4.1% 4.7% 62 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 63 OUR PERFORMANCE Historical Financial Summary CONTINUED Regional Breakdown – Ingredients26 Regional Breakdown – Consumer And Foodservice32 Sales Volume (000 MT) 27 Reference Products Non-reference Products Revenue ($/MT) 27 Reference Products Non-reference Gross Margin ($/MT) Reference Products – Margin Non-reference Products – Margin Ingredients Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin % 28 Normalised earnings ($ million) Normalised earnings margin % 29 Divisional Breakdown – Ingredients 30,31 Global Ingredients And Operations – Volume (liquid milk equivalents, million)10 – Volume (000s MT)10 – Revenue ($ million) – Gross margin ($ million) – Gross margin %28 Fonterra Ingredients Australia – Volume (liquid milk equivalents, million)10 – Volume (000s MT)10 – Revenue ($ million) – Gross margin ($ million) – Gross margin %28 Other And Eliminations – Volume (liquid milk equivalents, million)10 – Volume (000s MT)10 – Revenue ($ million) – Gross margin ($ million) 64 FONTERRA ANNUAL REPORT 2018 JULY 2018 JULY 2017 JULY 2016 1,794 620 4,851 5,637 1,841 696 4,262 5,567 1,920 720 3,276 4,972 309 6.4% 1,275 22.6% 232 5.4% 1,165 20.9% 330 10.1% 1,348 27.1% 20,520 2,986 16,306 1,472 9.0% 879 5.4% 21,305 3,019 15,266 1,473 9.7% 943 6.2% 22,390 3,074 13,005 1,860 14.3% 1,204 9.3% JULY 2018 JULY 2017 JULY 2016 18,427 2,778 14,564 1,297 19,369 2,879 14,087 1,333 8.9% 9.5% 20,350 2,911 11,835 1,733 14.6% 1,755 350 1,877 77 4.1% 338 (142) (135) 98 1,619 305 1,522 78 5.1% 317 (165) (343) 62 1,600 316 1,396 58 4.2% 440 (153) (226) 69 Oceania Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Normalised earnings ($ million) Normalised earnings margin %29 Asia Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Normalised earnings ($ million) Normalised earnings margin %29 Greater China Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Normalised earnings ($ million) Normalised earnings margin %29 Latin America Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Normalised earnings ($ million) Normalised earnings margin %29 Total Consumer And Foodservice Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Normalised earnings ($ million) Normalised earnings margin %29 JULY 2018 JULY 2017 JULY 2016 1,656 623 2,159 433 20.1% 67 3.1% 1,773 331 1,865 456 24.5% 176 9.4% 1,413 266 1,564 335 21.4% 165 10.5% 747 578 1,534 459 29.9% 117 7.6% 5,590 1,798 7,122 1,683 23.6% 525 7.4% 1,743 636 1,952 438 22.4% 87 4.5% 1,703 310 1,810 501 27.7% 194 10.7% 1,278 237 1,277 359 28.1% 204 16.0% 735 600 1,478 446 30.2% 91 6.1% 5,459 1,783 6,517 1,744 26.8% 576 8.8% FONTERRA ANNUAL REPORT 2018 1,834 698 2,051 444 21.6% 97 4.7% 1,549 292 1,944 599 30.8% 244 12.6% 874 167 916 329 35.9% 131 14.3% 623 643 1,385 436 31.5% 108 7.8% 4,882 1,800 6,296 1,808 28.7% 580 9.2% 65 OUR PERFORMANCE Historical Financial Summary CONTINUED Regional Breakdown – Consumer 30,31 Regional Breakdown – Foodservice30, 31 JULY 2018 JULY 2017 JULY 2016 JULY 2018 JULY 2017 JULY 2016 Oceania Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Asia Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Greater China Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Latin America Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Total Consumer Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 1,228 525 1,644 340 1,309 538 1,508 355 1,415 599 1,618 354 20.7% 23.5% 21.9% 1,131 233 1,238 377 1,104 220 1,284 402 1,030 215 1,482 492 30.5% 31.3% 33.2% 139 71 343 149 112 58 269 120 76 43 233 105 43.0% 44.6% 45.1% 653 550 1,418 429 637 569 1,363 414 543 613 1,289 405 30.3% 30.4% 31.4% 3,151 1,379 4,643 1,295 3,162 1,384 4,424 1,291 3,064 1,470 4,622 1,359 27.9% 29.2% 29.4% Oceania Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Asia Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Greater China Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Latin America Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Total Foodservice Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 427 98 515 93 433 98 444 83 419 99 433 90 18.1% 18.8% 20.8% 643 98 627 79 599 90 526 99 520 77 462 107 12.6% 18.8% 23.2% 1,273 195 1,221 186 1,166 179 1,008 239 798 124 683 224 15.2% 23.7% 32.8% 94 28 116 30 97 32 115 32 80 30 96 31 25.9% 27.8% 32.3% 2,437 419 2,479 388 2,295 399 2,093 453 1,817 330 1,674 452 15.7% 21.7% 27.0% 66 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 67 OUR PERFORMANCE Historical Financial Summary CONTINUED Operating Performance – China Farms Notes to the Historical Financial Summary Volume (liquid milk equivalents, million)10 Volume (000s MT)10 Revenue ($ million) Gross margin ($ million) Gross margin %28 Normalised earnings ($ million) Normalised earnings margin %29 JULY 2018 JULY 2017 JULY 2016 273 22 262 5 1.9% (9) 335 26 269 23 229 16 183 (40) 8.6% (22.0%) 1 (59) (3.4%) 0.4% (32.2%) 1 All season statistics are based on the 12-month milk season of 1 June–31 May. 16 Normalised net profi t after tax divided by sales revenue. 2 From the beginning of the 2009 season the Farmgate Milk Price has 17 Cash fl ow generated by normal business operations, less net taxes paid. 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. 3 FY18 dividend over volume weighted average FCG price of $5.84 for the period 1 Aug-31 Jul. 4 Average payout for a 100% share-backed supplier. 18 Working Capital is calculated as current trade receivables plus inventories, less current trade payables and accruals. It excludes amounts owing to suppliers and employee entitlements. 19 Economic net interest-bearing debt refl ects total borrowings less cash and cash equivalents and non-current interest-bearing advances adjusted for derivatives used to manage changes in hedged risks. 5 Retentions are calculated as net profi t after tax attributable to 20 Economic debt to debt plus equity ratio is calculated as economic net Co-operative shareholders at 31 July divided by the number of shares at 31 May, less dividend per share. interest-bearing debt divided by economic net interest-bearing debt plus equity excluding hedge reserves. 6 Weighted average share price represents the average price Fonterra Co-operative Group shares traded at weighted against the trading volume at each price over the period 1 August-31 July. 21 Debt payback ratio is economic net interest bearing debt divided by EBITDA. Both debt and EBITDA are adjusted for the impact of operating leases. 22 Capital employed excludes brands, goodwill and equity accounted 7 Source: Fonterra Farmgate Milk Price Statement representing the investments. weighted-average United States Dollar contract prices of Reference Commodity Products. 8 Source: Oceania Export Series, Agricultural Marketing Service, US Department of Agriculture. 9 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. 10 Includes sales to other strategic platforms. Represents external sales. 23 Capital expenditure comprises purchases of property, plant and equipment and intangible assets, and net purchases of livestock. 24 Return on capital is calculated as normalised EBIT, less a notional tax charge divided by capital employed including brands, goodwill and equity accounted investments. 25 Return on capital is calculated as normalised EBIT, less equity accounted investees’ earnings, less a notional tax charge, divided by capital employed. 11 Normalised earnings before interest, tax, depreciation and amortisation and is calculated as profi t for the period before net fi nance costs, tax, depreciation and amortisation. 26 Figures excludes bulk liquid milk. The bulk liquid milk volume for the year ended 31 July 2018 was 68,000 MT of kgMS equivalent (year ended 31 July 2017 was 76,000 MT of kgMS equivalent). 12 Represents segment earnings before unallocated fi nance income, fi nance costs and tax. For the years ended 31 July 2016, 2015 and 2014, Greater China has been disclosed separately in alignment with the disclosures in the segment note. For the years ended 31 July 2013 and earlier, Greater China was part of Asia. The year ended 31 July 2015 has been restated to refl ect changes to the organisation of business units that occurred in the year ended 31 July 2016. The year ended 31 July 2014 has been restated to refl ect changes to the organisation of business units that occurred in the year ended 31 July 2015. 13 Normalised Net Profi t after Tax attributable to equity holders of the Parent. 14 Normalised EBITDA divided by sales revenue. 15 Normalised EBIT divided by sales revenue. 27 Revenue and sales volume exclude Foodservice volumes to China, Latin America and Quick Service Restaurant channels. This volume for the year ended 31 July 2018 was 198,000 MT (year ended 31 July 2017 was 143,000 MT). 28 Normalised gross margin divided by sales revenue. 29 Normalised EBIT divided by revenue. 30 Adjusted to refl ect normalisation adjustments. 31 Summing of individual numbers from the regional and divisional breakdown may not add up to the totals in each category due to rounding. 32 Includes share of Consumer and Foodservice overhead allocations, the total impact of which is $59 million. 68 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 69 OUR CORPORATE GOVERNANCE Corporate Governance The Board, Shareholders’ Council and Management of Fonterra consider that strong governance plays a critical role in the success of our Co-operative and are committed to achieving the highest standard of corporate governance, representation and leadership. To support this the Board has 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. Fonterra continuously reviews its governance representation and leadership to ensure they reflect best practice for our Co-operative. This Corporate Governance statement is current as at 13 September 2018 and has been approved by the Fonterra Co-operative Group Limited Board. CHANGES TO THE FONTERRA BOARD In line with the changes approved by farmer shareholders in October 2016, from 2 November 2017 the number of Directors elected by farmer shareholders (Farmer Directors) on the Board is not more than seven, with not more than four Directors appointed by the Board (Appointed Directors). There were a number of changes to the Fonterra Board during the financial year ending 31 July 2018. In November 2017: – Mr David Jackson, an Appointed Director, retired and Mr Bruce Hassall was appointed to the Board to fill this vacancy. – Mr Ian Farrelly’s appointment to the Board completed. – Ms Leonie Guiney and Mr David McLeod, both Farmer Directors, retired from the Board and Mr Brent Goldsack and Mr Andrew Macfarlane were elected to the Board as Farmer Directors. COMPLIANCE WITH BEST PRACTICE GOVERNANCE STANDARDS The Board’s governance framework takes into consideration contemporary standards in New Zealand and Australia, including the principles in the NZX Corporate Governance Code which came into effect for reporting periods from 1 October 2017 (NZX Code). Fonterra focusses on governance in a way that promotes: • the interests of our farmer shareholders, unit holders and other key stakeholders • Fonterra’s Co-operative philosophy, which is largely expressed through our Co-operative principles • transparency, giving our farmer shareholders, unit holders and other stakeholders the information they need to assess our performance • effective risk management and compliance to ensure that Fonterra meets its business objectives and all legal and reporting requirements • an appropriate balance between the roles and responsibilities of the Board and Management • communication with important stakeholder groups, including farmer shareholders, employees, customers, unit holders, debt investors, governments and the communities Fonterra works in. Corporate Governance CONTINUED Principle 2: Board Composition and Performance BOARD CHARTER The Board Charter includes details about the Board composition and procedures including the Chairman’s election and role, the Board’s relationship with Management, incident management engagement, training provided to Directors, and the process for assessing the Board’s performance. The Charter is reviewed each year. The Board Charter and the Charters of the Board Committees are available on www.fonterra.com. BOARD APPOINTMENTS The Constitution of Fonterra provides for not more than 11 Directors and sets out how they are appointed. In accordance with the Constitution, not more than seven Directors are elected by farmer shareholders from the shareholder base (Farmer Directors), and not more than four Directors are appointed by the Board (Appointed Directors). The Board is committed to building capabilities and maintaining the highest standards of governance. The Board considers it important that there is a good balance of experience on the Board. A list of attributes that all Directors must be able to demonstrate has been developed by the Board and is reviewed annually. The Board has also developed a list of skills that the Board believes are required to effectively govern a complex, international co-operative, operating in multiple markets, answering to diverse stakeholders. The skills list is reviewed annually and, if required, updated. The Board then develops a Skills Matrix by assessing the required weighting of each skill against the aggregate skills of the current Board. The Skills Matrix is used to identify the skills to be targeted in each year, through the Farmer Director election process and in the appointment of the Appointed Directors. The list of attributes and skills, the Skills Matrix and the Board’s targeted skills are published each year as part of the Farmer Director election process to assist potential candidates in assessing their suitability and to assist farmer shareholders when assessing the candidates put forward for election. Principle 1: Code of Ethical Behaviour CODE OF ETHICS A culture of honesty and integrity is integral to Fonterra’s reputation and commitment to become the world’s most trusted source of dairy nutrition. Fonterra expects its Directors, officers and employees to maintain high ethical standards and to operate ethically and legally in the countries where we do business, underpinned by its four values - especially ‘Do What’s Right’. Fonterra’s code of ethics is made up of three documents: Code of Business Conduct - The Way We Work, the Board Charter and Fonterra’s Ethical Behaviour Group Policy. These documents set clear expectations for our Directors and employees regarding ethical behaviour including the requirement for honesty and integrity, dealing with conflicts of interest, the use of corporate information and assets and property, giving and receiving gifts, procedures for whistle blowing and managing breaches. All three documents are required to be reviewed and approved annually. The Board has also developed a Code of Conduct for Directors. The Way We Work also provides practical guidance on how to apply Fonterra’s four values in everyday situations with farmer shareholders, unit holders, customers, suppliers and the wider community. Fonterra’s Ethical Behaviour Group Policy and The Way We Work are published in multiple languages and are available to all employees on Fonterra’s intranet. As with other Fonterra Group Policies, employee training is included within Fonterra’s global induction programme and annually refreshed. Individuals are assessed to ensure understanding of Group Policies and an annual certification process promotes compliance. Fonterra funds an independently operated whistle-blowing hotline. The hotline gives individuals a confidential channel (by phone, email, mail, or online) to report concerns about behaviour that is unethical or does not meet the standards described in The Way We Work. This hotline is available in all regions where Fonterra operates. In the 2018 financial year, 42 disclosures were made globally to the hotline. All disclosures were fully investigated, appropriate action taken and timely updates made available to the whistle-blower. Fonterra operates a Conflict of Interest Register where employees must enter all actual or potential conflict of interests. Fonterra also operates a Gift & Entertainment Register where employees must record all gifts given or received, and hospitality and entertainment with third parties. The Way We Work, the Board Charter and Fonterra’s Ethical Behaviour Group Policy are available on www.fonterra.com. SECURITIES TRADING POLICY Fonterra has adopted a Securities Trading Policy that details the rules for trading in shares, capital notes, retail bonds, units, milk price futures and options traded on the NZX and other listed securities of Fonterra or the Fonterra Shareholders’ Fund from time to time. The policy applies to Directors, officers, employees and contractors of the Fonterra Group (globally) and members of the Shareholders’ Council and Milk Price Panel, and is additional to legislative requirements for trading securities in New Zealand and Australia. The Securities Trading Policy is available, along with other key Group Policies on www.fonterra.com. All Directors comply with the legislative requirements for disclosing interests in listed voting securities of Fonterra and its related companies. 70 71 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR CORPORATE GOVERNANCE Corporate Governance CONTINUED Corporate Governance CONTINUED DISCLOSURE EXECUTIVE LEADERSHIP GENDER COMPOSITION Information about each Director (including experience, length of service, independence and ownership interests) is disclosed at the end of this section or in the statutory information section of this Annual Review, and is also available on www.fonterra.com. DIVERSITY & INCLUSION POLICY Embedding diversity and inclusion in how we think, act and operate enables innovation to flourish throughout Fonterra and is fundamental to delivering our sustainable Co-operative ambition. Fonterra has published its Diversity and Inclusion Policy on www.fonterra.com and appointed a dedicated Diversity and Inclusion Manager to drive our global strategic framework. Fonterra’s Diversity and Inclusion Policy has three key areas of focus: Our People: attracting and selecting, developing and promoting and retaining diverse talent, while avoiding practices that are discriminatory or exclusive. Our Strategy: ensuring our organisation reflects the diversity of our markets, customers, stakeholders and the communities in which we operate. Our Identity: respecting, leveraging and embracing the unique skills and diverse perspectives of our people, reflecting a core Fonterra value of ‘Do What’s Right’. DIVERSITY AND INCLUSION TARGET AND OBJECTIVES In 2018, Fonterra formalised its commitment to increasing the representation of women and ethnic minorities within senior leadership levels. The Board approved aspirational targets and objectives to increase women in leadership from current levels of around 33% to 50%1 by 2022 and further targeting a mix of 20% ethnic diversity within global leadership levels2. To achieve our gender and ethnicity targets, the objective of ensuring a balance of 50/50 gender balance which comprises 20% ethnic diversity of candidates for long and short-lists for leadership roles was agreed by the Board. All selection decisions continue to be made on merit. Approved targets are underpinned by comprehensive metrics that enable regular reporting on progress. A three member Independent Selection Panel recommends appropriate candidates to the Board’s Nominations Committee to be put to farmer shareholders for their consideration to be elected as Farmer Directors. The members of the Independent Selection Panel are all independent of Fonterra. One member is appointed by the Board, one by the Shareholders’ Council and a third appointed by the other two members of the panel. In addition to candidates recommended by the Nominations Committee, there is a self-nomination process where candidates can propose themselves for election as Farmer Directors with the support of 35 shareholders. The Farmer Directors are elected by postal ballot and online voting by farmer shareholders. The voting packs circulated to all farmer shareholders include biographical information on each candidate including relevant skills and experience. The elections are overseen by the Shareholders’ Council. The People, Culture and Safety Committee oversees the process for identifying and recommending potential Appointed Directors. Prior to appointment by the Board, the Fonterra Shareholders’ Fund is consulted. The Appointed Directors are ratified by farmer shareholders at the next Annual Meeting. 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, global reach and complexity. They bring to the Board perspectives, experience and skills to complement and enhance the attributes and skills provided by the Farmer Directors. DIRECTOR INDEPENDENCE The rules of the Fonterra Shareholders’ Market (FSM Rules) require Fonterra to have a minimum of two Independent Directors or if there are eight or more Directors, three or one-third of the total number of Directors of Fonterra, whichever is greater. With Fonterra’s current Board of 11 Directors, four must be 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. Farmer Directors must be qualified as farmer shareholders under section 12.3 of the Constitution and are therefore not considered Independent Directors. As at 31 July 2018, Clinton Dines, Bruce Hassall, Simon Israel and Scott St John each did not have (and continue not to have) any disqualifying relationship in relation to Fonterra and were therefore Independent Directors. David Jackson was an Independent Director until his resignation with effect from 2 November 2017. John Monaghan, who is a Farmer Director, is the Board-elected Chairman. 1 Our gender targets include a variance of +/- 10% to account for when we have low population sizes i.e.: n<20 2 Ethnic diversity is defined as increased representation from minority groups globally. 72 As at 31 July 2017 FONTERRA MANAGEMENT TEAM GENDER FTE 7 % MALE 6 86% FEMALE 1 14% GENDER DIVERSE UNDECLARED – 0% – 0% As at 31 July 2018 The gender composition of Fonterra Management Team members remains unchanged between 2017 and 2018. FONTERRA MANAGEMENT TEAM GENDER FTE 7 % MALE 6 86% FEMALE 1 14% GENDER DIVERSE UNDECLARED – 0% – 0% BOARD GENDER COMPOSITION As the majority of Directors are appointed by farmer shareholders through an independent process, the Board has not adopted gender targets for the Board in 2018. The Board remains committed to addressing the gender composition of the Board, including by building a pipeline of Directors through the Fonterra Governance Development Programme and through the independent Farmer Director election process. As at 31 July 2017 BOARD FTE 12 % MALE 9 75% FEMALE 3 25% GENDER GENDER DIVERSE UNDECLARED – 0% – 0% As at 31 July 2018 As at 31 July 2018 the gender composition of Board members comprised two female and nine male Directors. BOARD FTE 11 % MALE 9 82% FEMALE 2 18% GENDER GENDER DIVERSE UNDECLARED – 0% – 0% ONGOING TRAINING Following appointment to the Board, Directors undertake an induction programme to familiarise themselves with Fonterra and its global business. 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 and visits to key offshore markets • Fonterra’s Constitution and other governance systems. Directors are expected to keep themselves abreast of changes and trends in the business, Fonterra’s environment and markets, and the economic, political, social and legal climate generally. The Board holds several workshops on relevant subjects each year, are provided with strategic readings each month and Directors are also expected to keep up to date with governance issues. Board visits to Fonterra’s global businesses occur regularly. 73 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR CORPORATE GOVERNANCE Corporate Governance CONTINUED ASSESS PERFORMANCE Directors formally assess the performance of the Board each year. A regular programme of peer review of individual Directors occurs as part of an ongoing Director development programme. Directors are also encouraged to attend external development and training programmes. The Shareholders’ Council reviews the Board’s Statement of Intentions against the performance and operation of the Group and reports on this to farmer shareholders annually. The Board is also responsible for reviewing the Chief Executive’s performance. DIVISION OF ROLES The Chairperson and Chief Executive roles at Fonterra are not exercised by the same individual. Principle 3: Board Committees Fonterra has a number of permanent Board Committees, as detailed below. Additional Board Committees will be formed when it is efficient or necessary to facilitate efficient decision- making by providing for a sub-group of Directors to focus on particular areas or issues and to develop recommendations to the full Board. The Board Committees have standard ‘Terms of Reference’ and each committee has a charter, which defines the scope and responsibilities of that committee and is approved by the Board each year. The minutes for each of the Board Committees’ meetings are supplied to the Board for review. The charters for each of the Board Committees are available on www.fonterra.com. COMMITTEE OR GROUP MEMBERSHIP AS AT 31 JULY 2018 PURPOSE People, Culture and Safety Committee John Wilson (Chair) Ashley Waugh John Monaghan Simon Israel (Independent) Clinton Dines (Independent) Bruce Hassall (observer) 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. Audit and Finance Committee Bruce Hassall (Chair and Independent) Andrew Macfarlane Ashley Waugh Scott St John (Independent) Nicola Shadbolt Donna Smit 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. Risk Committee Ashley Waugh (Chair) Bruce Hassall (Independent) Brent Goldsack Nicola Shadbolt Clinton Dines (Independent) Co-operative Relations Committee John Monaghan (Chair) Andrew Macfarlane Brent Goldsack Donna Smit Bruce Hassall (Chair and Independent) Clinton Dines (Independent) Andrew Macfarlane John Monaghan Duncan Coull (SHC observer) Matthew Pepper (SHC observer) 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 risk management framework, the behaviours required of its people and its guidelines, policies and processes for monitoring and mitigating enterprise-wide risks. 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 recommend to the Board candidates for election as Farmer Directors. Scott St John (Chair and Independent) Bruce Hassall (Independent) Brent Goldsack Andrew Wallace (Independent) Bill Donaldson To provide assurances to the Board as to the governance of the Milk Price and the Milk Price Manual, and the proper application of the Milk Price Principles. Nominations Committee Milk Price Panel 74 Corporate Governance CONTINUED BOARD AND COMMITTEE ATTENDANCE BOARD  AUDIT & FINANCE COMMITTEE CO-OPERATIVE RELATIONS COMMITTEE MILK PRICE PANEL NOMINATIONS COMMITTEE PEOPLE, CULTURE & SAFETY COMMITTEE RISK COMMITTEE Eligible to Eligible to Eligible to Eligible to Eligible to Eligible to Eligible to Attend Attendance  Attend Attendance  Attend Attendance  Attend Attendance  Attend Attendance  Attend Attendance  Attend Attendance  Clinton Dines Ian Farrelly Brent Goldsack Leonie Guiney Bruce Hassall Simon Israel David Jackson David MacLeod Andrew Macfarlane John Monaghan Nicola Shadbolt Donna Smit Scott St John Ashley Waugh John Wilson 18 6 12 4 12 18 6 4 12 16 18 18 18 18 18 16 6 11 4 12 18 6 4 12 15 18 18 18 16 18 – 1 – – 7 – 1 – 5 – 7 7 7 5 5 – 1 – – 7 – 1 – 5 – 6 6 7 5 5 – 1 4 1 – – – 1 4 5 – 4 – 1 – – 1 4 1 – – – 1 3 5 – 4 – 1 – – – 4 – 4 – 3 – – – – – 7 3 – – – 4 – 3 – 3 – – – – – 7 2 – 1 1 1 1 1 1 1 1 8 – – – 7 8 2 – – 8 – – – 8 8 8 – - – 5 8 2 – – 7 – – – 8 8 4 – 2 1 2 – 1 1 – – 4 – – 2 1 4 – 1 1 2 – 1 1 – – 4 – – 2 1 AUDIT AND FINANCE COMMITTEE There is an established Audit and Finance Committee as described on the previous page. The Audit and Finance Committee comprises two Appointed Directors and four Farmer Directors. The committee is chaired by Bruce Hassall, who is an Independent Director and a Fellow of the New Zealand Institute of Chartered Accountants. 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 are independent. The Panel consists of two Appointed Directors, one Farmer 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 Scott St John. Other Board members are Bruce Hassall and Brent Goldsack. The Shareholders’ Council appointees are Andrew Wallace and Bill Donaldson. The Board confirmed that at 31 July 2018, Scott St John, Bruce Hassall and Andrew Wallace are considered to be Independent Members of this Panel. MAJORITY INDEPENDENT DIRECTORS – AUDIT AND FINANCE COMMITTEE, NOMINATIONS COMMITTEE AND PEOPLE, CULTURE AND SAFETY COMMITTEE The Audit and Finance Committee, Nominations Committee and People, Culture and Safety Committee committees do not comprise a majority of Independent Directors. There is currently no headroom for Fonterra, based on having 11 Directors, to have more than four Independent Directors (as prescribed by the FSM Rules), as the Farmer Directors fill each of the seven positions open to them (and as noted above, the Farmer Directors are not considered Independent Directors). Given this, it is difficult for Fonterra to appoint a majority of Independent Directors to these committees without excluding Farmer Directors or significantly increasing the workload of the Independent Directors. Fonterra does not consider that this is a significant issue, as both the Audit and Finance Committee and the Nominations Committee are chaired by Independent Directors, with the People, Culture and Safety Committee chaired by a Farmer Director. In addition, under the FSM Rules, the Audit and Finance Committee is not required to comprise of a majority of Independent Directors. Employees attend Audit and Finance Committee and People, Culture and Safety Committee meetings at the request of the Committees. TAKEOVER OFFER Given its co-operative structure and the thresholds on share ownership in the Constitution, the Board does not believe that it is necessary to establish protocols for a takeover offer. 75 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018  OUR CORPORATE GOVERNANCE Corporate Governance CONTINUED Principle 4: Reporting and Disclosure WEBSITE DISCLOSURE DISCLOSURE POLICY Fonterra is committed to promoting well-informed and efficient markets in its shares, units issued by the Fonterra Shareholders’ Fund and debt securities. The Board has approved a Group Disclosure Policy to ensure compliance with the FSM Rules regarding disclosure. The Group Disclosure Policy governs Fonterra’s communications with investors and market participants, and the disclosure of information relevant to Fonterra. This policy, and the Group Disclosure Standard which gives effect to the policy, are available on www.fonterra.com. Fonterra has established a Disclosure Committee that holds regular and ad hoc meetings to oversee Fonterra’s continuous disclosure obligations. The members of the Disclosure Committee are the CEO, CFO, Managing Director Corporate Affairs, Director Capital Markets and the Director, Governance. The Disclosure Committee’s Charter states that the committee has responsibility for overseeing Fonterra’s continuous disclosure obligations and reviewing, monitoring and implementing the Group Disclosure Policy. The Committee maintains a register of continuous disclosure matters and also ensures a consistent and high standard of communication with farmer shareholders, unit holders, other investors and market participants on a timely basis. The Chairman of the Board, the Chairman of the Audit and Finance Committee and the Chairman of the Milk Price Panel attend the Committee’s meetings to review and approve the release of the Interim and Annual Reports, and on an ad hoc basis to provide input into specific continuous disclosure obligations. 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 FSM Rules and the listing rules of the NZX or the ASX (as the case may be) is disclosed simultaneously to the Fonterra Shareholders’ Market, the NZX Main Board and the ASX. Fonterra simultaneously discloses relevant information on ASX on behalf of the Fonterra Shareholders' Fund. At present Fonterra has the following documents available on www.fonterra.com: • Board Charter • People, Culture and Safety Committee Charter • Audit and Finance Committee Charter • Risk Committee Charter • Co-operative Relations Committee Charter • Nominations Committee Charter • The Way We Work (Code of Business Conduct) • Group Disclosure Policy and Group Disclosure Standard • Group Diversity and Inclusion Policy • Group Environmental Policy • Group Ethical Behaviour Policy • Group Privacy Policy • Group Securities Trading Policy Fonterra does not have a Director Remuneration Policy for the reasons noted below under the heading ‘Director Remuneration’. NON-FINANCIAL REPORTING Fonterra is guided by international best practice and agrees that adoption of internationally recognised reporting frameworks is a good way of allowing users of our disclosure information to more easily compare it with others. For this reason we have adopted the Global Reporting Initiative (GRI) guidelines. In this Annual Report, we provide coverage of both financial and non-financial matters. Non-financial reporting includes coverage of progress on strategy in the ‘Who is Fonterra” section. High-level consideration of material environmental, social and governance (ESG) factors and practices are included in the ‘Our Sustainability ’ section. In December 2017 Fonterra issued its first Sustainability Report based upon GRI guidelines to further expand our non-financial disclosure for each financial year. We plan to release our Sustainability Report annually, with the next report due to be issued in November 2018. 76 Corporate Governance CONTINUED Principle 5: Remuneration Fonterra’s remuneration framework is designed to attract, retain and motivate high quality Directors and senior management. DIRECTOR REMUNERATION The Constitution modifies the discretion of the Board to set remuneration of Directors. In accordance with the Constitution, farmer shareholders elect an independent committee of six farmer shareholders (the Directors’ Remuneration Committee) to consider and make recommendations to the Annual Meeting on remuneration for Farmer Directors, which is required to be approved by farmer shareholders. The members of the Directors’ Remuneration Committee as at 31 July 2018 were David Gasquoine (Chair), John Gregan, Glenn Holmes, Scott Montgomerie, Stephen Silcock, and Gerard Wolvers. The Board has full discretion over the remuneration of Appointed Directors with such remuneration not being approved at the Annual Meeting. The Board has historically remunerated Appointed Directors at the same level as Farmer Directors in line with Directors’ Remuneration Committee recommendations. Given the arrangements outlined above, Fonterra does not have a specific policy for remuneration of Directors. Directors and employees attend Directors’ Remuneration Committee meetings at the invitation of the Committee. The details of the Directors’ remuneration are contained on page 58 of the Annual Financial Results for the year ended 31 July 2018. REMUNERATION OF OUR PEOPLE Our People, Culture and Safety Committee, that governs the remuneration of management, reviewed and made changes to our remuneration approach to better balance the need to attract and retain talented people, with the need to deliver the highest possible overall returns to our farmers and unit holders. Key changes made last year were to amend the short-term (STI) and long-term incentive (LTI) Plans to better align them to our overall performance. The details of these programmes are outlined below but it is worth highlighting that the LTI plans are now based on Return on Capital (ROC) and Earnings per Share (EPS) metrics. Some of the outcomes of these changes in FY18 were: • We did not meet the minimum performance thresholds for the new LTI Plan in FY18 and therefore no LTI payments were earned. • The result is a 57% year-on-year decrease in total remuneration payments for our CEO and a similar level of decrease for our senior executives. • For the FY18 performance period outlined in this report, our CEO Theo Spierings will receive total remuneration of $3,545,777 versus $8,320,324 earned in FY17. REMUNERATION BENCHMARKING Benchmarking of our remuneration is conducted using independent third-party advisors as appropriate to the market in which our employees work. Where appropriate, Fonterra will use supplementary pay intelligence data. Pay benchmarking for the CEO, Fonterra Management Team (FMT) and certain senior roles is conducted using independent third-party remuneration advisers appointed by the Board. Given that the Co-operative’s size and global scale is unique to New Zealand, the peer group for these roles is comprised of 24 Australian listed companies that are more closely matched to the size and complexity and operational scope of Fonterra, allowing a more appropriate benchmarking of senior executive remuneration. The benchmark also reflects that senior positions within Fonterra require global expertise, and are typically recruited from competitive global talent markets, particularly Australia and Asia. Fonterra aims to pay at the median of the benchmark of the given peer group for our senior executives. Fonterra’s remuneration framework for salaried staff is based on a ‘total remuneration’ approach, which is consistent with best practice globally. This includes base salary, benefits (superannuation and insurance), and variable remuneration (incentives). Our remuneration levels are independently benchmarked against comparable companies. Adjustments may occur on a cyclical basis, such as an annual salary review, or on an as-needed basis to recognise factors such as additional responsibilities. The framework is designed to take into account budget targets and restraints, market conditions, internal equity, and governance factors such as local legislation, as well as taking into account individual performance. Fonterra’s incentive programmes are designed to drive the Co- operative’s performance by: • Focussing on the Co-operative’s primary objective of maximising returns for its farmer shareholders; • Promoting collaboration and a one team approach to achieve Fonterra’s goals; • Establishing targets which are challenging yet achievable; and linked to team (such as business unit) and group performance. At the end of each financial year, performance is reviewed and incentive payments are approved by the People, Culture and Safety Committee at its discretion. The Board and the Committee retain absolute discretion in respect to payments for all incentive schemes. EXECUTIVE REMUNERATION AND INCENTIVE PLANS Fonterra’s remuneration framework for the CEO and members of the FMT is designed to attract and retain key talent while ensuring a strong link between performance and reward. Remuneration for these employees comprises three components: Fixed Remuneration, Short-Term Incentives and Long-Term Incentives. Each of the components are detailed below: Fixed Remuneration Fixed Remuneration consists of base salary and benefits. Fixed Reward for the CEO and FMT is generally reviewed on an annual basis, taking into account market relativities and the individual performance of each senior executive. Any Fixed Remuneration changes for the CEO must be approved by the Board. 77 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR CORPORATE GOVERNANCE Corporate Governance CONTINUED Corporate Governance CONTINUED Short-Term Incentives Long-Term Incentives CEO Remuneration Paid within the FY18 fiscal year STIs are total at-risk payments that are designed to align and focus the FMT on delivering exceptional results. STI targets are expressed as a percentage of base remuneration. For the CEO and Chief Operating Officers, the STI target is set at 60% of fixed remuneration. At the beginning of each financial year, the Board agrees the business plan and organisational objectives. These objectives form the basis on which the year’s STI plan is then set. The FY18 STI outcomes for the CEO and FMT are determined by three elements: • Fonterra Group Performance (Volume, EBIT and an Organisational Efficiency measure) • Health & Safety and Food Safety & Quality • Total Farmer Pay-out A minimum performance threshold must be met for achievement of any of the Group performance elements. The maximum incentive opportunity for CEO and FMT is capped at 200% of individual target pay-out. The Board retains complete discretion of STI outcomes and may adjust the final outcome as it deems appropriate. Fonterra’s LTI Plan is designed to reward the CEO and FMT for delivering successful outcomes for the Co-operative over the long term. LTI targets are expressed as a percentage of base remuneration. The LTI target is set at 60% of fixed remuneration for the CEO. For the Chief Operating Officers, the LTI target is set at 50% of fixed remuneration. The FY18-20 LTI outcomes for the FMT are determined by two elements: • Return on Capital including intangibles (NOPAT/Invested Capital) • Growth in Earnings per Share (EPS) For any payment to be made, a minimum performance threshold must be met as outlined in the LTI Plan. The maximum incentive opportunity is capped at 200% of individual target pay-out. The Board retains complete discretion of LTI outcomes and may adjust the final outcome as it deems appropriate CEO REMUNERATION This year, Fonterra will report CEO remuneration to reflect both actual remuneration paid in the fiscal year for previous performance, and remuneration earned for performance relating to the current fiscal year. All values are reported in New Zealand Dollars. The information contained in this section relates to Mr Spierings who was in the role of CEO for the duration of FY18. CEO Remuneration Earned for FY18 Performance ‘Remuneration Earned’ aligns remuneration outcomes with performance periods, providing what we believe is a clearer indication of pay for performance. LTI and STI outcomes are listed against the relevant performance period, regardless of when the payment is made. We believe this reporting approach provides the right balance of transparency and disclosure while accurately reflecting the outcomes for a given fiscal year. PERIOD FY18 FY17 SALARY BENEFITS STI 2,462,800 2,462,800 103,275 242,340 979,7021 1,182,144 LTI 02 4,433,0404 TOTAL REMUNERATION 3,545,7773 8,320,3245 1 Represents the FY18 STI outcome. This payment was approved by the Board in September 2018 and will be paid in October 2018. 2 Fonterra’s LTI Plan did not meet minimum performance thresholds in FY18 and therefore no remuneration was earned. 3 Represents a 57% year-on-year decrease in remuneration realised vs FY17. 4 Represents the FY17 Velocity Leadership Incentive outcome. 5 FY17 Total Remuneration Earned. For FY18, Mr Spierings realised the following compensation: (c) CEO Long-Term Incentive (a) CEO Fixed Remuneration Over the course of the FY18 financial year, the CEO earned fixed remuneration of $2,462,800 (unchanged from FY17). (b) CEO Short-Term Incentive The LTI value of the CEO’s remuneration is set at 60% of fixed remuneration if all targets are achieved. • FY18 LTI • FY18-19 LTI • FY18-20 LTI The STI value of the CEO’s remuneration is set at 60% of fixed remuneration if all targets are achieved. • For the 2018 Financial year, the CEO realised a total LTI payment of $0. This is against a target of $1,477,680. For the 2018 Financial year, the CEO realised a total STI payment of $979,702 ($1,182,144 in 2017 Financial Year). This is against a target of $1,477,680. The Board has approved this STI outcome and payment will be made in October 2018. Participation in the FY18-19 and FY18-20 LTI Plan ceases on resignation and any LTI deferrals from these plans are forfeited. The Board retains complete discretion over final LTI payments and may adjust the final outcome as it deems appropriate. ‘Remuneration Paid’ is how CEO remuneration has been traditionally reported, reflecting remuneration in the period it is received, rather than the performance period the payment relates to. For example, incentive payments relating to FY17 performance are received and reported in FY18. PERIOD FY18 FY17 SALARY BENEFITS STI LTI TOTAL REMUNERATION 2,462,800 2,462,800 235,0991 170,036 1,182,1442 1,832,3234 4,191,6863 3,855,248 8,071,729 8,320,407 1 Represents Superannuation/Kiwisaver. 2 Represents FY17 STI paid in FY18. 3 Comprises previous year(s) deferred compensation - FY15 LTI (0.2m), FY16 Velocity Leadership Incentive outcome (VLI) (0.66m), FY17 VLI (3.32m). 4 Represents FY16 STI paid in FY17. Some employees who are eligible for the STI plan have a portion of their incentive aligned with their individual performance (typically 50% of the total STI), and others are aligned fully to the relevant Group or business unit KPI scorecard. Senior Management is typically aligned to 100% of Fonterra Group Performance, resulting in their incentives being fully aligned to Fonterra’s outcomes as a business. Other Incentive Plans Some business units, both in New Zealand and offshore, use sales incentive plans for our market facing sales and support teams. These are targeted to achieve specific revenue growth outcomes in key markets as well as aligning to our Group and business unit strategic objectives. Employees in these plans do not, typically, participate in any other short-term incentive plans. Long Term Incentive Plans Fonterra offers a Long-Term Incentive (LTI) Plan for certain senior executives. This Plan is designed to reward and retain key senior executives based on longer-term objectives. The Fonterra Management Team (FMT) is eligible to participate, as well as a selected number of senior executives who lead large functions within our core business units, hold significant profit and loss responsibility, or head significant corporate functions. The nature of these LTI Plans means that payments can be deferred over multiple time periods. This means that, in any given year, multiple payments may be made for incentives earned in prior years. For purposes of clarification, we have summarised below the LTI Plans that are active or where potential deferred payments are yet to be made. REMUNERATION AND INCENTIVE PLANS FOR SALARIED STAFF Fixed Remuneration Under our ‘total remuneration’ approach for salaried positions, Fonterra generally aims to pay at the median rate in the markets in which we operate. For roles that are deemed critical or that have a significant influence on business performance, Fonterra may choose to benchmark at the upper quartile rate. This is particularly true for certain international markets where securing key talent can be difficult. Review of Fixed Remuneration Fixed remuneration for salaried and waged employees who are not covered by a collective agreement is reviewed annually. Remuneration for employees who are on collective agreements is negotiated and agreed in partnership with Fonterra’s employee representative organisations and is reviewed in line with the schedules agreed with those employee representative organisations. Short Term Incentive Plans The majority of permanent salaried employees in Fonterra participate in an annual short-term incentive (STI) plan. In FY18, this incentive covered approximately 6,000 employees. The STI plan encourages our people to focus on Fonterra’s strategic objectives within each financial year. At the beginning of each financial year a series of Group and business unit key performance indicators (KPIs) are identified and approved by the People, Culture and Safety Committee. The KPIs are established every year, but normally include important financial measures (revenue and EBIT), operational efficiency measures, and measures centred around health and safety and food safety and quality. For a small, targeted group of employees, our STI plan also includes an incentive component that is based on the total available farmer pay-out. This is designed to align the targeted group’s incentive outcomes to that of our farmer shareholders’ financial outcomes. 78 79 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR CORPORATE GOVERNANCE Corporate Governance CONTINUED Velocity Leadership Incentive (FY16/17) FY18 and FY18-19 Long-Term Incentives With the introduction of a new LTI structure and the subsequent discontinuation of the VLI, two shorter term ‘bridging’ LTI plans were developed to ensure that Fonterra appropriately incentivises performance over the FY18 and FY18-19 vesting periods. Both the FY18 and FY18-19 LTI Plans are based on the same structure and retain the same measures as the FY18-20 LTI Plan, albeit for a shorter performance period. Targets for these plans were developed with reference to the FY18 and FY19 business plans and were approved by the Board. For the FY18 and FY18-19 Plans, assuming performance thresholds have been met, 50% of the resulting outcome is paid as cash in October the following fiscal year and 50% is deferred as cash for 12 months. The Board retains overall discretion in relation to all aspects of the FY18 LTI Plan and the FY18-19 LTI Plan, including payment of deferral. FY19–FY21 Long-Term Incentive The FY19-21 LTI Plan is based on an identical structure and retains the same measures as the FY18-20 LTI Plan. The FY19-21 LTI Plan targets for ROC and EPS have been set with reference to the FY21 business plan and have been approved by the Board. The Board retains overall discretion in relation to all aspects of the FY19-FY21 LTI Plan. The Velocity Leadership Incentive (VLI) was the LTI Plan in place for FY16 and FY17. It has been discontinued and did not apply in FY18. The VLI was introduced as a targeted two-year plan to accelerate and reward the Fonterra business transformation, which the Co-operative refers to as ‘Velocity’. The FMT, selected senior management, and a small number of employees who led significant work streams in FY16 in support of Velocity were eligible to participate in the VLI. In FY16 and FY17 Velocity delivered significant benefits across the Farmgate Milk Price, earnings and working capital. In FY17 it also supported a material uplift in Fonterra’s organisational health and employee engagement. The FY16 VLI was paid in cash with 70% paid following the end of FY16, and the remaining 30% deferred over two years in two payments of 15% - one in FY17 and the other in FY18. On target performance under the FY16 VLI was set at 60% of fixed salary for the CEO, 50% for the FMT, and ranged from 25% to 50% of fixed salary for other participating employees. In FY16, Velocity delivered above expectations in terms of both financial performance arising from efficiency and value creation. The FY17 VLI payment schedule was changed to a 50% payment following the end of FY17, with the remaining 50% deferred over two years in two payments of 25% - one in FY18 and the other to be in FY19. The payment of the first deferral was dependent on achievement of a stipulated lift in organisational health to recognise the importance of sustainable change. The stipulated organisational health hurdle was met and the first deferral was paid in December 2017. On target performance under the FY17 VLI was set at 60% of fixed salary for the CEO, 50% of fixed salary for the FMT, and ranged from 25% to 50% of fixed salary for other participating employees. The People, Culture and Safety Committee governs the VLI Plan and approves all results and payments in respect of the VLI. The Board retains overall discretion in relation to all aspects of the VLI. FY18–FY20 Long-Term Incentive In FY18, the People, Culture, and Safety Committee approved a new LTI Plan for FY18 to FY20 and beyond. The change marked a return to a more traditional LTI Plan. It is designed to incentivise the FMT and certain senior executives in relation to the achievement of the longer-term strategic objectives of the Co-operative. This LTI Plan uses two core financial metrics to measure achievement of the Co-operative’s performance. The metrics are Return on Capital (ROC) and Earnings per Share (EPS), both of which are commonly used globally in long term incentive plans. These metrics are important as they directly align to the Co- operative’s performance, and its returns to its farmer shareholders, and are readily measurable. These outcomes sit alongside the Co-operative’s objective of maximising the Farmgate Milk Price in a sustainable manner. LTI Plan targets are set over a three-year performance period. Assuming performance thresholds have been met at the end of the three-year period, 100% of the resulting outcome is paid in cash in October the following fiscal year. The FY18-FY20 LTI targets for ROC and EPS were set at the beginning of FY18, with reference to the FY18-FY20 business plan. The FMT and selected senior executives are eligible to participate. The Board retains overall discretion in relation to all aspects of the FY18-FY20 LTI Plan. 80 Corporate Governance CONTINUED Principle 6: Risk Management HEALTH AND SAFETY Fonterra is committed to providing a safe and healthy work environment for anyone who is affected by our operations. Continuous health and safety improvement is an integral part of everything we do. Achieving effective health and safety improvement is regarded as essential to our long-term success and an integral part of our values and how we run our business. We have focussed programmes to address our critical risks and our injury reduction ambitions. Fonterra’s health and safety performance is measured using a number of reactive and preventive indicators. These include Total Recordable Injury Frequency Rate (TRIFR), number of serious harm injuries and status of self-assurance and internal control Audits conducted throughout the business. Our TRIFR has increased over the past year from 5.2 to 6.1 with slightly fewer serious harm injuries in FY18 overall compared to FY17. We remain committed to achieving our longer term TRIFR goal of five which represents world class within our industry group. Our focus is to continue to track our efforts on a broad range of health and wellbeing programmes to enhance our people care and actively prevent incidents from occurring. RISK MANAGEMENT FRAMEWORK Fonterra ensures its performance is optimised through the identification and management of the most material risks to the business. The Board receives regular updates from the Risk Committee and reporting on Fonterra’s Risk Management Framework. Fonterra’s Risk Management Framework is based on a three lines of defence model. Compliance with our Group Policy Framework is a condition of employment at Fonterra, as articulated in our Group Policy Principles. As the first line of defence our people leaders have clear responsibilities for business risk management and to ensure compliance with Group Policy and Standards. Technical functions provide the second line of defence through a range of specialist audit programmes across the business. Our Internal Audit programmes and external and customer audit systems comprise the third line of defence. Our Risk Management Framework is aligned with international best practice and includes a consistent process that: • Considers our goals and relevant context • Identifies any assumptions or uncertainties that could affect achieving our goals • Prioritises control effort through assessing the potential consequences of a risk materialising, the likelihood of that occurrence • Considers risk drivers • Evaluates current controls, their effectiveness and outcome acceptability • Introduces new controls or action plans to strengthen our position • Regularly reviews control effectiveness, context changes and resulting exposure. Fonterra’s Risk Management Policy outlines our risk principles, accountabilities and the requirements for managing and reporting risk within the business. At the highest level, the most material risks to the business are grouped to reflect our focus on people, strategy, and identity. In the Sustainability section, we provide more detailed information on our risk management approach for health and safety, food safety and quality, environmental and animal welfare risks. These are reviewed regularly to consider any changes or need to adapt control strategies, through an Integrated Risk Forum that enables key business leaders identified as risk and opportunity guardians to assess and manage current risks and identify and prepare for emerging risks. These matters are reported to, and recorded by, the Risk Committee. We aim to deepen the understanding, management and reporting of key business risks as well as reporting on emerging risk as part of our approach to strengthening organisational resilience. 81 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR CORPORATE GOVERNANCE Corporate Governance CONTINUED Principle 7: Auditors AUDITOR FRAMEWORK The Audit and Finance Committee is responsible for making recommendations to the Board regarding the appointment of the external auditor. The external auditor is appointed by farmer shareholders at the Annual Meeting. The Audit and Finance Committee reviews the independence of the auditor and reviews the external audit fees, the terms of engagement and annual audit plan. 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 Audit and Finance Committee, and the types of activities that are not permitted. The Audit and Finance Committee 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. The Audit and Finance Committee monitors the performance of these additional activities undertaken by the auditor. The Audit and Finance Committee Chairman communicates regularly with the external auditor and the Audit and Finance Committee meet with the external auditor without Management at least twice a year. The Audit and Finance Committee is responsible for ensuring that the ability of the auditor to carry out its statutory audit role is not impaired, or could reasonably be perceived to be impaired. The fees paid to Fonterra’s auditor, PricewaterhouseCoopers are detailed in Note 4 to the Annual Financial Results for the year ended 31 July 2018. An RFP process is currently underway for the provision of external audit services for the financial year ended 31 July 2020. The external auditor is required to attend Fonterra’s Annual Meeting and be available to answer questions from farmer shareholders in relation to the audit. INTERNAL AUDIT Fonterra’s Internal Audit function provides the Audit and Finance Committee and Management with objective and independent assurances on the design and effectiveness of internal controls. A close working relationship with Management is critical to ensure Internal Audit remains relevant and provides adequate audit coverage. Internal Audit supports the achievement of Fonterra’s Group business objectives by: • Evaluating the effectiveness of risk management, controls and governance processes • Delivering reasonable assurance over key business risks to the Audit and Finance Committee and Management • Providing recommendations for control environment improvements • Executing assignments in compliance with Institute of Internal Audit Standards The approach to Internal Audit is based on the principle of line management responsibility for risk and controls. • Management is responsible for implementing, operating and monitoring the system of internal controls to provide reasonable assurance of achieving business objectives. • Internal Audit is responsible for: – Delivering a reasonable degree of assurance (as determined by the Audit and Finance Committee) over business risk – Assisting the business with special reviews or investigations where requested and approved by the Audit and Finance Committee – Complying with the Internal Audit methodology. 82 Corporate Governance CONTINUED Principle 8: Shareholder Rights and Relations FONTERRA.COM AND FARM SOURCE™ DIGITAL TOOLS WEBSITE Fonterra has a website (www.fonterra.com) where investors and interested stakeholders can access financial and operational information and key corporate governance information about Fonterra as an issuer. SHAREHOLDERS’ COUNCIL One of the Board’s most important relationships is with the Shareholders’ Council. The Council, Fonterra’s representative body, which is established under the Fonterra Constitution, is independent of the Board and as at 31 July 2018 comprised 25 farmer shareholders elected as councillors, representing 25 wards across New Zealand. The Shareholders’ Council was created to be the guardian of the Co-operative Principles which apply to the cornerstone activities of the Co-operative. 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, Board and Management have a working interface document which sets out the principles to facilitate the working partnership between the Board, the Council and Management and the way operational issues will be dealt with by the Board and the Council. 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 farmer shareholder updates. The Farm Source™ website enables farmer 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. Fonterra’s My Co-op app provides constantly updated news and information from across the Co-op and the industry including milk price announcements, updates from the Chairman and CEO and rural and regional council news. The On Farm app provides daily milk production and quality information, comparisons against last season volumes, tanker movements, and summary reports of key milk performance information for the last 30 days. ANNUAL MEETING The Board views the Annual Meeting of farmer shareholders, which is held at a different venue around New Zealand each year, as an opportunity to communicate directly with farmer shareholders and the Board ensures that adequate time is provided at these meetings for farmer shareholders to raise issues or ask questions from the floor. The working interface document is available on the Farm Source™ website. Notices of Meetings are sent to farmer shareholders at least ten working days before the meeting. 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 communication with its farmer shareholders. An extensive farmer shareholder and supplier relations programme is managed by the Farm Source™ team. Channels for electronic communication are provided through the fonterra.com and Farm Source™ websites and the My Co-op phone application. In addition, Fonterra provides farmer shareholders with the ability to receive communications (such as the Annual Report) from Fonterra electronically. Fonterra’s communications with farmer shareholders include regular face-to-face meetings, Sky broadcasts, a regular Global Dairy Update, Farm Source™ magazine publication, My Co-op posts and regular emails from the Chairman, CEO and Regional Heads. As described above, Fonterra releases to the relevant stock exchanges all material information, and will comply with the listing rules of the Fonterra Shareholders’ Market with respect to shareholder communications. FARMER MEETINGS A schedule of regular meetings with farmer shareholders, sharemilkers and farm workers is held across the country at least twice each year. Often these are run in conjunction with the Shareholders’ Council and Farm Source™ regional teams. Farmer Directors also regularly attend other farmer meetings during the year on specific topics. In addition, the Board consults with farmer shareholders on specific issues as they arise. The Constitution describes the process whereby a farmer shareholder can raise a proposal for discussion or resolution at the next meeting of farmer shareholders at which the farmer shareholder is entitled to vote. ANNUAL REPORT The Group’s Annual Report including financial statements and an 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, 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 Group Disclosure Policy. Farmer shareholders and other stakeholders receive regular updates on these and other issues relevant to them and all media and market releases are available on fonterra.com. VOTING Shareholders have the right to vote on major transactions (as defined in the Companies Act 1993) as well as other major decisions that may change the nature of Fonterra as prescribed by the listing rules of the FSM. In particular, FSM Rule 8.1.1 restricts Fonterra from entering into any transaction (or series of linked or related transactions) which would change the essential nature of the business of Fonterra or in respect of which the gross value is in excess of 50% of the average market capitalisation of Fonterra without the prior approval of Fonterra’s shareholders. In accordance with the co-operative nature of Fonterra, voting is based on the quantity of milk solids supplied to Fonterra, backed by shares and is not on the principle of one vote per share. 83 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS Summary Financial Statements FOR THE YEAR ENDED 31 JULY 2018 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 Auditor’s Report Statutory Information Non-GAAP Measures Glossary 85 86 87 88 89 90 91 103 105 106 107 Directors’ Statement FOR THE YEAR ENDED 31 JULY 2018 The Directors hereby approve and authorise for issue the summary financial statements for the year ended 31 July 2018 presented on pages 85 to 102. For and on behalf of the Board: JOHN MONAGHAN Chairman 12 September 2018 BRUCE HASSALL Director 12 September 2018 Fonterra Co-operative Group Limited (Fonterra, the Company or the Co-operative) 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 a FMC Reporting Entity under the Financial Markets Conduct Act 2013. Fonterra is also required to comply with the Dairy Industry Restructuring Act 2001. These summary financial statements comprise Fonterra and its subsidiaries (together referred to as the Group) and include the Group’s interest in its equity accounted investees after adjustments to align to the accounting policies of the Group. 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. The Group’s full financial statements comply with International Financial Reporting Standards. They also comply with New Zealand Equivalents to International Financial Reporting Standards and have been prepared in accordance with Generally Accepted Accounting Practice applicable to for-profit entities. The Board has elected to present summary financial statements for the year ended 31 July 2018 as part of the Annual Report sent to Shareholders. These summary financial statements include notes setting out key information. These summary financial statements are presented for the year ended 31 July 2018. The comparative information is for the year ended 31 July 2017. 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 2018. In the process of applying the Group’s accounting policies, management make a number of judgements, estimates of future events, and assumptions. These are all believed to be reasonable based on the most current set of circumstances available to the Group. Judgements and estimates that have the most significant effect on the amounts recognised in the financial statements for the year ended 31 July 2018 are those used to determine the recoverable amounts of the following assets: the investment in Beingmate (Note 7), the China Farms assets and the goodwill attributed to the consumer and foodservice businesses in New Zealand and Brazil. These matters are also communicated as key audit matters in the audit opinion on the full financial statements. The full financial statements for the year ended 31 July 2018, approved and authorised for issue by the Board on 12 September 2018, 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 in fast-moving consumer goods and foodservice businesses. These summary financial statements are presented in New Zealand Dollars ($ or NZD), which is Fonterra’s functional and presentation currency, and rounded to the nearest million, except where otherwise stated. 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 Fonterra’s registered office at 109 Fanshawe Street, Auckland, New Zealand or on Fonterra’s website, www.fonterra.com. 84 FONTERRA ANNUAL REPORT 2018 FONTERRA ANNUAL REPORT 2018 85 OUR FINANCIALS Income Statement FOR THE YEAR ENDED 31 JULY 2018 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 WPC 80 recall costs Impairment of equity accounted investees Net foreign exchange (losses)/gains Share of profit of equity accounted investees Profit before net finance costs and tax Finance income Finance costs Net finance costs (Loss)/profit before tax Tax expense (Loss)/profit after tax (Loss)/profit after tax is attributable to: Equity holders of the Co-operative Non-controlling interests (Loss)/profit after tax GROUP $ MILLION NOTES 31 JULY 2018 31 JULY 2017 GROUP $ MILLION 31 JULY 2018 31 JULY 2017 Statement of Comprehensive Income FOR THE YEAR ENDED 31 JULY 2018 2 9 20,438 (17,279) 3,159 192 (651) (572) (873) (400) (196) (405) (12) 20 262 23 (439) (416) (154) (42) (196) (221) 25 (196) 19,232 (15,968) 3,264 190 (641) (550) (810) (334) – (35) 29 7 1,120 34 (389) (355) 765 (20) 745 734 11 745 (Loss)/profit after tax Items that may be reclassified subsequently to profit or loss: Cash flow hedges and other costs of hedging, net of tax Net investment hedges and translation of foreign operations, net of tax Hyperinflation gains/(losses) attributable to equity holders Share of equity accounted investees’ movements in reserves Other reserve movements Total items that may be reclassified subsequently to profit or loss Items that will not be reclassified subsequently to profit or loss: Net fair value gains on investments in shares Foreign currency translation losses attributable to non-controlling interests Hyperinflation movements attributable to non-controlling interests Non-controlling interests other movements Total items that will not be reclassified subsequently to profit or loss Total other comprehensive expense recognised directly in equity Total comprehensive (expense)/income Total comprehensive (expense)/income is attributable to: Equity holders of the Co-operative Non-controlling interests Total comprehensive (expense)/income (196) (459) 188 17 – (1) (255) 8 (2) 12 – 18 (237) (433) (468) 35 (433) Earnings per share: Basic and diluted earnings per share The accompanying notes form part of the financial statements. GROUP $ 31 JULY 2018 31 JULY 2017 (0.14) 0.46 86 745 128 (124) (1) – (2) 1 2 (3) – (2) (3) (2) 743 737 6 743 87 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS Statement of Financial Position AS AT 31 JULY 2018 Statement of Changes in Equity FOR THE YEAR ENDED 31 JULY 2018 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Tax receivable Derivative financial instruments Other current assets Total current assets Non-current assets Property, plant and equipment Equity accounted investments Livestock Intangible assets Deferred tax assets 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 liabilities Other non-current liabilities Total non-current liabilities Total liabilities Net assets EQUITY Subscribed equity Retained earnings Foreign currency translation reserve Hedge reserves Other reserves Total equity attributable to equity holders of the Co-operative Non-controlling interests Total equity 88 GROUP $ MILLION NOTES 31 JULY 2018 31 JULY 2017 446 2,355 2,917 47 59 141 5,965 6,810 615 288 3,227 583 204 323 12,050 18,015 161 831 2,116 1,579 35 296 14 101 5,133 5,907 480 130 5 11 6,533 11,666 6,349 5,887 934 (364) (267) 29 6,219 130 6,349 393 2,303 2,593 32 580 181 6,082 6,391 887 319 3,115 363 239 446 11,760 17,842 11 1,112 2,117 1,330 34 43 40 44 4,731 5,151 547 148 9 8 5,863 10,594 7,248 5,858 1,637 (552) 192 5 7,140 108 7,248 5 6 5 GROUP $ MILLION As at 1 August 2017 (Loss)/profit after tax Other comprehensive (expense)/income Total comprehensive (expense)/income Transactions with equity holders in their capacity as equity holders: Dividend paid to equity holders of the Co-operative Equity instruments issued Dividend paid to non-controlling interests – 29 – (482) – – As at 31 July 2018 As at 1 August 2016 Profit after tax Other comprehensive income/(expense) Total comprehensive income/(expense) 5,833 1,384 – – – 734 – 734 Transactions with equity holders in their capacity as equity holders: Dividend paid to equity holders of the Co-operative Equity instruments issued Dividend paid to non-controlling interests – 25 – (481) – – ATTRIBUTABLE TO EQUITY HOLDERS OF THE CO-OPERATIVE SUBSCRIBED EQUITY RETAINED EARNINGS FOREIGN CURRENCY TRANSLATION RESERVE HEDGE RESERVES OTHER RESERVES TOTAL NON- CONTROLLING INTERESTS TOTAL EQUITY 5,858 1,637 (552) – – – (221) – (221) 192 – (459) (459) – – – 5 7,140 – (221) 24 (247) 24 (468) – (482) – – 29 – 108 7,248 25 10 35 – 15 (196) (237) (433) (482) 44 (28) (28) – 188 188 – – – 5,887 934 (364) (267) 29 6,219 130 6,349 (428) – (124) (124) – – – 64 – 128 128 – – – 6 6,859 88 6,947 – (1) (1) 734 3 737 – (481) – – 25 – 11 (5) 6 745 (2) 743 – (481) 42 67 (28) (28) As at 31 July 2017 5,858 1,637 (552) 192 5 7,140 108 7,248 89 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018 OUR FINANCIALS Cash Flow Statement FOR THE YEAR ENDED 31 JULY 2018 Cash flows from operating activities Profit before net finance costs and tax Adjustments for: Foreign exchange losses/(gains) Depreciation and amortisation Impairment of equity accounted investees Other Decrease/(increase) in working capital: Inventories Trade and other receivables Amounts owing to suppliers Payables and accruals Other movements Total Cash generated from operations Net taxes paid Net cash flows from operating activities Cash flows from investing activities Cash was provided from: – Proceeds from disposal of property, plant and equipment – Proceeds from sale of livestock – Co-operative support loans – Other cash inflows Cash was applied to: – Acquisition of property, plant and equipment – Acquisition of livestock (including rearing costs) – Acquisition of intangible assets – Advances to and investments in equity accounted investees – Other cash outflows Net cash flows from investing activities Cash flows from financing activities Cash was provided from: – Proceeds from borrowings – Interest received – Other cash inflows Cash was applied to: – Interest paid – Repayment of borrowings – Dividends paid to non-controlling interests – Dividends paid to equity holders of the Co-operative – Other cash outflows Net cash flows from financing activities Net (decrease)/increase in cash Opening cash Effect of exchange rate changes Closing cash Reconciliation of closing cash balances to the statement of financial position: Cash and cash equivalents Bank overdraft Closing cash 90 GROUP $ MILLION 31 JULY 2018 31 JULY 2017 PERFORMANCE 1 SEGMENT REPORTING Notes to the Summary Financial Statements FOR THE YEAR ENDED 31 JULY 2018 262 239 544 405 5 1,193 (313) 75 277 98 42 179 1,634 (86) 1,548 26 79 149 13 (858) (45) (147) (151) (14) (948) 4,334 18 – (446) (4,077) (27) (453) (74) (725) (125) 382 28 285 446 (161) 285 1,120 (1) 526 35 (20) 540 (177) (634) 745 (100) (48) (214) 1,446 (70) 1,376 105 62 41 10 (690) (89) (103) (42) – (706) 4,174 13 38 (393) (3,968) (28) (456) (2) (622) 48 357 (23) 382 393 (11) 382 The financial information reviewed by the Fonterra Management Team (FMT) has evolved over the past two years to reflect the changes in the management structure to support the operations of the Group. From 1 August 2017 the financial information reviewed by the Fonterra Management Team is solely based on the previously identified ‘strategic platforms’. a) Operating segments Operating segments reflect the way financial information is regularly reviewed by the FMT. The measure of profit or loss used by the FMT to evaluate the underlying performance of operating segments is normalised segment earnings before net finance costs and tax. To enable underlying segment performance to be compared between reporting periods a normalised segment income statement has been presented. Comparative segment income statements have been re-presented on a normalised basis. Transactions between segments are based on estimated market prices, with the exception of the sale of milk from China Farms to Ingredients. The transfer price used for these transactions is an amount reflective of long-term milk price trends in China. Unallocated costs represent corporate costs including Corporate Affairs and Group services. REPORTABLE SEGMENT DESCRIPTION Ingredients Represents the collection, processing and distribution of the Ingredients business in New Zealand, global sales and marketing of New Zealand and non-New Zealand Ingredients products, Fonterra Farm Source™ stores, the Ingredients business in Australia (including Milk Supply and Manufacturing) and the Ingredients business in South America. Consumer and Foodservice – Oceania – Asia – Greater China – Latin America China Farms Represents the fast-moving consumer goods (FMCG) and Foodservice businesses in New Zealand and Australia (including export to the Pacific Islands). Represents FMCG and Foodservice businesses in Asia (excluding Greater China), Africa and the Middle East. Represents FMCG and Foodservice businesses in Greater China. Represents FMCG and Foodservice businesses in South America and the Caribbean. Represents farming operations in China. 91 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 a) Operating segments continued a) Operating segments continued GROUP $ MILLION 31 JULY 2018 INGREDIENTS CONSUMER AND FOODSERVICE OCEANIA ASIA GREATER CHINA LATIN AMERICA TOTAL CHINA FARMS UNALLOCATED COSTS AND ELIMINATIONS TOTAL GROUP $ MILLION 31 JULY 2017 INGREDIENTS CONSUMER AND FOODSERVICE OCEANIA ASIA GREATER CHINA LATIN AMERICA TOTAL CHINA FARMS UNALLOCATED COSTS AND ELIMINATIONS TOTAL Normalised segment income statement External revenue1 Inter-segment revenue 13,485 2,001 1,849 1,564 1,532 6,946 2,821 158 16 – 2 176 Revenue from sale of goods 16,306 2,159 1,865 1,564 1,534 7,122 – 262 262 – 20,431 (3,259) – (3,259) 20,431 Normalised segment income statement External revenue1 Inter-segment revenue 12,986 2,280 1,810 142 1,668 142 Revenue from sale of goods 15,266 1,952 1,810 1,272 5 1,277 1,478 – 1,478 6,228 289 6,517 – 269 269 – (2,838) 19,214 – (2,838) 19,214 Cost of goods sold (13,793) (1,514) (1,309) (918) (1,032) (4,773) (246) 2,844 (15,968) Cost of goods sold Segment gross profit Operating expenses Net other operating income Net foreign exchange gains/(losses) Share of profit/(loss) of equity accounted investees Normalised segment earnings before net finance costs and tax Normalisation adjustments: Reduction in the carrying value of investment in Beingmate2 WPC80 recall costs3 Time value of options4 Segment earnings before net finance costs and tax Finance income Finance costs (Loss)/profit before tax Other segment information: (14,834) (1,726) (1,409) (1,229) (1,075) (5,439) (257) 3,251 (17,279) 433 456 335 459 1,683 5 (8) 3,152 (373) (289) (183) (368) (1,213) (31) (444) (2,496) 1,472 (808) 111 50 54 8 (1) – 18 (9) – 14 (1) – 24 (2) 4 64 (13) 4 879 67 176 165 117 525 – (196) (5) – – – – – – (439) – – – – – (439) – – 22 – (5) (9) – – – 678 67 176 (274) 117 86 (9) (493) (5) (37) 192 – 1 54 (493) 902 – – – (439) (196) (5) 262 23 (439) (154) Volume5 (liquid milk equivalents, billion) Volume5 (metric tonnes, thousand) 20.52 2,986 1.66 623 1.77 331 Depreciation and amortisation ($ million) Capital expenditure6 Equity accounted investments Capital employed7 ($ million) (389) (26) (13) 644 308 9,156 62 – 515 17 – 95 1.41 266 (2) 2 204 (65) 0.75 578 5.59 0.27 (4.18) 22.20 1,798 22 (683) 4,123 (29) (70) (26) 61 10 352 142 214 877 (25) 85 788 (59) 100 8 (544) 861 615 (1,269) 9,552 Segment gross profit Operating expenses Net other operating income Net foreign exchange gains/(losses) Share of profit/(loss) of equity accounted investees Normalised segment earnings before net finance costs and tax Normalisation adjustments: Gain on sale of Darnum manufacturing plant2 Reduction in the carrying value of investment in Beingmate3 Time value of options4 Segment earnings before net finance costs and tax Finance income Finance costs Profit before tax 1,473 (725) 106 42 47 943 42 – (1) 438 (355) 4 – 501 (306) 4 (5) 359 (161) 6 – 446 (370) 8 3 1,744 (1,192) 22 (2) 23 (31) 14 (1) 6 (387) 6 9 3,246 (2,335) 148 48 – 87 – – – – – 194 204 – – – – (76) – 4 91 – – – 4 (4) 1 48 576 – (76) – 1 – – – 1 (365) 1,155 – – – 42 (76) (1) (365) 1,120 984 87 194 128 91 500 Other segment information: Volume5 (liquid milk equivalents, billion) Volume5 (metric tonnes, thousand) Depreciation and amortisation ($ million) Capital expenditure6 Equity accounted investments Capital employed7 ($ million) 21.30 3,019 (367) 592 209 7,950 1.74 636 (31) 60 – 463 1.70 310 (15) 23 – 117 1.28 237 (2) – 617 22 0.74 600 (33) 34 10 270 5.46 1,783 (81) 117 627 872 0.34 26 (26) 38 45 789 (4.16) (648) (52) 104 6 (518) The segment note for the year ended 31 July 2017 has been restated. $42 million of operating expenses and $4 million of other operating income has been reallocated from Unallocated Costs and Eliminations to the Consumer and Foodservice operating segments. The reallocation has been made to better reflect costs in the segment in which they are reported to the FMT, to aid comparability between years. 34 (389) 765 22.94 4,180 (526) 851 887 9,093 1 Total Group revenue from the sale of goods is $20,438 million. The difference of $7 million relates to the normalisation of time value of options. 1 Total Group revenue from the sale of goods is $19,232 million. The difference of $18 million relates to the normalisation of time value of options. 2 Of the $439 million normalisation adjustment, $405 million relates to impairment of equity accounted investees and $34 million relates to Fonterra’s 2 The $42 million normalisation adjustment relates to other operating income. equity accounted share of Beingmate’s losses. 3 The $196 million normalisation adjustment relates to operating expenses 3 Of the $76 million normalisation adjustment, $35 million relates to impairment of equity accounted investees and $41 million relates to Fonterra’s equity accounted share of Beingmate’s losses. 4 Of the $5 million normalisation adjustment, $7 million relates to revenue offset by $12 million of net foreign exchange losses. 4 Of the $1 million normalisation adjustment, $18 million relates to revenue offset by $19 million of net foreign exchange losses. 5 Includes sales to other strategic platforms. Total column represents total external sales. 5 Includes sales to other strategic platforms. Total column represents total external sales. 6 Capital expenditure comprises purchases of property (less specific disposals where there is an obligation to repurchase), plant and equipment and 6 Capital expenditure comprises purchases of property, plant and equipment and intangible assets, and net purchases of livestock. intangible assets, and net purchases of livestock. 7 Capital employed is calculated as the average for the period of; net assets excluding net-interest bearing debt, deferred tax balances and brands, 7 Capital employed is calculated as the average for the period of; net assets excluding net-interest bearing debt, deferred tax balances and brands, goodwill and equity accounted investments. goodwill and equity accounted investments. 92 93 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 b) Geographical revenue DEBT AND EQUITY GROUP $ MILLION 3 SUBSCRIBED EQUITY INSTRUMENTS REST CHINA OF ASIA AUSTRALIA NEW ZEALAND UNITED STATES EUROPE LATIN AMERICA REST OF WORLD TOTAL Geographical segment external revenue: Year ended 31 July 2018 Year ended 31 July 2017 3,980 5,684 3,383 5,165 1,836 1,592 2,076 793 2,056 1,254 681 838 2,272 3,116 20,438 2,162 2,782 19,232 Revenue is allocated to geographical segments on the basis of the destination of the goods sold. c) Non-current assets GROUP $ MILLION INGREDIENTS OCEANIA NEW ZEALAND REST OF WORLD NEW ZEALAND AUSTRALIA ASIA GREATER CHINA LATIN AMERICA TOTAL GROUP Geographical segment non-current assets: As at 31 July 2018 As at 31 July 2017 5,538 5,479 467 347 1,324 1,285 928 840 827 738 1,127 1,481 1,052 11,263 988 11,158 GROUP $ MILLION AS AT 31 JULY 2018 AS AT 31 JULY 2017 11,263 583 204 12,050 11,158 363 239 11,760 GROUP $ MILLION 31 JULY 2018 31 JULY 2017 2,593 2,401 10,115 1,245 6,243 (2,917) 17,279 9,471 932 5,757 (2,593) 15,968 Reconciliation of geographical segment’s non-current assets to total non-current assets: Geographical segment non-current assets Deferred tax assets Derivative financial instruments Total non-current assets 2 COST OF GOODS SOLD Opening inventory Cost of milk: – New Zealand sourced – Non-New Zealand sourced Other costs Closing inventory Total cost of goods sold 94 Co-operative shares, including shares held within the Group Co-operative shares may only be held by a shareholder supplying milk to the Company (farmer shareholder), by former farmer shareholders for up to three seasons after cessation of milk supply, or by Fonterra Farmer Custodian Limited (the Custodian). Voting rights in the Company are dependent on milk supply supported by Co-operative shares¹. Balance at 1 August 2017 Shares issued under the Dividend Reinvestment Plan² Balance at 31 July 2018 Balance at 1 August 2016 Shares issued under the Dividend Reinvestment Plan² Balance at 31 July 2017 CO-OPERATIVE SHARES (THOUSANDS) 1,606,933 4,990 1,611,923 1,602,703 4,230 1,606,933 1 These rights are also attached to vouchers when backed by milk supply (subject to limits). 2 Total value of $29 million (31 July 2017: $25 million) The rights attaching to Co-operative shares are set out in Fonterra’s Constitution, available in the ‘About Us/Our Governance’ section of Fonterra’s website. Units in the Fonterra Shareholders’ Fund 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 2018, 111,423,603 Co-operative shares (31 July 2017: 126,047,304) were legally owned by the Custodian, on trust for the benefit of the Fund. Balance at 1 August 2017 Units issued Units surrendered Balance at 31 July 2018 Balance at 1 August 2016 Units issued Units surrendered Balance at 31 July 2017 UNITS (THOUSANDS) 126,047 20,946 (35,569) 111,424 111,992 29,933 (15,878) 126,047 The rights attaching to units are set out in the Fonterra Shareholders’ Fund 2018 Annual Report, available in the ‘Investors/Fonterra Shareholder’s Fund’ section of Fonterra’s website. Capital management and structure The Board’s objective is to maximise equity holder returns over time by maintaining an optimal capital structure. Trading Among Farmers (TAF) allows shares in Fonterra to be traded between shareholders, on the Fonterra Shareholders’ Market (a private market operated by NZX Limited). The Fund supports this by allowing investors, including farmers, to trade in units backed by Economic Rights in Fonterra. The Fund also allows farmer shareholders to acquire units and exchange them for shares in Fonterra, and to exchange shares for units and dispose of those units on the NZX or ASX. The Group provides returns to farmer shareholders through a milk price, and to equity holders through dividends and changes in the Company’s share price. The Fund is subject to the issue and redemption of units at the discretion of Fonterra and Fonterra’s farmer shareholders. Fonterra has an interest in ensuring the stability of the Fund and has established a Fund Size Risk Management Policy, which requires that the number of units on issue remain within specified limits and that within these limits, the number of units is managed appropriately. Fonterra may use a range of measures to ensure the Fund size remains within the specified limits, including introducing or cancelling a dividend reinvestment plan, operating a unit and/or share repurchase programme and issuing new shares. 95 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 4 DIVIDENDS PAID The Dividend Reinvestment Plan applied to all dividends in the table below. 5 BORROWINGS CONTINUED Total borrowings in the table above are represented by: DIVIDENDS 2018 Interim dividend – 10 cents per share1 2017 Final dividend – 20 cents per share2 2017 Interim dividend – 20 cents per share3 2016 Final dividend – 10 cents per share4 $ MILLION YEAR ENDED 31 JULY 2018 YEAR ENDED 31 JULY 2017 161 321 – – – – 321 160 1 Declared on 20 March 2018 and paid on 20 April 2018 to all Co-operative shares on issue at 6 April 2018. 2 Declared on 23 September 2017 and paid on 20 October 2017 to all Co-operative shares on issue at 9 October 2017. 3 Declared on 21 March 2017 and paid on 20 April 2017 to all Co-operative shares on issue at 5 April 2017. 4 Declared on 18 August 2016 and paid on 9 September 2016 to all Co-operative shares on issue at 1 September 2016. 5 BORROWINGS Economic net interest-bearing debt Economic net interest-bearing debt reflects the effect of debt hedging in place at balance date. Net interest-bearing debt position Total borrowings Cash and cash equivalents Interest-bearing advances1 Bank overdraft Net interest-bearing debt Value of derivatives used to manage changes in hedged risks on debt instruments Economic net interest-bearing debt GROUP $ MILLION AS AT 31 JULY 2018 AS AT 31 JULY 2017 6,738 (446) (332) 161 6,121 78 6,199 6,263 (393) (435) 11 5,446 155 5,601 1 Includes Fonterra Co-operative Support Loan balance of $177 million (31 July 2017: $135 million) which are netted against amounts owing to suppliers. 96 BALANCE AS AT 1 AUGUST 2017 PROCEEDS REPAYMENTS FOREIGN EXCHANGE MOVEMENT CHANGES IN FAIR VALUES OTHER BALANCE AS AT 31 JULY 2018 GROUP $ MILLION 164 854 137 35 500 4,573 6,263 1,054 2,849 – – – 431 4,334 (919) (2,551) (7) – – (600) (4,077) – (24) 1 – – 293 270 – – – – – (61) (61) 5 – – – – 4 9 304 1,128 131 35 500 4,640 6,738 GROUP $ MILLION BALANCE AS AT 1 AUGUST 2016 PROCEEDS REPAYMENTS FOREIGN EXCHANGE MOVEMENT CHANGES IN FAIR VALUES OTHER BALANCE AS AT 31 JULY 2017 454 879 143 35 499 4,342 6,352 951 2,698 – – – 525 4,174 (1,249) (2,713) (6) – – – (3,968) – (10) – – – (138) (148) – – – – 1 (158) (157) 8 – – – – 2 10 164 854 137 35 500 4,573 6,263 Commercial paper Bank loans Finance leases1 Capital notes2 NZX-listed bonds Medium-term notes Total borrowings3 Commercial paper Bank loans Finance leases1 Capital notes2 NZX-listed bonds Medium-term notes Total borrowings3 1 Finance leases are secured over the related item of property, plant and equipment. 2 Capital notes are unsecured subordinated borrowings. 3 All other borrowings are unsecured and unsubordinated. Leverage ratios The Board closely monitors the Group’s leverage ratios. The primary ratios monitored by the Board are: – Debt payback. The debt payback ratios are adjusted for the impact of operating leases. They are calculated as 1. Funds from operations divided by economic net interest-bearing debt, and 2. Economic net interest-bearing debt divided by earnings before interest, tax, depreciation and amortisation (EBITDA). – Gearing. The gearing ratio is calculated as economic net interest-bearing debt, divided by equity plus economic net interest- bearing debt. Equity is as presented in the statement of financial position, excluding hedge reserves. The gearing ratio as at 31 July 2018 was 48.4 per cent (31 July 2017: 44.3 per cent). The Group is not subject to externally imposed capital requirements. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity risk is to ensure that it will always have sufficient funds to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. The Group has a policy in place to ensure that it has sufficient cash or facilities on demand to meet expected operational expenses for a period of at least 80 days, including the servicing of financial obligations. This excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In such situations back-up funding lines are maintained and as set out in the Company’s constitution, the Company can defer payments to farmer shareholders if necessary. The Group manages its liquidity by retaining cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Fonterra’s funding facilities are reviewed at least annually, which is one of the key financial risk management activities undertaken by the Group to ensure an appropriate maturity profile given the nature of the Group’s business. At balance date the Group had undrawn lines of credit totalling $3,732 million (31 July 2017: $3,811 million). Liquidity and refinancing risks are also managed by ensuring that Fonterra can maintain access to funding markets throughout the world. To that end, Fonterra maintains debt issuance programmes in a number of key markets and manages relationships with international investors. 97 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 WORKING CAPITAL 6 OWING TO SUPPLIERS The Board uses its discretion in establishing the rate at which Fonterra will pay suppliers for the milk supplied over the season. This is referred to as the advance rate. The following table provides a breakdown of the advance payments made to suppliers: Owing to suppliers1 ($ million) Farmgate Milk Price2 (per kgMS) Of this amount: – Total advance payments made during the year – Total owing as at 31 July Amount advanced during the year as a percentage of the milk price for the season ended 31 May GROUP AS AT 31 JULY 2018 1,579 $6.69 $5.55 $1.14 83% AS AT 31 JULY 2017 1,330 $6.12 $5.21 $0.91 85% 1 This amount is after offsetting $177 million of Fonterra Co-operative Support Loan repayments relating to the 2017/18 season (31 July 2017: $135 million). 2 Represents the average price for milk supplied on standard terms of supply. The Fonterra Farmgate Milk Price Statement sets out information about the Farmgate Milk Price as calculated in accordance with the Farmgate Milk Price Manual and the price for milk supplied on standard terms. It can be found in the ‘Investors/Farmgate Milk Prices’ section of the Fonterra website. INVESTMENTS 7 EQUITY ACCOUNTED INVESTMENTS The Group’s significant equity accounted investments are listed below. The ownership interest in these entities is 51 per cent or less and the Group is not considered to exercise a controlling interest. Equity accounted investees with different balance dates from that of the Group are due to legislative requirements in the country the entities are domiciled or are aligned with their other investors’ balance dates or to align with the milk season. EQUITY ACCOUNTED INVESTEE NAME COUNTRY OF INCORPORATION AND PRINCIPAL PLACE OF BUSINESS AS AT 31 JULY 2018 AS AT 31 JULY 2017 OWNERSHIP INTERESTS (%) DMV Fonterra Excipients GmbH & Co. KG Beingmate Baby & Child Food Co., Ltd Falcon Dairy Holdings Limited Germany China Hong Kong All investees have balance dates of 31 December. 50 18.8 51 50 18.8 51 Beingmate Baby & Child Food Co., Ltd. (Beingmate) As part of Fonterra’s long-term investment in the China market Fonterra holds an 18.8 per cent shareholding in Beingmate. The investment is recognised in the Consumer and Foodservice Greater China operating segment. During the year Beingmate’s share price has traded significantly below the share price at the time Fonterra acquired its investment, and also below the base share price used in the valuation assessments at 31 July 2017 and 31 January 2018. As a result, the carrying value of the investment has been assessed for impairment at 31 July 2018. To assess the recoverable amount of the investment a fair value less costs to sell methodology has been applied. The fair value of the investment has been determined using an estimate of what a market participant would pay for a similar long-term strategic equity stake in Beingmate under current market conditions. The key assumptions used in determining the fair value are the base share price and the net premium above the base share price (acquisition premium) that would be paid for a long-term strategic investment of a similar size. This valuation methodology requires judgement, and is Level 3 in the fair value hierarchy as it is not based on market observable inputs. 98 Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 7 EQUITY ACCOUNTED INVESTMENTS CONTINUED The assumptions underlying the calculation of the fair value of the 18.8 per cent strategic investment in Beingmate are: RMB PER SHARE Weighted average share price period Weighted average base price Net premium (including costs to sell) Implied value per share AS AT 31 JULY 2018 AUDITED 31 JANUARY 2018 UNAUDITED 31 JULY 2017 AUDITED 30 trading days  up to 31 July 2018 4.91 0.48 5.39 15 trading days from 22 January 2018 5.36 0.52 5.88 30 trading days pre-trading halt date up to 10 July 2017 13.66 2.45 16.11 Base share price assumption For the year ended 31 July 2018, to remove the impact of market volatility, a 30 trading-day period (20 June 2018 to 31 July 2018) was used to determine the base share price. The closing share price as at 31 July 2018 was RMB5.26 per share. The shares are traded on the Shenzhen stock exchange and accordingly the share price changes regularly, including during the period between balance date and the date these financial statements were authorised for issue. A change in the base share price to RMB4.50 per share would lead to elimination of the $18 million excess of recoverable amount over the carrying amount. For the six months ended 31 January 2018, to remove the impact of market volatility, a 15 trading-day period immediately after the forecast earnings downgrade announced by Beingmate on the 21 January 2018 was used (22 January 2018 to 9 February 2018). It was appropriate to use information from immediately after the reporting date as the Beingmate share price continued to decline despite no new information being provided to the market. This was considered the most appropriate period as the market had fully reflected the earnings downgrade impact. For the year ended 31 July 2017, Beingmate shares were on a trading halt from 12 July 2017 to 4 September 2017, therefore in the absence of an active market, the period immediately before the trading halt (26 May to 10 July 2017) was considered the most appropriate period to determine the base price given that during this period the shares traded at a relatively stable range. Net premium assumption The acquisition premium reflects that a market participant would expect to pay a premium above the quoted share price to acquire a long term strategic investment. The premium is determined by considering recent transaction data and the characteristics of the investment and is calculated relative to the base share price. The amount attributed to the acquisition premium reflects that Beingmate is an established local participant in a growth market and has a number of brands registered under the new regulations effective 1 January 2018. The significant reduction in the acquisition premium from 31 July 2017 reflects the poor financial performance, reduction in market share, and the operational and governance challenges experienced by Beingmate during the year. As at 31 July 2018 the valuation assessment is not sensitive to a reasonable change in the acquisition premium. Carrying value of the investment The carrying value of the investment in Beingmate has reduced from the prior year primarily due to an impairment loss recognised in the 31 January 2018 interim financial statements. As at 31 July 2018 the carrying value of the investment is supported by the fair value assessment therefore no further impairment has been recorded. A reconciliation of the carrying amount of the investment is shown below. GROUP $ MILLION AS AT 31 JULY 2018 AUDITED 31 JANUARY 2018 UNAUDITED 31 JULY 2017 AUDITED Opening balance Share of losses Impairment loss Effect of movement in exchange rates Closing balance 617 (34) (405) 26 204 617 (28) (405) 60 244 740 (41) (35) (47) 617 99 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 FINANCIAL RISK MANAGEMENT 8 FINANCIAL RISK MANAGEMENT Overview 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 optimisation of the return on assets. Financial risk management is centralised, which supports compliance with the financial risk management policies and procedures set by the Board. KEY FINANCIAL RISK MANAGEMENT ACTIVITIES Market risks The Group uses various derivative financial instruments to manage its exposure to changes in foreign currency exchange rates, interest rates and commodity prices. Liquidity risk The Group actively manages its minimum on-hand cash facilities, access to committed funds and lines of credit and the maturity profile of its financial obligations. For further detail refer to Note 5. Capital management The Group actively manages its capital structure through leverage and coverage ratios. The Fonterra Shareholders’ Fund removes the redemption risk associated with Co-operative shares. For further detail refer to Note 3. OTHER 9 TAXATION Taxation – income statement The total taxation expense in the income statement is summarised as follows: Current tax expense Prior period adjustments to current tax Deferred tax movements: – Origination and reversal of temporary differences Tax expense GROUP $ MILLION 31 JULY 2018 31 JULY 2017 81 (5) (34) 42 97 (25) (52) 20 9 TAXATION CONTINUED The taxation charge that would arise at the standard rate of corporation tax in New Zealand is reconciled to the tax expense as follows: (Loss)/profit before tax Prima facie tax expense at 28% Add/(deduct) tax effect of: – Effect of tax rates in foreign jurisdictions – Non-deductible expenses/additional assessable income – Non-assessable income/additional deductible expenses – Prior year under provision Tax expense before distributions and deferred tax Effective tax rate before distributions and deferred tax1 Tax effect of distributions to farmer shareholders Tax expense before deferred tax Effective tax rate before deferred tax1 Add/(deduct) tax effect of: – Origination and reversal of other temporary differences – Losses of overseas Group entities not recognised Tax expense Effective tax rate1 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 2018 31 JULY 2017 (154) (43) (27) 168 (24) (5) 69 NA (27) 42 NA (2) 2 42 NA 20 54 765 214 (33) 54 (30) (25) 180 23.5% (163) 17 2.2% 2 1 20 2.6% 20 52 1 The effective tax rate is the tax charge on the face of the income statement expressed as a percentage of the profit before tax. For the year ended 31 July 2018 the Group has recorded a net loss before tax, as a result the calculation of an effective tax rate is not applicable. 100 101 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS Notes to the Summary Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2018 Independent Auditor’s Report 10 CONTINGENT LIABILITIES, PROVISIONS AND COMMITMENTS TO THE SHAREHOLDERS OF FONTERRA CO-OPERATIVE GROUP LIMITED Contingent liabilities In the normal course of business, Fonterra, its subsidiaries and equity accounted investees, are exposed to claims and legal proceedings that may in some cases result in costs to the Group. In early August 2013, Fonterra publicly 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 the High Court of New Zealand and separate Singapore arbitration proceedings against Fonterra in relation to the WPC80 precautionary recall. The New Zealand High Court proceedings have been stayed pending completion of the Singapore arbitration. On 1 December 2017, the Singapore arbitration panel issued its award (judgement), finding in favour of Danone and ordered Fonterra to pay €105 million ($183 million) in recall costs to Danone. In addition to the recall costs, Fonterra was also required to pay Danone €29 million ($49 million) representing interest on the award amount and Danone’s costs in connection with the arbitration proceedings. Fonterra paid the award amount in December 2017 and the interest and costs in March 2018. It is unclear whether Danone will continue to pursue the New Zealand High Court proceedings that were stayed pending the decision in the Singapore arbitration. Due to the uncertainty regarding whether Danone will seek to re-initiate these proceedings, and the nature and scope of these potential proceedings in light of the arbitration findings and award, no amount has been recognised in relation to these proceedings. There are no additional claims or legal proceedings in respect of this matter that require provision or disclosure in these financial statements. The Group has no other contingent liabilities as at 31 July 2018 (31 July 2017: nil). 11 NET TANGIBLE ASSETS PER SECURITY Net tangible assets per security1 $ per listed debt security on issue $ per equity instrument on issue Listed debt securities on issue (million) Equity instruments on issue (million) 1 Net tangible assets represents total assets less total liabilities less intangible assets. GROUP AS AT 31 JULY 2018 AS AT 31 JULY 2017 5.18 1.94 603 1,612 6.86 2.57 603 1,607 The summary financial statements comprise: – the statement of financial position as at 31 July 2018; – the income statement for the year then ended; – the statement of comprehensive income for the year then ended; – the statement of changes in equity for the year then ended; – the cash flow statement for the year then ended; and – the notes to the summary financial statements. OUR OPINION The summary financial statements are derived from the audited financial statements of Fonterra Co-operative Group Limited (the Company), including its controlled entities (the Group) for the year ended 31 July 2018. In our opinion, the accompanying summary financial statements are consistent, in all material respects, with the audited financial statements, in accordance with FRS-43: Summary Financial Statements issued by the New Zealand Accounting Standards Board. SUMMARY FINANCIAL STATEMENTS The summary financial statements do not contain all the disclosures required by New Zealand equivalents to International Financial Reporting Standards (NZ IFRS). Reading the summary financial statements and the auditor’s report thereon, therefore, is not a substitute for reading the audited financial statements and the auditor’s report thereon. The summary financial statements and the audited financial statements do not reflect the effects of events that occurred subsequent to the date of our report on the audited financial statements. THE AUDITED FINANCIAL STATEMENTS AND OUR REPORT THEREON We expressed an unmodified audit opinion on the audited financial statements in our report dated 12 September 2018. That report also includes the communication of key audit matters. Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current year. RESPONSIBILITIES OF THE DIRECTORS FOR THE SUMMARY FINANCIAL STATEMENTS The Directors are responsible, on behalf of the Company and Group, for the preparation of the summary financial statements in accordance with FRS-43: Summary Financial Statements. AUDITOR’S RESPONSIBILITY Our responsibility is to express an opinion on whether the summary financial statements are consistent, in all material respects, with the audited financial statements based on our procedures, which were conducted in accordance with International Standard on Auditing (New Zealand) 810 (Revised), Engagements to Report on Summary Financial Statements. AUDITOR INDEPENDENCE We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners (PES 1) issued by the New Zealand Auditing and Assurance Standards Board and the International Ethics Standards Board for Accountants’ Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements. Bruce Hassall was appointed an Independent Director and Chair of the Audit and Finance Committee (AFC) of the Company on 2 November 2017. Bruce Hassall was Chief Executive Officer of PricewaterhouseCoopers to 30 September 2016 when he retired from the firm. At the time of his appointment, the Board of the Company (the Board) made the decision that Bruce Hassall would not be involved in the appointment of the Group’s auditor or the setting of audit fees for three years from the date of his appointment. Scott St John, Independent Director and member of the AFC, would act as Chair of the AFC for these matters and the Chair of the Board will join the AFC for deliberation. In addition, the engagement partner on the audit has direct access to the Chair of the Board to address any actual or perceived auditor independence threats. 102 103 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS Independent Auditor’s Report CONTINUED Brent Goldsack was appointed a Director of the Company on 2 November 2017. Brent Goldsack retired as a partner of PricewaterhouseCoopers on 22 September 2017. Brent Goldsack was not involved in the provision of any audit services to the Group during his time as a partner of PricewaterhouseCoopers. Bruce Hassall and Brent Goldsack had no financial relationship with PricewaterhouseCoopers upon their appointment as Directors of the Company. Our firm carries out assurance services for the Group to assess risks and controls in relation to the Group’s food supply chain as well as other assurance and attestation services. Partners and employees of our firm may deal with the Group on normal terms within the ordinary course of trading activities of the Group. These matters have not impaired our independence as auditor of the Group. WHO WE REPORT TO This report is made solely to the Company’s shareholders, as a body. Our audit work has been undertaken so that we might state those matters which we are required to state to them in an auditor’s 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 12 September 2018 Statutory Information FOR THE YEAR ENDED 31 JULY 2018 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 A 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 BBB+ 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 the NZX Main Board/Debt Market 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. The Company was issued with a waiver of Rule 11.1.1 to enable it to decline to accept or register transfers of Capital Notes (NZDX listed debt securities FCGHA) if such transfer would result in the transferor holding or continuing to hold Capital Notes 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 not a multiple thereof. The effect of this waiver is that the minimum holding amount in respect of the Capital Notes will, at all times, be $5,000 in aggregate and can only be transferred in multiples of $1,000. Fonterra Co-operative Group Limited (Fonterra) was issued with a ruling in respect of Rule 1.7.1(d) of the Fonterra Shareholders’ Market Rules on 27 June 2017 by NZX. The effect of this ruling was to not preclude the appointment of Mr Bruce Hassall to the position of an independent director of Fonterra, by virtue of a child of Mr Hassall being employed in a non-decision making and non-senior role at Fonterra. Fonterra was issued with a ruling in respect of Rule 5.1.2(c) on 22 November 2016 by NZX. The effect of this ruling is that Fonterra’s internal governance resolutions are considered to be matters that do not require the NZX to approve a notice of meeting under Rule 5.1.1. Fonterra was issued with a waiver of Rule 3.2.1(c) on 31 August 2016 by the NZX, to the extent that such Rule requires Fonterra to have a minimum of two independent directors or, if Fonterra has eight or more directors, three or one-third of the total number of directors, whichever is greater. This waiver was granted in connection with the resignation of Mr John Waller and applied for a period ending on the earlier of the appointment of a new independent director or three months from the date of the waiver. NZX TRADING HALTS No trading halts were placed on Fonterra securities by NZX Regulation in the financial year ended 31 July 2018. 104 105 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR FINANCIALS 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 107. 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 (Loss)/profit for the period Add: Depreciation Add: Amortisation Add: Net finance costs Add: Taxation expense Total EBITDA Add/(Less): Time value of options Add: Reduction in the carrying value of investment in Beingmate Add: WPC80 recall costs Less: Gain on sale of Darnum manufacturing plant Total normalisation adjustments Normalised EBITDA Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised EBIT (Loss)/profit for the period Add: Net finance costs Add: Taxation expense Total EBIT Add: Normalisation adjustments (as detailed above) Total normalised EBIT GROUP $ MILLION 31 JULY 2018 31 JULY 2017 (196) 446 98 416 42 806 5 439 196 – 640 1,446 745 435 91 355 20 1,646 1 76 – (42) 35 1,681 GROUP $ MILLION 31 JULY 2018 31 JULY 2017 (196) 416 42 262 640 902 745 355 20 1,120 35 1,155 Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised earnings per share (Loss)/Profit for the period Add: Normalisation adjustments (as detailed above) Add: Normalisation adjustment to net finance costs (Less)/Add: Tax on normalisation adjustments Total normalised earnings Less: Share attributable to non-controlling interests Net normalised earnings attributable to equity holders of the Parent Weighted average number of shares (thousands of shares) Normalised earnings per share ($) 106 GROUP $ MILLION 31 JULY 2018 31 JULY 2017 (196) 640 26 (63) 407 (25) 382 1,610,005 0.24 745 35 – 12 792 (11) 781 1,604,744 0.49 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. EBIT EBITDA means earnings before interest and tax and is calculated as profit for the period before net finance costs and tax. 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 net interest bearing debt means net interest-bearing debt including the effect of debt hedging. Farmgate Milk Price Gearing ratio 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. is calculated as economic net interest-bearing debt divided by total capital. Total capital is equity excluding the hedge reserves, plus economic net interest-bearing debt. Grade free farmers who consistently exceed our highest milk quality standards. 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 specific events or circumstances that are outside the control of the business, or relate to major acquisitions, disposals or divestments, or are not expected to occur frequently. It also includes fair value movements if they are non-cash and have no impact on profit over time. Unusual transactions by size are those that are unusually large in a particular accounting period. Normalised EBIT means profit for the period before net finance costs and tax, and after normalisation adjustments. Normalised earnings per share (EPS) means normalised profit after tax attributable to equity holders divided by the weighted average number of shares for the period. Normalised profit after tax means net profit after tax after normalisation adjustments, and the interest and tax impacts of those normalisation adjustments. Normalised segment earnings means segmental profit for the period before net finance costs and tax, and after normalisation adjustments. Payout Retentions Return on capital means the total cash payment to farmer shareholders. It is the sum of the Farmgate Milk Price (kg/MS) and the dividend per share. Both of these components have established policies and procedures in place on how they are determined. means net profit after tax attributable to farmer shareholders divided by the number of shares at 31 May, less dividend per share. is calculated as normalised EBIT less equity accounted investees’ earnings divided by capital employed. Capital employed is calculated as the average for the period of: net assets excluding net interest-bearing debt, deferred tax balances and brands, goodwill and equity accounted investments. Segment earnings means segmental profit for the period before net finance costs and tax. Working Capital is calculated as current trade receivables plus inventories, less current trade payables and accruals. It excludes amounts owing to suppliers and employee entitlements. 107 FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR DIRECTORY Directory FONTERRA BOARD OF DIRECTORS AUDITORS PricewaterhouseCoopers Level 22, PwC Tower 188 Quay Street Auckland 1010 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 11, Deloitte Centre 80 Queen Street Auckland Central 1010 New Zealand INVESTOR RELATIONS ENQUIRIES Phone +64 9 374 9000 investor.relations@fonterra.com www.fonterra.com John Monaghan Clinton Dines Brent Goldsack Bruce Hassall Simon Israel Andrew Macfarlane Nicola Shadbolt Donna Smit Scott St John Ashley Waugh John Wilson FONTERRA MANAGEMENT TEAM Miles Hurrell Marc Rivers Lukas Paravicini Robert Spurway Judith Swales Kelvin Wickham Mike Cronin Mark Van Zon REGISTERED OFFICE Fonterra Co-operative Group Limited Private Bag 92032 Auckland 1142 New Zealand 109 Fanshawe Street Auckland Central 1010 New Zealand Phone +64 9 374 9000 Fax +64 9 374 9001 108 FONTERRA ANNUAL REPORT 2018This document is printed on environmentally responsible paper stocks. 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