Fonterra Annual Report 2018

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FY2018 Annual Report · Fonterra

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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

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

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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

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OUR STORY STARTS HERE

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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

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018

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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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018

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% 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

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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.

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FONTERRA ANNUAL REPORT 2018

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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

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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.

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FONTERRA ANNUAL REPORT 2018

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.

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FONTERRA ANNUAL REPORT 2018

LETTER FROM THE CHAIRMAN

Meeting our
commitments

J
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C
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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.

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

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

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

FONTERRA ANNUAL REPORT 2018

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.

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

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

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

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.

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

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

FONTERRA ANNUAL REPORT 2018

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.

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

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

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.

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.

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

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.

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

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.

FONTERRA ANNUAL REPORT 2018

KickStart
Breakfast

This year, KickStart
Breakfast grew
to 976 clubs and
served more than
125,000 breakfasts
every school week.

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.

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

Camila Gómez receives SoproleTM
educational scholarship from
Gustavo Rencoret, Senior Corporate
Counsel, Soprole, in Chile.

team helping at FareShare
food kitchen.

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

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.

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

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

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

FONTERRA ANNUAL REPORT 2018

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.

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

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

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

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.

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.

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

OUR PEOPLE

Board of Directors

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

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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

OUR PEOPLE

Management Team

5
7

1. 2. 3. 4. 5. 6. 7. 8.

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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

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

0.14

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.

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

2014

2015

2016

2017

2018

2014

2015

2016

2017

2018

Normalised EPS and Dividend Yield4

Leverage

EPS (cents)

Dividend Yield

Gearing %

Debt/EBITDA

7.3%

4.4%

6.7%

2015

2016

2017

1.7%

2018

1.6%

2014

49.7

4.7x

42.3

4.9x

48.4

4.5x

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

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%).

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%)

(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%

cents

FONTERRA ANNUAL REPORT 2018

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

0.14

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.

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

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%)

30%

(2%)

(1%)

(59%)

(7%)

1,472

1,346

555

791

(30)

879

1,473

1,239

428

811

(38)

194

943

309

232

33%

1,275

1,165

8.3%

9.8%

–

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

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%).

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

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 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

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

551

(626)

525

580

(16)

278

(329)

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.

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

Asia LME

1,773 million

Oceania LME

1,656 million

FONTERRA ANNUAL REPORT 2018

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%

(5%)

165

117

176

525

204

194

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.

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

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

(19%)

(15%)

262

269

(3%)

(9)

1 (1,734%)

1 Excluding one-off milk powder sales in FY17.

FONTERRA ANNUAL REPORT 2018

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

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

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

22.2

3,965

22,275

1,041

503

157

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%

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%

FONTERRA ANNUAL REPORT 2018

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)

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%

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

343

149

112

269

120

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

515

433

444

419

433

18.1%

18.8%

20.8%

643

627

599

526

520

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%

116

115

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%

FONTERRA ANNUAL REPORT 2018

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

262

1.9%

(9)

335

269

229

183

(40)

8.6%

(22.0%)

(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.

FONTERRA ANNUAL REPORT 2018

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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR CORPORATE GOVERNANCE

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.

As at 31 July 2017

FONTERRA MANAGEMENT TEAM

GENDER

FTE

MALE

86%

FEMALE

14%

GENDER DIVERSE

UNDECLARED

–

As at 31 July 2018
The gender composition of Fonterra Management Team members remains unchanged between 2017 and 2018.

FONTERRA MANAGEMENT TEAM

GENDER

FTE

MALE

86%

FEMALE

14%

GENDER DIVERSE

UNDECLARED

–

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

MALE

75%

FEMALE

25%

GENDER

GENDER DIVERSE

UNDECLARED

–

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

MALE

82%

FEMALE

18%

GENDER

GENDER DIVERSE

UNDECLARED

–

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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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

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

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

–

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.

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.

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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR CORPORATE GOVERNANCE

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

103,275

242,340

979,7021

1,182,144

LTI

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:

(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

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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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.

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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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.

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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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

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.

FONTERRA ANNUAL REPORT 2018

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

20,438

(17,279)

3,159

192

(651)

(572)

(873)

(400)

(196)

(405)

(12)

262

(439)

(416)

(154)

(42)

(196)

(221)

(196)

19,232

(15,968)

3,264

190

(641)

(550)

(810)

(334)

–

(35)

1,120

(389)

(355)

765

(20)

745

734

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

–

(1)

(255)

(2)

–

(237)

(433)

(468)

(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

745

128

(124)

(1)

–

(2)

(3)

–

(2)

(3)

(2)

743

737

743

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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

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

6,533

11,666

6,349

5,887
934
(364)
(267)

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

4,731

5,151

547

148

5,863

10,594

7,248

5,858
1,637
(552)
192

7,140

108

7,248

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

–

(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

–

(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)

–

5 7,140

–

(221)

24 (247)

24 (468)

– (482)

–

108 7,248

–

(196)

(237)

(433)

(482)

(28)

–

188

–

5,887

934

(364)

(267)

29 6,219

130 6,349

(428)

–

(124)

–

128

–

6 6,859

88 6,947

–

(1)

734

737

– (481)

–

(5)

745

(2)

743

–

(481)

(28)

As at 31 July 2017

5,858

1,637

(552)

192

5 7,140

108 7,248

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

GROUP $ MILLION

31 JULY 2018

31 JULY 2017

PERFORMANCE

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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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

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

–

176

Revenue from sale of goods

16,306

2,159

1,865

1,564

1,534

7,122

–

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

(8)

3,152

(373)

(289)

(183)

(368)

(1,213)

(31)

(444)

(2,496)

1,472

(808)

111

(1)

–

(9)

–

(1)

–

(2)

(13)

879

176

165

117

525

–

(196)

(5)

–

(439)

–

(439)

–

(5)

(9)

–

678

176

(274)

117

(9)

(493)

(5)

(37)

192

–

(493)

902

–

(439)

(196)

(5)

262

(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

–

515

–

1.41

266

(2)

204

(65)

0.75

578

5.59

0.27

(4.18)

22.20

1,798

(683)

4,123

(29)

(70)

(26)

352

142

214

877

(25)

788

(59)

100

(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

943

–
(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

–

–
–

–

194

204

–

–
–

–

(76)
–

–

–
–

(4)

576

–

(76)
–

–

–
–

(365)

1,155

–

–
–

(76)
(1)

(365)

1,120

984

194

128

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.

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,

goodwill and equity accounted investments.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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

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

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

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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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.

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.

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

6,199

6,263

(393)

(435)

5,446

155

5,601

Includes Fonterra Co-operative Support Loan balance of $177 million (31 July 2017: $135 million) which are netted against amounts owing to suppliers.

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

500

4,573

6,263

1,054

2,849

–

431

4,334

(919)

(2,551)

(7)

–

(600)

(4,077)

–

(24)

–

293

270

–

(61)

–

304

1,128

131

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

499

4,342

6,352

951

2,698

–

525

4,174

(1,249)

(2,713)

(6)

–

(3,968)

–

(10)

–

(138)

(148)

–

(158)

(157)

–

164

854

137

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.

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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

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.

18.8

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.

Notes to the Summary Financial Statements CONTINUED

FOR THE YEAR ENDED 31 JULY 2018

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

FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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

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

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

(5)

(34)

(25)

(52)

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)

(27)

(2)

765

214

(33)

(30)

(25)

180

23.5%

(163)

2.2%

2.6%

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 2018OUR 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

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FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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

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FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR 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)

1,681

GROUP $ MILLION

31 JULY 2018

31 JULY 2017

(196)
416
42

262

640

902

745
355
20

1,120

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.

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FONTERRA ANNUAL REPORT 2018FONTERRA ANNUAL REPORT 2018OUR DIRECTORY