Fonterra Annual Report 2019

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FY2019 Annual Report · Fonterra

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You,
me,
us
together

9
1
0
2

T
R
O
P
E
R
L
A
U
N
N
A

Tātou, tātou

We know
when we
work together
we can create
goodness.

CONTENTS

02
Letter from
our Chairman
Page 02

Letter from
our CEO
Page 06

14
Our Co-operative
Difference
Page 14

Working with
our farmers
Page 16

Our new direction
Page 10

Honour Roll for Milk
Quality Excellence
Page 20

22
Farmer spotlight
Page 22

Employee spotlight
Page 24

Our Board
Page 26

Our Management
Team
Page 28

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30
Our year
in review
Page 30

Our sustainability
approach
Page 32

Nutrition
Page 34

Environment
Page 36

Community
Page 38

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40
Group Financial
Metrics
Page 40

Group Overview
Page 42

Ingredients
Page 46

Consumer and
Foodservice
Page 48

China Farms
Page 52

Historical Financial
Summary
Page 54

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62
Corporate
Governance
Page 62

76
Summary Financial
Statements
Page 76

116
Directory
Page 116

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LETTER FROM THE CHAIRMAN

A year of
fundamental
change

“

FY19 was a year of significant
challenges and change for
our Co-op as we continued to
fundamentally change the culture
and strategy of our organisation.
John Monaghan
CHAIRMAN

”

FY19 was a year of significant challenges and change for
our Co-op as we continued to fundamentally change the
culture and strategy of our organisation.

We started by looking at our Co-op’s purpose. We did a lot
of listening to people within the Co-op, to our customers,
partners and other stakeholders. They told us that we
need to show up differently, but also that this Co-op’s
intergenerational success was what motivated them.

Our new purpose is already guiding our decision making,
culture and behaviour as an organisation. It’s more than
words. You can see the progress reflected in the numbers.
We set ourselves a target to reduce our debt by $800 million.
With the addition of the proceeds from the sale of DFE
Pharma, which was completed outside the reporting period,
we intend to reduce debt by approximately $1 billion. Our
average capital expenditure for the previous six years has
been more than $1 billion. This year it was $600 million.
We have reduced headcount by more than 1,400 people,
frozen salaries for our people earning over $100,000 and
decided that we won’t be paying incentive bonuses for FY19.

We’ve made a good start, but we have more to do.

Underlying business performance
Our headline loss of $605 million doesn’t reflect the
commitment we made to you last year and frankly,
isn’t good enough.

Our write-down decisions and other one-offs took us
from what would have been a modest profit by our
standards of $269 million, to a loss-making position
for the year. We know we need to do more to live up
to our shared expectations of our Co-op.

Underneath that, the majority of our business is delivering.
Our normalised earnings for FY19 were 17 cents per share
and critically, the business units that are the foundation
of our new strategy – New Zealand Ingredients and
Foodservice – have delivered.

New Zealand Ingredients, our largest business, continued
to perform well. Gross margin was $1,332 million, up 3%
on last year due to favourable pricing.

Our Foodservice performance also improved on last year,
with gross margin up 10%.

At $6.35 per kgMS the Farmgate Milk Price was the third
year of sustainable prices. The Co-op generated $9.7 billion
for milk payments to our farmer owners in FY19.

Farmgate Milk Price for
2018/19 season

$6.35 per

kgMS

New Zealand milk collections
for 2018/19 season

1,523 million

kgMS

Share price, down 26.4%
year/year 1

$3.77

Dividend

0 No

dividend

1 For the period 31 July 2019
2 Fonterra Shareholders Fund (FSF) unit price as at 31 July 2019
Note: the Fonterra unit price as at 25th September 2019 was $3.22 NZD

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019Shareholder Value
Our decision to not pay a dividend and significantly
write-down a small number of assets came as a surprise
to many. I understand and share the frustration that farmers
and unit holders rightfully feel, and the impact that these
decisions have had on our share price and the balance sheets
of our owners in an already challenging environment.

We don’t make impairments lightly. Once made, most
cannot be fully reversed. While painful, they were the
right decisions.

Our Co-op reviews the value of our assets every year.
We make an overall assessment of their value and future
earnings potential. The process requires us to make a series
of judgement calls. Small changes to our assumptions can
cause meaningful changes in the valuation.

Our assessment is then reviewed by external auditors,
along with the rest of our financials, every year.

Our Co-op’s dividend policy has been to pay 65%-75%
of adjusted Net Profit After Tax over time. The Board’s
decision not to pay a dividend for FY19 was part of our
stated intention to reduce the Co-op’s debt, which is
in everybody’s long-term interests.

Our unit price finished the financial year down 26.4% at
$3.77. Its recovery will be a priority for us in FY20. We will
improve our performance in FY20 and we expect the
market to respond accordingly.

Leadership changes
In January, our Co-op mourned the passing of former
Chairman John Wilson. John retired from our Board in
November 2018 to focus on battling a serious illness.
John will be remembered for his contribution as a
farmer owner, inaugural Chairman of the Fonterra
Shareholders’ Council on merger, as a Farmer Elected
Director from 2003, and as Chairman from 2012.

Nicola Shadbolt (9 years) and Ashley Waugh (3 years)
also retired by rotation at the 2018 Annual Meeting. We
welcomed back Leonie Guiney to the Board and were joined
by two new Farmer Directors, Peter McBride and John Nicolls.

New Strategy
Developing our new strategy was a key priority for the
Board and senior Management in FY19.

We started development of the strategy by thinking about
what we have learned from past decisions and agreeing
what we want our Co-op to stand for today.

You need to embrace the best from the past and adapt
it for the future.

Eighteen months ago, we may have said we’re a global dairy
giant here to make a difference in the lives of two billion
people through a volume ambition of 30 billion litres of
milk by 2020.

Today, we stand for value. We’re a New Zealand dairy
farmers’ co-op, doing smart, innovative things with
New Zealand milk to create value for our owners,
customers, and communities in which we work and live.

We have the best milk in the world here at home.
By championing it, we believe people will continue to
seek out and pay a premium for products backed by our
unique provenance story – our Co-op heritage, grass-fed
New Zealand milk, backed by ethical and sustainable
farming practices.

We will prioritise New Zealand milk, complemented by
milk components sourced offshore only when required.
As a result, we plan to start exiting our off-shore milk pools.

Scale ingredients have always been the engine room of our
Co-op. Our new strategy will build off that by increasing our
targeted research and development, energy and investment
into our speciality ingredients business – products in
medical nutrition and sports and active nutrition – which
is performing well and has strong growth potential.

We will focus on four ingredient categories that reflect
the way consumers enjoy dairy as part of their lifestyles:
Paediatrics, Medical and Ageing, Sports and Active, and
Core Dairy.

Alongside that, we want a leaner consumer business that
is focused on the products and places where we think we
can create sustainable and superior value. The consequence
of that is that we plan to be in less categories, and will likely
reduce our product portfolio dramatically. For example, we
currently have over 600 product variations of Anlene. In the
future, it will be closer to 50.

Our Foodservice business is already the leader in China,
we want to push out further to lead in Asia Pacific and form
new partnerships to help us expand into other markets
without the need for large amounts of capital.

The success of the strategy will be measured by the health
of our business, our environment, and our people. It comes
with performance targets, including Return on Capital,
greenhouse gas emissions, and the engagement levels
of our farmers and staff.

It sounds simple, the best strategies often are. But simplicity
shouldn’t be confused with a lack of ambition.

Our earnings range for FY20 starts at 15-25 cents
per share, but the five-year plan is to deliver a target
of 50 cents per share.

Our starting earnings range reflects our change in culture.
We will earn the right to make ambitious decisions by first
doing the basics right and returning our balance sheet to a
position of strength. That will give us options to go for the
opportunities that we create in the future.

To use a cricketing analogy, we want to build an innings by
hitting singles, before trying to hit the ball out of the park.

We won’t have it all our own way, but we’re confident that,
implemented well, the strategy will bring a new period of
success for our Co-op.

On behalf of the Board I’d like to thank you for your support
and loyalty this year.

This simple change in how we see ourselves leads us
to make fundamentally different decisions.

John Monaghan

“ We have the best milk in
the world here at home.
By championing it, we
believe people will
continue to seek out
and pay a premium for
products backed by our
unique provenance story –
our Co-op heritage,
grass-fed New Zealand
milk, backed by ethical
and sustainable
farming practices.”

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019LETTER FROM THE CEO

Resetting
the business

“

In FY19 we made decisions to set
us up for future success. Many of
these were painful, but they were
needed to reset our business and
achieve success in the future.
Miles Hurrell
CEO

”

I would like to start this letter by acknowledging that this
year has been incredibly tough. I also want to thank our
farmer owners, unit holders and employees for their loyalty.
I know our performance impacts you and your families and
that’s why your support means so much.

In FY19 we made decisions to set us up for future success.
Many were painful, but they were needed to reset our
business and achieve success in the future.

Reflecting changing realities in our asset
valuations and future earnings
We made the decision to reduce the carrying value of several
of our assets and take account of one-off accounting
adjustments. These totalled $826 million, which contributed
to a Net Loss After Tax of $605 million for FY19.

As we do every year, we took a hard look at our asset
valuations and future earnings potential. When it came to
DPA Brazil, Fonterra Brands New Zealand and China Farms,
we saw there were either some changes in their local
economies, increased competition or business challenges
impacting their forecast earnings. This meant we needed
to reduce their carrying value.

Clearly, any write-down of an asset is not done lightly. But
what I hope people can also see is that we’re leading the
Co-op with a clear line of sight on potential opportunities
as well as the risks.

Lifting the level of discipline
I’m pleased with the progress we’ve made with our financial
discipline. You can see it in our improved cashflow, reduced
debt and significant cost savings. We have done this through
a commitment to our three-point plan – to take stock, get
the basics right and ensure more realistic forecasts.

As part of taking stock of our business we reviewed
our asset portfolio and made significant calls on three
assets we identified as no longer core to our strategy.
We sold Tip Top for $380 million and have sold our share
of DFE Pharma for $633 million. We also wound back
our relationship with Beingmate and are now looking
at options to reduce our financial stake in this company.

$826m

Reduction in Net Profit After Tax attributable to
equity holders, as a result of the strategy review

Net Loss After Tax

Reduction in capital expenditure

$605m
$261m
$185m
$1,095m

Reduction in normalised operating expenses

Free cashflow, an improvement of 83%

Reduction in debt

$469m
$1billion

Proceeds from all announced asset sales
available for debt reduction1

1 Final amount dependent on exchange rates and final

settlement adjustments

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019Our new strategy will:
• Prioritise New Zealand milk.

• Grow our sales of Sports and Active,

Medical and Aging and Paediatric ingredients.

• Develop new Foodservice markets.

• Only make consumer products where we

have a right to win.

• Lift our research and development spend.

• Use milk components and non-dairy

ingredients sourced from around the world.

• Collaborate more based on intellectual

property and skills.

• Divest non-core businesses.

• Reduce debt.

Taking stock of our business didn’t stop there. We also
kicked off a strategic review of DPA Brazil and two of our
farm-hubs in China, exited Venezuela and announced the
closure of our Dennington manufacturing site in Australia.

This sort of discipline around reviewing our asset portfolio
isn’t a one-off. We are continuously reviewing our assets
and making sure they are meeting the changing needs of
the Co-op.

As part of the three-point plan, we also set a goal in FY19 to
reduce our debt by $800 million. Tip Top made a significant
contribution and, along with the sale of DFE Pharma, we
expect to exceed this target in FY20.

We also set ourselves a target to reduce capital expenditure
by $200 million in FY19 and we achieved $261 million.
We reduced our operating expenses by $185 million, year
on year, which means we exceeded our target of bringing
them back to FY17 levels within two years.

This takes discipline right across the organisation – so, I’m
proud of the teamwork involved in achieving this.

Getting clear on why we exist – our purpose
In FY19 we got clear on our purpose and why we exist:
Our Co-operative, empowering people to create goodness
for generations. You, me, us together. Tātou, tātou.

It is important that we don’t just focus on our immediate
priorities but also lift our sights to the horizon and see the
opportunity we have to create goodness for generations
to come – and that’s what our purpose helps us do.

We want a purpose that inspires our Co-op, unites us
with others, drives action and guides our choices so we
can move forward together.

Completing our new strategy
The last call for the year has been finalising and sharing
our new strategy.

It’s a strategy which recognises we are a New Zealand
co-op, doing amazing things with New Zealand milk to
enhance people’s lives and create value for customers
and farmers. It’s a strategy that’s rich in innovation,
sustainability and efficiency. It unlocks value and sees
us focusing on three goals – healthy people, healthy
environment and healthy business.

This is the right strategy for us, but it requires us to make
some hard choices. We’ve looked at the big opportunities
and risks for a New Zealand dairy co-op today. We’ve also
got clear on what our strengths are and the hard realities
we have to face up to. I’m pleased that we now have a
strategy that is built from the belief that our farmers’
milk here in New Zealand is the best and most precious
in the world.

This strategy will see us focus on world-class dairy
ingredients for our customers around the world, and
innovative ingredients that meet nutrition needs right
across people’s life stages. It will also see us create new
opportunities in new ways for food service and take a more
targeted approach to opportunities in consumer brands,
focusing only where we can create sustainable value.

As I have said before, this is a fundamental change for us
– we have dropped our volume ambition and now it’s all
about value. It’s about us being much more targeted and
focused around our unique strengths.

Priorities for FY20
FY20 will be the first year delivering our new strategy.
We have four key priorities that will help us take steps
towards our goals of healthy people, healthy environment
and healthy business. They are:

1 Build a winning team
• We will introduce and successfully shift to our

new customer-led operating model.

2 Support regional New Zealand

• We will inject $10 billion into rural communities

through competitive milk price payments.

3 Reduce our environmental footprint

• Through The Co-operative Difference, we will work

with our farmer owners so that a further 1,000 farms
have a Farm Environment Plan and we will prepare
emission profile reports for all our farmer owners.

• We will continue to improve energy efficiency

and water use at our manufacturing sites.

4 Hit our financial targets. We will:

• Improve our debt position so that our debt is no

more than 3.75 times our earnings, down from 4.3.

• Reduce our capital expenditure to no more than

$500 million (down $100 million on FY19).

• Achieve a gross margin in excess of $3 billion.

• Meet our earnings guidance of 15-25 cents per share.

I am excited about our Co-op’s future. I’m energised about
laying the foundations for a sustainable and successful
co-op. We need to deliver for our farmers, deliver for our
country, and take the best of New Zealand to the world.
Let’s make it happen.

Miles Hurrell
Chief Executive Officer

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019

OUR NEW DIRECTION

Our Goals

Healthy
people

Healthy
environment

Healthy
business

Our Values

Co-operative
spirit

Do what’s
right

Challenge
boundaries

Make it
happen

Our Purpose

Our Co-operative,
Empowering people
To create goodness for generations.
You, me, us together
Ta-tou, ta-tou

Our Co-operative is made up of amazing
people, our farmer owners, employees,
and the people we connect with in our
communities.
Our Co-operative is stronger when we work
together, in the good times and in the tough
times. That’s the essence of our purpose and
the title of this report – You, me, us together
Ta-tou, ta-tou (all of us together).

Over the past 18 months we’ve taken a hard
look in the mirror. We have listened to each
other to understand what connects us, what
inspires us and how we work together
to create goodness now and for generations
to come.
This has provided us with the foundation
for a powerful purpose statement. This is
our starting point, the ‘why’ we exist, that
connects and resonates with our farmer
owners and employees.

e
v
i
t
a
r
e
p
o
-
o
C
r
u
through our new strategy O

It also reinforced the importance of our
Co-operative’s values, and the need to
change the way we behave, connecting
our strategy, our decisions and actions
to our purpose and values.
At our heart we are a New Zealand dairy
co-operative, doing amazing things with our
farmers’ milk to enhance people’s lives and
create value for farmers and customers.
We are clear what our goals are:

Healthy people
Healthy environment
Healthy business

This comes to life

FONTERRA ANNUAL REPORT 2019
Demand for dairy will
remain strong. Changing
global trends support this.

Authenticity & Provenance
Authenticity & Provenance

Healthy Living

Out of Home

Naturalness

Sustainability

We will match our
unique strengths to
consumer needs

Creating sustainable
value from our farmers’
New Zealand milk

To enhance lives, and create
value for our farmers and
customers

WE WILL CONCENTRATE ON THESE
CONSUMPTION CATEGORIES

CORE DAIRY

FOODSERVICE

PAEDIATRICS

SPORTS & ACTIVE MEDICAL & AGEING

Our
Strategy

Our strategic review has reached into all areas of our business, considering everything
we do in our portfolio and across the local and global context we work in.

Our new strategy represents a fundamental change, moving us away from our previous ambition
to be a global dairy company making a diff erence in lives around the world, to a new strategic
direction connected to our Co-operative heritage and strengths, our farmers and their families.

The world needs dairy, and demand for our New Zealand milk will continue to grow. Global trends
are towards more natural foods, and towards consumers wanting to know more about where their
food comes from, how it is made, and what impact it has on the environment and communities.

Our Co-op has unique strengths to meet these needs. Our milk provides nutrition around the
world, and our pasture-based farming systems produce it in a natural way. We have world-leading
innovation capability, dairy know-how, and deep customer relationships spanning many years in
every corner of the globe. We have serious scale and ability to execute globally, and this gives us
options to choose products and markets.

Our new strategy is driven by our clear identity as a New Zealand dairy co-operative that does
amazing things with our farmers’ milk, enhancing lives and creating value for farmers and customers.

Our New Strategy

What Needs To Change

Our strategy is to match our unique strengths to consumer
needs. Doing this will create sustainable value from our farmers’
New Zealand milk by connecting what our farmers do on
farm to what our customers value.

We will be more focused on playing in the areas we can win.
We want to continue being globally competitive in Core Dairy
(base and advanced ingredients), while growing in the categories
of Paediatrics, Sports and Active, Foodservice and Medical and
Ageing. Consumer brands will be a smaller part of our portfolio
targeted on where we can create superior value.

We will do this by linking our strategy to our purpose and
values, changing our behaviours and actions, and diff erentiating
ourselves through:

We have some realities we need to face. We’ve got work to
do to rebuild trust and rebuild the culture of a winning team.
In our home market, we’re facing growing competition from
food multi-nationals who don’t share our Co-operative ethos.
And as a farmer-owned co-operative with a long-term focus,
we need to adopt a lower risk profi le than some organisations
because we are committed to leaving a legacy for future generations.

This means reducing debt and exiting non-core investments to
get our Co-operative to a more sustainable risk and investment
profi le, to simplify our business and focus Management’s eff orts
more clearly on our primary task of adding value to our farmers’
New Zealand milk by meeting customer and consumer needs.

Innovation

To create superior value for our
customers and our Co-operative.

How We Measure Progress And Success

Our objective is to create a successful and sustainable
co-operative. This means measuring our success against
the triple bottom line – social, environmental and economic.

Sustainability

To do what is right for the long term good
and to meet consumer and community needs.

Efﬁ ciency

To unlock and create greater
value from our scale and effi ciency.

Healthy people

Value nutrition, strong relationships,
supporting communities

Healthy environment

Lower footprint, zero waste,
restoring nature

Healthy business

Sustainable pay-out, return on
capital, reliable dividends

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR CO-OPERATIVE DIFFERENCE

Our Co operative
Difference

We are working together for a strong
and sustainable Co-operative.

Peo

ple a
nit

Enviro n

rative

e
p
o
-
o
C

5
O u r Future Aspirations

Animals

g n i

i o n for achievements

Our Core
Terms of Supply

On-Farm Support

Clear guidance on future direction
based on emerging customer and
community trends.

All on-farm activities aligned
across five focus areas.

Recognition for farmers who are
moving beyond the Terms of Supply.

Well defined Terms of Supply to
protect the Co-operative here
and now.

Supporting our farmers underpins
everything we do. In person,
in digital, in partnership.

This year we launched The Co-operative Difference.
It is a straight-forward way of bringing together what
our farmers need to know today, and what they need
to prepare for in the future. It also celebrates farmers
who go the extra mile to make our Co-operative
more sustainable.

Dairying is a big part of New Zealand and has been
for almost 150 years. Farming families have made
the most of being able to grow grass all year-round,
producing delicious, fresh milk. We need to protect,
enhance and regenerate our environment so families
can continue to farm for generations to come.

At the same time, our customers and communities
increasingly want sustainably produced products.
We all want to make choices that are good for the
future, where people and the planet are cared for.

We’ve stepped up and improved the way we look after
the environment. Farmers have fenced waterways,
upgraded effluent systems, improved nitrogen
management, and strengthened animal welfare
practices. But rising expectations mean we all need
to keep lifting our game.

Our Co-op wants to make it easier for farmers to know
what needs to be done and why it matters. Farming is
complicated enough these days and we believe there
are ways we can work better together. That’s why we
introduced The Co-operative Difference, and through
it we can support farmers and help them change and
adapt for the future.

The Co-operative Difference:
• Brings together existing on-farm requirements

and makes them easier to understand.

• Recognises farmers who go above these requirements.

• Gives farmers clear guidance on likely future

requirements and trends.

• Saves farmers time by removing duplication

and streamlining reporting requirements, helping
our Co-op protect its market position, strengthen
our sustainability claims, and drive demand for
our products.

• Supports farmers with on-farm practices by working
together and providing industry-leading assistance,
using our industry partnerships where possible.

• Clarifies what will happen when requirements aren’t
met, supports those who are struggling, and takes
a firm line with those who refuse to change.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR CO-OPERATIVE DIFFERENCE

Working with
our farmers

On-Farm Support

Co-operative

Farmers can make the most of our Co-op’s regional
knowledge, expertise and services in managing their farms.
Our sustainable dairying, milk quality and animal welfare
specialists are in every region and our 0800 Service
Centre team is only ever a phone call away.

$40.8 m

in Farm Source™ Reward Dollars,
discounts on everyday farming
supplies, and partnership deals.

Farmer engagement in our
Co-operative is key, which
is why it is a step towards
achieving recognition in
The Co-operative Difference.

This year, farmers engaged
with our Co-operative in a
number of ways. They attended

local events, site visits, global tours, watched webinars,
participated in various learning opportunities, and used
our digital platforms and smartphone apps.

co-operative events.

585 435
71%

farmers attended the
MyConnect Conference.

90% of
farms use
our apps.

of our milk was produced
by farming families running
a single farm.

10 cents

per kgMS

in savings and rewards for the average-sized Co-op farm
if they purchase all their farm supplies from Farm Source.™

Our stores have farming needs covered, with local
knowledge, product advice and expertise. We provide
seasonal deals for everything from fencing to calf feed
and offer eligible farmers benefits such as 90 day interest
free purchases and the ability to earn Farm Source™ Reward
Dollars on every dollar spent in our stores. Beginning in June,
eligible farmers can also spread payments or defer them for
six months on all Farm Source store purchases over $500.

A new electricity deal
We maximise our collective scale to deliver the most
competitive prices. We are always on the hunt for lower
prices, better deals, and bigger discounts. In a New Zealand
first, Genesis Energy has launched a new electricity plan,
For Dairy. It’s offered exclusively by Farm Source™ and was
designed with dairy farmers by Genesis Energy. This new
plan can save farmers between 5 and 25% off their milking
shed electricity bill.

Fixed Milk Price
We’re always looking for new ways to help farmers
share up, make their farms more sustainable, and
manage their cash flow.

This year we introduced Fixed Milk Price. It’s our eighth
financial tool for farmers and offers ten opportunities
a season to fix a price for up to 50% of their estimated
milk supply.

This helps farmers reduce some of the risk from global
milk price volatility and gives them more confidence in
making business decisions as they know that some of
their fixed costs are covered. We can also provide
customers with longer contracts at a guaranteed price.
Customers value this certainty and it can bring additional
value back to our Co-op.

farms440

In the first two months of the tool being available (June and
July), 440 farms participated and locked in over 23 million
kgMS at a fixed price. About 60% of the farms that participated
supply less than 200,000 kgMS in a season.

Environment

Sustainable Dairying Advisors
(SDAs) work alongside farmers
to identify opportunities to
improve environmental practices
on farm. This year, we have
grown our team of SDAs.

Sustainable Dairy Advisors.

of our farms now have
a Farm Environment Plan.

23%
27
$4,700

average savings by each farm when they get a Farm
Environment Plan from our Co-op instead of elsewhere.

Last year, 12% of farms had a Farm Environment Plan (FEP).
This year that number has nearly doubled and we are
working with our farmers to ensure they all have an
FEP before 2025. These plans, delivered by our SDAs at
no additional cost, assess the environmental effects and
risks associated with farming activities and provide
tailored actions to help individual farms meet their regional
requirements and sustainability goals. By having an FEP,
farms are a step closer achieving recognition under
The Co-operative Difference.

This year, we have developed unique nitrogen reports
that our farmers can use to meet local regulatory
requirements in the Auckland, Marlborough,
Horizons and Canterbury regions.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR CO-OPERATIVE DIFFERENCE
Working with our farmers CONTINUED

Animals

People and Community

Milk

We know that cows are at the heart
of every dairy farm. Ensuring they
are valued and treated with respect
is of paramount importance to the
success of our Co-op. Farms that
have an Animal Health Plan,
developed alongside their vet,
implemented on-farm and
reviewed annually, are a step closer
to achieving recognition through
The Co-operative Difference.

Beginning this year, our farmers are providing more
information about animal welfare practices in support
of our new ‘Cared for Cows’ claim. The claim will help our
customers know with confidence that our dairy products
are produced using the highest of animal welfare standards,
and will help drive more value and market share.

Our provenance programme for ingredients customers
and Trusted Goodness™ promise for consumers helps
tell the story of how our farmers keep cows happy and
healthy so they can produce high-quality milk. It’s backed
up by data farmers provide annually about how they farm,
and helps our products stand out from the rest.

$97 m

of this year’s sales revenue from
products with a provenance claim.

We can attribute $97 million of this year’s sales revenue
to customers purchasing our ingredients and making
provenance claims using our Non-GMO, Grass-fed,
Made with NZ Dairy and Made with NZMP Dairy claims.

Farming’s not easy but it can
be an incredibly rewarding
career. That’s why we want
to provide safe, healthy
working environments and
opportunities for people
to grow and learn.

Working together with local organisations, we are
supporting farmers in creating Health and Safety plans
that will help everyone on-farm get home safe at
the end of every day. This is a key step to achieving
recognition under The Co-operative Difference.

Our Emergency Response Team (ERT) is quick to the scene
to help our farmers and communities when natural
disasters strike. Our ERT went to the West Coast this year
to help other Kiwi farmers fix storm damage and get back
up and running after heavy rain and flooding.

The ERT is a group of 98 committed employees. Most of the
time they are working in our manufacturing sites but they
are also trained firefighters, mountain search, rescue and
recovery experts, and volunteer first responders, and will
do whatever it takes to help our communities recover from
natural disasters.

Thank you to all our farmers
who have worked so hard to
provide safe, high-quality milk
throughout the 2018/19 season.
Our farmers go above and
beyond to achieve milk quality
excellence and this enables
our Co-op to create more
value and deliver to our
customers’ specifications.

This year, our farmers have done New Zealand proud.
Almost 1,800 farms achieved Grade Free status.
Of those, 437 achieved Grade Free for four years or
more, and 35 achieved Grade Free for 10 years or more.

These farmers are on the right track to achieve recognition
this season through The Co-operative Difference as they
already get the tick for Grade Free. Farmers are also
working hard to keep their Somatic Cell Count below
150,000 and their Fat Evaluation Index grade at A,
two additional elements required to achieve recognition
under The Co-operative Difference.

Another 1,409 farms received just one grade the entire
season and were recognised as Merit recipients and 4,086
received an Achievement certificate which recognises their
ability to keep their farm’s Somatic Cell Count low.
In addition to the honour roll on the following page,
we recognise the efforts of all farmers.

1,780

farms achieved Grade Free status,
including 437 that have achieved
Grade Free for four years or more.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR CO-OPERATIVE DIFFERENCE

Honour Roll for
Milk Quality Excellence

Legend

Gold

Farming entities that
achieved Grade Free
for at least the last
10 seasons.
B L & Estate R J Mohring
B M & B C & JH Geddes
B S & P J Strang
C & H Mabey
C J & K L Ladd
C M & K M O’Donoghue
Caskey Farms
Est of M F Blake & M Blake
F A & R C M Smits Ltd
F B Bonenkamp & J B
Cunningham
G B & J S Coulter
Golden Mile Farms Ltd
Inishbulfin Farm Ltd
J A & Estate of KJ Jolly
J L & M A Cooke
K & S MacKenzie Farms Limited
K J & H Chalmers Ltd
Kemra Farm Ltd
Kim Steffert Family Trust
L J & L M Still
M J & L M Van Tiel
Miroc Limited
Owhango Farms Limited
R & P Woods Farms Ltd
R S & R D Gordon
Riverside Farms
(Taranaki) Limited
Romill Partners
Rye Downs Ltd
Schorn Trust
Serendipity Trust
Sim Brothers Ltd
Sim Family Farms Ltd
Steffert Farms Ltd
Stephen Zink
Takitimu Trust

Achievement

Top 10 farming entities
with the lowest Somatic
Cell Count.
1 G L & G F Bell
2 J M Mellow
3 D A & M A Mullan
4 M C & J P Fisher
5 J C & F M Henchman
6 M & L Arnold
7 Ternstone Ltd
8 Est of M F Blake & M Blake
9 K J & H Chalmers Ltd
10 Le Emari Trust T/A

Willowbridge Dairies

Farming entities that
achieved Grade Free
for at least the last
four seasons.
5 M Trust
A Holten & N Brown
A J & K L Murdoch
Abacus Dairy Limited
Abbey Farm Partnership
Acacia Farms Ltd
Ahipaipa Farms Ltd
Amberhay Limited
Aramaunga Farms Ltd
Arataki Dairies Limited
Ashgrove Dairy Farms Limited
B & D Dodunski
B N & P A Jones
B P & P N Kennedy
B S & S K Dhaliwal
Barmac Dairies Ltd
Beechbank Dairies Ltd
Bibberne Farms Ltd
Browne Pastoral Enterprises Limited
Bullot Family Trust
C B Farms Ltd
C J & C J McKenzie Ltd
C J & V K Taylor
C W & J Redshaw
C W & M Y Matthews Family Trust
C.D. Farms Ltd
Clutha Lea Ltd
Collins Family Trust
Conlan Trust
Cranief Clifton Ltd
D & D Alexander Trust
D & E J Pringle
D & K Miles Limited
D C & V F Frew
D J & R E G Goodwin
D J & S A McMillin
D J Noble & K M Jones
D R & E M Henman
D S & L R Wilson Ltd
Daisy Dairying Ltd
DDB Dairy Enterprises Limited
Drysdale Holdings Ltd
Dugald McKenzie Family Trust
E F & J A Allcock
F A & R C M Smits Ltd
Fairview Trust
Far South Farms Ltd
Fardale Dairies Ltd
Farmer Fred Ltd
Farview Farms Ltd
G A & K T Lynch
G B & D G Hodges Trust
G K & D J Landon Family Trust
G R J & R J Saddleton
Golden Mile Farms Ltd
Hard Road Dairies
Hillcrest at Fairfax Ltd
Hudson Trust

I J Oliver
J A & Estate of KJ Jolly
J B & L M Suisted Limited
J E & C T Brien
J H & H R Smyth
J L & K S Gwerder Family Trust
J L & M A Cooke
J R & A T M Hale
J Van Der Kooy
J W & A M Steeghs
J W Prictor
James Lyttle
JJ & AB Roskam Ltd
K & S Richards Limited
K B Olesen & R J Stephens
K J & H Chalmers Ltd
Kainui Peatlands Ltd
L J Bleakley
Lockerbie Farms 2001 Ltd
M & A Schrader Family Trust
M & C O’Grady Ltd
M & J Barker Trust
M E Hunt & Son Ltd
M R & K J Luke Ltd
Malandra Downs Limited
Mary Allen Farm Ltd
McFetridge Farms Ltd
Michael O’Connor
Miroc Limited
Molehill Farm Ltd
N J & M Bleakley
Oceanview Farms Ltd
O’Reilly Family Trust
P V & P G Mullin Trust
Parkhill Farms Ltd
Paul Turner Farm Trust
Pikowai Transport Ltd
PJ Nelson Farming Ltd
Puketi Farming Enterprises Ltd
R & P Woods Farms Ltd
R J Mandeno No.2 Family Trust
R N Cornes
R P & M G Frank
R W & W J Cudby Family Trust
Rainbowcreek Farms Limited
Ritson Holdings Limited
River Heights Limited
Rodney G & S J Joblin
Roseneath Farm Limited
S & S Iorns
S G & B L Thirkell
S M Duynhoven & Estate
of JB Duynhoven
S M Shead
Sea Breeze Farms
Sean McErlean Trust
Steffert Farms Ltd
Stephen Zink
Stopford Road Limited
Te Ngutu Land Holding Co Ltd
Te Repo Farms Ltd
V E & D M Grant
Valley Road Farm Ltd
W B Scott Family Trust

W.A & H.R Simpson Farming Ltd
Waituna Investments Ltd
Watershed Ventures Ltd
Webber Farm Ltd
Whenuakura Farm Limited
Willowfields Ltd
A H & A C Webster
Abbott Brothers
AGC Farms Limited
Airlie Lodge (Walton) Ltd
Allison Family Farms Ltd
Alton Pastures Limited
Auroam Tahi Limited
B & E V Blake
B J & D A Verryt Family Trust
B M & B C & JH Geddes
B M & R M Sarten
B S & P J Strang
Barneyco Trust Partnership
Bent River Farms
BJ & DM Ahlers
Bonezco Farms Ltd
Burton Trust
C & M Tippett
C & M Young Ltd
C C J & F A Jones
Carnarvon Farms Ltd
Casey Coxhead Ltd
Cavan Downs Trust
Chetwynd
Colhaven Limited
Cotlands Ltd
Creekside Pastures Ltd
D P & T G Schumacher
Daybreak Farms Limited
Eichler Farms Limited
F B Bonenkamp & J B Cunningham
Farmbuild Milk Company Ltd
Forest Hill Downs Limited
Fowler Family Prosperity Trust
Frisia Farm Trust
G A & J M Fox
G A & V M Weir
G C & J M Knowles
G C Hall
G J Farms Ltd
G M & A J Gower
Gee ‘N’ Tee Ltd
Glen Eden Otago Ltd
Grat Farms Ltd
Gregory Farms Ltd
Hines Family Trust
I H & D J Bryant
I Hampton & A Golvin
I J Sutherland Partnership
Inishbulfin Farm Ltd
J & J Anderson Family Trust
Partnership
J E & D M Cooper
J H & R Cotman
J L Hooper & A L Robertson
J P & J S Adams
JDQ Ltd
JE & KL Gilbert

Thank you to all our farmers who have worked so hard to provide safe,
high-quality milk throughout the 2018/19 season. In addition to the
honour roll, we acknowledge the effort of all of our farmers who
work hard every day to produce the best possible milk.

Gold continued

K J & J B Argyle
K J & M T Dwyer Trusts P/S
K R Cresswell
K W & D M Blackstock
K W & D R Lowe Family Trust
Kevin Fleming Ltd
Knockinnon Farm Trust
L J & L M Still
L S & K A Phipps
Lynton Dairy Limited
M C & M Davey
M I & P M Stevenson
Family Trusts P/ship
M J & L M Van Tiel
M J & W P Van Veen
Mangatoki Partnership
MJA Farms Ltd
MW & KA Olsen
N A & K M McColl
NB & LJ Crosbie Ltd
Otu Creek Farm Limited
Owhango Farms Limited
P H S & P C Byford
R & A Tait T/A Black Cow Dairies
R S & R D Gordon
R T & E A Brown Ltd
R.L. Mathis Ltd
RK & A Hines Limited
Rogers Farming Ltd
Romill Partners
RV & LH Kokich Farms Ltd
Ryan Bennett
Ryelands Farm Company Ltd
S G McKenzie
Serendipity Trust
Sim Brothers Ltd
Sim Family Farms Ltd
Somerset Trust
T D Hall Trust
T M Mcdowall
Tawa Land Company Limited
Tawa Ridge Farms Ltd
Tayco Farm Limited
The Red Cow Company Limited
Trimor Ltd
Troy & Natalie Farming Partnership
True Blue Trusts
Vale Green Services Limited
Wainui Dairies
Waiparu Farm Ltd
Waiparu Holdings Limited
Wattle Downs Ltd
Webber & Maxwell Partnership
Westmeath Trust
Willcox Farms Ltd
A & N Harvey Family Trust
A A & L J Edward Trust
Abbott Trusts Partnership
Avon Downs Ltd
B C & K A Keller
B D Mead
B L & D J Haylock
B M & J A Ahlers
Bell Farm 2008 Limited

Bothwell Farms Ltd
Burnell Farms Ltd
C & B Jensen Family Trust
C & D Padrutt Trust
C E & D L Rogers
C M & K M O’Donoghue
Caskey Farms
Claremont Trusts Partnership
CM Farming Ltd
Cowley Dairies Ltd
D & S Farms
D A & M A Mullan
D B H Farms Limited
D J & E A Turner
D J & G M Hooper
D P & T M Stephens
D W & M E Kidd
DR & PJ Hannah Ltd
Drylands Trust
Estate E A Bonner
Fabish Bros Farms Ltd
Falcon Farms Trust
Farming Tee Jay Ltd
Florida Farms Ltd
Fonterra - O’Brien Farm
Four Roads Farms Limited
G B & J S Coulter
G E Sutherland Trust
G L & R L Burr
Glengarry (Dvke) Farming Co Ltd
GRC Farms Limited
Harrihi Farms
Hayley Buckman Family Trust
Hutton Farm Holdings Ltd
Inferno Farms Limited
J A & B E Turnwald
J D Farms
J L & H M Coatsworth
J M De Renzy
Jayland Partnership
Johnson Farm Co. Ltd
K & S MacKenzie Farms Limited
K E & V J Bond
Kaimai Dairy Ltd
Kemra Farm Ltd
Kieran McErlean Trust
Kim Steffert Family Trust
Knightlands Ltd
Kywaybre Farms Ltd
L J Hodges
L.G. & J.M. Morris Limited
Lesdale Friesians Ltd
Lizlyn Dairies Ltd
Longacre Properties Limited
Lutz Farming Company Ltd
M & C Mogg Ltd
McGee Partnership
McGowan-Weake Ltd
Meyer Family Trust
Mitchells Milky Way Limited
MR & TJ Frost Ltd
Mudspring Farms Limited
N R & L A Fox
NR Ensor Limited

To qualify, farms must have supplied 45 days or more in each season.

P G & D M Dombroski
P L & R E Berryman
P R & V P Dawson
Placement Services Limited
Poc Ar Buille Limited
R J Troughton
R K J Allen
Rasing Farms Ltd
Rich Feet Limited
Rosebrae Farm Ltd
Southern Meadows 2011 Ltd
Springpark Farms 2008 Ltd
T D & J A Rhind
T N Langlands
Tainui Group Holdings Limited
Takitimu Trust
The D & A Roberts Family Trust
The Hyjinks Trust
TW Langford Family Trust
Two Name Farming Limited
Up At 5 Ltd
Van Rossum Ltd
Waicola Holdings Ltd
Waiotu Farms Ltd
Waiwira Holdings Ltd
Whakahora Farm Ltd
A M Bond & Estate of R G Bond
A R Mills
Aaron and Marcia Flay Partnership
ABH Trust
Aghern Holdings Ltd
Altura Dairy
Ararata Holdings Ltd
B & L Jones Ltd
B L & Estate R J Mohring
Barriball Farms Ltd
Berwick Holdings Ltd
Birchland Partnerhip
Bogaard Farms NZ Ltd
Boswell Dairy Ltd
Burnside Farms Ltd
C & H Mabey
C F & M T Muller
C J & K L Ladd
C T & K M A McLean
Chislehurst Farms Limited
Cressey Dairies Ltd
D & E Cole
D & I Edward Ltd
D B & K M Johnson Farms LTD
D Crofskey
D E & M E Hines
D L & S J Deeming
Derrys Farm Ltd
Est of M F Blake & M Blake
Estate Charles Bailey
Estate of Elizabeth Paretuarangi
Ormsby
F W G & J P Stanbridge
G & C Came Ltd
G A Knight
G E & V E Cooper
G H & M J Savill
G L & G F Bell

Given Family Trust
Interlaken Farms Ltd
J & LM Van Burgsteden
Jascas Trust
Jaska Farm Trust
Kerenui Ltd
Kohi Partnership
Kopane Dairies
L J & B C Torr
L J & M Prictor
Lawson Road Farm Ltd
M G & A M Hurley
M G & M Uram
M J & T M Davies
Maken Milk Ltd
Manuka Ridge Limited
Mark A Mullan Trust
Marua Partnership
Massey University Farms
Matai Farms Ltd
Mattajude Family Trust
Maude Peak Farm Trust
Maxlands Farms Limited
Mead Family Farm Ltd
Milestone Trust
Milkwell Ltd
MJ & KL Family Trust
N & M Paton
N J & W A Vollebregt
N R Dilks
Ngahape Valley Farm Ltd
Okapua Farming Company Ltd
P D & J M Bish
P D & S S Sharpe
P H & W F Iorns
P J & M L Cotter
Pharlee Trust
Port Molyneux Dairies Limited
R & S Singh
R A & J L Hamilton
R W & R R O’Brien
Riverside Farms (Taranaki) Limited
Ruakiwi Dairies Limited
RVS Farming Ltd
Rye Downs Ltd
S B & Y M Thompson
Sabin & Co Ltd
Schorn Trust
Seven of Nine Ltd
Shawlink Ltd
Shenandoah Trust
Sisley Farms Ltd
T & C Brown Limited
T G & R J Wells
T R D Reesby
The Adare Company Limited
The Herewahine Trust
VBI Ltd
W & C Candy Trust
W R & Z W Kite
W W Olsen
Whitten Holdings Ltd
WP & A Moore

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PEOPLE

Farmer
spotlight

This year, so many farmers have shown
great leadership in farming and have done
the industry proud, taking home several
national and regional titles.

Fonterra Dairy Woman
of the Year
Trish Rankin
Taranaki farmer, teacher and environmentalist
Trish Rankin was named 2019 Fonterra Dairy Woman
of the Year. The other finalists were also Co-op farmers –
Shareholders’ Councillors Julie Pirie and Emma Hammond
and former Shareholders’ Councillor Kylie Leonard.

Dairy Business
of the Year
Okaihau Pastoral Holdings Ltd
Northland’s Okaihau Pastoral Holdings won the 2019
Dairy Business of the Year title, an award judged on
financial performance, environmental performance
and people management. Runner up was River
Terrace Dairy Ltd from Ashburton.

Responsible Dairying Award
Damian and Jane Roper
Taranaki farmers Damian and Jane Roper won the 2019
Responsible Dairying Award, receiving the newly created
John Wilson Memorial Trophy. The award recognises
dairy farmers who demonstrate leadership in their
approach to sustainability and who are respected by
their fellow farmers and their community for their
attitude and role in sustainable dairying.

Our farmers have outdone themselves,
winning two of three national titles at
the NZ Dairy Industry Awards.

New Zealand Share Farmer
of the Year
Colin and Isabella Beazley
Northland’s Colin and Isabella Beazley won the 2019
New Zealand Share Farmer of the Year title. Tokoroa
contract milkers Marc and Nia Jones were the runners-up
with Manawatu sharemilkers Thomas and Jemima
Bebbington third.

Dairy Trainee of the Year
Nicola Blowey
Canterbury/North Otago’s Nicola Blowey, who is
originally from the UK, was named 2019 New Zealand
Dairy Trainee of the Year. Waikato’s Matt Dawson was
second with Central Plateau’s Harry Phipps third.

Young Farmer
of the Year Award
James (Jimmy) Robertson
22-year-old Fonterra business graduate James (Jimmy)
Robertson won the 2019 Young Farmer of the Year Award,
becoming the youngest ever winner of the iconic award
in its 51-year history. James, who grew up on a dairy farm
in Waikato, also took out the People's Choice Award.

Ballance Farm
Environment Award
Adrian and Pauline Ball
Waikato farmers Adrian and Pauline Ball won the 2019
Ballance Farm Environment Awards, becoming the new
National Ambassadors for Sustainable Farming and
Growing and the recipients of the Gordon Stephenson
Trophy. Fellow Co-op farmers Nick and Nicky Dawson
from Hawke’s Bay and Fraser and Katherine McGougan
from the Bay of Plenty were national finalists after
winning their respective regions.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PEOPLE

Employee
spotlight

Image supplied by Tim Collins
and RNZ First Up.

Our Te Rapa tanker drivers
Act of kindness that means a lot
to a Co-op family
Our tanker drivers at Te Rapa depot have known Andrew
Oliver for 15 years and showed how special that relationship
is earlier this year. Andrew is the adult son of farmers
Ken and Deidre, and is one of only a handful of people
in the world with Fryns-Aftimos syndrome, a rare
chromosome condition.

For Andrew, many of his activities become habits. Seeing
the tankers collect the milk before bedtime is one of them.
If pick-ups were on the late-shift, that could mean he was
up until 2am, and that meant the same for Ken. The family
managed this for over a decade but when Diedre suffered a
minor stroke, Ken was struggling to keep the farm going
and surviving on three to four hours of sleep.

Desperate, Ken phoned Farm Source’s 0800 Service
Centre. When the depot heard of the challenges
Ken was having, the entire pick-up schedule for the
depot was changed.

“ A big outfit like Fonterra
doesn’t have to do that.
They simply could’ve
ignored the request but
no, they came through
and we’re very grateful.”

Ken Oliver, farmer owner.

Ken is now guaranteed a pick-up anywhere between
6.30pm and 8pm. Andrew draws a picture each night and
gives it to the tanker driver and they are put up on a wall
at the depot. Ken said the change in pick-up time has meant
a lot to the family.

“A big outfit like Fonterra doesn’t have to do that.
They simply could’ve ignored the request but no, they
came through and we’re very grateful.”

Our Energy team
A small team guiding big changes

The co-firing of our Brightwater plant with biomass
this year is a milestone for Fonterra’s Energy Team,
charged with guiding Global Operations to meet its
target to reduce carbon emissions by 30% by 2030
and to be net zero by 2050.

The six-person team has deep experience in utilities,
operating, managing and controlling boilers, water
treatment plants, chemical engineering and lots of
experience with electricity. Led by Linda Thompson,
they are responsible for researching new and existing
technologies and assessing which are best suited
operationally and cost effectively to help achieve
the targets.

Brightwater was a prototype. The boiler there
was designed to burn coal and there was a lot
of discussion about whether they could achieve
what was wanted without causing problems with
operational performance. In the end, Brightwater
has shown key assumptions were correct and that
the technology works. The conversion slashes the
amount of coal used and cuts carbon emissions at
the site by around 2,400 tonnes a year – roughly
the same as taking 530 cars off the road. The job
now is to see how it can be replicated at other sites.

Ian Goldschmidt, General Manager Sustainability
and Resources, said the team is fully aware of how
important their work is. “It’s a huge responsibility.
There are some really good people in the team
and we also have the steering committee, with
a number of senior leaders on it, to support and
guide us. There’s some horsepower behind the
decisions we make.”

A trial at the Te Awamutu site to run its existing
coal boiler exclusively on wood pellets was also
completed this year. While it highlighted some
practical issues such as the volume of pellets
required and how to keep them dry, early indications
are it could reduce carbon emissions by around
84,000 tonnes per year, the equivalent of taking
18,500 cars off the road.

Our NZMP Team
Protein packed pantries
and a perfect partnership

In a collaboration that started in late 2018, the
global Sports and Active Lifestyle (SAL) teams and
Fonterra Research and Development Centre (FRDC)
in Palmerston North, New Zealand, have worked on
a project that will see household pantries across the
United States and Europe filling up with protein
fortified food mixes made from NZMP ingredients.

Protein is a key driver in the $200 billion global SAL
category, with annual growth of around 8%. Keeping
consumers’ nutrition needs top of mind, our SAL team
members in the United States and Europe led the drive
for these trends to shape FRDC’s innovation roadmap.

Consumer-led, market insights from the people who talk
to customers every day are key to FRDC as they review
the growing number of different food formats in which
protein is being consumed. The result in this case is more
than 15 different applications with nearly half a dozen
other ingredients reformatted or adapted, providing
a strong base to push further into the SAL category.

A team of eight worked on the project at FRDC and
with input from the SAL and in-market sales teams
were able to understand the needs of the market
and adapt as changes came through.

The United States, followed closely by Europe,
are the market leaders in the SAL category. In those
regions it’s not unusual to see protein fortified foods
on supermarket shelves amongst other products, not
just in the health food section or health food shops.

Protein bars are most popular with consumers at the
moment. It’s a market worth USD1.2 billion globally and
is growing at 14% CAGR. But there is increasing demand
for different ways to consume protein and the project will
see ingredients developed for use in pancake, brownie
and muffin home baking mixes through to ice cream.

Key considerations in development include taste,
texture, cohesiveness and flavour. Extensive tasting
sessions and working with sensory scientists is all
part of the process. Work continues to develop
further options to meet evolving consumer demands.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PEOPLE

Board of Directors

1. John Monaghan

2. Clinton Dines

3. Brent Goldsack

4. Leonie Guiney

5. Bruce Hassall

6. Simon Israel

7. Andrew Macfarlane

8. Peter McBride

9. John Nicholls

10. Donna Smit

11. Scott St John

5. Bruce Hassall
Board Responsibilities Appointed Director, Chair
of the Audit and Finance Committee, Member of
the Safety and Risk Committee and the Milk Price
Panel and is an observer on the Appointments and
Remuneration Committee
Term of Office 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 Officer 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 and serves as a director on the Board
of Bank of New Zealand. He was previously 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 financial reporting
information system processes, risk management,
business acquisitions, capital raising and IPOs
across both listed and private companies.
BCom, FCA (CAANZ)

6. Simon Israel
Board Responsibilities Appointed Director, Member
of the Appointments and Remuneration Committee
Term of Office 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
Pacific Breweries, Griffin 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

7. Andrew Macfarlane
Board Responsibilities Farmer-elected Director,
Member of the Co-operative Relations Committee
and the Appointments and Remuneration Committee
Term of Office 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 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). Andy was previously a
Director of Ngai Tahu Farming Limited. 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. He 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.ScC

1. John Monaghan
Board Responsibilities Farmer-elected Director,
Chairman, Chair of the Appointments and
Remuneration Committee
Term of Office 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 Centreport
Limited and Centreport Properties Limited, and
is a member of the Executive Board of the
New Zealand China Council. John is a Chartered
Member of the Institute of Directors. 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 Appointments and Remuneration Committee
and the Safety and Risk Committee
Term of Office Appointed 2015
Clinton Dines 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 Port
of Newcastle, Sky Renewables Pty Limited 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 firm based in Brisbane.
He is an Adjunct Professor at Griffith University’s
Asia Institute and is a Member of the Griffith
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, Griffith), CIM, INSEAD

3. Brent Goldsack
Board Responsibilities Farmer-elected Director,
Chair of the Co-operative Relations Committee,
Member of the Safety and Risk Committee and the
Milk Price Panel
Term of Office 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 currently chairs the Board
of Waitomo Group Limited and its subsidiaries.
Brent serves on the Board of Canterbury Grasslands
Limited. Brent is actively involved as a shareholder
of three dairy operations in the Waikato and has
shareholding interests in other dairy farms with
operations in both New Zealand and the United
States. In addition to his strong financial 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. Leonie Guiney
Board Responsibilities Farmer-elected Director,
Chair of the Safety and Risk Committee, Member
of the Audit and Finance Committee
Term of Office Elected 2018
Leonie Guiney was elected to the Fonterra Board
in 2018. Leonie previously served on the Board
from 2014 to 2017. Leonie has worked in the
agriculture sector for more than 25 years in a
number of positions including lecturer of Dairy
Production at Lincoln University, consultant on the
BNZ Growth Programme for farmers and has held
roles with Golden Vale Dairy Co-operative in Ireland,
LIC and FarmRight South Island. Leonie lives and
farms at Fairlie in South Canterbury and is a director
and shareholder of four Canterbury farms and
Bobby Square Limited.
BAgrSci

8. Peter McBride
Board Responsibilities Farmer-elected Director,
Member of the Audit and Finance Committee,
Co-operative Relations Committee and the
Governance Development Programme Committee
Term of Office Elected 2018
Peter McBride was elected to the Fonterra Board
in 2018. He is a member of the Zespri China
Advisory Board. Peter was previously the Chairman
and a Director of Zespri Group Limited and other
related companies. Peter is a Managing Director of
South-East Hort Limited and subsidiaries and Ellett
Beach Farms Joint Venture. He was previously a
Director of the New Zealand International Business
Forum and a member of the Executive Board of the
New Zealand China Council. Peter has shareholding
interests in the Waikato.
B. Horticulture, PG Dip Com Agribusiness

9. John Nicholls
Board Responsibilities Farmer-elected Director,
Member of the Co-operative Relations Committee
Term of Office Elected 2018
John Nicholls was elected to the Fonterra Board
in 2018. John previously served on the Fonterra
Shareholders’ Council from 2009 to 2011 and is
an experienced company Director. John is Chairman
of MHV Water (formally Mayfield Hinds Irrigation
Limited), New Zealand’s largest intergenerational
irrigation co-operative, and he also serves on other
local Boards. John has a Degree in Agriculture and
a Postgraduate Diploma in Agricultural Science.
He has shareholding interests in the South Island,
owning six dairy farms in mid Canterbury.
B.Agr, PG AgrSci

10. Donna Smit
Board Responsibilities Farmer-elected Director,
Member of the Audit and Finance Committee and
the Co-operative Relations Committee
Term of Office Elected 2016
Donna Smit was elected to the Fonterra Board
in December 2016. Donna serves on the Board
of the Manager of the Fonterra Shareholders’ Fund.
Donna lives and farms at Edgecumbe, and has
built and owns five dairy farms in Eastern
Bay of Plenty and Oamaru. Donna is a Director
of EastPack Limited 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
financial and risk management has been built
through her extensive business experience and
financial background, and complements her deep
dairy farming experience.
FCA

11. Scott St John
Board Responsibilities Appointed Director,
Chair of the Milk Price Panel and Member of
the Audit and Finance Committee and the Safety
and Risk Committee
Term of Office Appointed 2016
Scott St John was appointed to the Fonterra
Board in 2016. 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, serving on the
Board of First NZ Capital and membership of both
the Capital Markets Development Taskforce and the
Financial Markets Authority Establishment Board.
B.Com, Diploma of Business

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PEOPLE

Management Team

5
7

1. Miles Hurrell

2. Marc Rivers

3. Deborah Capill

4. Mike Cronin

5. Robert Spurway

6. Judith Swales

7. Kelvin Wickham

4. Mike Cronin
Managing Director, Co-operative Affairs
Mike Cronin is the Managing Director Co-operative
Affairs, where he oversees Food Safety, Health
and Regulatory, Governance, Risk and Audit,
Farm Source, Sustainability, Global Stakeholder
Affairs, Maori Strategy, Communications, Legal,
and Purpose teams. Mike is also responsible
for co-ordinating the CEO’s office, the Fonterra
Management Team, and the Fonterra Board.
After joining Fonterra in 2002, Mike has worked
on many of Fonterra’s most significant projects,
including the buyback of the Anchor brand in
New Zealand, Trading Among Farmers, the
Governance and Representation Review, and
the refresh of the Fonterra Purpose. Prior to 2014
when he joined the Fonterra Management Team,
Mike was the General Manager of Strategy
Deployment and then Group Director Governance
and Legal. Mike has a Bachelor of Laws and Bachelor
of Arts from the University of Auckland.

5. Robert Spurway
Chief Operating Officer, Global Operations
Robert Spurway joined Fonterra in 2011. As Chief
Operating Officer, Global Operations, Robert
leads Fonterra’s global operations business and is
responsible for our 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 our Co-operative’s
New Zealand milk supply. Prior to that, he was
Fonterra’s South Island Regional Operations
Manager. In this role, he oversaw the greenfield
development of our Co-operative’s Darfield 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).

6. Judith Swales
Chief Operating Officer, Global Consumer
and Food Service
Judith Swales leads Fonterra’s Global Consumer
and Foodservice business, responsible for delivering
innovative nutritional products and solutions to
consumers in over 80 countries. Prior to this she
led Fonterra’s innovation business unit, shaping
the future of Fonterra by harnessing innovation,
emerging technologies and game changing business
models, while embedding a performance driven
culture. Judith joined our Co-operative in 2013 as
Managing Director Australia and 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.
Judith worked for a number of UK retailers which
culminated in her move to Australia in 2001 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.

7. Kelvin Wickham
Chief Operating Officer, NZMP™
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 30 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 focused 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.

1. Miles Hurrell
Chief Executive Officer
Miles Hurrell is the Chief Executive Officer of
Fonterra. His appointment as CEO in August 2018
follows a 19-year career with our Co-operative
which has spanned four continents. Miles is focused
on resetting the business and implementing our
Co-op’s new strategy to deliver sustainable value.
Prior to his appointment as CEO, Miles held the
role of Chief Operating Officer, Farm Source, with
responsibility for farmer services and engagement,
milk sourcing and the operation of New Zealand’s
70 Farm Source™ retail stores. Before this, Miles
held a number of leadership roles across our Co-op,
including Group Co-operative Affairs Director and
General Manager Middle East, Africa, Russia and
Eastern Europe where he led a period of sustained
growth across the region. Earlier in his career, Miles
worked as the General Manager of Global Sourcing
and oversaw the streamlining of our Co-operative’s
European operations. Miles has completed
management programmes at INSEAD (International
Executive Development), London Business School
(Finance), Kellogg’s North-Western University
(Global Sales) and the International Institute for
Management Development (Marketing).

2. Marc Rivers
Chief Financial Officer
Marc Rivers joined Fonterra in February 2018
as the Chief Financial Officer, responsible for
our Co-operative’s finances, procurement and
information systems. Marc is an experienced global
finance 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, focusing 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. Deborah Capill
Managing Director, People and Culture
Deborah Capill joined Fonterra as Managing
Director People and Culture in February 2019.
She leads a team responsible for delivering
Fonterra’s people strategy, which includes
innovative solutions to attract, develop and
retain the best global talent and drive strong
engagement across our Co-operative’s 22,000
employees. With over 25 years’ global experience
in both strategic and operational Human Resources
roles, Deborah has previously worked for several
market-leading companies including Deutsche
Post DHL, Williams Lea Tag, NZI and Kodak NZ.
Her specialties include building organisation
capability and culture, extensive change management
experience, outsourcing, managing shared service
centres, organisation design, talent management,
executive management development and
compensation. Deborah has lived and worked
in Singapore, Belgium, Czech Republic, the
United Kingdom, Germany and New Zealand.
She is a New Zealander with a Bachelor of Science
Degree and Diplomas in Business Management
and Personnel Management.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR YEAR THAT’S BEEN

Our year
in review

Looking back at some of the big moments
across our business over the last year.

May 2018
2018/19 season opens with a
forecast Farmgate Milk Price
of $7.00 per kgMS

August 2018

Miles Hurrell steps into
the role of interim CEO

2018/19 forecast Farmgate
Milk Price revised down
to $6.75 per kgMS

October 2018
Introduced a forecast
Farmgate Milk Price range
and revised down the
forecast milk price to
$6.25-$6.50 per kgMS

We drop our volume
ambition, refocus the
business on value and set
clear cost saving targets

December 2018
2018/19 forecast
Farmgate Milk Price
range revised down to
$6.00-$6.30 per kgMS

We announce the
Fixed Milk Price
scheme to help our
farmers gain better
certainty of what
they will be paid
for their milk

July 2018
John Monaghan
becomes Chairman

November 2018
Our Brightwater site
begins co-firing its coal
boiler on wood biomass

September 2018
We outline three
immediate steps to
lift performance: Take
stock of the business,
get the basics right
and ensure more
accurate forecasting

May 2019
We sell Tip Top to global
ice cream company Froneri

We announce that we are
closing our Dennington
site in Australia

2018/19 forecast Farmgate
Milk Price range narrows
to $6.30 - $6.40 per kgMS

Forecast earnings per
share range revised down
to 10-15 cents

We announce a strategic
review of our farm-hubs
in China and that we are
reviewing ownership of
our DPA Brazil joint venture

March 2019
Miles Hurrell becomes
permanent CEO

We sell our interest in
Venezuelan consumer joint
venture Corporacion Inlaca

We start a sales process
for our 50% share of
DFE Pharma

July 2019
We put a stop to installing
any new coal boilers
or increasing capacity
to burn coal

We set new waste targets
of zero solid waste to
landfill by 2025 and 100%
recyclable, reusable or
compostable packaging
by 2025

January 2019
John Wilson passed
away (retired from
Board November 2018)

June 2019
We announce the
sale of our interest
in foodspring

February 2019
We buy a stake in US based
food company, Motif
Ingredients, a company
developing and commercialising
bio-engineered animal and
food ingredients

2018/19 forecast Farmgate
Milk Price range increases
to $6.30-$6.60 per kgMS

FY19 forecast earnings per
share revised down to 15-25
cents and we announce a full
strategic review is underway

April 2019
The Co-operative
Difference launches,
helping our farmer owners
know what is expected
now and in the future

MPI sets three national
goals to eradicate
Mycoplasma bovis

Trialled wood pellets
in our Te Awamutu
site’s boiler

Spring

Good pasture growth leads
to strong start to season

Summer

Hot and dry summer in
New Zealand, drought in Australia

Autumn

Dry in some regions

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR YEAR THAT'S BEEN

Our
Approach

Embedding sustainability at the heart of
everything we do is a strategic priority.
We’re a business built from farms passed down from one
generation to the next, and that means ensuring the land
and natural bounty of our country are preserved for
generations to come.

By improving how we dairy, we believe we can make a more
positive impact on the world. That means caring about
nutrition, our environment, and our communities.

Nutrition:
Improving health and wellbeing through the
products and services we deliver.
Environment:
Achieving a healthy environment for
farming and society.
Community:
Delivering prosperity for our farmers and
wider communities.

Fonterra supports the United Nations’ Sustainable
Development Goals and we have prioritised ten goals where
we believe we can make the most difference. We are joining
forces across sectors and society to contribute to a healthier
planet and the lifestyles of the people on it.

The Board of Directors has formed a Sustainability
Advisory Panel to challenge and guide us as we embed
sustainability into our business. The six external experts are:
Sir Rob Fenwick, Bridget Coates, Paul Gilding, Michelle Pye,
Hugh Logan and Aroha Mead.

On-track.

Behind plan.

1 94% of sites globally are already certified.

Nutrition

Address public health challenges by improving the
nutritional profile of our products and promoting
healthy diets.

Improve access to adequate nutrition by developing

affordable products tailored to specific nutritional
needs of communities.

Improve the wellbeing of individuals by leading
innovation in advanced dairy nutritional products
to address specific health needs.

FY19 delivery

Launch a new affordable product.

Continue to reformulate products to

nutritional guidelines.

Continue to rollout electronic product traceability.

Targets

2019: 100% sites certified to leading Food

Safety and Quality (FSQ) levels.1

2020: 75% of our product portfolio meets endorsed

nutrition guidelines.

2025: 100% of our product portfolio meets

endorsed nutrition guidelines.

Environment

Community

Improve the health and biodiversity of our land
and waters by reducing the impacts of farming and
manufacturing, and working in partnership with others.

Support healthy, sustainable livelihoods for our

farmers by returning the most value from every drop
of milk by moving more of our milk to higher value.

Lead the transition to a low-carbon future by

Provide positive livelihoods for our people by

investing in innovation and infrastructure to remove
greenhouse gas emissions from our supply chain.

developing a diverse, skilled and agile workforce and
promoting a healthy and safe working environment.

Meet the growing nutritional demand through

improvements in productivity and minimising waste
from farm to consumer.

Invest in the future of our communities by sharing
what we do best and building farming capability in
key emerging dairy markets.

FY19 delivery

Deliver another 1,000 FEPs.

Commission biomass co-firing at Brightwater.

Establish global targets for waste reduction.

Targets

2025: All farms have an FEP.

2026: All sites treating wastewater to leading

industry standards.

2030: Climate neutral growth for farming.

2030: 30% reduction in GHG emissions for

manufacturing operations.

FY19 delivery

Halve the gender pay gap for New Zealand

employees from 2% to 1%.

Continue to deliver free portions of dairy

nutrition for New Zealand children.

Deliver earnings per share forecast.

Targets

Continue to invest in community programmes

in key markets.

World-class injury prevention

(total recordable injury frequency rate).

World-class engagement.

Return on capital above our weighted average

2050: Net zero emissions for manufacturing operations.

cost of capital.

Long-term contribution

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019

OUR YEAR THAT'S BEEN

Nutrition

Our products can help improve the health and
wellbeing of people around the world.
Here’s a snapshot of how we helped this year.

Soprole™ Protein+
In Chile, we have continued to expand our range of
Soprole™ Protein+ products this year with four new
varieties hitting supermarket shelves. These products offer
higher levels of quality dairy protein and help consumers
spread their consumption of protein throughout the day.
Protein+ Plain yoghurt was voted by consumers as the
Product of the Year for innovation.

In New Zealand, we have also continued to expand our
range of Anchor™ Protein+ products. Protein has a key
role in maintaining bones, muscles, cartilage and skin.

Anchor™ Greek Yoghurt
In New Zealand we launched a new range of Anchor™
Greek yoghurt. It is made with authentic Greek cultures
and provides a source of protein and calcium. The natural
unsweetened variety has no added sugars and all varieties
earn top scores of 4.5 or 5 stars in the Health Star
Rating scheme.

Anmit™ – Affordable nutrition
We started piloting an affordable nutrition product in
Ethiopia this year called Anmit,™ an abbreviation of
Anchor™ and Atmit. Atmit is an Ethiopean grain and dairy
mixture like a drinkable porridge that can take up to
a week to prepare, but our Anmit™ delivers the goodness
in just two minutes. Developed with local stakeholders,
including the Ethiopian Food and Nutrition Society, it is
fortified with nutrients tailored to local needs and
delivered at an affordable price.

NZMP™ NutriWhite Dairy-Based Powder
In Africa and South-East Asia it’s sometimes difficult for
low-income families to buy affordable, quality food. Their
diets are often lacking in essential micronutrients. That’s
why we developed NZMP NutriWhite – an affordable,
nutritionally-fortified dairy-based powder – which is
designed for adding to tea and coffee. It’s fortified with
Iron, Zinc, Calcium and Vitamins A, C and D, and also
tastes good.

NZMP™ Mozzarella Range
We have extended our range of Mozzarella cheeses to meet
the needs of different customers. These include a premium
variety right through to a cost-effective option, and some
options that meet specific criteria – such as reduced salt.
Salt is a vital ingredient in cheese-making. It adds flavour,
helps with ripening and works as a natural preservative.
Reducing salt is not easy and requires specific know-how,
but by doing so means our customers can offer reduced
salt options in their product ranges.

NZMP™ SureStart™ MFGM Lipid 70
Our latest innovative paediatric ingredient was
launched at Health Ingredients Europe in November 2018.
The benefits of MFGM Lipid 70 are backed by science
which suggests there is a role supporting infant brain
development and cognition, when used in infant formula
products. Our ability to manufacture this ingredient at
multiple sites gives our customers confidence we can
supply the quantities they need.

NZMP™ Lifestyle Probiotics
We launched two NZMP probiotics into the sports and
active lifestyle market this year. LactoB 001 (HN001™)
and Bifido 019 (HN019™) were originally discovered
in New Zealand dairy cultures. After extensive clinical
research, we have commercialised these to help people
improve their digestive health and immunity. Our
specialised processing techniques mean we can offer
customers a longer shelf-life in some applications.

We expanded our range of
Soprole Protein+ products.

We extended our
range of Mozzarella cheeses.

Anchor™ Greek yoghurt provides
a source of protein and calcium.

We launched two probiotics
into the sports and active lifestyle market.

Protein innovation

No.1

Providing nutrition

Mins.

Soprole™ Protein+ Plain
yoghurt was voted by
consumers as the Product
of the Year for innovation.

Anmit™, our affordable
nutrition pilot in Ethiopia,
is ready in just two
minutes.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR YEAR THAT'S BEEN

Environment

Water and Biodiversity
Healthy freshwater and ecosystems are essential
to the long-term success of our business, and to the
communities where we live, work and farm.

Climate Change
Climate change is a global environmental, economic
and social challenge, and we support a transition to a
low-carbon economy.

Farming
On farm, we are helping farmers establish Farm
Environment Plans (FEPs) which include a range
of prioritised improvements unique to their farm
(see Working with our farmers section). To support this
we have developed a new nitrogen scorecard. Nitrogen
loss risk is calculated across six farm management
practices to help farmers further reduce the risk
of nitrogen loss.

Sustainable water catchments require collaboration
to help protect and regenerate waterways, and meet
the environmental aspirations of local communities.
Through our Living Water partnership with the Department
of Conservation we are identifying game-changing and
scalable solutions. In addition, we are supporting farmers,
local iwi and community groups to deliver initiatives
prioritised by the community. For example, in Canterbury
an electric barrier is protecting endangered Mudfish from
predators, in Northland work is underway to protect
Whitebait habitat, and in other regions there are multiple
wetland restoration projects.

Manufacturing
Our new target is to improve water efficiency at
manufacturing sites in water-stressed regions by 30%
by 2030 and continuously improve water efficiency
at all other sites.

To achieve this, there are a large number of initiatives
underway across our manufacturing sites. For example,
at Edendale, by capturing the steam generated by one
of the dryers and treating it appropriately, we can reuse
it instead of using fresh water. This means we draw less
water from the aquifer and have less wastewater to treat.
We estimated this initiative saved between 700-750m3
water per day in February when it went live, and can save
about 1,000m3 water per day in optimal operating conditions.

Farming
Over the last 25 years, by improving the efficiency of their
farming operations, New Zealand farmers have reduced
on-farm emissions intensity by about 20%.1

Owl Farm near Hamilton, a Fonterra farmer and DairyNZ
partnership farm, has reduced Green House Gas (GHG)
emissions by 8% and lifted operating profit by 14% through
improved management practices over the last two years.

Achieving this is challenging and relies on highly-skilled
farm management and high-quality data to support
decision-making. To support our farmers, we have been
working on a trial of farm-specific GHG reporting and
our goal is for all our New Zealand farmers to have a
report by the end of 2020.

Manufacturing
For our global manufacturing operations, our targets are
to reduce our GHG emissions by 30% by 2030 and achieve
net zero emissions by 2050.

All sites are focused on energy efficiency. It makes good
economic sense, it helps reduce our emissions and will
help our transition to low carbon fuel sources. Looking
for alternative fuel sources, however, is the key to
emissions reduction.

At Brightwater, we converted the boiler so it can co-fire
wood biomass with coal. It went live in November 2018,
reducing GHG emissions by about 480 tonnes CO2-e
during FY19.

Building on the lessons learned at Brightwater, we
completed a successful trial at Te Awamutu where we
converted the coal boiler to burn wood pellets and
tested for three days. We are working to ensure security
and quality of the wood pellet supply, but at this stage
it is estimated that moving to this solution would reduce
annual emissions by 84,000 tonnes CO2-e.

1 Interim Climate Change Committee (2019). Action on Agricultural Emissions (p26).

Nicki Atkinson setting a net at Waituna Lagoon
as part of our Living Water partnership.

The Fonterra Australia packaging team with
a bench made from recycled soft plastics.

New packaging target

100%

New waste target

Zero

On-Farm emissions

20%

100% recyclable,
reusable or
compostable
packaging by 2025.

Zero solid waste to
landfill from our
sites by 2025.

In the last 25 years,
New Zealand farmers
have reduced on-farm
emissions by 20%.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019Open Gates visitors get a chance
for some photos on farm.

A tanker up close
at Open Gates.

OUR YEAR THAT'S BEEN

Community

Caring for people is at the core
of our Co-operative.
At Fonterra, we contribute to three
interconnected communities:

• The people who own and work on the farms that
supply us with milk, and others who work in the
end-to-end supply chain providing us with goods
and services.

• The people who are employed by Fonterra,

all around the world.

• The people in the communities where we live and work.

Caring for our people
We want all our people to be healthy, live a balanced life
and to go home from work safely every day. This year
we reduced our injury rate to 4.9 per million work hours,
a level which is considered world class for our industry.
Tragically however, a member of staff lost their life on
one of our China farms and serious harm injuries
increased from 14 to 18. For all fatalities and serious
injuries we conduct investigations to identify root
causes and take the necessary corrective actions.

Enjoying Kickstart Breakfast Club
at Putaruru Primary School.

18.2

Open Gates

8,000

Milk for Schools

18m

KickStart Breakfast

30m

More than 8,000
people visited Fonterra
farms throughout
New Zealand.

Fonterra farmers
provided 18 million
portions of milk this year
to 140,000 children.

In the last 10 years more
than 30 million breakfasts
have been served.

Fonterra Milk for Schools
competition winners at Mossburn
School got a special visitor.

14.3

12.7

9.8

8.8

8.1

6.4

6.1

5.2

4.9

)
s
r
u
o
h
k
r
o
w
n
o

i
l
l
i

r
e
p
(
R
F
I
R
T

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

We also recognise the importance of a diverse and inclusive
workforce. Our LGBTTI+ (lesbian, gay, bisexual, transgender,
takatāpui, intersex) friends and allies network has helped
us make good progress towards achieving Rainbow Tick
accreditation in New Zealand and we launched new
e-learning modules on diversity and unconscious bias.

Connecting our communities – Open Gates
We expanded our Open Gates programme. It gives
the public a chance to see what goes on behind farm
and factory gates. It’s about openness, engagement
and education.

More than 8,000 people visited 16 shareholders’ farms
throughout New Zealand to learn how our farmers care
for their animals and the environment. It’s an opportunity
for Kiwis to experience a working dairy farm, chat with
farmers, see cows being milked and check out the
technology on a Fonterra milk tanker.

Our Te Rapa, Darfield and Edendale sites also opened
their gates, welcoming almost 3,000 visitors to see
how we turn raw milk into high-quality nutritious food.

In-school Programmes
Fonterra Milk for Schools
Active in almost 1,400 schools, with around 140,000
children taking part every day, Fonterra farmers provided
18 million portions of milk this year. To celebrate back
to school in 2019, schools were invited to nominate their
local community hero. The winners were Rangikura School
in Porirua, Mossburn School in Southland and Auckland’s
Willowbank School, who all received a visit from Fonterra
Ambassador and former All Black captain, Richie McCaw.

KickStart Breakfast
This year, KickStart Breakfast grew to over 1,000 clubs
with more than 30,000 Kiwi kids participating. In the last
10 years, more than 30 million breakfasts have been served
through the programme, a partnership with Sanitarium
and the Ministry of Social Development. The clubs not
only provide kids with a healthy breakfast to kick-start
their school day, they also help students develop social
skills and take on extra responsibilities.

Caring for communities through
social procurement
We joined other leading organisations and signed
up as founding members of New Zealand’s first social
procurement buyer group. Established by the Ākina
Foundation, the Fwd: platform connects procurement
teams with social enterprises that have a positive impact
on society as they deliver various goods and services.
It gives us another way to do good through our
business activities.

Total recordable injury frequency rateFONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019

OUR PERFORMANCE

Group
Financial
Metrics

These charts have been
selected to represent
the financial metrics for
Fonterra, to provide an
historical summary of
our performance.

Milk Collection

kgMS (millions)

1,614

1,566

1,526

1,505

1,523

Normalised Gross Margin

$ GM (millions)

$ GM/LME

3,332

3,641

3,246

3,152

3,015

0.15

0.14

CAPEX6

$ (millions)

1,531

944

851

861

600

2015

2016

2017

2018

2019

2015

2016

2017

2018

2019

2015

2016

2017

2018

2019

Total Cash Payout

$ Farmgate Milk Price

$ Dividend

4.65

0.25

4.40

2015

4.30

0.40

3.90

2016

6.52

0.40

6.12

2017

6.79

0.10

6.35

6.69

2018

6.35

2019

Sales Volume (LME bn)1

Ingredients

Consumer and Foodservice

22.8

4.5

23.7

4.9

22.9

5.4

22.2

5.4

21.9

5.1

21.5

2015
2015

22.4

2016
2016

21.3

2017
2017

20.5

2018
2018

21.4

2019

Volume to Higher Value 2

Advanced Ingredients (LME m)4
Consumer and Foodservice (LME m)
As % of Total LMEs3

44%

47%

46%

37%

5,398

6,493

6,827

7,093

4,470

2015

4,881

2016

5,378

2017

5,365

2018

5,132

2019

Normalised EBIT

$ EBIT (millions)

$ EBIT/LME

1,358

0.06

1,155

0.05

974

0.04

902

819

0.04

Working Capital Days

2015

2016

2017

2018

2019

2015

2016

2017

2018

2019

Dividend Yield and Normalised EPS

Leverage

EPS (cents)

Dividend Yield

7.3%

4.4%

6.7%

2015

2016

2017

1.7%

2018

0.0%

2019

Gearing %

Debt/EBITDA

49.7

4.7x

44.3

3.5x

2.8x

48.4

48.2

4.5x

4.3x

2015

2016

2017

2018

2019

Return on Capital
(including intangibles and EAI5)

9.2%

8.3%

6.9%

6.3%

5.8%

Free Cash Flow

$ Free Cash Flow (millions)

2,184

670

600

1,095

2015

2016

2017

2018

2019

2015

2016

2017

2018

2019

(1,372)

1 Does not add to total due to inter-group eliminations.
2 Advanced Ingredients split only from 2016.
3 Advanced Ingredients and Consumer and Foodservice

products as a percentage of total LMEs.

4 The way in which Ingredients presents certain inter-segment

sales between Ingredients and Foodservice was revised in FY19.
This increased FY19 Advanced Ingredients sales volumes for the
12 months ended 31 July 2019 by 946 million LMEs.

5 Equity accounted investments.
6 Capital expenditure comprises purchases of property (less specific
disposals where there is an obligation to repurchase), plant and
equipment and intangible assets, and net purchases of livestock.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PERFORMANCE

Group
Overview

New Zealand Ingredients and our Foodservice business
improved on last year but were offset by challenges
in some markets, and significant impairments and
one-off items, resulting in a net loss. Cash flow
improved significantly and solid progress was made
on reducing expenditure and decreasing debt.

The performance of the largest part of our business,
New Zealand Ingredients, improved on last year with
increased sales and lower operating expenses contributing
to higher normalised earnings before interest and tax (EBIT).
Our global Foodservice business also improved on last year
with normalised gross margin up 10%. This was despite
lower sales volumes, following a slow start to butter sales
in Greater China and Asia. Key areas of challenge in the
business included Australia Ingredients, the ingredients
and consumer businesses in Latin America and the
consumer businesses in Sri Lanka, Hong Kong and
New Zealand. These challenges were the main reasons
our normalised gross margin was down $137 million,
or 4%, on the previous year, but were largely offset by
normalised operating expenses decreasing by $185 million.
‘Other income’ declined due to lower one-off gains than the
previous year, and as a result our normalised EBIT declined
9% to $819 million, from $902 million the previous year.

1 Percentages as shown in tables may not align to the calculation based on

numbers in the tables due to rounding.

2 Refer to note 2 of the Notes to the Financial Statements.
3

Includes other operating income, net foreign exchange gain/(loss) and share
of equity accounted investees.

4 Debt payback ratio is economic net interest bearing debt divided by earnings
before interest, tax, depreciation and amortisation (known as Debt/EBITDA).
Both Debt and EBITDA are adjusted, from reported amounts, for the impact
of operating leases, certain normalisations and non-cash amounts.

5 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.

6 Return on capital is calculated as normalised EBIT, less a notional tax charge

divided by capital employed including brands, goodwill and equity-accounted
investments. Return on capital, excluding brands, goodwill and equity-
accounted investments was 7.6% (31 July 2018: 8.0%).
Includes asset divestments.

NZD MILLION

31 JULY 2019 31 JULY 2018 CHANGE1

FOR THE YEAR ENDED

Volume (LME, billion)

Volume (’000 MT)

21.9

4,139

22.2

4,123

Sales revenue

20,114

20,438

Normalised gross margin2

3,015

3,152

(2)%

(4)%

Normalised gross margin
percentage

15.0%

15.4%

–

Other income and other3

115

246

(53)%

Reported operating
expenses

Normalised operating
expenses2

Reported EBIT

Normalised EBIT2

Net finance costs

Reported tax expense

Net loss after tax

Reported earnings
per share (cents)

Normalised earnings
per share2 (cents)

Dividend per share (cents)

Adjusted debt to
EBITDA4 (ratio)

Gearing ratio5

Return on capital6

Free cash flow7

Capital expenditure

(2,905)

(3,097)

(2,311)

(2,496)

(104)%

(9)%

(1)%

(321)%

262

902

(416)

(42)

(196)

(210)%

(10)

819

(418)

(177)

(605)

(0.35)

(0.14)

(153)%

0.17

–

0.24

(29)%

–

4.3x

48.2%

5.8%

1,095

(600)

4.5x

48.4%

6.3%

600

(861)

83%

30%

Net Loss After Tax

$605 m

Normalised EBIT

$819 m

Return on Capital

5.8%

from
6.3%

Normalised Earnings Per Share

0.17 c

29%

There were also some significant one-off items. These
totalled $829 million before tax, and increasing to
$885 million after tax. Of this amount, $59 million was
attributable to non-controlling interests and the net
amount attributable to equity holders is $826 million.
This included impairing the carrying values of some assets
and other one-off accounting adjustments, the most
significant being DPA Brazil, our Venezuelan consumer
business, China Farms and our New Zealand consumer
business. While they do not impact the day to day
operations of the business, they are reported in the Income
Statement and as a result we have reported a Net Loss
After Tax of $605 million. After adjusting for non-controlling
interests, this represented 35 cents per share.

Our continued focus on financial discipline has resulted in a
reduction in normalised operating expenses of $185 million,
or 7%, and capital expenditure reducing by $261 million
to $600 million. Combined with improved trade working
capital and divestments, our free cash flow improved
significantly and debt reduced by $469 million. Following
the recently announced sale of our holding in foodspring™,
and DFE Pharma for cash proceeds of $0.6 billion, our debt
is forecast to be reduced further in the next financial year.

While good progress has been made on improving cash flow
and reducing debt, given the disappointing earnings and
significant one-off items we decided not to pay a dividend
this year.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PERFORMANCE
Group Overview CONTINUED

New Zealand milk collection for the 2018/19 season was
1,523 million kgMS, up 1.2% compared to the previous
season. This was a result of the first half of the season
benefiting from favourable weather conditions compared
with last season. Our sales volume of Liquid Milk
Equivalents (LME) was down 2% from 22.2 billion LME
last year to 21.9 billion LME, mainly due to lower butter
sales volume in Foodservice. On a metric tonne basis, sales
volume increased 15,000MT on last year.

Fonterra’s total sales revenue declined by 2% to $20.1 billion,
mainly due to product mix.

Our group normalised gross margin percentage reduced
from 15.4% last year to 15.0%, predominantly due to reduced
margin from the challenges in Australia Ingredients, Latin
America and some of our Consumer markets.

In our Ingredients business, New Zealand Ingredients’ gross
margin performance improved from last year but was offset
by Australia Ingredients, which was significantly down
on last year due to drought, reduced domestic milk
supply and intense competition. As a result, Ingredients’
normalised gross margin was down 3% to $1,427 million.
Ingredients’ normalised operating expenses were down
but not sufficient to offset Australia’s significantly reduced
gross margin, resulting in normalised EBIT down 8% from
$879 million to $811 million.

Foodservice normalised gross margin increased 10%,
mainly due to improved prices and product mix.
Overall, Consumer normalised gross margin was down
8% due to the challenges predominantly in Latin America,
Sri Lanka and Hong Kong. As a result, total Consumer
and Foodservice normalised EBIT was down 14% on last
year from $525 million to $450 million. Consumer and
Foodservice improved its performance in the second
half relative to the first half, as both Greater China and
Latin America recovered from a slow start, with 70%
of earnings generated in the second half. Greater China
performance reflected strong demand for Anchor Food
Professionals™ UHT milk and Anchor Food Professionals™
culinary cream. However, high in-market butter inventories
impacted our sales volume and margins during the first
half of the year.

Our Oceania Consumer and Foodservice business
improved over last year, particularly across all core
categories in our Australia Consumer business. This was
offset by our performance in Latin America, with Soprole
being impacted by a ‘buy local’ marketing campaign,
which impacted the sales of a number of foreign owned
companies. Latin America has recovered to more normal
performance levels in the final quarter of 2019, with nearly
three quarters of Latin America’s 2019 earnings generated
in the fourth quarter.

The performance of our two Fonterra-owned farming hubs in
China improved, however, the joint venture farms increased
their losses as they go through the start-up phase. We are
continuing to see improvement in the average price our
Ingredients business has been achieving for milk from our
China Farms, with 39% of our revenue from milk sold for
more than 4RMB versus 19% in 2018. But it is still less than
what Ingredients buys it for. Our end-to-end China Farms
operation recorded a total loss of $30 million, compared to
a loss of $38 million last year.

With our continued focus on financial discipline, we
have made good progress on reducing our expenditure.
Our normalised operating costs were $2,311 million
this year, $185 million below the previous year, and we
intend to continue reducing these further. We also made
significant progress reducing our capital expenditure.
We set ourselves a target to reduce our capital expenditure
by $200 million this year. We achieved a $261 million
reduction, with capital expenditure decreasing from
$861 million last year to $600 million.

Our net finance costs were in line with the previous
year but our tax expense increased by $135 million, from
$42 million last year to $177 million. This was mainly due
to the derecognition of the deferred tax asset from our
joint venture in Brazil.

While our earnings performance has been disappointing,
our cash flows and liquidity are strong and contribute to
the strength of our balance sheet. This year, our free cash flow,
being the cash flow that is available to pay interest and
dividends and to reduce debt, increased by $495 million
to $1,095 million. The main reasons for this were lower
capital expenditure, and proceeds from divestments,
combined with our continued strong controls on working
capital, with working capital days unchanged at 83 days.

Normalised Operating Expenses

2,311 m

Free Cash Flow

1,095 m

Capital Expenditure

600m

83%

30%

Our continued focus
on financial discipline
has contributed to
the strength of our
balance sheet.

With the improved free cash flow, we reduced our economic
net interest bearing debt by $469 million. This was less
than our target of $800 million by 31 July 2019, but with
continued financial discipline and the proceeds from
the divestment of our interests in foodspring™, and in
DFE Pharma, and our plan to sell some of our shares in
Beingmate, we are confident that we will reduce our debt
and leverage to within our target ranges.

As a result of the full business review, it became clear
that we needed to reduce the carrying value of several of
our assets and take account of other one-off accounting
adjustments. These totalled $829 million before tax, and
increasing to $885 million after tax. Of this amount, $59
million was attributable to non-controlling interests and the
net amount attributable to equity holders is $826 million.

Our carrying value of DPA Brazil has been impaired by
$149 million before tax and $259 million after tax, of which
$200 million is attributable to equity holders. This change is
mainly due to the economic conditions in Brazil and business
performance recovering slower than previously forecast.

As a result of the sale of our Venezuelan consumer
business, and the closing of our small Venezuelan
Ingredients business, we made an accounting adjustment
of $134 million relating primarily to the release of the
adverse accumulated foreign currency translation reserve.

Our carrying value for China Farms was impaired
by $203 million due to the slower than expected
improvement in operating performance.

In our New Zealand Consumer business, the impact of
the strategy review is a $244 million loss before tax and
a $210 million loss after tax. This is due to the accounting
loss on disposal from selling Tip Top, and impairment of
the consumer business assets reflecting the compounding
effect of operational challenges, along with a slower than
planned recovery in our market share.

Our Australian Ingredients business is adapting to lower
milk collections. As a result, we announced the closure
of our Dennington factory which, combined with other
restructuring costs, saw a one-off adverse impact of
$68 million before tax and $50 million after tax.

FONTERRA ANNUAL REPORT 2018

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PERFORMANCE

Ingredients

New Zealand Ingredients’ performance improved on
last year. However, our normalised EBIT declined 8% to
$811 million due to ongoing challenges in our offshore
businesses – Australia Ingredients and Prolesur in Chile.

New Zealand milk collection for the 2018/19 season was
1,523 million kgMS, up 1.2% compared to the previous
season. This was mainly because of favourable weather
conditions in the first half, resulting in higher peak day
collections. However, less favourable on-farm conditions
in the second half meant collections were down in the
second half compared to last season; the net result being
collections were up 18 million kgMS on last season.

As noted in the 2019 Interim Report, volume and
sales revenue for Ingredients in FY19 now includes all
inter-segment sales, whereas previously some sales to
Foodservice were only shown in Foodservice. This was
due to the way in which Ingredients presents certain
inter-segment sales between Ingredients and Foodservice
being revised in 2019. The change increased Ingredients’
sales volumes for the 12 months ended 31 July 2019 by
1.1 billion LME and 188,000MT, and increased sales revenue
by $901 million. This change had no impact to the reported
gross margin for the Ingredients or Foodservice businesses.
Therefore on a like for like basis, total sales volumes and
revenue were down from last year due mainly to lower sales
in Australia Ingredients and product mix changes.

Overall, our Ingredients’ normalised gross margin was down
from 9.0% to 8.4% and in dollar terms it declined 3% to
$1,427 million, largely due to challenges in our Australian
Ingredients business. Lower operating expenses, down $73
million to $735 million, were not enough to offset Australia’s
performance and lower ‘other operating income’, resulting
in Ingredients’ normalised EBIT declining 8% to $811 million.

Normalised New Zealand Ingredients’ gross margin
increased 3% to $1,332 million. We have seen favourable
pricing within both the reference and non-reference
portfolios, with higher price premiums achieved from global
accounts and government tenders and favourable price
relativities achieved in the non-reference portfolio.

Summary Financials

NZD MILLION

31 JULY 2019 31 JULY 2018 CHANGE1

FOR THE YEAR ENDED

Volume (LME, billion)

Volume (’000 MT)

Sales revenue

Normalised total
gross margin

Normalised New Zealand
Ingredients

– New Zealand

Reference products

– New Zealand

Non-reference products

– China raw milk2

– Other gross margin

Normalised Australia
Ingredients

Other gross margin

Normalised EBIT

21.4

3,171

20.5

2,986

17,035

16,306

1,427

1,472

(3)%

1,332

1,297

626

555

13%

701

(19)

811

791

(30)

(19)

879

(11)%

37%

225%

(87)%

(13)%

(8)%

Gross margin ($ per MT) – New Zealand Ingredients

Reference products
($ per MT)

Non-reference products
($ per MT)

336

309

905

1,275

(29)%

1 Percentages as shown in tables may not align to the calculation based on

numbers in the tables due to rounding.

2 China raw milk gross margin represents the net benefit/(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.

This was because the average price for non-reference
products decreased less than the fall in reference product
pricing. New Zealand Ingredients’ favourable pricing was
partially offset by higher conversion costs associated
with bringing new plants online and additional costs
of processing larger volumes of milk at peak. The gross
margin on our reference products was $626 million, up
13% on last year reflecting the lower cost of fat following a
decline during the year in fat prices. The gross margin for
non-reference products was $701 million, down 11% on
the year before due to the increased cost of protein.
Our New Zealand Ingredients business also benefited from
improved ‘other gross margin’, predominantly in its global
sourcing business due to favourable commodity prices.

The New Zealand Ingredients’ gross margin was also
impacted by a $19 million loss representing the difference
between the domestic milk price and the internal raw
milk price paid to China Farms. Last year this loss was $30
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.

In Australia, milk collection for the 2018/19 season was
120 million kgMS, 33 million kgMS or 22% lower than the
2017/18 season. Reduced Australian collections were due
to poor seasonal conditions and high input costs, primarily
feed and water, leading to herd size reductions, farm
exits from key regions (particularly northern Victoria)
and declining share in a highly competitive market.

Higher milk prices and a smaller milk pool meant Australia
Ingredients had a challenging year. We increased our milk
price in response to the competitive market, but lower
collections meant that some factories were underutilised.
These factors increased our cost of goods and adversely
impacted our normalised gross margin, which declined
from $77 million to $10 million. We rationalised resources
at Stanhope and continue to work with a range of partners
to fill Darnum, which returned to 100% Fonterra ownership
this year after we unwound the joint venture with Beingmate.
We also announced the closure of our Dennington site in
Victoria. The closure had a one-off impact on earnings of
$54 million, which was normalised.

We undertook a business simplification process which
resulted in a significant reduction in operating expenses, and
addressing this overcapacity is expected to result in future
cost savings. We expect high milk prices to continue to be a
factor next season, and product mix will be important as we
utilise a smaller milk pool.

In Latin America, Prolesur’s milk collections were down 16%
due to strong competition for farmers’ milk. The increased
cost of milk and reduced collections resulted in Prolesur not
making a profit. Prolesur was the main reason Ingredients’
‘other gross margin’ was down 13% to $85 million.

New Zealand Ingredients’
Normalised Gross Margin

1,332 m

Normalised Total
Gross Margin

1,427 m

New Zealand Ingredients’
Revenue and Volume1

FOR THE YEAR ENDED

NZD MILLION

31 JULY 2019 31 JULY 2018 CHANGE

PRODUCTION VOLUME (’000 MT)

Reference
products

Non-reference
products

1,881

1,849

768

762

SALES VOLUME (’000 MT)2

Reference
products

Non-reference
products

1,864

1,794

774

620

25%

REVENUE PER MT (NZD)2

Reference
products

Non-reference
products

4,739

4,851

(2)%

5,427

5,637

(4)%

1 Table excludes bulk liquid milk. Bulk liquid milk for the 12 months
to 31 July 2019 was 73,000 MT (12 months ended 31 July 2018:
68,000 MT).

2 The way in which Ingredients presents certain inter-segment

sales between Ingredients and Foodservice was revised in FY19.
This increased sales volumes for the 12 months ended 31 July 2019
by 21,000 MT and 167,000 MT on reference and non-reference
products respectively, and increased sales revenue by $153
million and $748 million on reference and non-reference products
respectively. This change had no impact to the reported gross
margin for the Ingredients business.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019
OUR PERFORMANCE

Consumer
and Foodservice

Our Foodservice business improved on last year
despite a slow start in butter sales. However, our
Consumer business was down on last year due
to challenges in some markets. Normalised EBIT
for our combined Consumer and Foodservice
business was down 14% to $450 million.

Overall, sales volumes in LME were down 4% on last year
mainly due to the lower sales of butter in Greater China
and Asia in the first half. Foodservice’s normalised gross
margin percentage improved from 15.7% to 18.0%, but
was offset by a reduction in Consumer’s normalised gross
margin percentage from 27.9% to 25.7%, largely due to
pricing pressure in Latin America and Asia.

Normalised operating expenses reduced by $40 million,
but this was not sufficient to cover the reduced normalised
gross margin resulting in normalised EBIT decreasing 14%
on last year to $450 million. The slow start to the year
was also reflected in earnings, with 70% of normalised
EBIT earned in the second half of the year. Our Oceania
Consumer and Foodservice business performed well, with
normalised EBIT of $92 million, up 38% from last year.

Summary Financials

Normalised EBIT: key performance drivers

NZD MILLION

31 JULY 2019 31 JULY 2018 CHANGE1

NZD MILLION

31 JULY 2019 31 JULY 2018

FOR THE YEAR ENDED

Volume (LME, billion)2

– Consumer

– Foodservice

Volume (’000 MT)

Sales revenue

Normalised gross margin

Normalised gross margin (%)

– Consumer

– Foodservice

Normalised EBIT

5.1

2.9

2.2

1,782

7,011

1,621

23.1%

25.7%

18.0%

450

5.4

2.9

2.4

1,765

7,122

1,683

23.6%

27.9%

15.7%

(4)%

Normalised EBIT prior year

Volume

(10)%

Price

Cost of goods sold

Operating expenses and other3

Normalised EBIT

(2)%

(4)%

–

525

(14)%

525

(180)

102

(13)

450

576

(18)

671

(714)

525

1 Percentages as shown in tables may not align to the calculation based

on numbers in the tables due to rounding.

2 Summing of individual numbers from the regional and divisional breakdown

may not add up to the totals in each category due to rounding.

Includes net other operating income, net foreign exchange gains/losses
and share of profit/loss of equity accounted investees.

Greater China
In Greater China our volumes declined 15% on last year
to 1,208 million LME, driven by a similar decrease in
Foodservice volumes as a result of higher in-market butter
inventories at the start of the year. This situation was
resolved in the second half with improved volumes and
earnings. Growth in Mainland China’s Consumer business
was offset by subdued retail sales in Hong Kong, resulting
in Greater China Consumer volumes decreasing 10% on
last year.

Foodservice gross margins increased to 18.1% compared
to 15.2% last year. The main reason was good growth in
both Anchor Food Professionals™ UHT milk and Anchor
Food Professionals™ UHT culinary cream in the Beverage
House channel. Our Anchor™ UHT cream volumes, had
strong growth and we are continuing to innovate in this
area, including the launch of a beer macchiato in July.

Consumer normalised gross margin was down 3% to
$145 million. Bringing Anmum™ distribution in-house
has returned a profit of $6 million with growth expected
to continue next year. However, subdued retail sales in
Hong Kong impacted Anmum™ and Anlene™ performance.
This has weakened our overall Consumer sales volumes
and normalised gross margin for Greater China. Normalised
EBIT was $160 million in Greater China Consumer and
Foodservice, down 3% on last year’s $165 million.

Latin America
Our sales volumes in Latin America were up 4% to 779
million LME but normalised gross margin was down 13%
to $399 million. Our earnings declined 66%, with normalised
EBIT down from $117 million last year to $40 million.

The main reason for the decline in earnings was a result of
a ‘buy local’ marketing campaign in Chile, which impacted
the sales and earnings of a number of foreign-owned
companies, including our own, Soprole. However, Soprole’s
performance has shown signs of returning to more normal
earnings levels in the last quarter of FY19, with nearly three
quarters of Latin America’s FY19 earnings generated in the
fourth quarter. Soprole’s brand strength means it holds a
number one position in most consumer product categories.

In Brazil, economic challenges led to higher input costs
for milk, which impacted our gross margins for the first
three quarters of 2019. However, the last quarter saw
an improvement in normalised gross margins and
market shares.

We had lower volumes in Venezuela, driven by the country’s
severe socio-economic situation which restricted consumers’
ability to access goods and services, and made accessing the
raw ingredients and materials to run our factories challenging.
For these reasons, we exited the market in March and as a
result had one-off items impacting our earnings.

Greater China Normalised Gross Margin

$349 m

Latin America Normalised Gross Margin

$399 m

Asia Normalised Gross Margin

13%

$451m

Oceania Normalised Gross Margin

$422 m

Greater China
Foodservice margins
were up despite
a slow start to
butter sales.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PERFORMANCE
Consumer and Foodservice CONTINUED

Consumer and Foodservice Performance

LME (BILLION)

NORMALISED EBIT ($M)

YEAR ENDED
31 JULY 2019

YEAR ENDED
31 JULY 2018

CHANGE1

YEAR ENDED
31 JULY 2019

YEAR ENDED
31 JULY 2018

CHANGE1

Consumer and Foodservice2

Oceania

Asia

Greater China

Latin America

5.1

1.7

1.4

1.2

0.8

5.4

1.7

1.5

1.4

0.7

(4)%

(6)%

(14)%

450

158

160

525

176

165

117

(14)%

38%

(10)%

(3)%

(66)%

Oceania
Our performance in Oceania Consumer and Foodservice
improved from last year. Sales volumes were up 2% to
1.7 billion LME, largely due to good growth across all core
categories in our Australia Consumer business. Gross
margin was down 3% to $422 million due to lower gross
margin in New Zealand Consumer from pricing competition
in key categories. The lower Oceania gross margin was
more than offset by the result of New Zealand Consumer’s
commitment to cost control and improved manufacturing
performance. This resulted in an improved Oceania
Consumer and Foodservice normalised EBIT of $92 million,
up 38% from last year.

In our Consumer business, sales volumes were up 3% to
1.3 billion LME. Australia’s Consumer volumes grew across
our core categories, where we continue to be the largest
branded player in spreads and cheese with 34% and 22%
value share respectively. This is our highest share in spreads
in five years and reflects our strong focus on partnering with
retailers to drive category growth. New Zealand’s Consumer
volumes were down due to our market share declining in
key categories, particularly yoghurt and cheese. However,
reduced operating expenditure meant it contributed
positively to Oceania earnings growth. Our New Zealand
Consumer business continues to focus on improving its
service levels and has seen strong improvement this year in
customer surveys, lifting from the bottom of the survey to
within the top half.

Oceania’s Foodservice business performed well against last
year due to Australia. Our Australian Foodservice business
continues to be recognised by industry partners with
numerous supplier awards, which has contributed to this
result. Oceania’s Foodservice sales volumes were up 1% to
433 million LME and gross margin was up 5% to $98 million.

Asia
Our sales volumes in Asia were down 6% to 1.4 billion LME,
predominantly due to lower butter sales in the Middle East
and Indonesia. The Middle East was impacted by challenging
economic conditions and in Indonesia we have focused on
value, moving away from lower margin butter sales, which
has resulted in improved gross margin. In Sri Lanka, political
uncertainty and price constraints contributed to lower
margins and a decrease in Asia’s overall normalised gross
margin from 24.5% last year to 24.2%.

Our Asia Consumer business volume declined 2% to
890 million LME. In Malaysia, our Fernleaf™ powder sales
volume has grown 51% year-on-year supported by the
increase in market share from 24% to 31% in the Family
Milk Powder segment. The increase was mainly driven by
customer trend switching from value-add powders to full
cream milk powder. However, this was more than offset
by the lower butter sales in the Middle East and trading
challenges in Sri Lanka. The pricing constraints in Sri
Lanka were the main reason for normalised gross margin
decreasing in Asia Consumer, down 5% to $359 million.

In Foodservice, volumes were down 13% to 559 million
LME also due to the lower butter sales in the Middle East
and Indonesia. Sales volume in Thailand increased on last
year due to Anlene™ and Anmum™ continuing to perform
well, with total market share increasing from 40% to 43%.
The change in Indonesia’s operating model was the main
contributor to the normalised gross margin increasing in
Asia Foodservice, up 17% to $93 million.

Our normalised EBIT for Consumer and Foodservice in
Asia was $158 million down 10%, predominantly due to
‘other income’ declining as a result of fewer one-off
gains than the previous year.

1 Percentages as shown in tables may not align to the calculation based

on numbers in the tables due to rounding.

2 Summing of individual numbers from the regional and divisional breakdown

may not add up to the totals in each category due to rounding.

Foodservice Normalised Gross Margin

$426 m

Greater China Foodservice
Normalised Gross Margin

Oceania Normalised EBIT

$203m
$92 m

10%

38%

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PERFORMANCE

China Farms

Our farming operations in China comprise seven
farms across two hubs, producing high-quality fresh
milk for the China ingredients, foodservice and
consumer markets, and an investment in two farms
with our joint venture partner.

We milk more than 31,000 cows across our two farm
hubs in China – around 17,000 at Yutian and 14,000 at
Ying. Sales volumes were down 5% to 259 million LME
compared to last year. Rainstorms and floods in Yutian
and animal health costs have impacted milk production
and subsequently sales volumes.

On a full end-to-end basis, China Farms made total losses
of $30 million normalised EBIT. This is made up of a
$14 million direct loss from China Farms inclusive of our
share of losses on the joint venture farms of $19 million,
a further $20 million loss in Ingredients and $4 million
gain in Consumer and Foodservice.

Factors impacting performance were lower production
volumes, additional animal management costs, and
increasing feed commodity prices due to trade disputes
between China and the US. Initiatives to drive efficiencies
on-farm and reduce our cost base did improve performance
in the second half.

China Farms Reported Financials

FOR THE YEAR ENDED

NZD MILLION

31 JULY 2019 31 JULY 2018 CHANGE1

Volume (LME, billion)

Volume (‘000 MT)

Sales revenue

Normalised gross margin

Normalised EBIT

0.3

249

(14)

0.3

262

(9)

(5)%

(6)%

(59)%

End-to-End China Farms Normalised EBIT

NZD MILLION

China Farms

– Fonterra-owned

– Joint venture

New Zealand Ingredients

Consumer and Foodservice

Total

FOR THE YEAR ENDED

31 JULY 2019 31 JULY 2018 CHANGE1

(14)

(19)

(20)

(30)

(9)

(4)

(5)

(30)

(38)

(59)%

247%

(259)%

33%

194%

21%

Our Ingredients business is responsible for purchasing
the raw milk from the Fonterra-owned farms and capturing
the highest value for this milk. We have seen an improvement
in the average price Ingredients has been achieving for milk,
which has seen our loss from China Farms in Ingredients
decrease from $30 million last year to $20 million this year.
In FY19, domestic milk prices improved and 39% of our
revenue was from milk sold for more than 4RMB, versus
19% in FY18.

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 Carrefour, Hema Fresh,
Starbucks, McDonald’s and other Quick Service Restaurant
channels continue to build positive momentum, as its raw
milk goes into higher value channels. These volumes are up
to 12% of our milk from China Farms, up 7% from last year.

1 Percentages as shown in tables may not align to the calculation based

on numbers in the tables due to rounding.

Normalised Gross Margin

Costs down

$5 m
33%

FROM
2018

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PERFORMANCE

Historical Financial
Summary

Market Statistics

Fonterra Seasonal Statistics1

Total New Zealand milk collected (million litres)

17,123

16,932

17,051

17,585

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

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

Weighted Average Commodity Prices ($ USD per MT FOB)

Whole Milk Powder7

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

85.4

1,413

110

1,523

9,887

2,602

1,612

6.35

–

6.35

–

4.63

2,907

2,216

4,448

3,772

0.69

20.0

11.4

8.6

82.0

1,404

101

1,505

80.1

1,417

109

1,526

86.9

1,453

113

1,566

18,143

89.7

1,520

1,614

10,162

10,267

10,579

10,753

2,712

1,612

2,722

1,607

3,098

1,602

3,379

1,599

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

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

JULY 2019

JULY 2018

JULY 2017

JULY 2016

JULY 2015

JULY 2019

JULY 2018

JULY 2017

JULY 2016

JULY 2015

Group Overview10,11

Income

Volume (liquid milk equivalents, billion)

Volume (000s MT)

Sales revenue ($ million)

Normalised EBITDA ($ million)12

Normalised EBIT ($ million) 13

Normalised NPAT ($ million)14

Reported earnings per share

Normalised earnings per share

Revenue Margin Analysis

Normalised EBITDA15

Normalised EBIT16

Normalised NPAT17

Cash Flow ($ million)

Operating cash flow18

Free cash flow18

Net working capital19

Capital Measures

Equity excluding hedge reserve ($ million)

Economic net interest-bearing debt ($ million)24

21.9

4,139

22.2

4,123

22.9

4,180

20,114

20,438

19,232

1,380

1,446

819

269

(0.35)

0.17

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

6.9%

4.1%

1.3%

7.1%

4.4%

1.9%

8.7%

6.0%

4.1%

11.2%

7.9%

4.6%

8.1%

5.2%

2.4%

1,123

1,095

3,168

6,149

5,730

1,548

600

3,432

6,616

6,199

1,376

670

3,055

7,056

5,601

3,278

2,184

2,159

6,883

5,473

668

(1,372)

3,650

7,196

7,120

Economic debt to debt plus equity ratio25

48.2%

48.4%

44.3%

49.7%

Debt/EBITDA22

Capital employed ($ million)23

Capital employed ($ million)24

Capital expenditure ($ million)25

Return on capital (including intangibles and EAI)26

Return on capital (excluding intangibles and EAI)27

4.3x

4.5x

3.5x

2.8x

4.7x

12,904

13,052

9,668

600

5.8%

7.6%

9,552

861

6.3%

8.0%

12,717

9,093

851

8.3%

11.1%

13,188

9,392

944

9.2%

12.4%

12,918

9,487

1,531

6.9%

8.9%

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PERFORMANCE
Historical Group Summary CONTINUED
Ingredients10,11

Regional Breakdown – Consumer and Foodservice10,11,33,34

JULY 2019

JULY 2018

JULY 2017

JULY 2016

JULY 2019

JULY 2018

JULY 2017

JULY 2016

Sales Volume (000 MT)28,29

Reference Products

Non-reference Products

Revenue ($/MT)28,29

Reference Products

Non-reference Products

Gross Margin ($/MT)

Reference Products

– Margin

Non-reference Products

– Margin

Ingredients

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Normalised earnings ($ million)

Normalised earnings margin %32

Divisional Breakdown – Ingredients10,11,33

New Zealand Ingredients

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Fonterra Ingredients Australia

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Other and Eliminations

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Gross margin ($ million)

1,864

774

4,739

5,427

1,794

620

4,851

5,637

1,841

696

4,262

5,567

1,920

720

3,276

4,972

336

309

232

330

7.1%

6.4%

5.4%

10.1%

905

1,275

1,165

1,348

16.7%

22.6%

20.9%

27.1%

21,421

20,520

21,305

22,390

3,171

2,986

3,019

3,074

17,035

16,306

15,266

13,005

1,427

1,472

1,473

1,860

8.4%

9.0%

9.7%

14.3%

811

879

943

1,204

4.8%

5.4%

6.2%

9.3%

JULY 2019

JULY 2018

JULY 2017

JULY 2016

19,494

18,427

19,369

20,350

2,972

2,778

2,879

2,911

15,393

14,564

14,087

11,835

1,332

1,297

1,333

1,733

8.7%

8.9%

9.5%

14.6%

1,659

328

1,760

1,755

350

1,877

0.6%

4.1%

1,619

305

1,522

1,600

316

1,396

5.1%

4.2%

268

(129)

(118)

338

(142)

(135)

317

(165)

(343)

440

(153)

(226)

Oceania

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Normalised earnings ($ million)

Normalised earnings margin %32

Asia

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Normalised earnings ($ million)

Normalised earnings margin %32

Greater China

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Normalised earnings ($ million)

Normalised earnings margin %32

Latin America

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Normalised earnings ($ million)

Normalised earnings margin %32

Total Consumer and Foodservice

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Normalised earnings ($ million)

Normalised earnings margin %32

1,692

627

2,159

422

1,656

623

2,159

433

1,743

636

1,952

438

1,834

698

2,051

444

19.5%

20.1%

22.4%

21.6%

4.3%

3.1%

4.5%

4.7%

1,450

297

1,862

451

1,549

298

1,865

456

1,624

300

1,810

501

1,549

292

1,944

599

24.2%

24.5%

27.7%

30.8%

158

8.5%

176

194

244

9.4%

10.7%

12.6%

1,208

299

1,483

349

1,413

266

1,564

335

1,278

237

1,277

359

874

167

916

329

23.5%

21.4%

28.1%

35.9%

160

165

204

131

10.8%

10.5%

16.0%

14.3%

779

559

1,507

399

747

578

1,534

459

735

600

1,478

446

623

643

1,385

436

26.5%

29.9%

30.2%

31.5%

2.7%

117

7.6%

6.1%

108

7.8%

5,129

1,782

7,011

1,621

5,365

1,765

7,122

1,683

5,380

1,773

6,517

1,744

4,882

1,800

6,296

1,808

23.1%

23.6%

26.8%

28.7%

450

525

576

580

6.4%

7.4%

8.8%

9.2%

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PERFORMANCE
Historical Group Summary CONTINUED
Regional Breakdown – Consumer10,11,33,34

Regional Breakdown – Foodservice10,11,33,34

JULY 2019

JULY 2018

JULY 2017

JULY 2016

JULY 2019

JULY 2018

JULY 2017

JULY 2016

Oceania

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Asia

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Greater China

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Latin America

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Total Consumer

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

1,258

1,228

1,309

524

1,641

324

525

1,644

340

538

1,508

355

1,415

599

1,618

354

19.7%

20.7%

23.5%

21.9%

890

204

1,276

359

906

201

1,238

377

1,025

209

1,284

402

1,030

215

1,482

492

28.1%

30.5%

31.3%

33.2%

126

361

145

139

343

149

112

269

120

233

105

40.2%

43.5%

44.6%

45.1%

670

527

1,364

367

653

550

1,418

429

637

569

1,363

414

543

613

1,289

405

26.9%

30.3%

30.4%

31.4%

2,944

1,330

4,642

1,195

2,928

1,347

4,643

1,295

3,084

1,373

4,424

1,291

3,064

1,470

4,622

1,359

25.7%

27.9%

29.2%

29.4%

Oceania

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Asia

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Greater China

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Latin America

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Total Foodservice

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

433

104

518

427

515

433

444

419

433

18.9%

18.1%

18.8%

20.8%

559

586

643

627

599

526

520

462

107

15.8%

12.6%

18.8%

23.2%

1,083

223

1,122

203

1,273

195

1,221

186

1,166

179

1,008

239

798

124

683

224

18.1%

15.2%

23.7%

32.8%

109

143

116

115

22.8%

25.9%

27.8%

32.3%

2,185

2,437

2,295

452

419

399

2,369

2,479

2,093

426

388

453

1,817

330

1,674

452

18.0%

15.7%

21.7%

27.0%

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR PERFORMANCE
Historical Group Summary CONTINUED
China Farms10,11

Volume (liquid milk equivalents, million)30

Volume (000s MT)30

Revenue ($ million)

Normalised gross margin ($ million)

Normalised gross margin %31

Normalised earnings ($ million)

Normalised earnings margin %32

JULY 2019

JULY 2018

JULY 2017

JULY 2016

259

249

273

262

335

269

229

183

(40)

2.1%

(14)

1.9%

(9)

8.6% (22.0)%

(59)

(5.6)%

(3.4)%

0.4% (32.2)%

Notes to the Historical Financial Summary

1 All seasonal statistics are based on the 12-month milk season of

1 June – 31 May.

2 The Farmgate Milk Price has been determined by the Board. In making

that determination, the Board takes into account the Farmgate Milk Price
calculated in accordance with the Farmgate Milk Price Manual.

3 Dividend yield is dividend (per share) over volume weighted average

share price for the period 1 August – 31 July.

4 Average payout for a 100% share-backed supplier.

5 Retentions (per share) are calculated as net profit after tax attributable

to Fonterra Co-operative Group Limited shareholders for the year ended
31 July divided by the number of shares at 31 May, less dividend per share.
Retentions are reported as nil where Fonterra has reported a net loss
after tax.

6 Weighted average share price represents the average price Fonterra
Co-operative Group Limited shares traded at, weighted against the
trading volume at each price over the period 1 August – 31 July.

7 Source: Fonterra Farmgate Milk Price Statement representing the

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 NZD/USD conversion rate is the rate that Fonterra

has converted net United States Dollar receipts into New Zealand Dollars
including hedge cover in place.

10 Percentages as shown in table may not align to the calculation
of percentages based on numbers in the table due to rounding
of reported figures.

Includes normalisation adjustments.

12 Normalised EBITDA is calculated as profit for the period before
net finance costs, tax, depreciation and amortisation, adjusted
for normalisations.

13 Represents earnings before finance income, finance costs and tax.

14 Normalised NPAT attributable to equity holders of the Parent.

19 Net working capital is calculated as total trade and other receivables
plus inventories, less trade and other payables. It excludes amounts
owing to suppliers and employee entitlements. Previously shown on
an inclusive basis.

20 Economic net interest-bearing debt reflects total borrowings less cash
and cash equivalents and non-current interest-bearing advances,
adjusted for derivatives used to manage changes in hedged risks.

21 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.

22 Debt payback ratio is economic net interest bearing debt divided by
earnings before interest, tax, depreciation and amortisation (known
as Debt/EBITDA). Both Debt and EBITDA are adjusted, from reported
amounts, for the impact of operating leases, certain normalisations
and non-cash amounts

23 Capital employed includes brands, goodwill and equity accounted investments.

24 Capital employed excludes brands, goodwill and equity accounted investments.

25 Capital expenditure comprises purchases of property (less specific
disposals where there is an obligation to repurchase), plant and
equipment and intangible assets, and net purchases of livestock.

26 Return on capital is calculated as normalised EBIT, less a notional
tax charge divided by capital employed including brands, goodwill
and equity accounted investments.

27 Return on capital is calculated as normalised EBIT, less a notional tax
charge divided by capital employed excluding brands, goodwill and
equity accounted investments.

28 Figures exclude bulk liquid milk. The bulk liquid milk volume for the

year ended 31 July 2019 was 73,000 MT of kgMS equivalent (year ended
31 July 2018 was 68,000 MT of kgMS equivalent).

29 The way in which Ingredients presents certain inter-segment sales

between Ingredients and Foodservice was revised in FY19. This increased
sales volumes for the year ended 31 July 2019 by 188,000 MT and increased
sales revenue by $901 million. This change had no impact to the reported
gross margin for the Ingredients business.

15 Normalised EBITDA divided by normalised sales revenue.

30 Includes sales to other strategic platforms.

16 Normalised EBIT divided by normalised sales revenue.

31 Normalised gross margin divided by normalised sales revenue.

17 Normalised NPAT divided by normalised sales revenue.

32 Normalised earnings divided by normalised sales revenue.

18 Refer to Cash Flow Statement for detail on Operating cash flow.

33 Summing of individual numbers from the regional and divisional

Free cash flow is the total of net cash flows from operating activities
less cash flows from investing activities.

breakdown may not add up to the totals in each category due to rounding.

34 Includes share of Consumer and Foodservice overhead allocations,

the total impact of which is $67 million.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR CORPORATE GOVERNANCE

Corporate
Governance

Strong governance plays a critical role in the
success of our Co-operative and the Board,
Shareholders' Council and Management of
Fonterra 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
the Co-operative.

This Corporate Governance statement is current as at
25 September 2019 and has been approved by the
Fonterra Co-operative Group Limited Board.

CHANGES TO THE FONTERRA BOARD

The Board of Directors has up to 11 members. 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 2019:
• In November 2018, Professor Nicola Shadbolt, Mr Ashley
Waugh and Mr John Wilson, all Farmer Directors, retired
from the Board and Ms Leonie Guiney and Mr Peter McBride
were elected to the Board as Farmer Directors.

• In December 2018, Mr John Nicholls was elected to the

Board as a Farmer Director.

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 January 2019 (NZX Code).

Fonterra focuses 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 the 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 assist

Fonterra in meeting 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
operates in.

Corporate Governance CONTINUED

Principle 1: Code of Ethical Behaviour

SECURITIES TRADING POLICY

CODE OF ETHICS

A culture of honesty and integrity is integral to Fonterra’s
commitment to, and reputation as an organisation that our
customers, farmers, business partners and communities trust.

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 our four values, especially ‘Do What’s Right’.

Fonterra’s code of ethics is made up of three documents:
The Way We Work (Code of Business Conduct), the Board Charter
and the Group Ethical Behaviour Policy. These documents,
available on fonterra.com and supported by our employment
agreements and other policy documents, lay out clear expectations
for our Directors, officers and employees regarding ethical
behaviour, including the requirement for the highest standard
of integrity, honesty and transparency, dealing with conflicts of
interest, the use of corporate information, assets and property,
giving and receiving gifts, procedures for whistle blowing and
managing breaches of the code of ethics. The Board has also
developed a Code of Conduct for Directors.

The Way We Work also guides us in how to apply Fonterra’s
four values in everyday situations with our farmers, unit holders,
customers, suppliers and the wider community.

Fonterra’s Group Ethical Behaviour Policy and The Way We
Work are available to all employees on the Fonterra intranet,
in multiple languages. As with all Group Policies, training on
these documents is an important part of our global induction
programme, and there is a yearly check-in and certification
process to support our people’s awareness and understanding
of these. In addition, annual refresher learning on our Ethical
Behaviour commitments, expectations, systems and processes
is required throughout the business.

Fonterra’s independently administered whistleblowing hotline
provides individuals with a confidential channel (by phone,
email, mail, or online) to report concerns about serious
wrongdoing, or behaviour that is unethical or does not meet
the standards described in The Way We Work. Individuals are
able to make anonymous complaints and raise issues without
disclosing their identity to Fonterra.

The hotline is available to everyone across our Co-operative
no matter where they are. In the 2019 financial year, 47 reports
were made to the hotline. Disclosures are investigated by a
Fonterra team not involved in the substance of the concern
(Internal Audit, other specialist teams or, where appropriate, an
external investigator). Appropriate action is then taken, with timely
updates made available to the whistle-blower through the hotline.

Fonterra operates a Conflict of Interest register where our
employees must enter actual or potential personal conflicts
of interests. Fonterra also operates a Gift & Entertainment
register where employees must record all gifts given or received,
including hospitality and entertainment with third parties,
above a nominal level.

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. This applies to Directors, officers, employees
and contractors of the Fonterra Group around the world and
members of the Shareholders’ Council and Milk Price Panel.
We do this in addition to legislative requirements for trading
securities in New Zealand and Australia.

The Securities Trading Policy and other key Group Policies are
available on fonterra.com. All our Directors comply with
the legislative requirements for disclosing interests in listed
voting securities of Fonterra and its related companies.

Principle 2: Board Composition
and Performance

BOARD CHARTER

The Board Charter includes details about the Board’s role,
responsibilities and obligations, 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 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, and
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.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR CORPORATE GOVERNANCE
Corporate Governance CONTINUED

Corporate Governance CONTINUED

DIVERSITY AND INCLUSION POLICY

EXECUTIVE LEADERSHIP GENDER COMPOSITION

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 publishes its Diversity and Inclusion Policy on
fonterra.com and through the leadership of our Talent
and Engagement Director we are driving our strategic
framework globally.

Fonterra’s Diversity and Inclusion Policy has three key areas
of focus:

Our People: attracting, selecting, developing, 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’.

As at 31 July 2018

FONTERRA MANAGEMENT TEAM

GENDER

FTE

MALE

86%

FEMALE

14%

GENDER DIVERSE

UNDECLARED

–

As at 31 July 2019
The gender composition of Fonterra Management Team members changed between 2018 and 2019.

FONTERRA MANAGEMENT TEAM

GENDER

FTE

MALE

71%

FEMALE

29%

GENDER DIVERSE

UNDECLARED

–

DIVERSITY AND INCLUSION TARGETS AND OBJECTIVES

BOARD GENDER COMPOSITION

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.

In July 2019 changes to the Farmer Director election process
were introduced. A three member Independent Selection
Panel recommends appropriate candidates 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 Independent Selection
Panel, there is a non-assessed candidate 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 Appointments and Remuneration 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.

DISCLOSURE

Information about each Director (including experience, length
of service, independence and ownership interests and attendance
at Board meetings) is disclosed at the end of this section
or in the statutory information section of this Annual Review.

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 to 50%1 by 2022
and further targeting a mix of 20% ethnic diversity within
global leadership levels.2

To achieve our gender and ethnicity targets, we have placed
emphasis on gender balanced long and short-lists for leadership
recruitment as well as establishing strong foundations of flexible
work practices, pay equity, and attractive parental leave policies to
attract, engage and retain women and minorities in our workplace.
We are actively working to mitigate the effects of unconscious bias
in recruitment, performance and talent management.

Approved targets are underpinned by comprehensive metrics
that enable regular reporting on progress globally.

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 2019. 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 Farmer Director election process.

As at 31 July 2018

BOARD

FTE

MALE

82%

FEMALE

18%

GENDER

GENDER DIVERSE

UNDECLARED

–

As at 31 July 2019
As at 31 July 2019 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 training and workshops on relevant subjects

each year, is 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.

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 farmers
annually. The Board is also responsible for reviewing the
Chief Executive’s performance.

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.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR CORPORATE GOVERNANCE
Corporate Governance CONTINUED

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 eleven 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 2019, 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.

DIVISION OF ROLES

John Monaghan, who is a Farmer Director, is the Board-elected
Chairman. The Chairman 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 fonterra.com.

In December 2018 the name and purpose of two Board Committees
were updated. The People, Culture and Safety Committee was
renamed as the Appointments and Remuneration Committee
and the Risk Committee was renamed as the Safety and Risk
Committee. Responsibility for health, safety and wellbeing has
moved to the Safety and Risk Committee.

During FY19 the Board formed three non-permanent Committees:
the Director Election Review Committee, the Divestment Review
Committee and the Capital Structure Committee. The Director
Election Review Committee was a joint Board and Shareholders’
Council Committee established in March 2019 to review what
aspects, if any, of the Director election process could be improved.
Mr Bruce Hassall, Mr Peter McBride and Mr Brent Goldsack were
the Board’s appointees to the Committee. The Divestment Review
Committee was established in March 2019 to oversee material
divestments and similar transactions. Mr Scott St John is the chair
of the Committee and Ms Leonie Guiney, Mr Brent Goldsack,
Mr Bruce Hassall and Mr Simon Israel are members of the
Committee. The Capital Structure Committee was established
in June 2019 to provide guidance over Management’s review of
Fonterra’s capital structure. Mr Bruce Hassall is the chair of the
Committee and Ms Leonie Guiney, Mr Brent Goldsack, Mr Peter
McBride and Mr John Nicholls are members of the Committee.

COMMITTEE OR GROUP

MEMBERSHIP AS AT 31 JULY 2019

PURPOSE

Appointments
and Remuneration
Committee

Audit and Finance
Committee

Co-operative Relations
Committee

John Monaghan (Chair)
Andrew Macfarlane
Simon Israel
(Independent)

Bruce Hassall
(Chair and Independent)
Donna Smit
Peter McBride

Brent Goldsack (Chair)
Andrew Macfarlane
John Nicholls

Clinton Dines
(Independent)
Bruce Hassall
(observer)

Leonie Guiney
Scott St John
(Independent)

Donna Smit
Peter McBride

Milk Price Panel

Safety and Risk
Committee

Scott St John
(Chair and Independent)
Bruce Hassall (Independent)
Brent Goldsack

Andrew Wallace
(Independent)
Bill Donaldson

Leonie Guiney (Chair)
Bruce Hassall
(Independent)

Brent Goldsack
Scott St John
(Independent)

To assist the Board in fulfilling its corporate governance
responsibilities in relation to the recruitment, retention,
remuneration and development of Directors, executives
and other employees.

To assist the Board in fulfilling its corporate governance
responsibilities in relation to Fonterra’s financial
reporting, audit activities, treasury matters, financial
risk management and internal control frameworks.

To assist the Board in fulfilling its corporate 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 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.

To assist the Board in fulfilling its corporate governance
responsibilities in relation to Fonterra’s management
of health and safety and key enterprise wide risks.
This includes promoting a safe and healthy working
environment and overseeing Fonterra’s risk management
framework to ensure the behaviours required, guidelines,
policies and processes for monitoring and mitigating
enterprise-wide risks are in place.

Corporate Governance CONTINUED

BOARD AND COMMITTEE ATTENDANCE

BOARD

AUDIT AND FINANCE
COMMITTEE

APPOINTMENTS AND
REMUNERATION
COMMITTEE

CO-OPERATIVE
RELATIONS
COMMITTEE

MILK PRICE PANEL

SAFETY AND RISK
COMMITTEE

Eligible
to Attend

Attendance

Eligible
to Attend

Attendance

Eligible
to Attend

Attendance

Eligible
to Attend

Attendance

Eligible
to Attend

Attendance

Eligible
to Attend

Attendance

Clinton Dines

Brent Goldsack

Leonie Guiney

Bruce Hassall

Simon Israel

Andrew
Macfarlane

Peter McBride

John Monaghan

John Nicholls

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 above.

The Audit and Finance Committee comprises two Appointed
Directors and three 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 2019, Scott St John, Bruce Hassall and Andrew Wallace
are considered to be Independent Members of this Panel.

NOMINATIONS COMMITTEE

The Nominations Committee was disestablished in June 2019
as part of the recommendations of the Director Election
Review Committee.

MAJORITY INDEPENDENT DIRECTORS – AUDIT AND
FINANCE COMMITTEE AND APPOINTMENTS AND
REMUNERATION COMMITTEE

The Audit and Finance Committee and Appointments and
Remuneration Committee 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 the
Audit and Finance Committee is chaired by an Independent
Director and the Appointments and Remuneration Committee
is 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
Appointments and Remuneration Committee meetings
at the request of the Committee.

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 2019FONTERRA ANNUAL REPORT 2019
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 fonterra.com.

Fonterra’s Disclosure Committee 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 Co-operative Affairs, Director Capital Markets
and the Director Governance, Risk and Audit.

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, the Chairman of the Milk Price Panel and
the Chairman of the Co-operative Relations Committee 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 fonterra.com:
• Board Charter

• Board Code of Conduct

• Audit and Finance Committee Charter

• Co-operative Relations Committee Charter

• Safety and Risk Committee Charter

• Appointments and Remuneration Committee Charter

• Group Privacy Policy

• The Way We Work (Code of Business Conduct)

• Group Disclosure Policy and Group Disclosure Standard

• Group Diversity and Inclusion Policy

• Group Health, Safety and Wellbeing Policy

• Group Environmental Policy

• Group Ethical Behaviour 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 Review, we provide coverage of both financial and
non-financial matters. Non-financial reporting includes coverage
of our new strategy in the ‘Our New Direction’ section. High-level
consideration of activities across our sustainability pillars of
Nutrition, Environment and Community are included in the
‘Our Year That’s Been’ section. In November 2018 Fonterra issued
its second Sustainability Report based upon GRI guidelines to
further expand our non-financial disclosure for each financial year.
We plan to release the Sustainability Report annually, with the
next report due to be issued in November 2019.

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 2019 were David Gasquoine (Chair), John Gregan,
Glenn Holmes, Scott Montgomerie and Stephen Silcock.
Gerard Wolvers resigned on 7 June 2019.

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 79
of the Annual Financial Results for the year ended 31 July 2019.

REMUNERATION OF OUR PEOPLE

Remuneration of our CEO and Management is governed by the
Appointments and Remuneration Committee (previously known
as the People, Culture and Safety Committee). Their focus is on
balancing the need to attract and retain talented people, with the
need to deliver the highest possible overall returns to our farmer
shareholders and unit holders.

Our remuneration framework remains largely unchanged
for the year ended 31 July 2019. The key points to note for
FY19 are:
• we did not meet the FY18-19 minimum performance

thresholds and therefore no Long-Term Incentive payments
were earned

• the decision was made not to make any Short-Term Incentive
payments or annual Sales Incentive Plan payments in relation
to FY19 performance

• for the FY19 performance period our previous CEO,

Theo Spierings, received total remuneration of $4,673,359
which included performance payments realised for FY17

• for the FY19 performance period our CEO, Miles Hurrell,

received total remuneration of $2,263,045 which includes
his payment for acting in the role between 15 August 2018
and 4 March 2019 before his permanent appointment on
5 March 2019.

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 our 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, 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).

The remuneration we pay our employees is benchmarked against
comparable companies in the country or region where they are
located, using information obtained from independent
remuneration consultants. 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 consider budget, market conditions,
internal equity, and governance factors such as local legislation,
as well as taking into account individual performance.

INCENTIVE PLANS

Fonterra’s incentive programmes are designed to drive our
Co-operative’s performance by:
• focusing on our 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 Appointments
and Remuneration 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
Remuneration for the CEO and FMT is generally reviewed on
an annual basis, with consideration to 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 2019FONTERRA ANNUAL REPORT 2019OUR CORPORATE GOVERNANCE
Corporate Governance CONTINUED

Short-Term Incentives

Long-Term Incentives

Fonterra’s LTI is designed to reward the CEO and the FMT for
delivering successful outcomes for our 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 remaining FMT members, the LTI target
is set between 30% and 50% of Fixed Remuneration.

The FY18-20 and FY19-21 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.

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
the STI is set at 60% of Fixed Remuneration and for the FMT, the
STI target is set between 30% and 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 FY19 STI outcomes for the CEO and the FMT
are determined by three elements:
• Fonterra Group Performance (Volume and EBIT)

• 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 the CEO and the FMT is capped
at 200% of individual target pay-out.

CEO REMUNERATION

Chief Executive Officer3 – Total Remuneration FY19

Miles Hurrell held the role of Chief Executive Officer on an interim basis from 15 August 2018 to 4 March 2019 before being
permanently appointed on 5 March 2019. Mr Hurrell’s annual fixed remuneration as at 31 July 2019 was $1,950,000. The total
remuneration he received in FY19 was $2,263,045, made up as follows.

FIXED REMUNERATION

PAY FOR PERFORMANCE

TOTAL REMUNERATION

SALARY

$1,377,756

BENEFITS4

$65,914

STI

LTI5

$219,375

OTHER6

$600,000

$2,263,045

3 The total remuneration received in FY19 by Mr Theo Spiering, whose employment as Chief Executive Officer ceased on 31 August 2018, was $4,673,359.

FY19 remuneration received included base salary, superannuation contributions, holiday pay entitlement and short-term and long-term incentive
payments in relation to performance in previous years.

4 Employer superannuation contribution.

5 Payment of the FY17 VLI deferred payment in relation to performance in FY17.

6 Comprises a payment of $600,000 in relation to interim CEO position and appointment as permanent CEO. This payment was contractually agreed

on 5 March 2019 and was paid in two instalments of $300,000 in May 2019 and July 2019.

Corporate Governance CONTINUED

Long Term Incentive Plans

This year Fonterra changed the eligibility of the FY19-21
Long-Term Incentive (LTI) plan to CEO and FMT members only.

Previous LTI plans extended eligibility beyond FMT to certain
senior executives. For purposes of clarification, we have
summarised below the LTI plans that are active or where deferred
payments have been made in FY19 for non-FMT members.

Velocity Leadership Incentive (FY17)

The Velocity Leadership Incentive (VLI) was the LTI plan in place
for FY17. It has been discontinued and did not apply in FY18
or beyond. The VLI was a targeted two-year plan to accelerate
and reward the Fonterra business transformation, which our
Co-operative referred to as ‘Velocity’.

The FY17 VLI payment schedule was a 50% payment following
the end of FY17, with the remaining 50% deferred over two years.
The second and final 25% deferral was paid in November 2018.

FY18–FY20 Long-Term Incentive

In FY18, the Appointments and Remuneration Committee
approved a new LTI plan for FY18 to FY20 and beyond.

The change marked a return to a more traditional LTI plan
designed to incentivise the achievement of longer-term strategic
objectives of our Co-operative. This LTI used two core financial
metrics to measure achievement of our Co-operative’s
performance. The metrics are Return on Capital and Earnings
per Share.

LTI plan targets were 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.

FY18 and FY18-19 Long-Term Incentives

With the introduction of the new LTI structure and the subsequent
discontinuation of the VLI, two shorter term ‘bridging’ LTI plans
were developed to ensure that Fonterra appropriately incentivised
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 Appointments and
Remuneration Committee.

For both the FY18 and FY18-19 plan, performance thresholds
were not met and no payment was 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 FY19,
this incentive covered approximately 6,500 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 Appointments and Remuneration 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.

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.

The decision was made not to make any STI or annual Sale
Incentive Plan payments in FY19.

Other Incentive Plans

Some business units, both in New Zealand and offshore, use
sales incentive plans for 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 participate in any other
short-term incentive plans.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR CORPORATE GOVERNANCE
Corporate Governance CONTINUED

Principle 6: Risk Management

HEALTH AND SAFETY

Fonterra is committed to providing a safe and healthy work
environment to 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 focused programmes to address our critical risks and
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, status of controls implemented as an
outcome of self-assurance and internal audits and serious
event investigations.

While our TRIFR has decreased over the past year from 5.2 to
4.9, there have been a higher number of serious harm injuries
in FY19 (18) compared to FY18 (14), and one fatality in China.

We remain committed to maintaining our longer term TRIFR
goal of 5.0 which represents world class within our industry
group. We will continue to track our efforts on a broad range
of personal safety, health and wellbeing programmes to enhance
our people care as well as on managing critical risks and process
safety to assure our key risk controls are effective.

RISK MANAGEMENT FRAMEWORK

Fonterra’s integrated risk management framework is based on
a three lines of defence model. The Board sets the risk appetite
settings for our Co-operative which are used to inform decision
making, policy settings and the risk management framework.

As the first line of defence, our people leaders have clear
responsibilities for business risk management and to ensure
compliance with external requirements as well as 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 programme, external and
customer audit systems comprise the third line of defence.
Compliance with our Group Policy Framework is a condition of
employment at Fonterra, which is also articulated in our Group
Policy Principles.

Our integrated risk management framework is aligned
with international best practice and includes a consistent
approach that:
• supports our people to understand risk, rationale

and relevance to business decision-making

• informs a customised risk management process for Fonterra

• enables the identification and implementation of

appropriate options to manage our risk

• enables continuous awareness and understanding of the

nature and level of risks across the business

• assures and improves the quality and effectiveness

of our risk management process design, implementation
and outcomes

• is an integral part of the business’s governance framework.

Fonterra’s Risk Management Policy outlines our risk principles,
accountabilities and the requirements for managing and
reporting risk within the business. The Integrated Risk Forum
meets quarterly to ensure a balanced view of risk and that our
most material risk and exposure profile is understood, reviewed,
appropriately managed and reported.

Members of the Integrated Risk Forum are senior managers from
across the business who evaluate our risks, identify and prepare
for emerging risks and provide a senior management level of risk
oversight through monitoring of, and reporting against our
Risk Appetite Statement, indicators and tolerances. This is
then provided to the Safety and Risk Committee. The Safety
and Risk Committee receives reports on Fonterra’s integrated
risk management framework and the Board receives regular
updates from the Safety and Risk Committee.

In our Sustainability Report we provide more detailed information
on our approach to health and safety, food safety and quality,
environmental and animal welfare risks.

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 meets 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 6 to the Annual Financial Results for the year
ended 31 July 2019.

An RFP process was completed during the year for the provision
of external audit services for the financial year ended 31 July 2020.
KPMG was the successful party in that process and the Board
will be recommending their appointment as external auditor
to farmer shareholders at the Annual Meeting.

ANNUAL MEETING

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.

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

– complying with the Internal Audit methodology.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR CORPORATE GOVERNANCE
Corporate Governance CONTINUED

Principle 8: Shareholder Rights and Relations

FARMER MEETINGS

WEBSITE

Fonterra has a website (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 2019 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 our 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.

The working interface document is available on the Farm
Source™ website.

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 farmers. An extensive farmer 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
farmers with the ability to receive communications (such as
the Annual Report) from Fonterra electronically.

Fonterra’s communications with farmers 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.

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 farmers on specific issues
as they arise.

FONTERRA.COM AND FARM SOURCE™ DIGITAL TOOLS

An overview of our Co-operative’s operations, financial
presentations and public announcements are all available on the
fonterra.com website. Our Co-operative also uses emails, including
regular updates from the Chairman, CEO and regular farmer
updates to share information with its stakeholders.

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 our Co-operative 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 OR SPECIAL 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 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.

Notices of Annual or Special Meetings are sent to farmer
shareholders at least 10 working days before the meeting.

Corporate Governance CONTINUED

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 2019FONTERRA ANNUAL REPORT 2019OUR FINANCIAL SUMMARY

Summary Financial
Statements

FOR THE YEAR ENDED 31 JULY 2019

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

110

112

113

115

Directors’ Statement

FOR THE YEAR ENDED 31 JULY 2019

The Directors hereby approve and authorise for issue the summary financial statements for the year ended 31 July 2019 presented on
pages 77 to 109. For and on behalf of the Board:

JOHN MONAGHAN
Chairman

25 September 2019

BRUCE HASSALL
Director

25 September 2019

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 an 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 2019 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 2019. The comparative information is for the year ended
31 July 2018. 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 2019.

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 2019 are:
– The recoverable amounts of the China Farms assets, the consumer and foodservice businesses in New Zealand and Brazil,

and the Australia ingredients business.

– The investment in Beingmate.

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 2019, approved and authorised for issue by the Board on 25 September 2019,
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 2019FONTERRA ANNUAL REPORT 2019

OUR FINANCIAL SUMMARY
Income Statement

FOR THE YEAR ENDED 31 JULY 2019

Revenue from sale of goods

Cost of goods sold

Impact of Strategy Review:

– China Farms impairment

– Australian strategic reset

– New Zealand consumer and foodservice business

– Other strategic reset costs

Gross profit

Other operating income

Selling and marketing expenses

Distribution expenses

Administrative expenses

Other operating expenses

Net foreign exchange losses

Share of profit of equity accounted investees

WPC80 recall costs

Impairment of Beingmate

Impact of Strategy Review:

– New Zealand consumer and foodservice business and Tip Top disposal

– Brazil consumer and foodservice business impairments

– Disposal of Venezuelan operations

– Australian strategic reset

– Other strategic reset costs

– Beingmate

(Loss)/profit before net finance costs and tax

Finance income

Finance costs

Net finance costs

Loss before tax

Tax expense

Loss after tax

Loss after tax is attributable to:

(Loss)/profit attributable to non-controlling interests

Loss attributable to equity holders of the Co-operative

Loss after tax

Earnings per share:

Basic and diluted earnings per share

The accompanying notes form part of these summary financial statements.

NOTES

31 JULY 2019

31 JULY 2018

GROUP $ MILLION

NOTES

31 JULY 2019

31 JULY 2018

GROUP $ MILLION

Statement of Comprehensive Income

FOR THE YEAR ENDED 31 JULY 2019

20,114

(17,099)

20,438

(17,279)

(203)

(23)

(7)

(2)

2,780

(590)

(561)

(773)

(387)

(1)

–

(237)

(149)

(134)

(45)

(17)

(12)

(10)

(434)

(418)

(428)

(177)

(605)

(48)

(557)

(605)

–

3,159

192

(651)

(572)

(873)

(400)

(12)

(196)

(405)

–

262

(439)

(416)

(154)

(42)

(196)

(221)

(196)

GROUP $

31 JULY 2019

31 JULY 2018

(0.35)

(0.14)

Loss 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 (losses)/gains attributable to equity holders

Foreign currency translation reserve losses transferred
to the income statement

Hyperinflation reserve gains transferred to the income statement

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 (losses)/gains on investments in shares

Foreign currency translation gains/(losses) attributable to
non-controlling interests

Hyperinflation movements attributable to non-controlling interests

Total items that will not be reclassified subsequently to profit or loss

Total other comprehensive income/(expense) recognised directly in equity

Total comprehensive expense

Total comprehensive (expense)/income is attributable to:

Equity holders of the Co-operative

Non-controlling interests

Total comprehensive expense

The accompanying notes form part of these summary financial statements.

(605)

(1)

(12)

(10)

193

(12)

–

158

(1)

–

158

(447)

(415)

(32)

(447)

(196)

(459)

188

–

(1)

(255)

(2)

(237)

(433)

(468)

(433)

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR FINANCIAL SUMMARY
Statement of Financial Position

AS AT 31 JULY 2019

Statement of Changes in Equity

FOR THE YEAR ENDED 31 JULY 2019

ASSETS
Current assets
Cash and cash equivalents
Trade and other receivables
Inventories
Tax receivable
Derivative financial instruments
Assets held for sale
Other current assets
Total current assets
Non-current assets
Property, plant and equipment
Equity accounted investments
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

The accompanying notes form part of these summary financial statements.

NOTES

31 JULY 2019

31 JULY 2018

GROUP $ MILLION

550
1,900
2,944
45
48
229
116
5,832

6,512
202
295
2,597
592
440
604
11,242
17,074

34
1,175
1,869
1,534
37
215
63
71
4,998

5,361
537
141
99
57
6,195

11,193

5,881

5,887
360
(183)
(268)
8
5,804

5,881

446
2,355
2,917
47
59
–
141
5,965

6,810
615
288
3,227
667
204
323
12,134
18,099

161
831
2,116
1,579
35
296
14
101
5,133

5,907
480
130
89
11
6,617

11,750

6,349

5,887
934
(364)
(267)
29
6,219

130

6,349

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

GROUP $ MILLION

As at 1 August 2018

Loss after tax

Other comprehensive (expense)/income

Total comprehensive (expense)/income

5,887

–

934

(557)

(17)

(574)

Transactions with equity holders in their capacity as equity holders:

Equity instruments issued

Dividend paid to non-controlling interests

–

(364)

(267)

29 6,219

130 6,349

–

(557)

(48)

(605)

(21)

142

(21)

(415)

158

(32)

(447)

–

181

–

(1)

–

5,887

360

(183)

(268)

8 5,804

5,858

1,637

(552)

As at 31 July 2019

As at 1 August 2017

(Loss)/profit after tax

Other comprehensive (expense)/income

Total comprehensive (expense)/income

–

(221)

–

(221)

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)

–

192

–

(459)

–

7,140

(221)

(247)

(468)

(482)

–

188

–

(22)

5,881

108

7,248

–

(196)

(237)

(433)

(482)

(28)

As at 31 July 2018

5,887

934

(364)

(267)

29 6,219

130 6,349

The accompanying notes form part of these summary financial statements.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR FINANCIAL SUMMARY
Cash Flow Statement

FOR THE YEAR ENDED 31 JULY 2019

Cash flows from operating activities
(Loss)/profit before net finance costs and tax
Adjustments for:
– Foreign exchange (gains)/losses
– Depreciation and amortisation
– China Farms impairment
– New Zealand consumer and foodservice business and Tip Top disposal
– Brazil consumer and foodservice business impairments
– Disposal of Venezuelan operations
– Australian strategic reset
– Beingmate
– 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 sale of businesses
– Proceeds from disposal of property, plant and equipment
– Proceeds from sale of livestock
– Proceeds from sale of investments
– Co-operative support loan repayments
– Other cash inflows
Cash was applied to:
– Acquisition of property, plant and equipment
– Acquisition of livestock (including rearing costs)
– Acquisition of intangible assets
– Acquisition of investments
– 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
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 increase/(decrease) 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

The accompanying notes form part of these summary financial statements.

GROUP $ MILLION

31 JULY 2019

31 JULY 2018

(10)

(29)
561
203
214
149
134
32
12
–
35
1,311

(52)
388
(222)
(124)
(112)
(122)
1,179
(56)
1,123

396
32
28
7
177
25

(541)
(37)
(82)
(10)
(6)
(17)
(28)

3,746
14

(427)
(4,149)
(22)
–
(12)
(850)
245
285
(14)
516

550
(34)
516

262

239
544
–
–
–
–
–
–
405
5
1,193

(313)
75
277
98
42
179
1,634
(86)
1,548

–
26
79
7
149
6

(858)
(45)
(147)
(14)
(151)
–
(948)

4,334
18

(446)
(4,077)
(27)
(453)
(74)
(725)
(125)
382
28
285

446
(161)
285

Notes to the Summary Financial Statements

FOR THE YEAR ENDED 31 JULY 2019

NEW AND AMENDED INTERNATIONAL FINANCIAL REPORTING STANDARDS

Impact of adopting NZ IFRS 15 Revenue from Contracts with Customers
Fonterra adopted NZ IFRS 15 from 1 August 2018.

Fonterra is not materially impacted by the adoption of NZ IFRS 15 because:
– Fonterra has historically recognised revenue at the time the risks and rewards of ownership of the products pass to the customer.
Fonterra determined that customers obtain control of the products at the same time as risks and rewards of ownership pass
to the customer. The timing of revenue recognition is therefore unchanged by the adoption of NZ IFRS 15.

– In relation to the contract price, Fonterra has not identified any material changes to the accounting for trade spend, rebates,

or other items of variable consideration.

Fonterra has elected to utilise the cumulative effect transition approach and to apply NZ IFRS 15 to contracts that were not completely
fulfilled at 1 August 2018. No transition adjustment is recognised as the impact of the adoption of NZ IFRS 15 and use of the practical
expedient has not had a material impact on the timing of revenue recognition or on the measurement of revenue.

The Group’s revenue accounting policy is disclosed in Note 3 of the Group’s full financial statements.

ACCOUNTING STANDARDS ISSUED BUT NOT YET EFFECTIVE

NZ IFRS 16 Leases
NZ IFRS 16 Leases replaces the current guidance on lease accounting. It requires a lease liability reflecting future lease payments,
and a ‘right-of-use asset’, to be recognised for most lease contracts where Fonterra is a lessee. This includes many of the leases
currently classified as operating leases for which no asset or liability is reflected on the statement of financial position under existing
accounting rules.

Fonterra has elected to utilise the modified retrospective approach. This will require an adjustment to equity as at 1 August 2019, and
prior year comparatives will not be restated. Fonterra has also elected to retain the current accounting treatment for short-term leases
and low-value assets.

Management has assessed the effect of applying NZ IFRS 16 through a project that included collecting and validating Fonterra’s
portfolio of leases, assessing the lease term and discount rate assumptions, implementing an IT system solution for lease accounting
under NZ IFRS 16, and implementing changes to internal processes and controls. Management is in the final stages of completing
the validation of the portfolio of leases through a review of historic supply arrangements. In addition, the long-term supply arrangement
with A-Ware disclosed in Note 21 of the Group’s full financial statements is currently being assessed to determine if it meets the
definition of a lease under NZ IFRS 16. Any lease accounting implications would be recognised during FY20 when the A-Ware plant
supporting the agreement is commissioned.

On transition to NZ IFRS 16 at 1 August 2019, based on management’s current expectation of the portfolio of leases, Fonterra expects
to recognise a right-of-use asset of $465 million and a lease liability of $487 million.

The adoption of NZ IFRS 16 does not have a significant impact on Fonterra’s net profit after tax. However, there will be an increase
in profit before net finance costs and tax, because a portion of the lease costs currently reported in cost of goods sold or operating
expenses will be recorded as finance costs. Following adoption of NZ IFRS 16, the presentation of lease payments in the cash flow
statement will change from operating activities to financing activities.

Based on Fonterra’s current expectation of the portfolio of leases held by Fonterra at 31 July 2019, the impact of adopting NZ IFRS 16
on the financial results for the year ending 31 July 2020 is estimated to be a reduction in the expenses of $98 million, an increase in
interest expense of $16 million, and additional depreciation of $86 million. This results in an overall decrease in net profit of $5 million.
Any change in the portfolio of leases following completion of the validation and review process will change the estimated impact
on Fonterra’s financial results. Fonterra’s lease population is likely to change during the year ending 31 July 2020, so the actual impact
is likely to vary from these estimates. At the date of these financial statements Fonterra had not yet determined any deferred tax
accounting impact of adopting NZ IFRS 16.

Fonterra’s operating lease commitments at 31 July 2019 are disclosed in Note 21 of the Group’s full financial statements.

There are no other new or amended standards that are issued but not yet effective that are expected to have a material impact
on the Group.

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR FINANCIAL SUMMARY

PERFORMANCE

SEGMENT REPORTING

a) Operating segments
Operating segments reflect the way financial information is regularly reviewed by the Fonterra Management Team (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.

Transactions between segments are based on estimated market prices, except for the sale of milk from China Farms to Ingredients.
The transfer price used for these transactions is RMB 4.00 per kg.

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, and the Australian and South American ingredients businesses.

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.

a) Operating segments CONTINUED

GROUP $ MILLION

31 JULY 2019

INGREDIENTS

CONSUMER AND FOODSERVICE

NOTES

OCEANIA

ASIA

GREATER
CHINA

LATIN
AMERICA

TOTAL

CHINA
FARMS

UNALLOCATED
COSTS AND
ELIMINATIONS

TOTAL

Normalised segment income statement
External revenue
Inter-segment revenue1
Revenue from sale of goods
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:
New Zealand consumer and foodservice
business
Disposal of Tip Top
China Farms impairment
Brazil consumer and foodservice
business impairments
Disposal of Venezuelan operations
Australia strategic reset
Other strategic reset costs
Beingmate
Segment earnings before
net finance costs and tax
Finance income
Finance costs
Loss before tax
Other segment information:
Volume2 (liquid milk equivalents, billion)
Volume2 (metric tonnes, thousand)
Depreciation and amortisation ($ million)
Capital expenditure3
Equity accounted investments
Capital employed4 ($ million)

13,328
3,707
17,035
(15,608)
1,427
(735)
61
16

811

–
–
–

(6)
(22)
(68)
–
–

2
2
2

2
2
2
2
2

1,989
170

1,814
48
2,159 1,862
(1,737) (1,411)
451
(284)
1
(8)

422
(333)
3
–

1,481
2
1,483
(1,134)
349
(190)
4
(2)

1,502
5
1,507
(1,108)
399
(366)
4
(1)

6,786
225
7,011
(5,390)
1,621
(1,173)
12
(11)

–
249
249
(244)
5
(21)
22
(1)

–
20,114
–
(4,181)
(4,181) 20,114
4,143 (17,099)
3,015
(2,311)
91
(1)

(38)
(382)
(4)
(5)

–

(2)

(1)

(19)

158

160

450

(14)

(428)

819

(204)
(25)
–

–
–
–
(2)
–

–
–
–

–
–
–
–
–

–
–
–

–
–
–
–
(12)

–
–
–

(204)
(25)
–

–
–
(203)

(143)
(112)
–
(5)
–

(143)
(112)
–
(7)
(12)

–
–
–
–
–

–
(15)
–

–
–
–
(12)
–

715

(139)

158

148

(220)

(53)

(217)

(455)

21.42
3,171
(408)
445
112
9,272

1.69
627
(27)
43
–
509

1.45
297
(12)
10
–
180

1.21
299
(2)
1
–
(42)

0.78
559
(33)
30
12
362

5.13
1,782
(74)
84
12
1,009

0.26
20
(26)
23
69
735

Reconciliation of reported to segment gross profit for the year ended 31 July 2019:

Segment gross profit
Normalisation adjustments
– China Farms impairment
– Australian strategic reset
– New Zealand consumer and foodservice business strategic review impact
– Other restructuring costs

Reported gross profit

(204)
(40)
(203)

(149)
(134)
(68)
(19)
(12)

(10)
16
(434)
(428)

(4.96)
(834)
(53)
48
9
(1,348)

21.85
4,139
(561)
600
202
9,668

GROUP $ MILLION

3,015

(203)
(23)
(7)
(2)

2,780

Ingredients inter-segment revenue includes sales to Foodservice businesses across the Group, this is a change from the way in which those sales were reported
for the year ended 31 July 2018 where they were reflected as an adjustment to the cost of goods sold. The change increased sales revenue by $901 million for
the year ended 31 July 2019, there was no impact on the gross profit or earnings of the Ingredients business or the Group.

2 Includes sales to other strategic platforms. Total column represents total external sales.
3 Capital expenditure comprises purchases of property, plant and equipment and intangible assets, and net purchases of livestock.
4 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. These balances incorporate intersegment net working capital and funding arrangements.

Notes to the Summary Financial Statements CONTINUEDFOR THE YEAR ENDED 31 JULY 2019Notes to the Summary Financial Statements CONTINUEDFOR THE YEAR ENDED 31 JULY 2019FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR FINANCIAL SUMMARY

a) Operating segments CONTINUED

b) Geographical revenue

Normalised segment income statement

External revenue1

Inter-segment revenue

Revenue from sale of goods

16,306

2,159

1,865

1,564

1,534

GROUP $ MILLION

31 JULY 2018

INGREDIENTS

CONSUMER AND FOODSERVICE

OCEANIA

ASIA

GREATER
CHINA

LATIN
AMERICA

TOTAL

13,485

2,001

1,849

1,564

1,532

6,946

2,821

158

–

CHINA
FARMS

UNALLOCATED
COSTS AND
ELIMINATIONS

TOTAL

–

262

–

20,431

(3,259)

–

(3,259)

20,431

176

7,122

(14,834)

(1,726)

(1,409)

(1,229)

(1,075)

(5,439)

(257)

3,251

(17,279)

1,472

433

456

335

459

1,683

(8)

3,152

(808)

(373)

(289)

(183)

(368)

(1,213)

(31)

(444)

(2,496)

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 before tax

Other segment information:

111

879

–

(196)

(5)

(1)

–

(9)

–

(1)

–

(2)

(13)

176

165

117

525

–

(439)

–

(439)

–

(5)

(9)

–

678

176

(274)

117

(9)

(493)

(5)

(37)

192

–

(493)

902

–

(439)

(196)

(5)

262

(439)

(154)

CHINA

REST
OF ASIA

AUSTRALIA

NEW
ZEALAND

UNITED
STATES

EUROPE

LATIN
AMERICA

REST OF
WORLD

TOTAL

GROUP $ MILLION

Geographical segment external revenue:

Year ended 31 July 2019

Year ended 31 July 2018

4,294

5,590

3,980

5,684

1,776

1,836

2,182

2,076

931

793

851

681

2,126

2,364 20,114

2,272

3,116 20,438

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 2019

As at 31 July 2018

5,467

5,538

305

467

756

1,324

1,007

928

840

827

944

1,127

891

10,210

1,052

11,263

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

GROUP $ MILLION

AS AT
31 JULY 2019

AS AT
31 JULY 2018

10,210

592

440

11,242

11,263

667

204

12,134

Volume5 (liquid milk equivalents, billion)

Volume5 (metric tonnes, thousand)

20.52

2,986

1.66

623

1.55

298

Depreciation and amortisation ($ million)

(389)

(26)

(13)

Capital expenditure6

Equity accounted investments

Capital employed7 ($ million)

644

308

9,156

–

515

–

1.41

266

(2)

204

(65)

0.75

578

1,765

(29)

(70)

332

142

214

877

(26)

(25)

788

(650)

4,123

(59)

100

(544)

861

615

(1,269)

9,552

5.37

0.27

(3.96)

22.20

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.

2 Of the $439 million normalisation adjustment, $405 million relates to impairment of equity accounted investees and $34 million relates to Fonterra’s equity

accounted share of Beingmate’s losses.

3 The $196 million normalisation adjustment relates to operating expenses.

4 Of the $5 million normalisation adjustment, $7 million relates to revenue offset by $12 million of net foreign exchange losses.

Includes sales to other strategic platforms. Total column represents total external sales. LMEs for FY18 have been restated to better reflect internal sales
between business segments.

6 Capital expenditure comprises purchases of property, plant and equipment and 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. These balances incorporate intersegment net working capital and funding arrangements.

STRATEGY REVIEW

During the year the Fonterra Board conducted a review of the business with the goal to align the business strategy, priorities,
resources and asset base with its long-term sustainable value drivers.

The Strategy Review had three dimensions:
– Strategic – to ensure alignment of focus and resources on our sources of differentiation and value creation to ensure we can

continue to create goodness for generations.

– Asset portfolio – to provide clarity on the assets that were aligned with the more focused strategy and those that were now
non-strategic or have been consistently underperforming, with a view to confirming an approach of hold, invest or divest.

– Operational – to review our operational performance, specifically in underperforming areas and where appropriate implement

the necessary improvement initiatives.

Many of the under-performing areas had previously implemented performance improvement plans that didn’t deliver sufficient
improvement.

Fonterra has reviewed the forecast earnings, incorporating the changed strategic direction and priorities, as well as the level
of success of current performance improvement activities.

The operational and asset portfolio reviews were commenced and announced in September 2018. In December 2018 it was announced
that as part of the asset portfolio review, Fonterra had reached an agreement with Beingmate to return to full ownership of the
Darnum plant in Australia and that Fonterra was looking at its ongoing ownership of Tip Top and considering a range of options
in relation to this asset.

In February 2019 it was announced that a full review of strategy was underway. In March 2019 Fonterra announced its interim result
and that it was commencing a sales process for its 50% share of DFE Pharma. It was also announced that Fonterra was considering its
options for its shareholding in Beingmate, that strong interest in Tip Top had been received and that Fonterra’s share of the Venezuelan
consumer joint venture, Corporacion Inlaca had been sold.

In May 2019 Fonterra announced that Tip Top had been sold, that a strategic review of the two Fonterra-owned farm-hubs in China
had commenced, the closure of the Dennington site in Australia and that Fonterra had agreed options for the future ownership
of the DPA Brazil joint venture, which included a potential sale of respective stakes.

In August 2019 Fonterra announced it intends to sell a portion of its stake in Beingmate and also announced a number of one-off
accounting adjustments related to non-cash impairment charges on four specific assets and the divestments made during the
financial year.

Throughout the year Fonterra has provided updates on the progress made in the operational review, which included reducing debt,
capital expenditure and operating expenses.

This note explains the accounting impact of the Strategy Review on the financial statements.

Summary Table: Net profit before tax impact of Strategy Review.

GROUP $ MILLION

NOTE

IMPAIRMENT
INTANGIBLE

IMPAIRMENT
PP&E

TOTAL
IMPAIRMENT

OTHER

LOSS ON
DISPOSAL

TOTAL
IMPACT

New Zealand consumer and
foodservice business

Disposal of Tip Top

Sub-total Fonterra New Zealand

China Farms impairment

Brazil consumer and foodservice business
impairments

Disposal of Venezuelan operations

Australia strategic reset

Other strategic reset costs

Beingmate

(189)

(7)

(196)

(7)

(203)

(196)

(203)

(189)

(133)

(16)

(9)

(23)

(32)

(8)

(36)

(19)1

(12)

(91)

(40)

(134)

(204)

(40)

(244)

(203)

(149)

(134)

(68)

(19)

(12)

(174)

(829)

Total net loss before tax impact

(331)

(233)2

(564)

a) New Zealand consumer and foodservice business and Tip Top disposal

The New Zealand consumer and foodservice business, including Tip Top, is reported in the Oceania consumer and foodservice segment.

Fonterra’s New Zealand consumer and foodservice business has historically had strong market shares and delivered significant returns.
Goodwill was recognised on the acquisition of New Zealand Dairy Foods and the lower North Island consumer business, as shown in
the goodwill table later in this note, and the historic returns supported these balances.

In more recent times, Fonterra’s New Zealand consumer and foodservice business has experienced a decline in performance due
to market conditions and operational challenges in FY18. During FY19 Fonterra has delivered improved year-on-year operational
performance, but margin compression has continued to be a challenge reflecting the increased level of competition in the
New Zealand market.

While the core dairy business remains a strategic priority, the Tip Top ice cream business was identified as non-strategic and was
divested in May 2019, supporting Fonterra’s objective to reduce debt levels.

As part of the strategic review, several options were considered to drive margin recovery and overall earnings growth. After balancing
the impact of ongoing competition, the level of capital investment required, the likelihood of successful delivery and the reality of
the current level of performance, a revised strategic plan was agreed. The outcome of the Strategy Review results in a lower level
of forecast earnings growth, resulting in an impairment as discussed below.

Consumer and Foodservice New Zealand goodwill and brand impairment

Impairment of Red Cow brand1

Goodwill impairment

Fonterra New Zealand goodwill and brand impairment

$ MILLION

185

189

1 Brand carrying amounts have been reviewed. The carrying amount of the Red Cow brand was not supported by future cash flows therefore the full carrying

amount of $4 million has been impaired.

The recoverable amount of the New Zealand consumer and foodservice business was assessed at $730 million. This was lower than
the carrying value of the business, resulting in an impairment of the goodwill attributed to the business of $185 million.

The revised business forecast reflects a recovery in business performance that will generate sufficient earnings to support goodwill
of $250 million and brands of $283 million.

A summary of the initial recognition of goodwill and the movements in the FY19 year is shown below.

Acquisition of Tip Top on Fonterra formation

Acquisition of New Zealand Dairy Foods in 2005

Acquisition of lower North Island consumer business in 2006

Goodwill on other FBNZ acquisitions

Goodwill balance as at 1 August 2018

Goodwill balance allocated to Tip Top at divestment1

Impairment

Goodwill balance as at 31 July 2019

$ MILLION

365

124

611

(176)

(185)

250

1 The entire goodwill balance in the table above is associated with the New Zealand consumer and foodservice business CGU, and is therefore tested for
impairment as part of that CGU. That CGU included Tip Top, up until Tip Top was sold. This means that goodwill was required to be attributed to the
accounting impact on disposal of the Tip Top business based on the fair value of Tip Top relative to the New Zealand consumer and foodservice business
at the date of disposal. That allocation resulted in attribution of $176 million of goodwill to Tip Top at the date of Tip Top’s disposal.

1 $2 million of the $19 million relates to costs separately disclosed above gross margin in the income statement.

2 The $233 million of production related asset impairments are separately disclosed above gross margin in the income statement.

a) New Zealand consumer and foodservice business and Tip Top disposal CONTINUED

Assumptions used in the impairment assessment
The recoverable amount of the business was determined on a value in use basis using a discounted cash flow methodology.
The assumptions used in the value in use calculation are based on management approved forecasts. The actual outcome is not
certain and any change to the assumptions could potentially lead to an additional impairment.

The forecast cash flows used in the impairment model are based on a five-year business plan and have been prepared considering
past performance as well as future expected performance aligned with the Board’s Strategy Review.

The forecast resulted in a reduction in expected volume growth and market shares, as well as margin improvement driven from
initiatives in trade spend management, manufacturing and supply chain efficiencies and reduced expenses.

Initiatives driving rationalisation of trade spend management and cost out, both through improved productivity in our manufacturing
and supply chain and through reduced operating expenditure, are the largest drivers of forecast earnings improvement.

The long-term growth rate applied to the future cash flows at year five of the forecast is 2.7 per cent (31 July 2018: 2.4 per cent).
This reflects the weighted average inflation rate of New Zealand and this business’s export markets.

The post-tax discount rate is 8.1 per cent (31 July 2018: 8.1 per cent). The pre-tax discount rate is 10.2 per cent.

The impact of changes in these key assumptions on the recoverable amount are shown in the table below. The sensitivities shown
assume the specific assumption changes in isolation, while all other assumptions are held constant.

KEY ASSUMPTIONS

VALUE ATTRIBUTED IMPACT ON THE RECOVERABLE AMOUNT

Annual trade spend management
savings (by year 5)

$31 million

Annual productivity savings
(manufacturing and supply
chain efficiencies) (by year 5)

$19 million

Annual operating expense savings
(by year 5)

$14 million

Terminal growth rate

2.7 per cent

Discount rate (post-tax)

8.1 per cent

An increase/(decrease) in trade spend management savings of $20 million
from year three would result in an increase/(decrease) in the recoverable
amount of $225 million.

An increase/(decrease) in productivity savings of $3 million from year
three would result in an increase/(decrease) in the recoverable amount
of $34 million.

An increase/(decrease) in operating expense savings of $4 million
from year three would result in an increase/(decrease) in the recoverable
amount of $45 million.

An increase/(decrease) in the terminal growth rate of 10 basis points would
result in an increase/(decrease) in the recoverable amount of $11 million

An increase/(decrease) in the discount rate of 50 basis points would
result in a decrease/(increase) in the recoverable amount of $67 million

The fair value less cost to dispose was also considered when determining the recoverable amount to ensure the higher of fair value less
cost to dispose and value in use was applied.

Sale of Tip Top
In May 2019, Fonterra sold its New Zealand ice cream business, Tip Top, to Froneri for $380 million. The transaction resulted in a post-tax
loss on sale of $11 million. The assets disposed of include: the net assets of Tip Top, the Tip Top brand, the carrying amount of the Kapiti
ice cream brand as a perpetual license was granted to Froneri, and an allocation of $176 million goodwill from the New Zealand
consumer and foodservice CGU.

Sales proceeds1

Net assets disposed excluding goodwill

Transaction costs

Goodwill balance allocated to Tip Top at divestment

Loss on sale2

1 Cash received of $376 million, net of working capital adjustments.

$ MILLION

380

(200)

(15)

165

(176)

(11)

2 Of the net loss on sale of $11 million: a loss of $40 million is recognised in net loss on divestment; and $29 million is recognised as a tax benefit relating to the

reversal of deferred tax liabilities.

The net assets allocated to the sale transaction were:

Trade and other receivables

Inventories

Property, plant and equipment

Brands

Trade and other payables

Deferred tax liability

Goodwill

Net assets disposed

$ MILLION

106

(19)

(29)

176

376

Tip Top is presented in the Oceania consumer and foodservice reportable segment. Excluding the loss on disposal, the profit after tax
attributable to Fonterra’s equity holders generated by Tip Top is $11 million in the 10 months to 31 May 2019 (year ended 31 July 2018:
$12 million).

PP&E impairment and other costs
$7 million of plant, property and equipment (PP&E) impairment has been recognised relating to assets that have been written off.
There are also $8 million of redundancy costs, consulting costs to support the review and other transition costs incurred.

b) China Farms impairment

Fonterra has announced it is assessing a wide range of options for its investment in its Fonterra-owned China Farms assets.
This reflects the reduced focus on off shore milk pools, the current losses being generated, and the intention to focus on
Fonterra’s strategic priorities.

As at 31 July 2018, the recoverable amount of the China Farm assets was equivalent to the carrying amount, which meant that
any adverse change in the supporting assumptions would result in an impairment.

The FY19 performance for the Fonterra-owned China Farms assets (including the amount recorded within the Ingredients business)
was a loss of $13 million compared to a $32 million loss in FY18. This improvement reflects an increase in average pricing and a
reduction in operating expenditure however this result was still behind the plan to break-even in FY19.

There have been several events over the years, highlighting a higher level of risk in operating the farms than previously anticipated.
Consequently, the current expectation of long-term sustainable milk production has reduced by seven per cent. This reduction across the
FY19 five-year plan and through the terminal value has been the most significant factor in the reduction in the recoverable amount of the
China Farms assets compared to prior year.

While the average milk price increased in FY19 to RMB 3.64, it remains short of the targeted RMB 4.00 per kg assumed in the FY18
recoverable amount assessment. Fonterra has revised the future milk price forecast to reflect a phased increase in pricing, driven by
the growth of premium customers and reduced volume being sold through traders. The lag in achieving this price point is the other
major contributor to the reduction in the recoverable amount relative to the FY18 recoverable amount.

The recoverable amount of the China Farms assets is $546 million. This was lower than the carrying value of the assets, resulting
in an impairment of property, plant and equipment of $203 million.

Assumptions used in the impairment assessment
The recoverable amount of the assets are determined on a value in use basis using a discounted cash flow methodology. The assumptions
used in the value in use calculation are based on management approved forecasts. The actual outcome is not certain and any change to
the assumptions could potentially lead to an additional impairment.

The forecast cash flows used in the impairment model are based on a five-year business plan and have been prepared considering past
performance as well as future expected performance aligned with the Board’s Strategy Review.

The long-term growth rate applied to the future cash flows at year five of the forecast is 2.6 per cent (31 July 2018: 3.0 per cent).
The post-tax discount rate is 9.1 per cent (31 July 2018: 9.1 per cent).

The impact of changes in these assumptions on the recoverable amount are shown in the table below. The sensitivities shown assume
the specific assumption changes in isolation, while all other assumptions are held constant.

KEY ASSUMPTIONS

VALUE ATTRIBUTED

IMPACT ON THE RECOVERABLE AMOUNT

Future milk price
(year five)¹

Milk production for sale
(year five)¹

RMB 4.16 per kg

An increase/(decrease) in the milk price of RMB 0.10 per kg would result
in an increase/(decrease) in the recoverable amount of $82 million.

350 million kg

An increase/(decrease) in the milk production of three per cent would
result in an increase/(decrease) in the recoverable amount of $47 million.

Feed costs per kg of milk sold
(year five)¹

RMB 1.99 per kg

An increase/(decrease) in feed costs of RMB 0.10 per kg would result
in an increase/(decrease) in the recoverable amount of $82 million.

Effluent costs per kg of milk sold
(year five)¹

RMB 0.14 per kg An increase/(decrease) in effluent costs of RMB 0.02 per kg would result

in an increase/(decrease) in the recoverable amount of $16 million.

Terminal growth rate

2.6 per cent

Discount rate (post-tax)

9.1 per cent

An increase/(decrease) in the terminal growth rate of 10 basis points
would result in an increase/(decrease) in the recoverable amount of
$7 million.

An increase/(decrease) in the discount rate of 50 basis points would result
in a decrease/(increase) in the recoverable amount of $47 million.

1 Year five has been chosen as it reflects the estimated long-term sustainable position.

The fair value less cost to dispose was also considered when determining the recoverable amount to ensure the higher of fair value
less cost to dispose and value in use was applied.

c) Brazil consumer and foodservice business impairments

The Brazil consumer and foodservice business is reported in the Latin America consumer and foodservice segment.

At 31 July 2019, Fonterra is in the process of investigating a range of options for the Brazil consumer and foodservice business.
No decision has been made on the option to be formally progressed.

Consumer and foodservice Brazil goodwill impairment
The goodwill attributable to the consumer and foodservice business in Brazil of $133 million was recognised in 2015 when Fonterra
acquired a controlling interest in DPA Brazil.

The economy in Brazil has been challenging and previously expected growth in the chilled dairy category has not eventuated.
The chilled dairy category performance is closely aligned with Fonterra’s volume and pricing outcomes.

Several improvement initiatives were implemented in the second half of 2019, improving gross margins and reducing operating
expenditure. While these have improved business performance they did not meet the level of improvement anticipated in the
forecast prepared in FY18.

The current forecast reflects some improvement in aspects of the Brazilian economy that will support the chilled dairy category
growth and enable both pricing and volume growth to be realised. However, given the lower level of improvement delivered in
FY19 than was expected, future expectations on the key revenue growth and margin assumptions, driven by volume and pricing,
have reduced in comparison to the FY18 recoverable amount assumptions. This has driven the bulk of the change in the recoverable
amount from prior year with both lower revenue and margin per cent growth now forecast.

The recoverable amount of the Brazil consumer and foodservice business was $234 million. This was lower than the book value of the
business, resulting in an impairment of the goodwill attributed to the business. Fonterra has written off the $133 million of goodwill.

The reduction in the recoverable amount results from a downward reassessment of forecast earnings. The change in the forecast
earnings outlook also impacts the forecast future taxable profits which are used to support the carrying amount of the deferred tax
asset in Brazil. The reduction in forecast future taxable profits means that the deferred tax asset in Brazil is now not expected to be
utilised in the foreseeable future. The deferred tax asset of $110 million has been derecognised through tax expense (refer Note 13).
Fonterra’s 51 per cent share is $55 million.

The forecast cash flows used in the impairment model are based on a three-year business plan and have been prepared considering
past performance as well as future expected performance aligned with the Board’s Strategy Review.

The assumption used for revenue growth is 9.8 per cent (compared to 9.6 per cent in FY18). Actual revenue growth was four per cent
in FY19. The revenue growth assumption is dependent on the recovery in the Brazilian economy and successful execution of initiated
and planned performance improvement activities. Gross margin assumptions have reduced compared to those forecast in FY18, with
a lower starting point and reduced margin improvements (2.7 per cent in FY19 compared to 4.8 per cent in FY18). These assumptions
include the impacts of inflation, volume growth and the annualised impact of the pricing initiatives delivered in FY19.

An annual growth rate of 6.86 per cent (2018: 8.3 per cent) has been applied to the year three cash flows to derive years four to 10.
This growth rate includes volume growth plus inflation. The terminal growth rate of 3.75 per cent (2018: 4.5 per cent) has been applied
to the cash flows from year 10.

The post-tax discount rate is 11.0 per cent (31 July 2018: 10.9 per cent). The pre-tax discount rate was 13.8 per cent.

KEY ASSUMPTIONS

VALUE ATTRIBUTED

IMPACT ON THE RECOVERABLE AMOUNT

Revenue growth

(first three-year CAGR)

9.8 per cent

An increase/(decrease) in revenue growth of 200 basis points would result
in an increase/(decrease) in the recoverable amount of $24 million.

Gross margin improvement

2.7 per cent

(first 3 years)

Year 4-10 growth rate

6.86 per cent

Terminal growth rate

3.75 per cent

Discount rate (post-tax)

11.0 per cent

An increase/(decrease) in the gross margin percentage of 50 basis points would
result in an increase/(decrease) in the recoverable amount of $25 million.

An increase/(decrease) in the growth rate percentage of 100 basis points would
result in an increase/(decrease) in the recoverable amount of $15 million.

An increase/(decrease) in the terminal growth rate of 10 basis points would
result in an increase/(decrease) in the recoverable amount of $2 million.

An increase/(decrease) in the discount rate of 50 basis points would result
in a decrease/(increase) in the recoverable amount of $16 million.

The fair value less cost to dispose was also considered when determining the recoverable amount to ensure the higher of fair value less
cost to dispose and value in use was applied.

c) Brazil consumer and foodservice business impairments CONTINUED

d) Disposal of Venezuelan operations

Provision for utilisation of indirect taxes
Fonterra has assessed its ability to recover Brazilian indirect tax credits and has concluded that a provision of $16 million is appropriate
given challenges in utilising and recovering certain tax credits.

Future divestment considerations
In combination with Nestlé, Fonterra’s joint venture partner, Fonterra is considering strategic options for the Brazil consumer and
foodservice business including potential divestment options. If a divestment was to occur this would trigger the release of the foreign
currency translation reserve balance associated with the Brazil consumer and foodservice business to profit or loss. This balance is $68
million debit at 31 July 2019. Given the range of options being considered, the business does not meet the held for sale criteria.

The business also has an asset relating to the indirect business tax credits of $142 million. Fonterra’s 51 per cent share being $72 million,
the value of which to a potential purchaser may be dependent on the nature of their business.

Due to the continued economic and political instability, Fonterra has divested its operations in Venezuela.

The impact of the divestment of the businesses in Venezuela on these financial statements is shown below:

Loss on sale of the Venezuelan consumer business

Closure of the Venezuelan ingredients operation

Impact on loss before tax

$ MILLION

(112)

(22)

(134)

Venezuelan consumer business
The Venezuelan consumer business was identified as a non-strategic asset in the Strategic Review and given the impact of current
economic conditions on business performance was flagged as an asset for potential divestment.

In March 2019, Fonterra sold its Venezuela consumer business to Mirona Foods Ltd. for $16 million (€9.7 million). The transaction
resulted in a loss on sale of $112 million, primarily due to the foreign currency translation reserve balance of $124 million attributable
to the Venezuelan business recognised in profit or loss on disposal of the business.

The loss on disposal is shown below.

Sales proceeds (cash) received

Net assets disposed

Gain before reclassification of reserves

Reclassification of foreign currency translation reserve

Reclassification of hyperinflation reserve

Loss on sale

The net assets disposed of were:

Trade and other receivables

Property, plant and equipment

Brands

Trade and other payables

Net assets disposed

$ MILLION

(16)

–

(124)

(112)

$ MILLION

(14)

The Venezuelan consumer business is presented in the Latin America consumer and foodservice reportable segment. Excluding the
loss on disposal, the loss after tax attributable to Fonterra’s equity holders generated by the Venezuelan consumer business was $3
million for the eight months to 31 March 2019 (year ended 31 July 2018: profit $9 million).

Venezuelan ingredients business
No material ingredient sales have been made into Venezuela since 2016, responding to Fonterra’s credit risk management expectations,
and reduced demand. Accordingly, in July 2019, Fonterra formally closed its ingredients sales office in Venezuela in line with the
operational review. This sales office had been supporting sales across the Latin America region in recent years and these sales
will now be supported out of Mexico.

This resulted in a loss of $22 million relating to the reclassification to profit or loss of the foreign currency translation reserve balance
attributable to the business.

e) Australian strategic reset

The Australian ingredients business is reported within the Ingredients segment.

As part of the Strategy Review, the Board was presented with several options for the future of the Australian ingredients business.
The Strategy Review incorporated the material decline in the performance of the Australian ingredients business during FY19. The key
drivers of this were the reduced milk volumes due to drought conditions and the increased competition for milk reducing Fonterra’s
share of collected volumes, the under-utilisation of Fonterra’s nutritional assets, including low demand through the joint venture with
Beingmate and the additional costs associated with Fonterra’s investment in new cheese capacity.

Impairment assessment
The Strategic Review and reduced performance are indicators of impairment and require an impairment assessment.

The Australian ingredients assets are considered a single CGU for the goodwill and asset impairment assessments because milk is
optimised across Fonterra’s Victorian and Tasmanian sites. These are considered separate from the Australian consumer and
foodservice business, which has delivered continued earnings growth in FY19.

The recoverable amount, which was determined using fair value less costs of disposal (FVLCD) of the Australian Ingredients business is
higher than the $942 million carrying amount and therefore, no impairment was required.

The FVLCD was determined using recent observable transactions which provided evidence of relevant multiples such as Enterprise
Value (EV) to revenue, EV to tangible assets and EV to milk supply. Fonterra considered these three multiples as the most relevant
multiples. All three of these multiples supported a similar FVLCD mid-point.

Assumptions used in the impairment assessment
Key assumptions used in determining the FVLCD are milk supply and revenue.

The milk supply outlook in the short-term is uncertain, however Fonterra expects it to normalise in the medium-term.

In the current year, the recoverable amount was determined using a FVLCD as it is higher than value in use. The reason for this is the
carrying value of the Australian Ingredient business increased with the completion of Stanhope’s expansion and the acquisition of the
Darnum site from Beingmate and the reduction in forecast milk supply reduced the CGU’s value in use.

The fair value measurement is in Level 3 of the fair value hierarchy. A reasonably possible change in assumptions would not cause the
CGU’s carrying amount to be impaired.

The value in use was also considered when determining the recoverable amount to ensure the higher of fair value less cost to dispose
and value in use was applied.

Strategic Review implications
The Strategy Review identified several initiatives, with an emphasis on sustainable milk supply, improved asset utilisation, productivity
improvements and operating expense reduction.

As a result, several actions were taken, including unwinding the joint arrangement with Beingmate to regain full control of the Darnum
site, shutting the Dennington site and reductions in operating expenditure. Fonterra is also pursuing several initiatives to improve
utilisation of the remaining assets.

The impact of these drivers and the responses on these financial statements is shown below:

Closure of the Dennington site

Other restructuring costs

Loss before tax

$ MILLION

(54)

(14)

(68)

The closure of the Dennington site was announced in May 2019, resulting in recognition of a loss of $54 million comprising of an
impairment of property, plant and equipment of $23 million, and additional costs of $31 million primarily relating to redundancy costs
and site restoration.

f) Other strategic reset costs
During the year ended 31 July 2019, Fonterra incurred other costs in relation to the Strategy Review of $17 million which are not
allocated to items addressed elsewhere in Note 2. $10 million of these relate to advisors supporting the asset review process where
the review and divestment process has not yet completed. Driven from the operational review, there are $7 million of redundancy
costs in segments of our business not addressed elsewhere in this note.

g) Changes to arrangements with Beingmate Baby & Child Food Co., Ltd (Beingmate)

Acquisition of Darnum manufacturing plant
In January 2019 Fonterra regained full ownership of the Darnum manufacturing plant in Australia, unwinding the joint arrangement
with Beingmate, and renegotiating commercial terms for product purchases by Beingmate.

The transaction price of $126 million (AU$120 million) represents the 51 per cent share of the Darnum manufacturing plant and
associated working capital balances. This has been treated as an asset purchase as no processes were acquired. Fonterra had been
providing these services to the joint venture under the terminated management agreement.

Amounts owed to Fonterra by Beingmate of $64 million (AU$61 million) have been settled against the transaction price, resulting in a
net amount owed to Beingmate of $62 million (AU$59 million). As at 31 July 2019 Fonterra has an amount payable to Beingmate of $62
million (AU$59 million) in relation to this transaction. The amount payable is unsecured and accrues interest at a market interest rate.
It is repayable in four equal annual instalments. The arrangement with Beingmate also includes an offsetting supply agreement of the
same timeframe that commits Beingmate to purchase minimum volumes of product from the Darnum plant.

Classification of the investment in Beingmate
In September 2018, Fonterra announced the strategic review of its investment in Beingmate. This review resulted in the termination of
several commercial arrangements with Beingmate, including the joint venture arrangement relating to the Darnum manufacturing plant
discussed above.

A further consequence of the review is that Fonterra has determined the Co-operative no longer has significant influence over its
Beingmate investment. This loss of significant influence means that Fonterra ceased equity accounting for its Beingmate investment, and
is recording the investment at fair value. Movements in fair value following the cessation of equity accounting are recorded in profit or loss.

This determination that significant influence has been lost required judgement. Fonterra’s judgement referenced a combination of factors:
– Fonterra has the right under a shareholders’ agreement to require the current controlling shareholder of Beingmate to support
Fonterra’s appointment of two directors to the Beingmate board. At the time Fonterra acquired its shareholding in Beingmate,
it nominated two individuals for appointment to the Beingmate board. These nominees were appointed to the Beingmate board
with the support of the Beingmate controlling shareholder.

– One of the Fonterra-nominated directors on Beingmate’s board resigned in March 2019. As a result, Fonterra has one remaining
director on Beingmate’s nine-person board. At this time, there are practical restrictions on Fonterra’s ability to appoint a further
director onto the Beingmate board. This means that Fonterra has less than 20 per cent voting rights on the Beingmate board and
less than 20 per cent ownership interest. NZ IFRS requires that with this level of interest, in order for Fonterra to assert significant
influence over Beingmate, Fonterra must rebut a presumption of no significant influence.

– Fonterra’s investment in Beingmate was originally accompanied by a broader strategic relationship. The nature of this relationship
has materially reduced. During FY19, Fonterra regained full ownership of the Darnum manufacturing plant in Australia, following
the unwind of its Darnum joint venture with Beingmate as described above. Fonterra also terminated Beingmate’s rights to
distribute Anmum in China in FY19.

– Fonterra has now also implemented a heightened information barrier between the Co-operative and its remaining director on
the Beingmate board. This has been put in place because of Fonterra’s intention to sell a portion of its Beingmate shareholding.

After assessing all relevant facts and circumstances and given the overall uncertainty as to Fonterra’s role and level of influence,
Fonterra considers there is no longer sufficient evidence to be able to clearly demonstrate the Co-operative continues to have
significant influence. As a result, Fonterra ceased equity accounting during FY19.

On cessation of equity accounting, Fonterra’s investment in Beingmate is classified as “held for trading” in accordance with NZ IFRS 9
because it is held principally for the purpose of sale. This means the investment is recorded at fair value, with changes in fair value
recorded in profit or loss. Fonterra has determined that, in accordance with NZ IFRS 13, the quoted share price is the appropriate price
to use to determine fair value. Fair value is therefore calculated as the quoted share price, multiplied by the number of shares held.

The cessation of equity accounting resulted in a $41 million gain. This $41 million is represented by a $71 million upwards revaluation
to fair value, less $30 million of foreign currency translation reserve losses recycled to profit or loss. Between the date of cessation of
equity accounting and 31 July 2019, the fair value of Fonterra’s investment in Beingmate reduced by a further $52 million and Fonterra
recorded $1 million of its share of losses before ceasing equity accounting. The total income statement impact is a $12 million loss.

The investment in Beingmate is presented in the Greater China consumer and foodservice reportable segment. Fonterra’s share of
losses from Beingmate as an equity accounted investment in the year ended 31 July 2019 was $1 million prior to the cessation of equity
accounting (31 July 2018: loss $34 million).

At 31 July 2019, the carrying value of Fonterra’s investment in Beingmate was $234 million. This is represented by 192 million shares,
at RMB 5.54 per share.

g) Changes to arrangements with Beingmate Baby & Child Food Co., Ltd (Beingmate) CONTINUED

REVENUE FROM SALE OF GOODS

Intention to reduce the shareholding in Beingmate
In August 2019, Fonterra announced its intention to sell down, over time, its 18.8 per cent equity shareholding in Beingmate.
Restrictions on the percentage of shares that can be sold down in individual transactions and uncertainty in the level of demand mean
that the timing and pricing of the sell-down is uncertain.

Fonterra can sell up to a maximum of one per cent on-market in each 90-day period. Applying the closing share price as at 31 July 2019,
a one per cent shareholding in Beingmate has a value of $12 million.

Given the level of uncertainty in the disposal plan and the small shareholding that could be disposed within 12 months using block
trade and/or on-market sales, classification as held for sale, which would recognise the entire investment as a current asset is not
considered appropriate.

Any future sales of Fonterra’s Beingmate shares will be transacted at the selling price achieved at the disposal date. This is likely to
differ from the 31 July 2019 fair value.

h) Assets held for sale
As at 31 July 2019 the following investments, valued at $229 million, were classified as ‘held for sale’. No investments met the held
for sale classification criterion as at 31 July 2018.

Goodminton AG (Goodminton)
In June 2019, Fonterra entered into an agreement to sell its investment in Goodminton. The sale is subject to regulatory approvals
and is expected to complete within one year of balance date. Accordingly, the investment in Goodminton was reclassified from equity
accounted investments to assets held for sale on 30 June 2019. The transaction was completed on 3 September 2019.

The investment in Goodminton is presented in the Ingredients reportable segment. Fonterra’s share of earnings relating to the
investment in Goodminton was $nil million for the 11 months to 30 June 2019 (year ended 31 July 2018: $nil million).

DMV Fonterra Excipients GmbH & Co.KG (DFE Pharma)
In March 2019, Fonterra announced that it had commenced a sales process for its 50 per cent shareholding in DFE Pharma.
As at 31 July 2019 this process was well advanced and it was reasonable to believe that a transaction would be highly probable.

The investment in DFE Pharma is presented in the Ingredients reportable segment. Fonterra’s share of earnings relating to the
investment in DFE Pharma was $44 million for the year ended 31 July 2019 (31 July 2018: $47 million).

DFE Pharma Post Balance Sheet Event
On 24 September 2019, Fonterra approved the sale of its 50 per cent shareholding in DFE Pharma. The sales price of €363 million
($633 million at the 24 September foreign exchange conversion rate) is made up of cash of €308 million ($537 million) and an interest
bearing loan of €55 million ($96 million). The sale and purchase agreement also contains earnout clauses in relation to earnings before
interest, tax, depreciation and amortisation for the 2019 and 2020 financial year, and specifies completion adjustments, which are not
included in the sales price above. Given the proximity to the date of authorising the financial statements, being 25 September 2019,
an estimate of the financial effect of the sale and any earnout clauses has not yet been determined.

Foreign Currency Translation Reserve

i)
A summary of the amounts transferred to the income statement from the foreign currency translation reserve, including amounts triggered
by items identified in this note are summarised below.

Disposal of Venezuelan consumer business

Closure of Venezuelan ingredients operations

Change in classification of investment in Beingmate

Other

Foreign currency translation reserve losses transferred to the income statement

NOTE

$ MILLION

124

193

Revenue from the Group's reportable segments is shown below.

Ingredients external revenue

Consumer and Foodservice external revenue

China Farms external revenue

Total external revenue

4 COST OF GOODS SOLD

Opening inventory

Cost of milk:

– New Zealand sourced

– Non-New Zealand sourced

Other costs

Impairment of production related assets1

Closing inventory

Total cost of goods sold

GROUP $ MILLION

31 JULY 2019

31 JULY 2018

13,328

6,786

–

20,114

13,485

6,946

–

20,431

GROUP $ MILLION

31 JULY 2019

31 JULY 2018

2,917

9,748

966

6,412

235

(2,944)

17,334

2,593

10,115

1,245

6,243

–

(2,917)

17,279

Impairments of production related assets in New Zealand, China and Australia are included with cost of goods sold (refer to Note 2).

DEBT AND EQUITY

SUBSCRIBED EQUITY INSTRUMENTS

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 shares.1

Balance at 1 August 2018

Shares issued under the Farm Source Rewards scheme

Balance at 31 July 2019

Balance at 1 August 2017

Shares issued under the dividend reinvestment plan2

Balance at 31 July 2018

CO-OPERATIVE SHARES
(THOUSANDS)

1,611,923

1,611,992

1,606,933

4,990

1,611,923

1 These rights are also attached to vouchers when backed by milk supply (subject to limits).

2 Total value of $29 million.

The rights attaching to Co-operative shares are set out in Fonterra’s Constitution, available in the ‘About/Governance and Management’
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 2019, 102,934,582 Co-operative shares (31 July 2018: 111,423,603) were legally owned by the Custodian,
on trust for the benefit of the Fund.

Balance at 1 August 2018

Units issued

Units surrendered

Balance at 31 July 2019

Balance at 1 August 2017

Units issued

Units surrendered

Balance at 31 July 2018

UNITS
(THOUSANDS)

111,424

17,769

(26,258)

102,935

126,047

20,946

(35,569)

111,424

The rights attaching to units are set out in the Fonterra Shareholders’ Fund 2019 Annual Report, available in the ‘Investors/Fonterra
Shareholder’s Fund’ section of Fonterra’s website.

100

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/or share repurchase programme and issuing new shares.

Post balance date equity instrument prices
After balance date, Fonterra’s share and unit prices fell below the book value of Fonterra’s consolidated net assets. Fonterra determined
that this share and unit price movement did not require further impairment testing for all, or for further components of, Fonterra’s
business. This is because it was not, in itself, an indicator of further impairment. This determination considered Fonterra’s view that the
share and unit price does not fully reflect the fair value of Fonterra’s business. Key contributors are: the lower liquidity in Fonterra shares
and units combined with prospective investor requirements for Fonterra to deliver on communicated targets; and broader movements
in NZX indices. Further, Fonterra shares and units trade without a full control premium.

6 DIVIDENDS PAID

No dividend was paid during the year ended 31 July 2019.

The Dividend Reinvestment Plan applied to all dividends paid during the year ended 31 July 2018 in the table below.

DIVIDENDS

2018 Interim dividend – 10 cents per share1

2017 Final dividend – 20 cents per share2

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.

BORROWINGS

Economic net interest-bearing debt
Economic net interest-bearing debt reflects the effect of debt hedging in place at balance date.

$ MILLION

YEAR ENDED
31 JULY 2019

YEAR ENDED
31 JULY 2018

–

161

321

GROUP $ MILLION

AS AT
31 JULY 2019

AS AT
31 JULY 2018

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

6,536

(550)

(142)

5,878

(148)

5,730

1 The balance as at 31 July 2018 included $177 million of Fonterra Co-operative Support Loan receivables (31 July 2019: nil) which were netted against

amounts owing to suppliers.

6,738

(446)

(332)

161

6,121

6,199

101

BORROWINGS CONTINUED

Total borrowings in the table above are represented by:

BALANCE AS AT
1 AUGUST 2018

PROCEEDS

REPAYMENTS

GROUP $ MILLION

FOREIGN
EXCHANGE
MOVEMENT

CHANGES IN
FAIR VALUES

OTHER

BALANCE AS AT
31 JULY 2019

Commercial paper

Bank loans

Finance leases1

Capital notes2

NZX-listed bonds

Medium-term notes

Total borrowings3

304

1,128

131

500

4,640

6,738

1,219

2,034

–

100

393

3,746

(1,271)

(2,547)

(60)

–

(271)

(4,149)

–

(27)

(23)

–

214

–

259

619

600

4,952

6,536

BALANCE AS AT
1 AUGUST 2017

PROCEEDS

REPAYMENTS

GROUP $ MILLION

FOREIGN
EXCHANGE
MOVEMENT

CHANGES IN
FAIR VALUES

OTHER

BALANCE AS AT
31 JULY 2018

Commercial paper

Bank loans

Finance leases1

Capital notes2

NZX-listed bonds

Medium-term notes

Total borrowings3

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

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 main debt payback ratio is adjusted for the impact of operating leases and it is calculated as economic net

interest-bearing debt divided by earnings before interest, tax, depreciation and amortisation (EBITDA). This is a key ratio considered
by the credit rating agencies when determining Fonterra’s credit rating.

– 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 2019 was
48.2 per cent (31 July 2018: 48.4 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 committed credit totalling $3,149 million
(31 July 2018: $3,732 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.

102

WORKING CAPITAL

8 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 suppliers ($ million)

Farmgate Milk Price1 (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 2019

AS AT
31 JULY 2018

1,534

$6.35

$5.40

$0.95

85%

1,579

$6.69

$5.55

$1.14

83%

1 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. It can be found in the ‘Investors/Farmgate Milk Prices’ section of
the Fonterra website.

LONG TERM ASSETS

PROPERTY, PLANT AND EQUIPMENT

As at 31 July 2019

Cost

Accumulated depreciation and impairment

Net book value at 31 July 2019

As at 31 July 2018

Cost

Accumulated depreciation and impairment

Net book value at 31 July 2018

GROUP $ MILLION

BUILDINGS
AND LEASEHOLD
IMPROVEMENTS

LAND

PLANT, VEHICLES
AND EQUIPMENT

CAPITAL WORK
IN PROGRESS

TOTAL

354

–

354

–

354

2,965

(1,200)

1,765

2,787

(1,042)

1,745

8,553

(4,455)

4,098

8,210

(4,220)

3,990

295

–

295

721

–

721

12,167

(5,655)

6,512

12,072

(5,262)

6,810

New Zealand Ingredients manufacturing assets
Fonterra considers there are no indicators of impairment for Fonterra’s New Zealand Ingredients manufacturing sites. Fonterra’s
New Zealand Ingredients manufacturing sites are considered to be, with limited exceptions, a single CGU, because these manufacturing
plants are utilised as a single network for processing raw milk supply, including meeting peak milk processing requirements.

103

AS AT
31 JULY 2019

AS AT
31 JULY 2018

Young dairy cows Market price

OUR FINANCIAL SUMMARY

10 LIVESTOCK

The quantity of livestock owned by the Group is presented below:

Young dairy cows

Mature dairy cows

Other livestock

Total livestock headcount

HEADCOUNT

AS AT
31 JULY 2019

AS AT
31 JULY 2018

28,702

37,997

444

67,143

32,630

34,561

3,054

70,245

During the year the Group collected 292 million litres of milk (31 July 2018: 312 million litres) from its dairy cows.

The value of livestock at 31 July is as follows:

288

11
4
15
(51)

295

109
186

–

295

319

–
6
6
(107)

288

134
153

288

GROUP $ MILLION

AS AT
31 JULY 2019

AS AT
31 JULY 2018

(22)

(34)

Opening balance

Rearing costs of young livestock
Changes in fair value recognised in the income statement
– Change in fair value – birth and growth
– Change in fair value – price changes
Subtotal changes in fair value
Disposal of livestock

Effect of movements in exchange rates

Closing balance

Represented by:

Young dairy cows
Mature dairy cows

Other livestock

Total livestock at 31 July

The changes in the fair values of livestock are reflected in the Group’s income statement as follows:

Cost of goods sold

Other operating income

Total changes in fair value

104

10 LIVESTOCK CONTINUED

Valuation techniques and significant unobservable inputs
The following table shows the relationship between the significant unobservable inputs and fair value measurement for mature and young
dairy cows:

TYPE

VALUATION
TECHNIQUE

SIGNIFICANT
UNOBSERVABLE INPUTS

RELATIONSHIP BETWEEN KEY UNOBSERVABLE INPUTS
AND FAIR VALUE MEASUREMENT

Mature dairy cows Discounted cash flows

Raw milk yield

Milk price

Feed costs

Average market
price of a
14-month-old
heifer

A three per cent increase/(decrease) in the raw milk yield from
a base of 31.0 kg per cow per day would result in a $7 million
(31 July 2018: $6 million) increase/(decrease) in fair value.

A RMB 0.10 increase/(decrease) in the selling price of milk from
a base price of RMB 3.78 per kg would result in a $13 million
(31 July 2018: $12 million) increase/(decrease) in fair value.

A RMB 0.10 increase/(decrease) in feed costs from a base cost
of RMB 2.06 per kg would result in a $13 million (31 July 2018:
$12 million) (decrease)/increase in fair value.

The average market price of a 14-month-old heifer for the year
ended 31 July 2019 was RMB 19,154 (31 July 2018: RMB 21,154).
A five per cent increase/(decrease) in the average market price
of a 14-month-old heifer would result in a $6 million (31 July
2018: $7 million) increase/(decrease) in fair value.

INVESTMENTS

11 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

DMV Fonterra Excipients GmbH & Co. KG1

Beingmate Baby & Child Food Co., Ltd2

Falcon Dairy Holdings Limited

All investees have balance dates of 31 December.

COUNTRY OF INCORPORATION AND
PRINCIPAL PLACE OF BUSINESS

Germany

China

Hong Kong

OWNERSHIP INTERESTS (%)

AS AT
31 JULY 2019

AS AT
31 JULY 2018

–

18.8

1 Fonterra’s investment in DMV Fonterra Excipients GmbH & Co. KG has been reclassified from an equity accounted investee to a held for sale asset (refer to

Note 2 for details).

2 During the year Fonterra’s significant influence in Beingmate ceased, and Fonterra subsequently accounts for its investment in Beingmate shares at their fair
value, with movements recorded in the income statement (Note 2 explains this). Consequently, Beingmate also ceased being a related party of Fonterra.

105

FINANCIAL RISK MANAGEMENT

12 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 7.

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 5.

OTHER

13 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

– Derecognition of DPA Brazil's deferred tax asset

Tax expense

GROUP $ MILLION

NOTES

31 JULY 2019

31 JULY 2018

(20)

110

177

(5)

(34)

–

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 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 2019

31 JULY 2018

(428)

(120)

(6)

249

(18)

109

–

109

(20)

177

356

(154)

(43)

(27)

168

(24)

(5)

(27)

(2)

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. The Group recorded a net loss

before tax, so the calculation of an effective tax rate is not applicable.

106

107

13 TAXATION CONTINUED

14 CONTINGENT LIABILITIES

New Zealand tax losses
The New Zealand tax consolidated group generated a taxable income in the current year. The deferred tax asset relating to New
Zealand tax losses of $522 million (31 July 2018: $554 million) has been recognised on the basis that taxable income will be generated in
the future against which the tax losses can be utilised.

The key assumptions in the assessment of future taxable income are New Zealand earnings, and the tax-deductible dividend.
The estimate of New Zealand earnings is based on performance of the New Zealand tax consolidated group relative to the overall
Group. This ratio has been applied to the profit before tax forecast in the Group’s three-year business plan. The tax-deductible dividend
assumption is based on the Group’s dividend policy and is set at the midpoint of the current policy which is 65 per cent to 75 per cent
of normalised net profit after tax. Fonterra determines its dividend policy and therefore has the ability to influence utilisation of the losses.

Changes in the key assumptions used could impact the expected time horizon for utilisation of the tax losses, for example higher
dividends could extend the utilisation horizon but would not impact the carrying amount of deferred tax assets available to be utilised
against future taxable profits. Any future reduction in offshore income resulting from the strategic review could reduce the timing of
utilisation of the tax losses, however, again this will not impact the carrying amount of the deferred tax asset available to be utilised.
Therefore, a reasonably possible change in the key assumptions does not change the carrying value of the deferred tax asset recognised.

Offshore tax losses
Deferred tax assets relating to tax losses carried forward of $131 million (31 July 2018: $253 million) are recognised by offshore entities
in the current year. DPA Brazil’s deferred tax asset which included tax losses has been derecognised in the current year, see Note 2c)
for further details.

$114 million of offshore tax losses recognised relate to tax losses in Australia and are recognised on the basis of utilisation through
future expected taxable income.

Gross tax losses of $356 million reflecting a deferred tax asset of $118 million (31 July 2018: $54 million gross, deferred tax asset
of $17 million) relating to offshore entities have not been recognised as they may not be utilised.

Deferred tax liabilities
Fonterra has made a key judgement to not recognise deferred tax liabilities in respect of unremitted earnings that are considered
indefinitely reinvested in foreign subsidiaries. As at 31 July 2019, these earnings amount to $1,085 million (31 July 2018: $1,089 million).
These could be subject to withholding and other taxes on remittance. Any offshore divestments made because of the strategic review
do not change this judgement on the basis there are a number of exit structures available that do not result in a payment of a dividend.

Fonterra’s intention regarding any future possible exit strategies is a key assumption. A reasonably possible change in this assumption
is not expected to change the conclusion that a deferred tax liability should not be recognised. This is because Fonterra management
has control of the subsidiaries, there are no plans to pay a dividend in the foreseeable future.

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 January 2014, Danone initiated legal proceedings against Fonterra in the High Court of New Zealand and separate Singapore
arbitration proceedings against Fonterra in relation to Fonterra’s Whey Protein Concentrate 80 (WPC80) precautionary recall in August
2013. The New Zealand High Court proceedings have been stayed pending completion of the Singapore arbitration.

The Singapore arbitration panel issued its award (judgement), finding in favour of Danone and ordered Fonterra to pay to Danone €105
million ($183 million) in recall costs. In addition, Fonterra also paid Danone €29 million ($49 million) representing interest on the award
amount and Danone’s costs in connection with the arbitration proceedings. Fonterra paid these amounts during the financial year
ended 31 July 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 2019 (31 July 2018: nil).

15 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 2019

AS AT
31 JULY 2018

4.67

2.04

703

1,612

5.18

1.94

603

1,612

108

109

REPORT OF THE INDEPENDENT AUDITOR ON THE SUMMARY FINANCIAL STATEMENTS

Independent Auditor’s Report CONTINUED

REPORT OF THE INDEPENDENT AUDITOR ON THE SUMMARY FINANCIAL STATEMENTS

TO THE SHAREHOLDERS OF FONTERRA CO-OPERATIVE GROUP LIMITED

AUDITOR INDEPENDENCE

The summary financial statements comprise:
– the statement of financial position as at 31 July 2019;

– 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 2019.

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 25 September 2019.

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, 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.

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 as 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, has continued to act as Chair of the AFC in relation to these matters
and the Chair of the Board has joined the AFC for deliberation. In addition, the engagement partner on the audit has direct access
to the Chair of the Board, John Monaghan, to address any actual or perceived auditor independence threats.

Brent Goldsack was appointed as a Farmer-elected 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 to the Board.

During the year, our firm provided services to the Group as described in note 6 to the audited financial statements, including;
assistance with collation of information for a vendor due diligence process; advice on a sale and purchase agreement; facilitation
and administration support for the Fonterra Strategic review including board strategy workshops and programme management
support; corporate tax advice to an equity accounted investee; access to generic training and technical accounting websites;
as well as other assurance and attestation services provided in our capacity as auditors. 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
25 September 2019

110

111

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR FINANCIAL SUMMARY
Statutory Information

FOR THE YEAR ENDED 31 JULY 2019

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 negative. 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 (Listing Rules). This means that where Capital Notes are quoted on NZX’s Debt Market, Fonterra Co-operative Group Limited
(Fonterra) is not required to comply with certain Listing Rules which apply to an issuer of quoted equity securities.

Fonterra was issued with a ruling in respect of Rule 1.7.1(d) of the Fonterra Shareholders’ Market Rules (FSM Rules) on 27 June 2017
by NZX Regulation (NZXR). 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 FSM Rule 5.1.2(c) on 22 November 2016 by NZXR. The effect of this ruling is that
Fonterra’s internal governance resolutions are considered to be matters that do not require the NZXR to approve a notice of meeting
under FSM Rule 5.1.1.

Fonterra was issued with a waiver of Listing Rule 5.2.3 on 5 November 2018 by NZXR for a period of six months from 15 November
2018. This was in respect of fixed rate bonds (FCG050s) quoted on the NZX Debt Market and was to the extent that this Listing Rule
would otherwise require the FCG050s to be held by at least 100 Members of the Public holding at least 25 per cent of the FCG050s
on issue.

NZX TRADING HALTS

On 9 August 2018 NZX Regulation (NZXR), at the request of Fonterra Co-operative Group Limited (Fonterra) and Fonterra
Shareholders' Fund (FSF), placed a trading halt on Fonterra and its debt securities (FCG030, FCG040, & FCGHA), and FSF. Fonterra
was preparing its annual financial statements for the financial year ended 31 July 2018 and as a result there was potential for a variation
from the earnings guidance previously given by Fonterra to the market. The trading halt had been requested to allow Fonterra to
determine this and to make any required announcement to the market. On 10 August 2018 Fonterra shared a revision to its forecast
2017/18 Farmgate Milk Price and updated its normalised earnings per share and dividend guidance. The trading halt was lifted on
10 August 2018 following this announcement.

112

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 115. 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

GROUP $ MILLION

31 JULY 2019

31 JULY 2018

Loss for the period

Add: Depreciation

Add: Amortisation

Add: Net finance costs

Add: Taxation expense

Total EBITDA

Add: New Zealand consumer and foodservice business

Add: Disposal of Tip Top

Add: China Farms impairment

Add: Brazil consumer and foodservice business impairments

Add: Disposal of Venezuelan operations

Add: Australia strategic reset

Add: Other strategic reset costs

Add: Beingmate

Add: Time value of options

Add: Reduction in the carrying value of investment in Beingmate

Add: WPC80 recall costs

Total normalisation adjustments

Normalised EBITDA

(605)

458

103

418

177

551

204

203

149

134

–

829

1,380

(196)

446

416

806

–

439

196

640

1,446

Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised EBIT

Loss 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 2019

31 JULY 2018

(605)

418

177

(10)

829

819

(196)

416

262

640

902

113

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR FINANCIAL SUMMARY
Non-GAAP Measures CONTINUED

Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised earnings per share

Glossary

NON-GAAP MEASURES

Loss for the period

Add: Normalisation adjustments (as detailed above)

Add: Normalisation adjustment to net finance costs

Add/(Less): Tax on normalisation adjustments

Total normalised earnings

Add/(Less): Share attributable to non-controlling interests

Less: Normalisation adjustments to non-controlling interests

Net normalised earnings attributable to equity holders of the Parent

Weighted average number of shares (thousands of shares)

Normalised earnings per share ($)

GROUP $ MILLION

31 JULY 2019

31 JULY 2018

(605)

829

–

280

(59)

269

(196)

640

(63)

407

(25)

–

382

1,611,980

0.17

1,610,005

0.24

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.

Pay-out

Retentions

Return on capital

means the total cash payment to farmer shareholders. It is the sum of the Farmgate Milk Price
per kgMS 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

Working capital days

is calculated as current trade receivables plus inventories, less current trade payables and
accruals. It excludes amounts owing to suppliers and employee entitlements.

is calculated as average period to date working capital divided by external revenue, multiplied
by the number of days in the period.

114

115

FONTERRA ANNUAL REPORT 2019FONTERRA ANNUAL REPORT 2019OUR DIRECTORY