Fonterra
Annual Report 2020

Plain-text annual report

ANNUAL REPORT 2020 Two simple words that bring together our purpose, values and strategy. T his year we’ve been given a reminder of where our strength lies. It’s in our people being Good Together and delivering on our purpose, values and strategy. We’re a New Zealand co-operative made up of everyday good people and we’re at our best when we unite and go all in for a common purpose. By focusing on three interconnected goals – Healthy People, a Healthy Environment and a Healthy Business – we are able to create goodness for generations for our farmer owners, employees, unit holders, customers, consumers and communities. Healthy Environment Our farmer owners care for the land and their animals. And they are committed to farming in a way that regenerates their farms and environment for future generations. In New Zealand we have a highly-efficient, pasture-based farming system and because of this we have one of the lowest on-farm carbon footprints in the world – approximately one-third of the global average. But we are not stopping there. In collaboration with others, we are working on innovative solutions to improve water quality and reduce our carbon footprint even further – like the work we’re doing with the Department of Conservation to find solutions to protect New Zealand’s waterways, the actions the Co-op is taking to address climate change and reduce emissions on-site and on-farm, as well as our efforts to reduce waste across the business. BenBBBeBenBenBeBBBB & && & & BBelelellB lelBelelB lellaa-ala-la-lalalaa RosRossRoRooRosRosRo ee, e, AuAuAucklaklaandndn Healthy People People are at the heart of our co-operative. What makes for Healthy People? Farmers getting the support they need to look after their families, their animals and their land. Employees having the opportunity to do fulfilling work in a safe and healthy workplace. Customers and consumers getting safe, nutritious and innovative products. And local communities receiving support from us where we can, especially in times of need. Healthy Business JamJamJamJamJamJJJ ieie-Lee && &&& & TayTayloror, CCCCC, raawwffoforforf d Sd Stt KerKerryry, OOOxOxOxOxOxOO forforforrrd Nd Nd Nd Nd Nd ortortortortth Ch Ch Ch Ch Cantantantantan erberber uryryu We know the long-term sustainability of our business is more than just numbers. It comes from successfully bringing our people together to do their best work, looking after our customers and caring for the environment and local communities. It also comes from challenging ourselves to innovate and do better – pushing ourselves to stay one step ahead so we unlock greater value for farmer owners, unit holders and customers. How our people are managing Covid-19 has proven once more that good things come from being Good Together. What else has driven our Healthy Business this year? Our relentless focus on doing what we said we will – delivering on our four priorities for the 2020 financial year: to build a great team, support regional New Zealand, hit our financial targets and reduce our environmental footprint. 2 3 2 6 10 14 16 18 24 32 40 72 75 76 82 83 144 149 151 152 164 176 178 181 OUR THREE GOALS LETTER FROM THE CHAIR Q&A WITH OUR CHIEF EXECUTIVE OFFICER A STRONG TEAM RESPONDING TO COVID-19 OUR YEAR IN REVIEW HEALTHY ENVIRONMENT HEALTHY PEOPLE THE CO-OPERATIVE DIFFERENCE HEALTHY BUSINESS ANNUAL FINANCIAL RESULTS DIRECTORS’ STATEMENT FINANCIAL STATEMENTS BASIS OF PREPARATION NOTES TO THE FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT NON-GAAP MEASURES GLOSSARY STATUTORY INFORMATION CORPORATE GOVERNANCE BOARD OF DIRECTORS MANAGEMENT TEAM DIRECTORY Fonterra uses several non-GAAP measures when discussing financial performance. These measures include normalised segment earnings, normalised EBIT, EBIT, normalisation adjustments and payout. These are non-GAAP financial measures and are not defined by NZ IFRS. Management believes that these measures provide useful information as they provide valuable insight on the underlying performance of the business. They are used internally to evaluate the underlying performance of business units and to analyse trends. These measures are not uniformly defined or utilised by all companies. Accordingly, these measures may not be comparable with similarly titled measures used by other companies. Non-GAAP financial measures should not be viewed in isolation nor considered as a substitute for measures reported in accordance with NZ IFRS. These non-GAAP measures are not subject to audit unless they are included in Fonterra’s annual financial statements. Please refer to page 149 for the reconciliation of the NZ IFRS measures to the non-GAAP measures and page 151 for definitions of the non-GAAP measures used by Fonterra. 4 5 Fonterra Annual Report 2020 Letter from the Chair Delivering on our commitments “Our international scale is one of the Co-op’s key strengths. Our people have worked hard to leverage that scale, shifting our New Zealand milk into the products and places where we can earn the highest possible value under the circumstances. JOHN MONAGHAN CHAIR O ur 2019/20 result is headlined by a return to sustainable earnings, with the Co-op posting total normalised earnings of $398 million, up $123 million on last year. With these improved earnings and a stronger balance sheet comes a return to paying a dividend, which was one of the four Board priorities this year. This year’s dividend payment of 5 cents per share and final Farmgate Milk Price of $7.14 per kgMS means the total payout for a fully share-backed farmer was $7.19 per kgMS, the fourth highest for the Co-op. These results show that the core of our strategy will deliver – even amid a global pandemic. Cultural change has been a focus for our Co-op’s leadership over the past two years. We can see that improvement reflected in the numbers, particularly our overall Debt1 which reduced by $1.1 billion in a single year. In the past 2 years, we have reduced overall Debt by $1.5 billion. Across the Co-op, our people have been calm and considered when responding to the new challenges that Covid-19 creates on a daily basis. We have stayed focused on our core business and delivered what we said we would, rather than let Covid-19 be an excuse to veer away from strategy. Our international scale is one of the Co-op’s key strengths. Our people have worked hard to leverage that scale, shifting our New Zealand milk into the products and places where we can earn the highest possible value under the circumstances. 1 Economic net interest-bearing debt. With that scale comes a greater exposure to world events. This year, like most others, our Co-op has had to manage geo-political events, civil unrest and other non-Covid-19 disruptions in our key markets. Our consumer businesses in Hong Kong and Chile, for example, continue to be hit hard by long- running civil unrest. Within that context, I’m pleased to report that the Board has delivered on its four priorities for the year: delivering the Milk Price, a return to respectable earnings, the continued implementation of our strategy, and governance succession and development. A RETURN TO RESPECTABLE EARNINGS We are not immune to Covid-19, but this year’s results show the diversity of our earnings, which has helped us to manage the impact of the global pandemic. Consumers have continued to seek out products backed by our New Zealand milk and the Ingredients business underpinned our performance again this year. When foodservice demand dropped away as a result of global lockdowns and social distancing rules, our Consumer business was able to pick up some of the slack. Ingredients’ normalised EBIT improved to $827 million, up 5% on last year. Normalised gross margins for New Zealand Ingredients was up to 9.3%. This result benefited from favourable price relativities between the products that determine our Milk Price, and the rest of our product range. Our Foodservice performance was strong in Greater China where we had a good start to the year and the full-year impact of Covid-19 was less than anticipated. Greater China Foodservice’s normalised EBIT increased to $169 million, up 49% on last year. This growth was balanced out by our Foodservice operations in the rest of Asia, Latin America and Oceania, which bore the brunt of Covid-19. Results in our Consumer business were also a mixed bag. Hong Kong continued to suffer from ongoing civil unrest, but our earnings performance in Oceania and Asia improved despite the disruption of Covid-19, after excluding FY20 impairments and earnings from FY19 divested businesses. DELIVERING A DIVIDEND This year marks a return to paying dividends, a position we expect to maintain in the future, assuming normal operating conditions. At 5 cents per share, the dividend is at the lower end of the 5-7 cent range calculated under the Board’s dividend policy guidelines. Under those guidelines, we expect the dividend payment to be 40-60% of reported Net Profit After Tax and take into consideration our current and future Debt positions. Any abnormal gains, such as a gain on sale of an asset, are considered separately. In the context of so much uncertainty, as Covid-19 continues to impact our key markets and customer confidence, distributing a 5-cent dividend is a prudent decision and one that balances our aims of further reducing Debt and distributing earnings. 6 7 Fonterra Annual Report 2020 Letter from the Chair Farmgate Milk Price for the 2019/20 season $7.14 per kgMS New Zealand milk collections for the 2019/20 season 1,517 million kgMS CONTINUING THE IMPLEMENTATION OF OUR STRATEGY The Board continues to refresh the Co-op’s risk appetite statement alongside refinements to our strategy and with a view to sustainable growth. We have developed a more conservative approach to risk across the business, be it our balance sheet, investment decisions and general business operations. It is a critical piece of work that gives us a much clearer view of the risk adjusted return, particularly for offshore investments, before we make our investment decisions. We have also continued to review our asset base in line with our strategy. Within the financial year we completed the earlier announced sales of DFE Pharma and foodspring® with cash proceeds of $623 million. Despite its improved earnings performance this year, we have looked at the future cash flow projections for our New Zealand Consumer business and made the call to write down that business by $21 million. Our Fonterra-owned China farms made a modest EBIT of $11 million this year, but we have also written down those assets, along with our joint venture farm. Continued geo-political tensions in Latin America have impacted our DPA Brazil business and as a result, that asset has been impaired. The total impact of write downs in the financial year was $289 million. We measure the success of our strategy in three buckets: healthy people, healthy environment and a healthy business. We have made good progress in all three areas, including a 20% reduction in energy intensity from our 2003 baseline at our New Zealand manufacturing sites. There is more work to be done in all three areas if we are to meet our long-term commitments. STABLE GOVERNANCE SUCCESSION AND DEVELOPMENT In June, the Board selected Peter McBride as our Chairman-elect as part of our commitment to planned governance succession. The early announcement was designed to provide Miles and his leadership team with the stability and confidence to push on with embedding our strategy and cultural change. Since June, Peter and I have worked together closely to ensure there is no disruption to the Co-op when he takes over the reins at the Annual Meeting in November. Holly Kramer joined our Board in April as an independent director. Holly fills the position left by Simon Israel who retired in November 2019. Farmers will be asked to ratify Holly’s appointment at the 2020 Annual Meeting. DELIVERING FOR FUTURE GENERATIONS – THE OUTLOOK FOR THE 2021 FINANCIAL YEAR AND BEYOND Looking to the 2021 financial year, there is a high level of uncertainty as to how the global recession and new waves of Covid-19 will impact demand globally. It is something the Co-op will be monitoring closely throughout the season. The best way of coping with uncertainty is to stay on strategy and focus on what is within our control – our financial discipline and cost of quality for example. We need to stay agile and draw on our strengths across the supply chain to manage and adapt to the changing global situation. From a Milk Price perspective, the supply and demand picture remains finely balanced and for that reason we are maintaining our forecast Farmgate Milk Price range of $5.90 - $6.90 for the 2020/21 season. In terms of our earnings, we are forecasting a full year normalised earnings per share range of 20-35 cents per share. This earnings range assumes a number of factors working in our favour, including that there is no heightened disruption from Covid-19 over what we currently face, and an improved trading performance driven out of Asia and Greater China. Dividend 5 cents per share Share price up 1.6% year/year* $3.82** *For the period 31 July 2020 **Fonterra Co-operative Group Limited (FCG) share price as at 31 July 2020 Further out, the future of our Co-op is exciting. We were match fit when Covid-19 struck, with a new strategy, structure, and culture. That has us well positioned to come out the other side where there will be new opportunities for us. We’re in the business of food, and it’s an exciting industry to be a part of. Food trends are constantly changing, there’s a lot of energy around new product development, and there’s new and emerging markets in most parts of the world. The provenance and quality behind New Zealand dairy will remain sought after internationally. People will always pay for quality, and we produce what I believe is the best milk in the world. Finally, on a personal note, I’d like to thank the 10,000 farming families that jointly own our Co-op for their loyalty and support. It has been a privilege to be part of this Co-op’s leadership, and its Chairman for the past two years. As a Fonterra governor I’m retiring out to the back paddock, but I remain an active and proud farmer-owner of this great Co-op. (cid:55)(cid:195)(cid:87)(cid:82)(cid:88)(cid:15)(cid:3)(cid:87)(cid:195)(cid:87)(cid:82)(cid:88)(cid:17)(cid:3) (cid:60)(cid:82)(cid:88)(cid:17)(cid:3)(cid:48)(cid:72)(cid:17)(cid:3)(cid:56)(cid:86)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:17) JOHN MONAGHAN CHAIR 8 9 Fonterra Annual Report 2020 Q&A with our Chief Executive Officer Q&A with our Chief Executive Officer Miles Hurrell answers key questions on the Co-op’s performance, the year ahead and the task of responding to Covid-19. How is the Co-op handling Covid-19? 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(cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:68)(cid:85)(cid:71)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:71)(cid:76)(cid:71)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:18)(cid:21)(cid:19)(cid:17) How have farmers and employees come through a tough year? 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(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:70)(cid:68)(cid:79)(cid:79)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:86)(cid:15)(cid:3)(cid:68)(cid:86)(cid:3)(cid:90)(cid:72)(cid:79)(cid:79)(cid:3) (cid:68)(cid:86)(cid:3)(cid:80)(cid:68)(cid:81)(cid:68)(cid:74)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:71)(cid:68)(cid:83)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:89)(cid:76)(cid:71)(cid:16)(cid:20)(cid:28)(cid:17)(cid:3)(cid:55)(cid:75)(cid:72)(cid:92)(cid:582)(cid:89)(cid:72)(cid:3) (cid:68)(cid:79)(cid:86)(cid:82)(cid:3)(cid:86)(cid:75)(cid:82)(cid:90)(cid:81)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:74)(cid:72)(cid:81)(cid:88)(cid:76)(cid:81)(cid:72)(cid:79)(cid:92)(cid:3)(cid:70)(cid:68)(cid:85)(cid:72)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:72)(cid:68)(cid:70)(cid:75)(cid:3) (cid:82)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:68)(cid:81)(cid:87)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3)(cid:68)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3) (cid:73)(cid:68)(cid:85)(cid:80)(cid:72)(cid:85)(cid:3)(cid:82)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:88)(cid:81)(cid:76)(cid:87)(cid:3)(cid:75)(cid:82)(cid:79)(cid:71)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:79)(cid:82)(cid:70)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:17)(cid:3) Has the Co-op hit its performance targets? (cid:44)(cid:582)(cid:80)(cid:3)(cid:83)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:68)(cid:92)(cid:3)(cid:90)(cid:72)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:17)(cid:3)(cid:58)(cid:72)(cid:582)(cid:89)(cid:72)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:72)(cid:71)(cid:3) (cid:82)(cid:81)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:73)(cid:82)(cid:88)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:29)(cid:3)(cid:75)(cid:76)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79) (cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:86)(cid:15)(cid:3)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:72)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:68)(cid:79)(cid:3)(cid:73)(cid:82)(cid:82)(cid:87)(cid:83)(cid:85)(cid:76)(cid:81)(cid:87)(cid:15) (cid:69)(cid:88)(cid:76)(cid:79)(cid:71)(cid:3)(cid:68)(cid:3)(cid:74)(cid:85)(cid:72)(cid:68)(cid:87)(cid:3)(cid:87)(cid:72)(cid:68)(cid:80)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:85)(cid:72)(cid:74)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79) (cid:49)(cid:72)(cid:90)(cid:3)(cid:61)(cid:72)(cid:68)(cid:79)(cid:68)(cid:81)(cid:71)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:76)(cid:81)(cid:70)(cid:85)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:51)(cid:85)(cid:82)(cid:73)(cid:76)(cid:87)(cid:3)(cid:68)(cid:73)(cid:87)(cid:72)(cid:85)(cid:3) (cid:87)(cid:68)(cid:91)(cid:3)(cid:69)(cid:92)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:7)(cid:20)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:15)(cid:3)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:71)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:39)(cid:72)(cid:69)(cid:87)(cid:3) (cid:69)(cid:92)(cid:3)(cid:80)(cid:82)(cid:85)(cid:72)(cid:3)(cid:87)(cid:75)(cid:68)(cid:81)(cid:3)(cid:7)(cid:20)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:41)(cid:85)(cid:72)(cid:72)(cid:3)(cid:38)(cid:68)(cid:86)(cid:75)(cid:3)(cid:41)(cid:79)(cid:82)(cid:90)(cid:20)(cid:3) (cid:90)(cid:68)(cid:86)(cid:3)(cid:68)(cid:79)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:7)(cid:21)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:39)(cid:82)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:68)(cid:80)(cid:72)(cid:3) (cid:87)(cid:76)(cid:80)(cid:72)(cid:3)(cid:68)(cid:86)(cid:3)(cid:85)(cid:72)(cid:86)(cid:83)(cid:82)(cid:81)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:38)(cid:82)(cid:89)(cid:76)(cid:71)(cid:16)(cid:20)(cid:28)(cid:3)(cid:71)(cid:72)(cid:80)(cid:82)(cid:81)(cid:86)(cid:87)(cid:85)(cid:68)(cid:87)(cid:72)(cid:86)(cid:3) (cid:87)(cid:75)(cid:72)(cid:3)(cid:85)(cid:72)(cid:86)(cid:76)(cid:79)(cid:76)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:87)(cid:85)(cid:72)(cid:81)(cid:74)(cid:87)(cid:75)(cid:3)(cid:82)(cid:73)(cid:3) (cid:69)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:3)(cid:70)(cid:82)(cid:16)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:17) What are the main reasons for the lift in the Co-op’s financial performance? (cid:50)(cid:88)(cid:85)(cid:3)(cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:81)(cid:82)(cid:85)(cid:80)(cid:68)(cid:79)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:40)(cid:37)(cid:44)(cid:55)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3)(cid:90)(cid:72)(cid:3)(cid:88)(cid:86)(cid:72)(cid:3) (cid:87)(cid:82)(cid:3)(cid:86)(cid:75)(cid:82)(cid:90)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:88)(cid:81)(cid:71)(cid:72)(cid:85)(cid:79)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:15)(cid:3) (cid:90)(cid:68)(cid:86)(cid:3)(cid:88)(cid:83)(cid:3)(cid:7)(cid:25)(cid:26)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:7)(cid:27)(cid:26)(cid:28)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:55)(cid:75)(cid:76)(cid:86)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3) (cid:71)(cid:85)(cid:76)(cid:89)(cid:72)(cid:81)(cid:3)(cid:69)(cid:92)(cid:3)(cid:68)(cid:3)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:3)(cid:81)(cid:82)(cid:85)(cid:80)(cid:68)(cid:79)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:74)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:73)(cid:76)(cid:87)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:44)(cid:81)(cid:74)(cid:85)(cid:72)(cid:71)(cid:76)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:15)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:86)(cid:87)(cid:85)(cid:82)(cid:81)(cid:74)(cid:3)(cid:86)(cid:68)(cid:79)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:74)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3) (cid:80)(cid:68)(cid:85)(cid:74)(cid:76)(cid:81)(cid:86)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:42)(cid:85)(cid:72)(cid:68)(cid:87)(cid:72)(cid:85)(cid:3)(cid:38)(cid:75)(cid:76)(cid:81)(cid:68)(cid:3)(cid:41)(cid:82)(cid:82)(cid:71)(cid:86)(cid:72)(cid:85)(cid:89)(cid:76)(cid:70)(cid:72)(cid:3) (cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:73)(cid:76)(cid:85)(cid:86)(cid:87)(cid:3)(cid:75)(cid:68)(cid:79)(cid:73)(cid:17)(cid:3) (cid:44)(cid:81)(cid:74)(cid:85)(cid:72)(cid:71)(cid:76)(cid:72)(cid:81)(cid:87)(cid:86)(cid:582)(cid:3)(cid:81)(cid:82)(cid:85)(cid:80)(cid:68)(cid:79)(cid:76)(cid:86)(cid:72)(cid:71)(cid:3)(cid:74)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3)(cid:83)(cid:85)(cid:82)(cid:73)(cid:76)(cid:87)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:88)(cid:83)(cid:3) (cid:7)(cid:20)(cid:25)(cid:24)(cid:3)(cid:80)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:7)(cid:20)(cid:17)(cid:25)(cid:3)(cid:69)(cid:76)(cid:79)(cid:79)(cid:76)(cid:82)(cid:81)(cid:17)(cid:3)(cid:36)(cid:87)(cid:3)(cid:75)(cid:68)(cid:79)(cid:73)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:74)(cid:85)(cid:82)(cid:86)(cid:86)(cid:3) (cid:83)(cid:85)(cid:82)(cid:73)(cid:76)(cid:87)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3)(cid:85)(cid:72)(cid:79)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:79)(cid:92)(cid:3)(cid:86)(cid:87)(cid:72)(cid:68)(cid:71)(cid:92)(cid:15)(cid:3)(cid:69)(cid:88)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:81)(cid:3)(cid:76)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:71)(cid:3) (cid:71)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:72)(cid:70)(cid:82)(cid:81)(cid:71)(cid:3)(cid:75)(cid:68)(cid:79)(cid:73)(cid:3)(cid:68)(cid:86)(cid:3)(cid:80)(cid:76)(cid:79)(cid:78)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:86)(cid:3)(cid:86)(cid:82)(cid:73)(cid:87)(cid:72)(cid:81)(cid:72)(cid:71)(cid:17)(cid:3) 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It is calculated as net cash flows from operating activities plus net cashflows from investing activities. 10 “It’s a tough environment for every market, industry and business right now. We’ve all felt the impact of Covid-19. For the global dairy market, Covid-19 has brought increased volatility and uncertainty. But despite this, Fonterra has performed well and delivered both a strong milk price and good earnings. MILES HURRELL CHIEF EXECUTIVE OFFICER 11 Fonterra Annual Report 2020 Q&A with our Chief Executive Officer Profit After Tax Total Group Normalised EBIT Debt down $659m Up $1.3 billion $879m Up $67 million $1.1 billion Free Cash Flow $1.8 billion Up $733 million “The Co-op is well aware of the difference we can make for New Zealand when we get it right. One of the biggest ways we contribute to the economy is through milk price payments – that’s us working hard every day to get the best price for our farmers’ milk. It makes me feel good to be part of a Co-op, that in the 2019/20 year, contributed around $11 billion to New Zealand’s rural economies. What has Fonterra done to reduce its impact on the environment? 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(cid:83)(cid:82)(cid:90)(cid:72)(cid:85)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:82)(cid:88)(cid:86)(cid:72)(cid:75)(cid:82)(cid:79)(cid:71)(cid:86)(cid:3)(cid:76)(cid:81)(cid:3)(cid:49)(cid:72)(cid:90)(cid:3)(cid:61)(cid:72)(cid:68)(cid:79)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3) (cid:20)(cid:17)(cid:24)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:86)(cid:17)(cid:3) • (cid:54)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:89)(cid:72)(cid:85)(cid:3)(cid:20)(cid:15)(cid:19)(cid:19)(cid:19)(cid:3)(cid:73)(cid:68)(cid:85)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:83)(cid:88)(cid:87)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3) (cid:41)(cid:68)(cid:85)(cid:80)(cid:3)(cid:40)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:51)(cid:79)(cid:68)(cid:81)(cid:86)(cid:3)(cid:11)(cid:41)(cid:40)(cid:51)(cid:86)(cid:12)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:79)(cid:68)(cid:70)(cid:72)(cid:15)(cid:3)(cid:90)(cid:75)(cid:76)(cid:70)(cid:75)(cid:3) (cid:80)(cid:72)(cid:68)(cid:81)(cid:86)(cid:3)(cid:22)(cid:23)(cid:8)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:79)(cid:92)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:68)(cid:85)(cid:80)(cid:86)(cid:3)(cid:81)(cid:82)(cid:90)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3) (cid:68)(cid:81)(cid:3)(cid:41)(cid:40)(cid:51)(cid:17) • (cid:38)(cid:82)(cid:80)(cid:83)(cid:79)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:68)(cid:85)(cid:80)(cid:16)(cid:86)(cid:83)(cid:72)(cid:70)(cid:76)(cid:73)(cid:76)(cid:70)(cid:3)(cid:74)(cid:85)(cid:72)(cid:72)(cid:81)(cid:75)(cid:82)(cid:88)(cid:86)(cid:72)(cid:3)(cid:74)(cid:68)(cid:86)(cid:3) (cid:72)(cid:80)(cid:76)(cid:86)(cid:86)(cid:76)(cid:82)(cid:81)(cid:3)(cid:85)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:73)(cid:68)(cid:85)(cid:80)(cid:72)(cid:85)(cid:3)(cid:82)(cid:90)(cid:81)(cid:72)(cid:85)(cid:86)(cid:3) (cid:86)(cid:82)(cid:3)(cid:87)(cid:75)(cid:72)(cid:92)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:71)(cid:68)(cid:87)(cid:68)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3)(cid:76)(cid:81)(cid:73)(cid:82)(cid:85)(cid:80)(cid:72)(cid:71)(cid:3) (cid:71)(cid:72)(cid:70)(cid:76)(cid:86)(cid:76)(cid:82)(cid:81)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:87)(cid:75)(cid:72)(cid:76)(cid:85)(cid:3)(cid:73)(cid:68)(cid:85)(cid:80)(cid:86)(cid:17)(cid:3) (cid:37)(cid:88)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:73)(cid:88)(cid:79)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3)(cid:76)(cid:81)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:18)(cid:21)(cid:19)(cid:3)(cid:90)(cid:68)(cid:86)(cid:3) (cid:80)(cid:68)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:79)(cid:79)(cid:3)(cid:87)(cid:82)(cid:3)(cid:86)(cid:90)(cid:76)(cid:87)(cid:70)(cid:75)(cid:3)(cid:73)(cid:85)(cid:82)(cid:80)(cid:3)(cid:70)(cid:82)(cid:68)(cid:79)(cid:3)(cid:87)(cid:82)(cid:3)(cid:90)(cid:82)(cid:82)(cid:71)(cid:3) (cid:83)(cid:72)(cid:79)(cid:79)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:87)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:55)(cid:72)(cid:3)(cid:36)(cid:90)(cid:68)(cid:80)(cid:88)(cid:87)(cid:88)(cid:3)(cid:80)(cid:68)(cid:81)(cid:88)(cid:73)(cid:68)(cid:70)(cid:87)(cid:88)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:86)(cid:76)(cid:87)(cid:72)(cid:17)(cid:3) (cid:44)(cid:582)(cid:80)(cid:3)(cid:83)(cid:79)(cid:72)(cid:68)(cid:86)(cid:72)(cid:71)(cid:15)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:71)(cid:72)(cid:86)(cid:83)(cid:76)(cid:87)(cid:72)(cid:3)(cid:79)(cid:82)(cid:74)(cid:76)(cid:86)(cid:87)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:71)(cid:72)(cid:79)(cid:68)(cid:92)(cid:86)(cid:3)(cid:71)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3) (cid:38)(cid:82)(cid:89)(cid:76)(cid:71)(cid:16)(cid:20)(cid:28)(cid:15)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:86)(cid:76)(cid:87)(cid:72)(cid:3)(cid:76)(cid:86)(cid:3)(cid:81)(cid:82)(cid:90)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:90)(cid:82)(cid:82)(cid:71)(cid:3)(cid:83)(cid:72)(cid:79)(cid:79)(cid:72)(cid:87)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:86)(cid:72)(cid:72)(cid:3)(cid:88)(cid:86)(cid:3)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:81)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:68)(cid:79)(cid:3)(cid:88)(cid:86)(cid:68)(cid:74)(cid:72)(cid:3)(cid:69)(cid:92)(cid:3) (cid:68)(cid:79)(cid:80)(cid:82)(cid:86)(cid:87)(cid:3)(cid:20)(cid:19)(cid:8)(cid:3)(cid:68)(cid:86)(cid:3)(cid:68)(cid:3)(cid:85)(cid:72)(cid:86)(cid:88)(cid:79)(cid:87)(cid:17) What are your priorities for 2020/21? (cid:58)(cid:72)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:87)(cid:75)(cid:85)(cid:72)(cid:72)(cid:3)(cid:83)(cid:85)(cid:76)(cid:82)(cid:85)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:578)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:38)(cid:82)(cid:16)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:15)(cid:3) (cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:38)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:92)(cid:17)(cid:3) (cid:581)(cid:38)(cid:82)(cid:16)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:582)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:79)(cid:79)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:69)(cid:72)(cid:76)(cid:81)(cid:74)(cid:3)(cid:75)(cid:72)(cid:85)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3) (cid:73)(cid:68)(cid:85)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:578)(cid:3)(cid:87)(cid:75)(cid:68)(cid:87)(cid:3)(cid:80)(cid:72)(cid:68)(cid:81)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:68)(cid:3) (cid:70)(cid:82)(cid:80)(cid:83)(cid:72)(cid:87)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:80)(cid:76)(cid:79)(cid:78)(cid:3)(cid:83)(cid:85)(cid:76)(cid:70)(cid:72)(cid:15)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:82)(cid:85)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:68)(cid:85)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3) (cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:86)(cid:88)(cid:86)(cid:87)(cid:68)(cid:76)(cid:81)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86)(cid:72)(cid:86)(cid:3)(cid:87)(cid:75)(cid:85)(cid:82)(cid:88)(cid:74)(cid:75)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:38)(cid:82)(cid:16) (cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:39)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:74)(cid:85)(cid:68)(cid:80)(cid:80)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:80)(cid:83)(cid:82)(cid:90)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3) (cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:88)(cid:79)(cid:79)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3)(cid:76)(cid:87)(cid:3)(cid:75)(cid:68)(cid:83)(cid:83)(cid:72)(cid:81)(cid:17) (cid:581)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:582)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:71)(cid:72)(cid:79)(cid:76)(cid:89)(cid:72)(cid:85)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:81)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:80)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3)(cid:578)(cid:3)(cid:76)(cid:81)(cid:3)(cid:83)(cid:68)(cid:85)(cid:87)(cid:76)(cid:70)(cid:88)(cid:79)(cid:68)(cid:85)(cid:15)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:85)(cid:76)(cid:89)(cid:72)(cid:3)(cid:72)(cid:68)(cid:85)(cid:81)(cid:76)(cid:81)(cid:74)(cid:86)(cid:15)(cid:3)(cid:85)(cid:72)(cid:71)(cid:88)(cid:70)(cid:72)(cid:3)(cid:39)(cid:72)(cid:69)(cid:87)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) (cid:76)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:3)(cid:85)(cid:72)(cid:87)(cid:88)(cid:85)(cid:81)(cid:3)(cid:82)(cid:81)(cid:3)(cid:70)(cid:68)(cid:83)(cid:76)(cid:87)(cid:68)(cid:79)(cid:17) (cid:36)(cid:81)(cid:71)(cid:3)(cid:581)(cid:38)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:92)(cid:582)(cid:3)(cid:76)(cid:86)(cid:3)(cid:68)(cid:69)(cid:82)(cid:88)(cid:87)(cid:3)(cid:71)(cid:82)(cid:76)(cid:81)(cid:74)(cid:3)(cid:90)(cid:75)(cid:68)(cid:87)(cid:582)(cid:86)(cid:3) (cid:85)(cid:76)(cid:74)(cid:75)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:86)(cid:15)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:72)(cid:81)(cid:89)(cid:76)(cid:85)(cid:82)(cid:81)(cid:80)(cid:72)(cid:81)(cid:87)(cid:17)(cid:3)(cid:55)(cid:75)(cid:68)(cid:87)(cid:3)(cid:80)(cid:72)(cid:68)(cid:81)(cid:86)(cid:3)(cid:72)(cid:91)(cid:70)(cid:72)(cid:72)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:3) (cid:72)(cid:91)(cid:83)(cid:72)(cid:70)(cid:87)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:86)(cid:15)(cid:3)(cid:80)(cid:68)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:79)(cid:82)(cid:90)(cid:16)(cid:70)(cid:68)(cid:85)(cid:69)(cid:82)(cid:81)(cid:3)(cid:73)(cid:82)(cid:82)(cid:87)(cid:83)(cid:85)(cid:76)(cid:81)(cid:87)(cid:3) (cid:80)(cid:82)(cid:71)(cid:72)(cid:79)(cid:3)(cid:68)(cid:3)(cid:83)(cid:82)(cid:90)(cid:72)(cid:85)(cid:73)(cid:88)(cid:79)(cid:3)(cid:83)(cid:82)(cid:76)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:71)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:87)(cid:76)(cid:68)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3) 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(cid:90)(cid:72)(cid:582)(cid:89)(cid:72)(cid:3)(cid:74)(cid:82)(cid:87)(cid:3)(cid:80)(cid:82)(cid:80)(cid:72)(cid:81)(cid:87)(cid:88)(cid:80)(cid:17)(cid:3)(cid:44)(cid:582)(cid:80)(cid:3)(cid:79)(cid:82)(cid:82)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:82)(cid:85)(cid:90)(cid:68)(cid:85)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3) (cid:90)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:73)(cid:68)(cid:85)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:72)(cid:72)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3) 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(cid:70)(cid:88)(cid:86)(cid:87)(cid:82)(cid:80)(cid:72)(cid:85)(cid:16)(cid:79)(cid:72)(cid:71)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:80)(cid:82)(cid:71)(cid:72)(cid:79)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:72)(cid:71)(cid:15)(cid:3) (cid:92)(cid:82)(cid:88)(cid:3)(cid:70)(cid:68)(cid:81)(cid:3)(cid:86)(cid:72)(cid:72)(cid:3)(cid:87)(cid:75)(cid:76)(cid:86)(cid:3)(cid:82)(cid:81)(cid:3)(cid:83)(cid:68)(cid:74)(cid:72)(cid:3)(cid:27)(cid:27)(cid:17)(cid:3)(cid:58)(cid:72)(cid:3)(cid:80)(cid:68)(cid:71)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:70)(cid:68)(cid:79)(cid:79)(cid:3)(cid:87)(cid:82)(cid:3) (cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:70)(cid:68)(cid:87)(cid:72)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:18)(cid:21)(cid:19)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:3)(cid:88)(cid:86)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3) (cid:83)(cid:85)(cid:72)(cid:89)(cid:76)(cid:82)(cid:88)(cid:86)(cid:3)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:80)(cid:82)(cid:71)(cid:72)(cid:79)(cid:3)(cid:69)(cid:72)(cid:70)(cid:68)(cid:88)(cid:86)(cid:72)(cid:3)(cid:76)(cid:87)(cid:3)(cid:68)(cid:79)(cid:79)(cid:82)(cid:90)(cid:72)(cid:71)(cid:3)(cid:88)(cid:86)(cid:3)(cid:87)(cid:82)(cid:3) (cid:74)(cid:76)(cid:89)(cid:72)(cid:3)(cid:68)(cid:3)(cid:74)(cid:82)(cid:82)(cid:71)(cid:3)(cid:70)(cid:82)(cid:80)(cid:83)(cid:68)(cid:85)(cid:76)(cid:86)(cid:82)(cid:81)(cid:3)(cid:90)(cid:76)(cid:87)(cid:75)(cid:3)(cid:79)(cid:68)(cid:86)(cid:87)(cid:3)(cid:92)(cid:72)(cid:68)(cid:85)(cid:17)(cid:3) Are you comfortable with the Co-op’s Debt levels? 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the standard 20th of the month term. In Thailand, with department stores closed and sales of Anlene MovMax impacted, our local team saw an opportunity to donate Anlene MovMax UHT products to healthcare professionals who needed support. And in New Zealand, with schools closed around the country, our teams moved quickly, partnering with various charitable groups to redirect nearly one million serves of Anchor milk from our in-school programmes to communities who needed it. T he impact of Covid-19 has been felt in every region and market we operate in, and as a result the global dairy market has been volatile and the outlook continues to be uncertain. Despite the challenges, farmers and employees have come together as one team to keep our business running and supply chains operating. Farmers have relied on us to pick up and process their milk, and our customers have counted on us to deliver. The work done over the last year to strengthen our balance sheet, and the Co-op’s ability to respond quickly, has helped us focus on the Covid-19 situation. (cid:50)(cid:88)(cid:85)(cid:3)(cid:86)(cid:70)(cid:68)(cid:79)(cid:72)(cid:15)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:76)(cid:87)(cid:87)(cid:72)(cid:71)(cid:3)(cid:83)(cid:72)(cid:82)(cid:83)(cid:79)(cid:72)(cid:15)(cid:3)(cid:85)(cid:72)(cid:79)(cid:76)(cid:68)(cid:69)(cid:79)(cid:72)(cid:3) (cid:74)(cid:79)(cid:82)(cid:69)(cid:68)(cid:79)(cid:3)(cid:86)(cid:88)(cid:83)(cid:83)(cid:79)(cid:92)(cid:3)(cid:70)(cid:75)(cid:68)(cid:76)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:75)(cid:68)(cid:81)(cid:74)(cid:72)(cid:3) (cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:3)(cid:80)(cid:76)(cid:91)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:82)(cid:89)(cid:72)(cid:3)(cid:83)(cid:85)(cid:82)(cid:71)(cid:88)(cid:70)(cid:87)(cid:86)(cid:3) (cid:69)(cid:72)(cid:87)(cid:90)(cid:72)(cid:72)(cid:81)(cid:3)(cid:80)(cid:68)(cid:85)(cid:78)(cid:72)(cid:87)(cid:86)(cid:3)(cid:80)(cid:72)(cid:68)(cid:81)(cid:87)(cid:3)(cid:90)(cid:72)(cid:3)(cid:70)(cid:82)(cid:88)(cid:79)(cid:71)(cid:3) (cid:70)(cid:82)(cid:81)(cid:87)(cid:76)(cid:81)(cid:88)(cid:72)(cid:3)(cid:87)(cid:82)(cid:3)(cid:71)(cid:85)(cid:76)(cid:89)(cid:72)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:15)(cid:3)(cid:71)(cid:72)(cid:86)(cid:83)(cid:76)(cid:87)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:71)(cid:76)(cid:86)(cid:85)(cid:88)(cid:83)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:88)(cid:81)(cid:70)(cid:72)(cid:85)(cid:87)(cid:68)(cid:76)(cid:81)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:38)(cid:82)(cid:89)(cid:76)(cid:71)(cid:16)(cid:20)(cid:28)(cid:17)(cid:3) In February, our Foodservice business in China was hardest hit, as restaurants, cafes and bakeries closed due to lockdown. Once restrictions eased, and cities opened up again, demand in the sector came back reasonably quickly as our Foodservice customers looked to make up for lost sales volumes, although it is still not at 100%. Having people on the ground in China was a huge benefit for us as we were able to get early, first-hand insights into what was happening. Our teams were flexible and adaptable and were prepared to try new ways of doing things. For example, our teams weren’t able to visit customers during lockdown so they quickly set up virtual training sessions and livestreams. Our Anchor Food ProfessionalsTM chefs demonstrated to customers and consumers how to cook recipes with our butter and cheese. Almost three million viewers tuned in – many of these were new business leads. Normally these sorts of sessions take a while to create, set up and execute but our team turned them around in a matter of days. And all while juggling the stress and extra pressures of a lockdown. When one of our medical nutrition customers put in an urgent request for more hydrolysate, a fast absorbing whey protein used to provide nutrition for patients, including those suffering from Covid-19 in the US, our teams quickly rallied to find a way to extend production by one month to fill the request. But acting quickly to keep our business going was not the only focus for our teams. They also took the initiative to help local communities as much as they could. With hand sanitiser in short supply in New Zealand, our Co-op redirected two million litres of ethanol for use in sanitiser production by working with our customer, Gull, as well as increasing production. We also recognised we could help our small and medium sized vendors in New Zealand with cash flow, and have accelerated payments to eligible vendors so 14 GGreG g As an essential business, our teams have drawn on all their strengths to keep the Co-op going. We’re incredibly proud of how our people around the world have pulled together to support each other and ensure our operations are continuing to run. It showed us what being Good Together is all about. Syed BhaBhavisvisha ha & N& Netaeta Maria &&& Shilpaa Meele issssaa TonToneeee 15 Fonterra Annual Report 2020 Our year in review Our year in review Looking back at some of the big moments across our business over the last year. MAY 2019 SEP 2019 OCT 2019 NOV 2019 DEC 2019 JAN 2020 FEB 2020 MAR 2020 APR 2020 MAY 2020 JUN 2020 JUL 2020 • 2019/20 season opens with a e forecast Farmgate 5 - Milk Price of $6.25 - $7.25 per kgMS AUG 2019 • We announce ell our intention to sell a portion of our e, stake in Beingmate, which we view as a financial investment only • We announce the y decision not to pay a dividend due to significant write-downs • WE OUTLINE OUR NEW STRATEGY AND MOVE TO A CUSTOMER-LED OPERATING MODEL • We announce the closure of our Te Roto site to consolidate our specialty cheese making facilities at our Eltham Bridge Street site • We announce that six New Zealand manufacturing sites in water constrained regions will reduce their water use by 30% by 2030 • • Celebrate five year anniversary of Farm Source™ • • 2019/20 forecast Farmgate Milk Price range revised up to $6.55 - $7.55 per kgMS • • Our reformulated Fresh ‘n Fruity % yoghurt, with 40% less added sugar, hits supermarket shelves in New Zealand • • Celebrate 10 years of KickStart Breakfast • Teh-han Chow is appointed as our interim CEO Greater China • We are awarded the Rainbow Tick for commitment to diversity in the workplace • We purchase a minority interest in Prolesur, taking our ownership of the Chilean milk processor from 86.2% to 99.9% • 2019/20 forecast Farmgate Milk Price revised up to $7.00 - $7.60 per kgMS • • We announce our Te Awamutu site will be coal free next season • • We complete the sale of our 50% share of DFE Pharma and foodspring® with cash proceeds of $623 million • • We extend MyMilk to the North Island, making it easier for farmers to join and grow in the Co-op • • Our business in China is impacted by Covid-19 outbreak • • Fraser Whineray starts in role as Chief Operating Officer • 2019/2020 • We announce • We launch e forecast Farmgate Milk Price 0 - narrowed to $7.10 - $7.30 per kgMS • 2020/21 opening season forecast Farmgate Milk Price announced at $5.40 - $6.90 per kgMS Simply Milk New Zealand’s first carbonzero milk in partnership with Foodstuffs North Island • 2019/20 forecast Farmgate Milk Price revised down to $7.10 - $7.20 per kgMS • 2020/21 forecast Farmgate Milk Price revised up to $5.90 - $6.90 per kgMS a Co-operative ent Difference Payment of up to 10 cents per kgMS for farms that meet sustainability and value targets • We accelerate payments for eligible small to medium-sized New Zealand businesses so n they’re paid within 10 days from the receipt of invoice • Peter McBride selected as Chairman-elect • New Zealand faces significant weather disruption with floods in the South h ht Island and drought conditions in the p North – our Co-op offers support • After completing strategic reviews of China Farms and DPA Brazil, we announce that sales processes for both assets are well under way • New Zealand goes into Covid-19 Alert Level 4 lockdown. Our Co-op continues to operate as an essential business • Chairman John Monaghan confirms he will retire at the Annual Meeting in November • Carly Robinson appointed as Director, Office of the CEO 16 17 Fonterra Annual Report 2020 Healthy Environment Greenhouse Gas Emissions (GHG)* 1.9% Reduction in GHG emissions from our global manufacturing sites. Water Use* 6.4% Reduction in water use at our manufacturing sites in water-constrained regions. Solid Waste* 970 tonnes Reduction in solid waste to landfill from our global operations. We are working together to achieve a healthy environment for farming and society. K (cid:68)(cid:3)(cid:82)(cid:85)(cid:68)(cid:3)(cid:87)(cid:72)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:88)(cid:68)(cid:15)(cid:3)(cid:78)(cid:68)(cid:3)(cid:82)(cid:85)(cid:68)(cid:3)(cid:87)(cid:72)(cid:3)(cid:87)(cid:195)(cid:81)(cid:74)(cid:68)(cid:87)(cid:68)(cid:17)(cid:3) When the land is well, the people will thri(cid:89)(cid:72)(cid:17) It is the land that protects and sustains us. The land that gives us our unique dairy goodness that we share with people around the world. By looking after the land, water and animals, and using resources wisely, we are finding a path to regenerate the environment. It’s all part of our transition to a more sustainable way of dairying. 18 * Compared to last year 19 Fonterra Annual Report 2020 Healthy Environment “The individual greenhouse gas reports will provide farmers with insight and understanding about what is happening on farm. It will help farmers identify any strengths and weaknesses and allow them to prioritise their next improvement steps. ANDREW KEMPSON ENVIRONMENT PROGRAMME LEAD Caring for the land today, so the land cares for us tomorrow (cid:55)(cid:76)(cid:68)(cid:78)(cid:76)(cid:81)(cid:68)(cid:3)(cid:87)(cid:72)(cid:3)(cid:90)(cid:75)(cid:72)(cid:81)(cid:88)(cid:68)(cid:3)(cid:76)(cid:3)(cid:87)(cid:213)(cid:81)(cid:72)(cid:76)(cid:3)(cid:85)(cid:195)(cid:15)(cid:3)(cid:75)(cid:72)(cid:76)(cid:3)(cid:82)(cid:85)(cid:68)(cid:81)(cid:74)(cid:68)(cid:3)(cid:87)(cid:68)(cid:81)(cid:74)(cid:68)(cid:87)(cid:68)(cid:3)(cid:80)(cid:271)(cid:3)(cid:81)(cid:74)(cid:195)(cid:3)(cid:85)(cid:195)(cid:3)(cid:72)(cid:3)(cid:75)(cid:72)(cid:78)(cid:72)(cid:3)(cid:80)(cid:68)(cid:76)(cid:3)(cid:81)(cid:72)(cid:76)(cid:17) HOW FONTERRA IS MAKING THIS HAPPEN (cid:44)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:69)(cid:76)(cid:82)(cid:71)(cid:76)(cid:89)(cid:72)(cid:85)(cid:86)(cid:76)(cid:87)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:79)(cid:68)(cid:81)(cid:71)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:90)(cid:68)(cid:87)(cid:72)(cid:85)(cid:90)(cid:68)(cid:92)(cid:86)(cid:3)by having a regenerative mindset, reducing the impacts of farming and manufacturing, and working in partnership with others. (cid:47)(cid:72)(cid:68)(cid:71)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:87)(cid:85)(cid:68)(cid:81)(cid:86)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:3)(cid:87)(cid:82)(cid:3)(cid:68)(cid:3)(cid:79)(cid:82)(cid:90)(cid:16)(cid:70)(cid:68)(cid:85)(cid:69)(cid:82)(cid:81)(cid:3)(cid:73)(cid:88)(cid:87)(cid:88)(cid:85)(cid:72) by investing in innovation and infrastructure to reduce greenhouse gas (GHG) emissions from our supply chain. (cid:48)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:74)(cid:85)(cid:82)(cid:90)(cid:76)(cid:81)(cid:74)(cid:3)(cid:81)(cid:88)(cid:87)(cid:85)(cid:76)(cid:87)(cid:76)(cid:82)(cid:81)(cid:68)(cid:79)(cid:3)(cid:81)(cid:72)(cid:72)(cid:71)(cid:86)(cid:3)through improvements in productivity and minimising waste from farm to consumer. FY20 DELIVERY – KEY ITEMS: 34% of our farms in New Zealand now have Farm Environment Plans Switching from coal to wood pellets at our Te Awamutu site Finalising farm-specific greenhouse gas reports KEY GLOBAL TARGETS: Reduce greenhouse gas emissions by 30% by 2030 Reduce water use at sites in water constrained regions by 30% by 2030 Zero solid waste to landfill by 2025 THE UN SUSTAINABLE DEVELOPMENT GOALS WE ARE CONTRIBUTING TO GOAL ACHIEVED TheThe RoRoberrts’ts’ FaFarm, rm TaTaranranakiaki Helping farmers reduce on-farm emissions New Zealand farmers are already some of the most carbon-efficient in the world, so making significant further improvements isn’t easy. The agriculture sector will need a comprehensive package of activities to address the challenge, and some are not yet technically or commercially viable. For now, the main improvements our farmers can deliver will continue to come from adopting good management practices on-farm such as being efficient with feed and fertiliser, having the right number of cows for the specific area of land, reducing cow replacement rates and ensuring good animal health. To support our farmers, we have been collaborating on the development of farm- specific greenhouse gas reporting. Following a successful pilot, we are now finalising the reports, which will be sent to farmers by October 2020. HOW WE ARE TRANSITIONING TO A LOW-CARBON FUTURE Improving energy efficiency We’ve delivered on our target to improve energy efficiency in our New Zealand manufacturing sites from our 2003 baseline by 20%. Improving energy efficiency in our manufacturing operations remains a top priority. Not only does it directly reduce our greenhouse gas (GHG) emissions, it makes commercial sense and it helps with our transition to lower carbon fuels. Hitting our 2020 energy efficiency target is a significant milestone – cumulatively, since 2003, that’s enough energy saved to power all the households in New Zealand for 1.5 years. Switching to renewable energy We are also moving to energy sources which produce less GHG emissions and are reducing our reliance on fossil fuels such as coal. We are taking a staged approach to renewable energy and this year we took a significant step with the conversion of our Te Awamutu site from coal to wood pellets. In New Zealand, wood biomass is a by- product of forest harvesting and processing, making it a good low-carbon alternative to coal. It’s estimated that once fully operational, this change at our Te Awamutu site will reduce our GHG emissions by around 84,000 tonnes per year, equivalent to taking around 32,000 cars off New Zealand roads and taking a big step towards our target of 30% reduction by 2030. “Achieving our energy efficiency goal has involved hundreds of projects and a daily focus from hundreds of staff over the years. Projects have ranged from changing how we run equipment, retro-fitting heat recovery systems, through to building new efficient factories. LINDA THOMPSON SUSTAINABLE ENERGY & UTILITY MANAGER 20 21 Fonterra Annual Report 2020 Healthy Environment REDUCING OUR ENVIRONMENTAL FOOTPRINT Prioritising on-farm improvements with Farm Environment Plans Helping farmers establish a Farm Environment Plan (FEP) and build on their good farming practices is how we can make the biggest difference on-farm in areas such as water quality, soil health and biodiversity. Each FEP is unique and includes a detailed map of the farm, identifying areas of existing strengths and also improvement areas for action. One of our Sustainable Dairying Advisors visits the farm and works with the farmer to consider things such as the risk of nutrient or soil loss into waterways, maintaining soil structure, protecting biodiversity and, where applicable, the efficient management of irrigation systems. 34% of our farms in New Zealand now have an FEP. Our aim is for every supplying farm in New Zealand to have an FEP by 2025. Collaborating on catchments Protecting and regenerating the environment in our local communities is not something we can do on our own. It takes a collaborative effort. Living Water is our 10-year partnership with the New Zealand Department of Conservation that brings together farmers, scientists, councils, communities and Mana Whenua to identify game-changing and scalable solutions that will enable farming and freshwater ecosystems to thrive side-by-side. It is focused on five key catchments, which all have ecological significance, as well as being in important dairying regions. An example of the work we’re doing is in the Waituna catchment where we have been investigating applying fertiliser in a targeted way. Fine particle application is a method 22 of applying less fertiliser which potentially reduces its impact on freshwater and saves farmers money. This year we commissioned AgResearch to complete a review of data from 250 field trials around New Zealand. Their analysis found the results were promising and worth pursuing further. We are now looking at the next steps that would be required to make this approach more widely available to farmers. Beyond the five Living Water catchments we’ve been working with iwi and local stakeholders across New Zealand. For example, recognising the important role wetlands can play in improving water quality, we have worked with the Waikato and Hawke’s Bay Regional Councils and Landcare Trust to assess feasibility, and demonstrate and help landowners to reinstate wetlands. Improving water efficiency Water is a precious resource and we’re committed to using it wisely. Aligned with best-practice thinking, our water efficiency target prioritises improvements where water is potentially constrained. This year we reduced water use at our sites in water-constrained regions by 6.4%, which is a 3.1% reduction against our 2018 baseline and a significant step towards our target of a 30% reduction by 2030. Our Stanhope site in Australia delivered most of the improvement, installing new treatment infrastructure which has significantly reduced the water it uses. Responsible use of water is important for all our manufacturing sites, even where there is water abundance and overall across all sites our water use was down by 3.7% on the last financial year. That’s almost two billion 34% of supplying farms in New Zealand now have a Farm Environment Plan, up from 23% at the start of the year litres of water saved, which is equivalent to more than 750 Olympic-sized swimming pools. Reducing waste to landfill We aspire to play our part in achieving ‘zero waste’ and last year we set a new target for our direct operations of sending zero solid waste to landfill by 2025. With a collective effort around the world, this year we have achieved a reduction of 970 tonnes. At our Takanini site, working with Adhesifs, we have eliminated 33 tonnes of solid waste. The backings from the labels we use on large volume products are now turned into tissue paper. In Indonesia, we worked with our waste contractor to change processes and the team now segregates all paper, plastic and food waste on site, achieving a 98% reduction (194 tonnes) for the year. MikMike, KawKawaa Stream, L, Limeim stostone ne DowDowns,ns, WaW ikatoo 23 Fonterra Annual Report 2020 Healthy People What is the most important thing in the world? It is people, it is people, it is people. (cid:43)(cid:72)(cid:3)(cid:68)(cid:75)(cid:68)(cid:3)(cid:87)(cid:72)(cid:3)(cid:80)(cid:72)(cid:68)(cid:3)(cid:81)(cid:88)(cid:76)(cid:3)(cid:82)(cid:3)(cid:87)(cid:72)(cid:3)(cid:68)(cid:82)(cid:34) (cid:43)(cid:72)(cid:3)(cid:87)(cid:195)(cid:81)(cid:74)(cid:68)(cid:87)(cid:68)(cid:15)(cid:3)(cid:75)(cid:72)(cid:3)(cid:87)(cid:195)(cid:81)(cid:74)(cid:68)(cid:87)(cid:68)(cid:15)(cid:3)(cid:75)(cid:72)(cid:3)(cid:87)(cid:195)(cid:81)(cid:74)(cid:68)(cid:87)(cid:68)(cid:17) W (cid:72)(cid:3)(cid:68)(cid:85)(cid:72)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:87)(cid:82)(cid:74)(cid:72)(cid:87)(cid:75)(cid:72)(cid:85)(cid:3)(cid:87)(cid:82)(cid:3)(cid:70)(cid:68)(cid:85)(cid:72)(cid:3) (cid:73)(cid:82)(cid:85)(cid:3)(cid:83)(cid:72)(cid:82)(cid:83)(cid:79)(cid:72)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:80)(cid:68)(cid:78)(cid:72)(cid:3)(cid:68)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3) (cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:92)(cid:3)(cid:76)(cid:80)(cid:83)(cid:68)(cid:70)(cid:87)(cid:17) That means looking after our team’s safety and wellbeing, providing employees with motivating work opportunities and playing a role in supporting local communities. It’s also about helping people live healthier lives through the goodness of dairy. The nutrients in dairy play an important role in growing and maintaining healthy bones, immunity, the functioning of your nervous system and so much more. There’s also power in some of the individual components of milk in helping manage and recover from injuries and illnesses. We often talk about the untapped potential of milk because our scientists are finding new benefits from dairy all the time – we’ve only scratched the surface. 25 AntAntntthhonhhh y JJy ohnohn & Luauannna,na ReReReReRReppppororp oaoa 24 Fonterra Annual Report 2020 Healthy People Lisa & Gordon, Darfield CARING FOR OUR PEOPLE We want all Fonterra people to go home from work safely every day. Unfortunately, this year our injury frequency rate has risen to 5.8, up from 4.9 last year. The number of serious harm injuries has significantly reduced, down 44% on last year. Overall, since 2010, our injury frequency rate has reduced 68%. Any work-related injury is one too many for us. As a result, we continue to look at ways to improve how we keep our people safe. (cid:44)(cid:81)(cid:71)(cid:76)(cid:70)(cid:68)(cid:87)(cid:82)(cid:85) (cid:55)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87) (cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72) Work-related fatalities (attributable to Fonterra – staff, contractors, on-site public) Total recordable injury frequency rate (TRIFR per million work hours) Number of serious harm injuries Zero harm FY18 0 FY19 1 FY20 0 World class for our industry group (<5) Zero harm 6.1 14 4.9 18 5.8 10 During Covid-19, the Co-op moved quickly to keep employees safe, cancelling all face-to-face meetings and domestic and international travel prior to New Zealand going into Alert Level 4 lockdown. As countries went into lockdown, strict social distancing and Personal Protection Equipment (PPE) guidelines were put in place globally to protect our essential workers and we had a dedicated IT team working around the clock to keep our systems running as all other employees worked from home. The Co-op has continued to keep health and safety measures in place and will continue to do so until we are confident employees won’t be at risk. Diversity in the work place is important to Fonterra, which is why we’re proud to have been awarded the Rainbow Tick this year. WORKING WITH FARMERS CARING FOR COMMUNITIES “We know when we embrace different perspectives, we’re more innovative, make better decisions and improve performance. There’s also a growing body of research indicating that diverse and inclusive teams outperform their peers. HAYLEE PUTARANUI, HEAD OF DIVERSITY AND INCLUSION We celebrated 10 years of providing valuable nutrition to Kiwi kids through KickStart Breakfast. In partnership with the Ministry of Social Development and Sanitarium, over 1,000 schools are involved and more than 30,000 children attend a KickStart Breakfast Club every school day. When schools closed after New Zealand went into Covid-19 lockdown, we switched our focus and redirected nearly one million serves of Anchor milk from our Fonterra Milk for Schools programme to those in the community most in need. KidKididds es enjon ying g KKgg ickickStaStatatatataaartrtrtttrt rr BreB akfastt Farm SourceTM, the Co-op’s farmer-facing team, marked their fifth year of working to help make farming easier by lowering on- farm costs, providing on-farm support and advice, and giving back to communities. Since Farm SourceTM began, we’ve returned more than $160 million in Farm SourceTM dollars, discounts and deals to farmers. When Southland faced the worst floods in 30 years, teams across the Co-op came together to help farmers and the local community. Initially, teams worked alongside emergency services, and then Fonterra’s Farm SourceTM team and the Edendale site’s Emergency Response Team went out on farm to help clear debris, repair fences and get farms up and running again. CARING FOR CONSUMERS We’ve reduced the amount of added sugar by 40% in Fresh ‘n Fruity yoghurt and 30% in our Anchor CalciYum. This is another step towards our goal of having 100% of our everyday and advanced products meet our independently- endorsed nutritional guidelines by 2025. 30% 40% less added sugar Caring for people is at the core of our Co-operative. HOW FONTERRA IS MAKING THIS HAPPEN (cid:51)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3)(cid:83)(cid:82)(cid:86)(cid:76)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3)(cid:72)(cid:80)(cid:83)(cid:79)(cid:82)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:72)(cid:82)(cid:83)(cid:79)(cid:72)(cid:3)by promoting a safe and healthy working environment and developing a diverse, skilled and agile workforce. (cid:36)(cid:71)(cid:71)(cid:85)(cid:72)(cid:86)(cid:86)(cid:3)(cid:83)(cid:88)(cid:69)(cid:79)(cid:76)(cid:70)(cid:3)(cid:75)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:3)(cid:70)(cid:75)(cid:68)(cid:79)(cid:79)(cid:72)(cid:81)(cid:74)(cid:72)(cid:86)(cid:3)by improving the nutritional profile of our products and promoting healthy diets. (cid:44)(cid:80)(cid:83)(cid:85)(cid:82)(cid:89)(cid:72)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:75)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:70)(cid:82)(cid:80)(cid:80)(cid:88)(cid:81)(cid:76)(cid:87)(cid:76)(cid:72)(cid:86)(cid:3)by doing business in the right way, sharing what we do best and playing our part to build resilient, sustainable communities. FY20 DELIVERY – KEY ITEMS Create a culture that empowers our people Shift to customer-led operating model Support communities through nutritional programmes KEY GLOBAL TARGETS World-class injury prevention World-class engagement 2022: 50% female representation in senior leadership 2025: 100% product portfolio meeting endorsed nutrition guidelines THE UN SUSTAINABLE DEVELOPMENT GOALS WE ARE CONTRIBUTING TO GOAL ACHIEVED 26 27 Fonterra Annual Report 2020 Healthy People “While our priority is and always will be collecting farmers’ milk, it’s really important that we step up and help communities in their time of need wherever possible. BARRY MCCOLL, GM NATIONAL TRANSPORT AND LOGISTICS 200,000 litres of water delivered to help with Northland drought DELIVERING MORE THAN MILK When New Zealand’s Northland community was struggling with drought earlier this year, our Northland team stepped in to lend a hand. Water deliveries were built into milk collection schedules so our tanker drivers could drop off water on their way up to collect milk from farms in the Far North. Our teams in Northland worked with the local regional council to help deliver water to the towns of Kaikohe, Kaitaia, Rawene and Dargaville, delivering more than 200,000 litres of water. But the work didn’t stop there. Our Co-op’s Waitoa tanker team also got a call up from Civil Defence when the township of Waihi, in New Zealand’s Hauraki District, ran dry after a burst water main – the team was more than happy to lend a hand. SHIFTING TO A CUSTOMER- LED OPERATING MODEL AND BUILDING A GREAT TEAM This financial year has been all about delivering on our new strategy, and one of the first things we did was shift to a new customer-led operating model and focus on building a great team. We made this change because our future is no longer about volume. Instead, it’s about prioritising New Zealand’s unique milk and growing its value, which means we need to understand our customers in ways we haven’t in the past. We now have three customer-facing businesses: Asia Pacific (APAC), Greater China, and Africa, Middle East, Europe, North Asia, Americas (AMENA). Having teams on the ground gives us early insights into what’s happening in market, and during Covid-19 this was invaluable. Our teams were able to work closely with customers to understand how Covid-19 was impacting their businesses, and in turn, what we could do to support them. In addition to having the right organisational structure to deliver on our strategy, we recognised our teams needed to be 100% clear on what was expected of them. That’s why we introduced Good Together – two simple words that remind us that every day we have to be contributing to our purpose, living our values and delivering on our strategy. During Covid-19, the power of Good Together really shone through as our teams pulled together to keep the business running, care for each other and help local communities. 28 in,nnn,nn,, TeTeTeTTeTTeTeTeTeT RaRaRaRaRaRaRaRaRaRaaRaRRR pappappapappapapaappapap inin, in,nn,nnnnnnnninnin,n, KevKevKevevKevKevKevKKevevKevvin, VicVicVicicVicVicVicVicVV ttttortort iaa & C& CCollolllllleageageageagageaggeageagggeageagguueuue,uuu , Aucklandandandannd 29 Fonterra Annual Report 2020 Healthy People Farmer and employee spotlight This year, farmers and employees have done us proud, taking home several national and regional titles, while three were recognised in the Queen’s New Year and Birthday Honours list. New Zealand Dairy Industry Awards New Zealand Dairy Industry Awards 23 of the 33 regional titles were won by Fonterra farmers, with three national titles going to Fonterra farmers. (cid:54)(cid:75)(cid:68)(cid:85)(cid:72)(cid:3)(cid:41)(cid:68)(cid:85)(cid:80)(cid:72)(cid:85)(cid:86)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:60)(cid:72)(cid:68)(cid:85) – Waikato’s Sarah and Aidan Stevenson, 50/50 sharemilking for Sue Williams on her 100ha, 330- cow Ngarua property since 2013. (cid:39)(cid:68)(cid:76)(cid:85)(cid:92)(cid:3)(cid:48)(cid:68)(cid:81)(cid:68)(cid:74)(cid:72)(cid:85)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:60)(cid:72)(cid:68)(cid:85) – Bay of Plenty’s Andre Meier, Farm Manager on Ao Marama Farms 250ha Te Puke property, milking 800 cows. (cid:39)(cid:68)(cid:76)(cid:85)(cid:92)(cid:3)(cid:55)(cid:85)(cid:68)(cid:76)(cid:81)(cid:72)(cid:72)(cid:3)(cid:82)(cid:73)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3)(cid:60)(cid:72)(cid:68)(cid:85) – Waikato’s Grace Gibberd, Farm Assistant on the DairyNZ 115ha property at Newstead, milking 360 cows. Fonterra Dairy Woman of the Year Ash-Leigh Campbell Ash-Leigh Campbell was named 2020 Fonterra Dairy Woman of the Year. The 28-year-old Farm Manager (cid:75)(cid:68)(cid:86)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:90)(cid:82)(cid:85)(cid:78)(cid:76)(cid:81)(cid:74)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:49)(cid:74)(cid:195)(cid:76)(cid:3)(cid:55)(cid:68)(cid:75)(cid:88)(cid:582)(cid:86)(cid:3)(cid:54)(cid:82)(cid:88)(cid:87)(cid:75)(cid:3)(cid:44)(cid:86)(cid:79)(cid:68)(cid:81)(cid:71)(cid:3)(cid:73)(cid:68)(cid:85)(cid:80)(cid:76)(cid:81)(cid:74)(cid:3) operation for more than three years. She is also Chair of the New Zealand Young Farmers Board and a previous (cid:36)(cid:75)(cid:88)(cid:90)(cid:75)(cid:72)(cid:81)(cid:88)(cid:68)(cid:3)(cid:60)(cid:82)(cid:88)(cid:81)(cid:74)(cid:3)(cid:48)(cid:195)(cid:82)(cid:85)(cid:76)(cid:3)(cid:41)(cid:68)(cid:85)(cid:80)(cid:72)(cid:85)(cid:3)(cid:36)(cid:90)(cid:68)(cid:85)(cid:71)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:79)(cid:76)(cid:86)(cid:87)(cid:17) Member of the New Zealand Order of Merit Dr Jeremy Hill Chief Science and Technology Officer Dr Jeremy Hill was recognised for his services to the dairy industry and scientific research. Jeremy has worked for Fonterra and its predecessors for over 30 years, and is internationally recognised for his dairy research, having published more than 100 works. Officer of the New Zealand Order of Merit Tony Wilding South Waikato farming stalwart Tony Wilding was recognised for his services to the dairy industry and the community. Tony has made a significant contribution to conservation and agricultural education, and was a driving force behind fairer sharemilking arrangements. Officer of the New Zealand Order of Merit Dr Harvey Indyk Senior Research Scientist Dr Harvey Indyk was recognised for his services to analytical research and the dairy industry, having developed techniques which allow scientists to accurately measure the levels of vitamins in milk. Fonterra Responsible Dairying Award New Zealand Champion of Cheese © – Stuff Nick and Nicky Dawson Hawke’s Bay farmers Nick and Nicky Dawson won the 2020 Fonterra Responsible Dairying Award, receiving the 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. Sam Pokaitara (right) Lichfield’s Brine Salt Cheese Process Project Manager took out this year’s supreme award after receiving the highest aggregate score across the three cheeses he entered for judging. Sam says the secret to making the best cheese is top quality milk and experienced operators who know what they’re doing. 30 31 Fonterra Annual Report 2020 The Co-operative Difference Progress this year The Co-operative Difference pulls together the best of what we do into five key focus areas. Milk 5,029 Environment 6,551** FARMERS HELPED CREATE goodness for generations by delivering Grade Free milk with an average Fat Evaluation Index of A or better and an average somatic cell count of 150,000 or less for at least 3 months of the season. FARM ENVIRONMENT PLANS helping farmers care for the land and waterways by reducing greenhouse gas emissions, recycling waste and making the most of the precious resources we use to create nutritious milk. Animals 4,571* ANIMAL HEALTH PLANS helping farmers to care for their cows. These are developed alongside vets and are reviewed at least every year. Co-operative & Prosperity 4,144* FARMERS recognised as actively engaged members of the Co-operative contributing to the long- term value of New Zealand. People & Community 6,332* HEALTH & SAFETY PLANS keeping hardworking and passionate people safe and well on farm. * This data is self-reported by farmers and is then verified by Fonterra’s independent on-farm auditors. The auditing process is currently underway. ** Includes farms with FEPs in the pipeline. 949 Te Tihi ACHIEVED LEVEL 3 “THE SUMMIT OF THE MOUNTAIN” FOR THE ENTIRE SEASON 843 Te Puku “THE MID POINT” SIX MONTHS FARMERS ACHIEVED LEVEL 2 893 Te Pūtake “THE START OF THE JOURNEY” THREE MONTHS FARMS ACHIEVED LEVEL 1 Working together for a strong and sustainable Co-op. T he Co-operative Difference is part of our Co-op’s strategy to add more value to New Zealand milk and respond to increasing demand from customers here and around the world for sustainably produced dairy. It supports farmers to produce high- quality, sustainable milk by making it easier for farmers to understand what is expected today and what they need to prepare for in the future. It also celebrates those who go the extra mile to make our Co-operative more sustainable. (cid:41)(cid:85)(cid:82)(cid:80)(cid:3)(cid:45)(cid:88)(cid:81)(cid:72)(cid:3)(cid:21)(cid:19)(cid:21)(cid:20)(cid:15)(cid:3)(cid:73)(cid:68)(cid:85)(cid:80)(cid:86)(cid:3)(cid:80)(cid:72)(cid:72)(cid:87)(cid:76)(cid:81)(cid:74)(cid:3)(cid:82)(cid:81)(cid:16) (cid:73)(cid:68)(cid:85)(cid:80)(cid:3)(cid:86)(cid:88)(cid:86)(cid:87)(cid:68)(cid:76)(cid:81)(cid:68)(cid:69)(cid:76)(cid:79)(cid:76)(cid:87)(cid:92)(cid:3)(cid:68)(cid:81)(cid:71)(cid:3)(cid:89)(cid:68)(cid:79)(cid:88)(cid:72)(cid:3)(cid:87)(cid:68)(cid:85)(cid:74)(cid:72)(cid:87)(cid:86)(cid:3) (cid:90)(cid:76)(cid:79)(cid:79)(cid:3)(cid:69)(cid:72)(cid:3)(cid:72)(cid:79)(cid:76)(cid:74)(cid:76)(cid:69)(cid:79)(cid:72)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:68)(cid:3)(cid:81)(cid:72)(cid:90)(cid:3)(cid:38)(cid:82)(cid:16)(cid:82)(cid:83)(cid:72)(cid:85)(cid:68)(cid:87)(cid:76)(cid:89)(cid:72)(cid:3) (cid:39)(cid:76)(cid:73)(cid:73)(cid:72)(cid:85)(cid:72)(cid:81)(cid:70)(cid:72)(cid:3)(cid:51)(cid:68)(cid:92)(cid:80)(cid:72)(cid:81)(cid:87)(cid:3)(cid:82)(cid:73)(cid:3)(cid:88)(cid:83)(cid:3)(cid:87)(cid:82)(cid:3)(cid:20)(cid:19)(cid:3)(cid:70)(cid:72)(cid:81)(cid:87)(cid:86)(cid:3) (cid:83)(cid:72)(cid:85)(cid:3)(cid:78)(cid:74)(cid:3)(cid:82)(cid:73)(cid:3)(cid:80)(cid:76)(cid:79)(cid:78)(cid:3)(cid:86)(cid:82)(cid:79)(cid:76)(cid:71)(cid:86)(cid:17) HOW THE CO-OPERATIVE DIFFERENCE HELPS • Brings together existing on-farm requirements and makes them easier to understand. • Ensures standards are clear, making it easier for farmers to create the highest- quality milk. • Recognises farmers who go beyond these standards to produce the highest quality milk, care for their animals, protect the environment, support their people and community, and engage in our Co-op. • Keeps farmers informed and up-to-date about future changes so they can prepare for them. • Saves time by streamlining reporting and auditing, minimising duplication and helping our Co-op protect its market position, strengthen its sustainability claims and drive demand for products that customers value most. • Supports farms wanting to improve by providing tailored, industry-leading support. ScoScott,tt, KKerryry & & RodRodneyney, Cantnterberburyry IN ORDER TO PRODUCE SAFE, SUSTAINABLE DAIRY PRODUCTS THERE ARE SOME THINGS THAT WE CAN NEVER AFFORD TO COMPROMISE ON. That's why we'll always: • Meet the requirements of our regulators • Comply with all market access requirements overseas • Produce safe, high-quality milk • Look after our people, animals and the environment. We call this “Our Core” Once the Core foundations are met, our farmers can grow further through three levels of achievement. To make it simple, we use the analogy of a journey up the mountain to reach greater things. Each level brings additional recognition. 32 33 Fonterra Annual Report 2020 The Co-operative Difference REWARDING SUSTAINABLE, HIGH VALUE MILK Farmers producing sustainable, high-quality milk will be eligible for a new payment. From June 2021, we’re introducing a Co-operative Difference Payment of up to 10 cents per kilogram of milk solids (kgMS) if the farm meets the Co-op’s on-farm sustainability and value targets. It’s part of our Co-op’s strategy to add value to New Zealand milk and respond to increasing demand from customers here and around the world for sustainably- produced dairy. The more a farmer achieves in The Co-operative Difference programme, the higher the payment will be. ONE-THIRD OF FARMS NOW HAVE FARM ENVIRONMENT PLANS A key part of The Co-operative Difference is our offering of tailored Farm Environment Plans (FEPs) to our farmers. These plans, delivered by our Sustainable Dairying Advisors at no additional cost, assess the environmental effects and risks associated with farming activities and provide tailored actions to help farms meet their regional requirements and sustainability goals. As of 31 July, 34% of our farms have an FEP – up from 23% last year. We want every farm to have an FEP before 2025. “It’s great to see these farmers recognised and rewarded for their efforts to produce and deliver a product that Fonterra can capture the highest value from. Through The Co- operative Difference, we can get better, together. TERENCE BROCX, NORTHLAND DAIRY FARMER Our Focus The Co-operative Difference MILK CO-OP & PROSPERITY ANIMALS ENVIRONMENT PEOPLE & COMMUNITY Glenys & Graham, Te Aroha FOCUS ON MILK QUALITY The headline in one of the national newspapers said it all, ‘Top cow care equals top milk quality’. They were talking about the Bell family from Te Aroha, whose achievements of low somatic cell count and grade-free milk is the stuff of Fonterra legend. How do they do it? They love their cows. Glenys and Graham Bell and their family have won national awards for their dedication and determination – but it hasn’t come easy. “It’s about observation. Everyone’s watching out for a problem.” And that means lots of testing, lots of care, lots of attention… and making sure the cows are well-loved. In fact, every cow on their farm has a name, and they’re able to trace entire family trees in the herd. Now their daughter Tania is share milking on another farm, so they’ve got some competition for the top spot as she was number two last year! Proof, if it was ever needed, that our Co-op farmers really are best of breed. 35 “They can see that you need to put everything into looking after the cows because that’s what gets results – low somatic cell counts, good cow health and good calving rates. GLENYS BELL, TE AROHA DAIRY FARMER 34 Fonterra Annual Report 2020 The Co-operative Difference Honour Roll for On-farm Excellence Thank you to all our farmers who have worked hard in the 2019/20 season to provide safe, high-quality milk. In addition to the honour role, we acknowledge the efforts of all our farmers for their commitment to on-farm excellence and producing the best possible milk. LEGEND TE TIHI Farming entities that achieved Grade Free for at least the last 10 seasons Farming entities that achieved The Co-operative Difference Te Tihi (Level 3) Kemra Farm Ltd B L & Estate R J Mohring K J & H Chalmers Ltd Clutha Lea Ltd F A & R C M Smits Ltd C M & K M O’Donoghue B M & B C & JH Geddes Ashgrove Dairy Farms Limited Waicola Holdings Ltd A Holten & N Brown Owhango Farms Limited Serendipity Trust R S & R D Gordon J E & D M Cooper Marua Partnership Sim Family Farms Ltd Sim Brothers Ltd D C & V F Frew J L & M A Cooke L J & L M Still W J & J G Pile Family Trust Schorn Trust G E & V E Cooper C & H Mabey C J & K L Ladd F B Bonenkamp & J B Cunningham Black & White Cow Company Limited Riverside Farms (Taranaki) Limited Shawlink Ltd Miroc Limited Caskey Farms Fowler Family Prosperity Trust R & P Woods Farms Ltd Golden Mile Farms Ltd 36 41 Degree South Limited 46 South Limited 5 M Trust 69 on Bedford Partnership 96 South Limited 99 South Limited A & A Renes Limited A & C Allado Dairies Limited A & C Hodges Family Trust A & H Ahlers Limited A & K Storey Limited A & L Ag Enterprises Limited A & M Wainman A & R Marshall A B & K J Zwagerman A C Schouten Farms Limited A D Harrison A D Harrison Family Trust A G & T A Rigter A G L & L M Smith A G L & L M Smith Family Trust A H & A C Webster A H Baxter Limited A I & J G Sanford A J & K L Murdoch A L & M B Jumawid Partnership A M & H E Kusabs A M Bond & Estate of R G Bond A R Hawkins & T M Finch A R Maxwell Limited A R Wards A T & J L Hughes Trust A W & M White A.F.B Group Limited Aaron and Marcia Flay Partnership Abacus Dairy Limited Abbey Farm Partnership Abbott Trusts Partnership ABH Trust AC & KM Ruddenklau Acacia Farms Limited AD & HA Foote ADDR Limmited AFT Group Aghern Holdings Limited Agincourt Farms Limited Agribaird Limited AGVenture Farms Limited Ahipene Farming Ltd Airlie Lodge (Walton) Ltd AK Dean Ltd ALD Dairy Ltd Alderbrook Farms Limited Alesh & Sandhiya Devi Alexandra Farms Ltd Aljo Farm Ltd Alley Farms Ltd Allison Family Farms Ltd Allout Investments Ltd Alpine Farms Ltd Alston Property Group Ltd Altitude Farms Limited Alton Pastures Limited Altra Partnership Altura Dairy AM Farming Amber Creek Limited Amber Park Family Trust Ambleside Dairy Farm Ltd AMF Trust Amlee Farming Partnership Andrew Marshall Family Trust Anglesea Consulting Ltd. ANLM Limited Annandale Farming Limited Annaross Family Trust No 2 Antrim Farming Limited Anvo Ag Limited AP & TM Davis T/A Bushvalley Farm AP Cowley & D K Riley AQA Agriculture Aramaunga Farms Ltd Ararata Holdings Ltd Aratika Holdings Limited Ardendale Farm Trust Ardmore Dairies Ltd Ardmore Farm Trust Ardoyne Farm Dairies Ltd Armour Dairying Ltd Arnold Dairy Farming Limited Ashdale Enterprises Ltd Ashers Farm Ltd Ashgrove Dairy Farms Limited Askin Plains Dairy Atlas Farms Ltd Auchtercairn Farm Limited AUI Farms Avondale Dairies Ltd Awaiti Trust Awapuketea Farming Company Limited B & C Anderton Limited B & D Dodunski B & L Bailey Ltd B & S Mathys Partnership B A Virbickas & L M Presow B C & H J McLellan B D & B A Mora B F & S J Gordon B G & M C Litchfield B H & L J Bourne B H Redgate & S M Thomas B J & D A Verryt Family Trust B J & J Abernethy Partnership B J & P Brisco B J & R A Lawn B J & T G Fernyhough B J Laing B K Came & K M Came Family Trust B L & D J Haylock B L & Estate R J Mohring B M & B C & JH Geddes B M & J A Ahlers B M & J L Chick Family Trust B M Thompson B N & P A Jones B R & S C Lee B S & B K Young B S & S M Winter B W & C A McNeil BAA Family Trust Baggott Farming Limited Balcombe Investments Baldrick Farms Ltd Ball Patch Ltd Ballindalloch Farm Ltd Balrath Partnership Bandara & Pavi BAN-OIR Ltd Barcia Dairies Ltd Barker Farms Limited Barmac Dairies Ltd Barnsdale Farms 2014 Limited Barridge Farms BASE Pair Dairy Bashford-Nicholls Chartiable Trust Baylins Trust Beckett Family Trust Bel Group Limited - Cloverlea BEL Group Ltd - Kowhai Terrace Belrari Farm Ltd Ben Callum Dairies Limited Benjamin Burmeister Trust Berry Dairy Farming Limited Berwick Holdings Ltd Beyond The Gate Limited Bibberne Farms Ltd Bill Bella Ltd Bill Hedley Limited Birch-holme Holdings Ltd BJ & DM Ahlers BJ & TM Verryt Ltd BJ Caird Ltd BL & TL Davie Farming Black & White Cow Company Limited Blom Family Farm Limited BM & GI Watson Ltd BM Farms Ltd Bobcat Trust Borst Holdings Ltd Boswell Dairy Ltd Bouton Farming Ltd Bowman Farm Limited Bradley Gore Trust Braemer Dairies Brats Farms Ltd Brent Wallace Ltd Brentworth Dairy Farm Limited Broadford Dairies Limited Broadview Farms (2018) Ltd Brooksdale Dairy Ltd Brookside Holdings Limited Broughshane Farm Limited Brown Kiwi Farms Limited Brownsville Farms Ltd Brunswick Downs (2014) Limited Buckley Farm Limited Budnutkins Family Trust Buhler Paton Partnership Bullot Family Trust Burgham Partnership Burke Farming Development Ltd Burnside Farms Ltd Burtlea Limited Burton Farm Trust Bushmills Trust Butler Family Trust BW Dairy Ltd C & A Dairies Limited C & D Padrutt Trust C & J Rowe Ltd C & M Tippett C & S Guyton Farms Ltd C & T Dovey C A Mansell & Son Ltd C A Rowe C and J Piggott Ltd C B & M F Dempsey Trust Partnership C D Jacobsen C D Will & A E Hunter C F & M T Muller C G & R A MacFarlane C G Bailey C H Land Limited C J & C J McKenzie Ltd C J & L M Houghton Ltd C L J & R M Vollebregt C L N Limited C N R Farming Ltd C R & D E Cloke C R & J J Dixon C R & K L Ruiterman C T & K M L Chase C T & W L Harper C W & J Redshaw C W & L A Peckham C W & M Y Matthews Family Trust C.A & A.C Dairies Ltd Cairndale Dairy Limited Cambridge Dairies Limited Carpe Diem Dairies Limited Caskey Farms Catalina Farms Causeway Trust Ceylandia Dairies Limited Chardan Farms Ltd Chatton Lea Holdings Ltd Cherrylane Jerseys Limited Chikasa Trust Christensen Farms Ltd Ciel Trust Circle K Farms Limited Clapcott Farms Ltd Claremont Trusts Partnership Clarks Potteries Ltd Clausen Contracting Ltd Clausen Farms Ltd Clearwell Limited Cleaver Farms Limited Cliff Donald Climie Road Farms Ltd Clover Sun Limited Cloverdene Dairy Ltd CM Farming Ltd CMC 2000 Ltd CME Farming Ltd Cochar Dairies Limited Cody Cowley Ltd Collis Farms Ltd Confederate Farm Ltd Contract STEL Cookson Trust Farms Ltd Copeland Farming 2012 Ltd Copeman Family Trust Cornerstone East Limited Cotlands Ltd Cotter Farming Ltd Coull Farms Ltd Cowley Ltd Craig Group Limited Craigower Farms Ltd Cravan Farms Limited Crayfish Trust Creekside Pastures Ltd Cressey Dairies Ltd Crockers Ranch Ltd Crown Ridge Partnership Crowsnest Farming Limited CW Taunt & HM Baldock D & D M Coupe Trust D & E Beckett Limited D & E J Pringle D & K & M Kavanagh D & K Miles Limited D & M Earl Ltd D & R Van Straalen Family Trust D & S Farms D A & S M Crawford D B & T A Wyber D B H Farming 2012 Limited D Baeyertz 2013 Ltd D C & V F Frew D D & D M Galletly D E & A M Jacobsen D G Harker Family Trust & W A Harker Family Trust D H & A J Speirs Family Trust D H J & J J Hughes D J & F J Lynch Ltd D J & G M Hooper D J & S A McMillin D J Noble & K M Jones D L & P Wilson D L & S M Cochrane Ltd D Lindsay & D Manu D P & C M Flood D P & C M Flood Family Trust D P & T G Schumacher D P & T M Stephens D R & E M Henman D R & J E Gilchrist D R & L A Marshall Ltd D R & L M Locke Ltd D R & N R Ellis D R & S K McKay D W & P A Wood D White D&D Bosch Ltd Dacrow Ltd DAGCO Limited Dairy Farms Partnership DairyPlus Limited Dairytrac Trust Dajo Trust Daker Ridge Trusts No.1 & No.2 Danatava Holdings Ltd Dandarrigan Trusts Partnership Daniel Cullen Family Trust Daniel Symons Daradowns Holdings Ltd Darnnco Agri Limited David & Angela Kennedy David & Corina Youle Trust David Leng Davis 5 Limited Dawn Dairies Ltd Daybreak Farms Limited DB & MJ Kalma Ltd DB & N Young DC & KR Fraser Partnership DDB Dairy Enterprises Limited Dean Semmens Ltd Dekker Farms Ltd Delarbe Farm Ltd Delca Faith Dairy Limited Denis J Crookenden & Bronwyn F Bax Dennis & Donna Gill Family Trust Dennley Farms Ltd Derrys Farm Limited Derryvale Ltd Des Landes Dairies Ltd Dingle Trust Partnership Dinnae Ken Ltd DNA Contracting Partnership DNR Farms Donagh Farm Trust Drakes Hill Farming Ltd Drysdale Dairies Ltd Dungarvan Farms Limited Dunmilkin Ltd Dunrobin Farm Partnership DW & JM Harris Partnership Dyfed Farming Ltd E A & J A Rolfe E B & J L Day E F & J A Allcock E G & N H Scott E Hut & A Jongmans E J & K J Field Trust E J Ritchie E L & D J Brook E S & J M Rattray E S Dairy 2008 Ltd E.K. & M.J. Chisnall Ltd Eastwick Farm Limited Edale Farms Ltd Eiffelton Contractors Ltd Eiffelton Dairy Ltd Ellis-Lea Farms (2000) Ltd Emerald Dairy Farm Ltd Est. M Q J Van Bysterveldt Estate Charles Bailey Estate D E G Swadling Estate of K Sminia Estate of N R Dilks Esternwest Farms Limited Eudunda Dairy Ltd Evans & Co Ashburton Limited Evans Partners Ltd Eyre View Dairies Ltd Eyrewell Dairy Ltd F & P Dawson Limited F A & D N Ahlers F G White & Estate of MM White F J & E A O’Connor F J Mullan & J A Mullan Family Trust F Stevens & S McCoy Fairfax Stonehouse Farm Ltd Fairhaven Farms Ltd FAM Limited Far South Farms Ltd Fareway Holdings Ltd Farmbuild Milk Company Ltd Farmer Fred Ltd Farming Tee Jay Ltd Farnley Tyas (2018) Limited Fast Track Dairies Ltd Felgate Farm Limited Ferguson Family Trust Fernglade Farm Ltd Fernhill Farms Koru Ltd Firdale Farms Limited Flag Farms Ltd Flaxmill Dairy Ltd Flaxwood South Fleming Family Trust Flett Pastures Limited Fonic Farms Limited Fonterra -Te Rapa Farm Fonterra -Tui Farm Foster Dairying Limited Four Seasons Contracting Four Seasons Farming Limited Fowler Family Prosperity Trust Freely Farms Ltd Frisia Farm Trust Fuller Dairy Limited Funny Farm Waikato Limited Fyvie Meadows Limited G & A Parker G & C Came Ltd G & K Kingston Family Trust G & P Russenberger G & S Carran Family Trust G A & J A Wright G A & J M Hall Ltd G A & K T Lynch G A & V M Weir G A W & M C Van Rossum G B & D G Hodges Trust G C & A M Williamson G Cronin & G M Impey Limited G D & P M Jackson G E & V E Cooper G E Sutherland Trust G I Norgate G K & D J Landon Family Trust G K S Cows Ltd G L & G D Love G L & G F Bell G M & A J Gower G M & B M Gillard G M & D L Yates G R & B L Irwin G R & D M Edge G R & I Griffiths G S & L J Rowe G T Came Family Trust G V & H P Wall Family Trust Galloway Enterprises Ltd GAPA Ltd Garn Farms Ltd Garstein Ltd GC & JO Appleby Ltd Gen Set Ltd George Finch (Farmers) Ltd George Scurr & Co Limited GG Partnership Gibson Pastoral Ltd Giggs Farming Limited Gill Farms Limited Given Farming Limited GJ & SP Carran Ltd GJ Buhler Farms Trust GJ Toner & Stacey Coward GKS Farms Limited GKW Farms Ltd GL & SM Martin Ltd Glasgarton Farm Ltd Glen Eden Otago Ltd Glen Rata Farm Partnership Glendine Ltd Glenmarie Dairies Ltd Glenmore Farm Glennevis Dairies Ltd Glenrowan Trust Glenspec Holdings Ltd GM & AM Woolley Golden Mile Farms Ltd Gopperth Family Trust Gordon Dale Farms (2006) Ltd Goreland Partnership Goud Milk Limited Graceland Farm Grant Allen Ltd Grant Gargan Trust Grantlea Dairy Ltd Grassmere Dairy Farm Ltd Grat Farms Ltd Green Light Farming Limited Green Pastures Dairy Ltd Green Sky Dairies Limited Greenbank Pastoral Ltd Greenwell Farms Ltd Greg Cowley Ltd Greg Low Limited Groundwater Holdings Ltd H & C Underwood H & K Farms Ltd H & M by de Ley H L & J E Wallace H Q Partnership H S Hancock Hahn Trading Limited Hall’s Enterprises Limited Hamill Family Trust Hamilton & Keene Sharemilking Ltd Hamkee Dairies Limited Hammens Limited Hammond Limited Hancock Farms Ltd Hanging Rock Dairies Ltd Hanson & Barnes Partnership Harakeke Dairy Ltd Partnership Hard Road Dairies Hardwick-Smith Partners Harrick Limited Hartland Pastoral Limited Hastings Farms Ltd Hastings Group Ltd Haurere Farms Ltd Hawkes Pastoral Ltd HBG Agri Ltd Heartland Holdings (2008) Ltd Hejlea Dairies Ltd Henmar Trust HG & RE McFarlane Hikuai Pastures Hillbrook Dairies Limited Hillcrest Culverden Farming Limited Hillpark Dairy Hillview Trust Hinemoa Dairying Ltd HLM Partnership HMW Farms Limited Hoe-o-Tainui Farms Ltd Hollands Farm Limited Hoogeveen Farms Ltd Hopcroft Farms Ltd Horomanga Holdings Ltd Horseclose Dairies Limited Howell Farming Limited HS & KM MacPhail Huia Trust Huirangi Valley Farms Limited Huntersview Farm Ltd Huntly Road Dairies Ltd Hurunui Ltd Partnership HWH Farming Ltd Hwitan Tune Holdings Ltd I & M Selak Ltd I & T Megaw Partnership I D & S D Read I H & D J Bryant I J Connor I R & V E Wilcox I T & M G Semmens I W & K D Shearer Family Trust Ian & Joyce Noble Limited Ihenga Holdings IM & RV Glenn Ltd Incline Farm Ltd Ingram Farming (2003) Limited Instone Trust Partnership Intensive Agriculture Ltd Irving Family Trust Ivy Plains Ltd J & C Anderson J & C Dairies Limited J & C Paterson Trust J & D Cullen Partnership J & H Schuurmans J & J Anderson Family Trust Partnership J & LM Van Burgsteden J & P S Malcolm J A & A A Patino J A & N J Anderson Partnership T/A Jonik Farming J B & K A Lord J B & L M Suisted Limited J B Fleming Family Trust J Buckley & D VanDenBeuken T/A Jaydee Partnership J C & C A Rossiter J C & P A Low Ltd J C & V G Wells J Duncan Farming Ltd J E & A E Watson J E & D M Cooper J E & S G Pike Family Trust J H & R Cotman J Haultain & K McCartin Partnership J L & L A G Adam J L Hooper & A L Robertson J L Murray & Sons Ltd J L Vollebregt Limited J M & K L Sneddon Partnership J M & M R Foster J M Mellow J McKay & A Brown J W & A M Steeghs J W & M J Osborne J W J & M K King Jabulaan Limited Jacob Abbott James Brown James Lyttle Jamze Trust Jascas Trust Jaska Farm Trust Jaunay Farms Ltd JAVAN Cream Company Ltd JB Mucca Farms Ltd JBT Farming Limited JCDAF Dairy Farms Ltd JE & KL Gilbert Jeremy Swain Jetstream Farms Ltd Jeyes Farming NZ Ltd JL & NA Wolff Partnership JM Cross & LA Hazelton JM McLaughlin & JM McLaughlin Family Trust Partner Joel & Jessica Brown John Armstrong Family Trust John Finlayson Ltd Johnston Family Trust Jojax Ltd JOLO Grace Ltd 37 Fonterra Annual Report 2020 The Co-operative Difference Honour Roll for On-farm Excellence TE TIHI (Cont.) Jomar Farm Ltd JP & AL Bourke Partnership JR & L M Stevenson Ltd Junior Turnbull Trust Jusswodeva Limited Just Holding Ltd JW Pouls Limited K & A Wilson Limited K & LG Pickett Limited K B Olesen & R J Stephens K C & L M Berry K D & T M Yates K E & V J Bond K G Reeve K J & H Chalmers Ltd K J & L F Christensen K J Coe K J Thompson & M Sataka K R Vollebregt K W & D M Blackstock K W & D R Lowe Family Trust K&M C Farms Limited Kahika Farming Limited Kaimai Dairy Ltd Kaimara Trust No 3 & 4 Kaipara View Farming Limited Kaiper Partnership Kaitake Farms Trust Kaiuma Reach Ltd Kaiwhio Dairies Limited Partnership Kakariki Valley Trust Kanuka Syndicate Ltd Kanuka Terrace Limited Kathdan Trust Limited Kauri Karaka Ltd Kauri Moor Farms Limited KC Cows Ltd Keelinn Farms Limited Kellydale Partnership Kemra Farm Ltd Kendre Farms Ltd Kereru Trust T/A Kereru Dairies Keritapu Farm Ltd Kerr Road Dairies Limited Kerr Road Dairies Ltd Keswick Farm Dairies Limited Kevin & Rhonda Belling Trust Kevin Fleming Ltd Kiekie Farms Ltd Kilkenny Farm Ltd Kilvarock Farming Company Ltd Kingsden Dairies Ltd Kingsway Farms Limited Kinkora Farm Ltd Kintore Farm Ltd Kiwi X Farmers Ltd KiwiDutch Dairies Ltd KJ&HL Uhlenberg(Waitui) Fam Tr. P’Ship KM & BM Muller Knightlands Ltd Knockinnon Farm Trust Kohi Partnership Kohique Farms Limited Kokako Road Ltd Kokoamo Farms Limited Koning Limited Konini Family Trust Koroa Group Ltd Kowalski Farms Ltd Kowhai Bush Family Trust 38 Kowhai Farms Partnership Kraakman Farms Ltd Kreignook Trust KTAC Farms Limited Kuranui Farm Limited Kywaybre Farms Ltd L & A Verstappen L & P Dairies Ltd L & P Smets L 2 B Lands Trust L A Ruthe L D & R M Barry L J & S L Wallace L J Bleakley L J Hodges L P & C L McClintock Limited L S & K A Phipps Lakeflats Limited Lakeside Ayrshires Ltd Landcorp Farming Ltd Lanseair Limited Lavender Dairies limited Lavic Partnership Law Family Farms Ltd Le Emari Trust - Morven Leningrad Farm Ltd Lesdale Friesians Ltd Letham Farms Ltd Levett Farming Limited Lillburn Valley Dairies Ltd Lincoln University Liquid Au Limited Lismore Dairy Limited Living Waters Dairy Ltd Lizlyn Dairies Ltd LJB Contracting Ltd Lobblinn Farms Ltd Lochlea Partnership Lockerbie Farms 2001 Ltd Lockinge Farms Ltd Longacre Properties Limited Lonmeck Dairy Limited Looman Dairies Ltd Loves Cows Limited LP & CL McClintock Ltd LR and SJ Hammond Limited Lynbrook Farm Ltd Lynburn Dairy Ltd Lynwood Dairies Limited M & A Hinricks M & A Schrader Family Trust M & C Brophy Family Trust M & C Mogg Ltd M & J Courage M & J Cudmore Limited M & L Wood Partnership M & M Kidd Partnership M & S Noord Contracting Ltd M A & J F Doherty M A & S M Zillwood M A Watt Family Trust M C & M Davey M Carlson & Co Limited M D & K L Deane M D Hammond M E G & D A Polyblank Family Trust M G & A K Earl Partnership M G & S A Hughes M G and B J Deane Limited M Gloyn M H & D E Nater M H Pastoral Limited M I & P M Stevenson Family Trusts P/ship M J & C Blagrove Ltd M J & D R McFetridge M J & M J Manley M J & M Scarlett M J & T M Davies M J & T M Lord M J & T R Schumacher M K Gummer Farm Partnership M M & L Baxter M M Brophy Family Trust M N & D Brown M Nesbit & A Absalom M P & V M J Joyce Trusts P/Ship M R & F L Hines M R & K J Luke Ltd M R & W Rowe M R Bennett M S & H Hammond M S & P M Davey M T & A J O’Connor M T & K J Taylor Maandonks Farm Limited Maandonks Pastoral Mac Chap No.3 Limited Macken Farm Ltd Maco Dairying Ltd Maerewhenua Investments Limited Mahoe Trust MAK Dairies Ltd Maka Ltd Maken Milk Ltd Makowhai Trust Manchester Dairy Limited Mangahuia Farms (Hawera) Mangaone Farms Mangatoki Partnership Mangawhiri Farms Ltd Manuka Downs Farm Limited Manuka Ridge Limited Marchant Farms Trust Mark & Nerida Dodge Ltd Marua Partnership Marusden Limited Massey University Farms Matai Trust Matakuri Ltd Matham Family Farm Ltd Mathieson@Rongomai Limited Matoka Farms Ltd Matricksen Ag Holdings Ltd Mavora Farms Ltd Maxlands Farms Limited Maybrooke Limited MB O’Hearn Limited MC Holland Farming Ltd McCarty Farms Ltd McCheesey Farming Limited McClelland Dairies Ltd McDonald Farming Limited McGee Partnership McHardy Farms Ltd McKay Creek Farms Limited McLachlan Farms Ltd McLean Farms Limited McLeod Farms Ltd McMillan Finnigan Partnership McNab Farms Limited Meadowbank Farm 2017 Ltd Mejeri Farms Ltd Melrose Dairy Ltd MERJ Investments Ltd Merrybent Ltd Merryfield Dairy Ltd MESK Farming Partnership Michael Clark Ltd Mid Island Farms Ltd Midfield Farm Ltd Milk Power Ltd Milkoad Limited Milkwell Ltd Millar Farm Ltd Milldale Farm No 2 Limited Mills Farms Ltd Millydale Pastures Ltd Minus 1 Ltd Minus 1 Trust Miroc Limited Mitchells Milky Way Limited MJ & CD Beattie MJ & KL Family Trust Molehill Farm Ltd Moneymore Dairies Ltd Monte Vista Farms Montland Limited Moo2U Ltd Mooi Dairies Ltd Moolah (2014) Limited Moorbyvale Farm Ltd Morana Farms Ltd Morelands Pastoral Ltd Morris Ag Ltd Morrison Farms Limited Morrow Holdings 2018 Limited Mosa Farming Ltd Motu Lodge Stud Ltd Mount View Trust MR & TJ Frost Ltd Mt Winchmore Farm Limited Mu Kau Ltd Muir Dairies Limited Mulbuk Farm Limited Mullerwhero Farming Ltd Mullford Trust Partnership Murdock Investments Ltd Murphy Farms Limited Murrayfield Dairy Limited Mutu Trust MW & KA Olsen N A & J J Higgins N C & J A Kelly N C & N Ruygrok N D & A J Rout N G & B D Simmons N J & C T Kane N J & M Bleakley N J & W A Vollebregt N J N Ormsby & T J Connellan N K & A M Fox N P Tull & N A Shelley N R & A H Berry N R & L A Fox Nadash Partners Newton Farms Limited Ngahape Valley Farm Ltd Nicholls Family Trust Nicholson O’Rourke Ltd Nithesdale Ltd Nomad Services Ltd NP Van Straalen Family Trusts Partnership NR Ensor Limited NS Farms Limited NT Lee & A Spethmann NYMIC Dairies Limited NZSF Canterbury Farms Limited - The Forks Oak Valley Farm Oaks Dairy Limited Oasis Farm Ltd Oberwil Farms Ltd O’Connor Rural Limted Ohoka Meadows Limited Ohtawa Farms Ltd Oliver K Limited Onstream Dairies Ltd Oporo Farms Ltd Orchard East Limited Orini Downs Station Limited Orongo Meadows Ltd Orton Downs Farm Partnership Orwell Dairies Limited Otaitai Dairys Trust OTO Trust Our Dairy Farm Limited Owhango Farms Limited Oxford Farming Limited P & A Farming Ltd P & C Farming Ltd P & J Dickson P & J Jamieson Family Trusts P & S Bryan Limited P A & J E Taylor P A Hoogeveen P B & E J Chick P C & R A Grey P D & S S Sharpe P D & S Wykes Family Trust P F & H S Sturt P G & D M Dombroski P G & M A Cashmere P H & C K Partnership P H J & M A Brown P H S & P C Byford P Hall & C M Duignan-Hall P J & R E Roberts Family Trusts P J & T L Walsh Family Trusts P Jones Family Trust P L & R E Berryman P N & D L Waite Family Trust P R & R F Mossman P S & B K Rai P S & H J Wilson P T & R D Williams Family Trust P T & V M Youngman P V & P G Mullin Trust P V & V L Risi P W & N J Bavin Pacey Farming Ltd Paengaroa North B10A Trust Pahau Dairy Ltd Pahtuna Farms Ltd Palmdale Farms Ltd Papawai Dairies Ltd Paramount Dairies Limited Parkhill Farms Ltd Pastoral Holdings Ltd Paterson AG Services Ltd Paton Trading Company Ltd Patterson Farming Limited Paul Clausen Limited Peel View Ltd Pekanga o te awa Farms Ltd Penrith Trust Peter Reeve Peter Templeton Petfield Farming Ltd Pheasantridge Ltd Phimister Farming Limited Piako (Middle Farm) Limited Pikowai Transport Ltd Pinefields Ltd Pineridge Partnership Piriaka Farms Ltd - M & C Ferris Pirie Farms Limited Piriti Dairies Limited PJ Hilhorst Ltd PJ Mayall Limited PKW Farms LP Placement Services Limited Platinum Dairies Ltd Platinum Farming Ltd PN & DA Botica Limited Poc Ar Buille Limited Pohuenui River Limited Poldrissick Farms Ltd Port Molyneux Dairies Limited Praire Farm Ltd Price Trusts Partnership Prima Farms Ltd Progressive Dairies Ltd Puketi Farming Enterprises Ltd Purdy Farm Ltd Pynewood Farm Ltd Quatre Farming Company Ltd R & A Tait T/A Black Cow Dairies R & L Dunn Partnership R & L J Simms R & S Singh R A & J L Hamilton R B & S M Grant Farming Limited R B Duncan R B Gooding Investments Ltd R C & K M Ormsby R F & C L Lansdaal Ltd R F & D M Sowerby R G King Ltd R J & C A Stevenson R J & J R Thomas R J & V M Bourke Trusts R J & Y L Le Fleming R L & F M Hurley R L & H J Colson Trust R M & S A Grayling R M O’Sullivan & P J Jones R N & D P Bridgeman R P & M G Frank R P Hunter & S G Wallace Partnership R S & R D Gordon R V & M M Martelli R W & F W Muller Trust R W & R D Kane Rai Farm Limited Rainbowcreek Farms Limited Rakaia Dairy Ltd T/A Railside Dairy Rakaia Island Limited Ranginui Station Limited Partnership Rangitata Island Dairy Partnership Ltd Raukapuka Farm Ltd Ravelston Farm Limited RD & MA Wilson Limited RD & TS Buchanan Ltd Reaymore Farming Limited Red Cow Farms Ltd Red Dragon Systems Limited Redpark Farm Limited Redwood Farm Trust Reed & Arden Farms Limited Reith Dairy Ltd Reuver Limited Rhodes Farming Partnership Ribbonwood Dairy Ltd Richview Limited Ridgedale Limited Risi Farms Limited River Heights Limited Riverhill Farming Limited Riverside Dairy Farm Ltd Riverview Oaks Limited RJ & MMJ Gardner Family Trusts Pnship RJ & NA Meade RJ Dairies 2018 Ltd RK & A Hines Limited RKBS Horne Ltd RM &AD Singgo RMH Dairy Limited Roaring View Farms Limited Robinson Farming Ltd Rockburn Dairy Ltd Rockford Holdings 2015 Ltd Rockwood Kaikoura Ltd Rocky Farms Joint Venture Ltd Rocky Point Enterprises Ltd Rodgers Farms Limited Rodney G & S J Joblin Rolfe Farms Limited Rooney Farms Limited Rose Farm Ltd Rosebrae Farm Ltd Rossco Farming Ltd Rosser Holdings Ltd Roswin Farm Limited Roto Farms Ltd Rotongata Dairies Ltd Rout Dairies Limited Ruakiwi Dairies Limited Ruapeka Farms Ltd Rukuhia Farm Ltd Rukuhia Holdings Ltd Ruthe Farms Ltd RVS Farming Ltd Ryelands Farm Company Ltd RYEM Partnership S & G Chick S & G Muggeridge S & K Garland Ltd S & K Phillips S & R Partnership Ltd S & R Pastoral Ltd S A & J M Roberts S B & Y M Thompson S England & P Walker S G & B L Thirkell S Huta & T Tawhiao Partnership S J & L M Colson S J & M R Dravitzki S J Bruce Family Trust S L & M P L Fergusson S M & S A Field S M Duynhoven & Estate of JB Duynhoven S M Muller & N K Buckthought S M Shead S Petterson Family Trust S Richards & L Coetzee S W & F M Settle Sailing Away Family Trust Sandbrook Farm Ltd Sanford Farming at Paradise Trust Sangro Farm Limited Sani Farms Limited Sanson Farms Sarwan Singh Farms Limited SBR Livestock Limited Scarlett-Brown Partnership Schayes Enterprises Ltd Schorn Trust Schouten & Reneti Farms Ltd Scott Evans Sharemilking Limited Sea Breeze Farms Seagrove Farms Ltd Seamist Dairies Ltd Searle Dairy Farming Ltd Seath Limited Semmens Holdings Limited Seven Mile Dairy Limited Seven of Nine Ltd Sfarmer Partnership Limited SG & A Donovan Ltd Shaan Gopperth Trust Shawlink Ltd Sherwood Farming Co Limited Silverbank Enterprises Limited Silverdene Farms (2000) Ltd Sim Brothers Ltd Sim Family Farms Ltd Sisley Farms Ltd Six O Farms SJ Bond & DJ Phillips SJ Pastures Limited SK Holdings (2017) Limited Smiling Dairies Limited Smith Enterprises Limited Snaplulu Ltd Snow View Dairy Ltd South Dairy Limited South Two Chain Limited Southern Meadows 2011 Ltd Southern Pastures (Tatua Farm) Ltd Partnership Spark Brothers Ltd Spring Peak Ltd Springdale Farms Trust St Andrews Dairy Ltd Staple Homestead Limited Steeghs Limited Steward Dairy Ltd Stichbury Farms Limited Stitcho Ltd Stone Country Dairies Ltd Stoney River Farm Ltd Stonyglen Dairies Ltd Stornaway Farm Ltd Stralough Ltd Streamline Limited Partnership Stromness Group Ltd Summerglow Dairies Limited Swim Farms Ltd Sybton Farm Limited Partnership T and M Wrigley Ltd T I & J K Bishop Family Trust T M Mcdowall T M Rawson & Est D B Palmer T P & R D Trail T P & R Sneddon T P Payton T S Curtis T W & G Y Sneddon Taikatu Plains Limited Tainui Group Holdings Limited Takapau Trust Tanner Dairies Trust Taradise Farm Taralea Farms Ltd Taramea South Ltd Taranga Town Supply Tauhara North Farming & Co LP Tauhei Farms Ltd Tawa Ridge Farms Ltd Tayco Farm Limited Te Awa Farms Limited Te Pohutukawa Farm Limited Te Repo Farms Ltd Te Tua Farm Ltd Te Whanake Enterprises Ltd Te Whanake Joint Venture Te Whenua O Matata Limited Tennant Farms Ltd Ternstone Ltd Terrace Top Dairy Ltd The 7C’s Limited The Bush Trust The D & A Roberts Family Trust The Flavall Trust The Grange Ltd The Harkaway Trust The Hendriks Family Trust The Herewahine Trust The Proprietors of Rakaia Incorporation The Vaughan Family Trust Theland Tahi Farm Group Limited Thomas Family Farming Ltd Thorp Dairying Ltd Three Daughters (2018) Ltd Three Springs Dairies Ltd Tierracrece Ltd Tihiroa Dairies Ltd Partnership Tihiroa Farms Ltd Tilbrook Farm Trust Timata Farming Company Ltd Tiptree Limited Tiro Roa Ltd Tiroroa Farms Limited TK & MG Wright TL & NL Bryant Holdings Ltd TL & SL Taylor Ltd TN & GL Gray Ltd TNN Holdings Ltd Tobruk Farms Ltd Todd Agri Ltd Todd Bavin Tokerau A5 Incorporation Tokoroa Pastoral Ltd Top Grass Farm Limited Torran Moor Ltd Totara Park Farms Limited Totoro Dairy Limited TP & TL Siffleet Trec Trust Tremewan Agriculture Limited Trevanion Farms Limited True Blue Trusts Tubs Agri Ltd Tui Company Limited Tui Glen Nikau Farm Limited Tunaview Trust Partnership Turnbull Family Trust Turney Farms Limited Turney Farms Ltd - 2 Tutukau East Z Trust Twenty Forty Farms Ltd Two Name Farming Limited Underwood Enterprises Ltd V & J Ralph Ltd V A & J J Nicholls V B Durham Farm Limited V J & C E Stevenson V T & S J Brophy Vale Green Services Limited Valley Road Farm Ltd Valverde Enterprises Limited Van Der Heyden Farms Ltd Van Vugt Brothers Limited Vat Farming Ltd VBI Ltd Ventsha Farms Ltd Vos Farms Ltd W & K Rolton W & L Harwood (Golden Acres) W E & T L Kowalski W H Lynn W J & A F Bridson W J & J G Pile Family Trust W J & V M Donald W J A & L J West W M & K B Bolt W M & S M Riepen W M & S R Fisher W R & D J Little W T J Waetford & H M Wallace Ptnshp W W Olsen W&N Hamers Partnership W.A & H.R Simpson Farming Ltd Waiari Dairies Ltd Partnership Waihapa Trusts Partnership Waikatland Waikirikiri Farm Partners LP Waimak Dairies Limited Waimanu Dairy Ltd Waimarama Farming Ltd Waimarie Pastoral Ltd Waimatuku Dairies Ltd Wainui Dairies Waionehu Farm Ltd Waiotu Farms Ltd Waiparu Farm Ltd Waiparu Holdings Limited Waipiata Trust Wairakau Farm Trust Waireka Dairy Farms Ltd Waitanui Dairy Farm Ltd Partnership Waituna Investments Ltd Waiwhakaata Trust Waiwira Holdings Ltd Wallace Johnstone Ltd Walsh Enterprises Limited Walter Gold Ltd Walton Park Farm Limited Wangapeka Holdings Limited Wardville Dairies Limited Warnock Park Ltd Watershed Ventures Ltd Waterstone Farm Limited Wattle Downs Ltd WBF Limited WE & TS Greene Partnership Wekanui Farming Ltd Wekanui Farming Ltd (No. 2) Welsh Family Farms Limited Wendon Dairies Ltd Westmorland Estate Ltd Westridge Farm Ltd Whakahora Farm Ltd Whakatohea Maori Trust Board Wheyland Farms Limited White Gold Enterprise Limited White Gold Ltd White Stone Holdings Limited Whitefield Partnership Wide Farms Ltd Wilgul Reds Willcox Farms Ltd Willmor Pastures Ltd Willowbank Farms 2015 Ltd. Willowfields Ltd Wilriskit Limited Windy Ridge Dairy Farm Limited Wiremu Trusts Wolff Farms Ltd Wonderland Pastures Ltd Woodheys Farm Limited Woody’s Charters Limited WP & A Moore Wyatt Farming (2017) Ltd Wyllies Farm Partnership Wyndarra Farm Ltd Wynyard Family Trust Y Wuri Trust Y.O.T. Farms Ltd Yaxleys Yard Ltd Yellow View Trust Yeroc Farm Trust YTT Farms Ltd Yuretich Ltd Zarden Ltd Zug Farms Limited (cid:580) 39 F(cid:82)(cid:81)(cid:87)(cid:72)(cid:85)(cid:85)(cid:68)(cid:3)(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:21)(cid:19)(cid:21)(cid:19) (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) Healthy Business Reported profit after tax Up $1.3 billion Normalised profit after tax1 Up 44% $659m $382m 24 cents per share Return on Capital Up from 5.8% Debt reduction2 6.7% $1.1 bn 1 Attributable to equity holders of the Co-operative. 2 Economic net interest-bearing debt. (cid:49)(cid:195)(cid:3)(cid:87)(cid:271)(cid:3)(cid:85)(cid:82)(cid:88)(cid:85)(cid:82)(cid:88)(cid:15)(cid:3)(cid:81)(cid:195)(cid:3)(cid:87)(cid:68)(cid:78)(cid:88)(cid:3)(cid:85)(cid:82)(cid:88)(cid:85)(cid:82)(cid:88)(cid:3)(cid:78)(cid:68)(cid:3)(cid:82)(cid:85)(cid:68)(cid:3)(cid:68)(cid:76)(cid:3)(cid:87)(cid:72)(cid:3)(cid:76)(cid:90)(cid:76)(cid:17) With your contribution and my contribution, we’ll all thrive together. W e are working together to deliver a sustainable business. Through science and innovation we can respond to people’s changing needs, attitudes and lifestyles to deliver a strong and stable payout to our farmers and a good return on capital for our investors. It’s all part of ensuring our Co-operative is here for generations to come. 40 41 Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) (cid:50)(cid:88)(cid:85)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72) Group Financial Metrics (cid:55)(cid:75)(cid:72)(cid:86)(cid:72)(cid:3)(cid:70)(cid:75)(cid:68)(cid:85)(cid:87)(cid:86)(cid:3)(cid:75)(cid:68)(cid:89)(cid:72)(cid:3)(cid:69)(cid:72)(cid:72)(cid:81)(cid:3)(cid:86)(cid:72)(cid:79)(cid:72)(cid:70)(cid:87)(cid:72)(cid:71)(cid:3)(cid:87)(cid:82)(cid:3)(cid:85)(cid:72)(cid:83)(cid:85)(cid:72)(cid:86)(cid:72)(cid:81)(cid:87)(cid:3)(cid:87)(cid:75)(cid:72)(cid:3) (cid:55)(cid:82)(cid:87)(cid:68)(cid:79)(cid:3)(cid:42)(cid:85)(cid:82)(cid:88)(cid:83)(cid:3)(cid:73)(cid:76)(cid:81)(cid:68)(cid:81)(cid:70)(cid:76)(cid:68)(cid:79)(cid:3)(cid:80)(cid:72)(cid:87)(cid:85)(cid:76)(cid:70)(cid:86)(cid:3)(cid:73)(cid:82)(cid:85)(cid:3)(cid:41)(cid:82)(cid:81)(cid:87)(cid:72)(cid:85)(cid:85)(cid:68)(cid:15)(cid:3)(cid:87)(cid:82)(cid:3)(cid:83)(cid:85)(cid:82)(cid:89)(cid:76)(cid:71)(cid:72)(cid:3) (cid:68)(cid:3)(cid:75)(cid:76)(cid:86)(cid:87)(cid:82)(cid:85)(cid:76)(cid:70)(cid:68)(cid:79)(cid:3)(cid:86)(cid:88)(cid:80)(cid:80)(cid:68)(cid:85)(cid:92)(cid:3)(cid:82)(cid:73)(cid:3)(cid:82)(cid:88)(cid:85)(cid:3)(cid:83)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72)(cid:17) New Zealand Milk Collection kgMS (millions) Normalised Gross Profit ($ millions)4 1,566 3,641 3,246 3,152 3,008 3,208 1,526 1,505 1,523 1,517 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Sales Volume MT (’000s millions)1,4 Normalised OPEX ($ millions)4 Consumer and Foodservice Ingredients 4,313 4,180 4,123 4,152 4,069 2,509 2,496 Reported Profit after Tax ($ millions)2,4 834 745 659 -196 2016 2017 2018 -610 2019 2020 Leverage Gearing Ratio (%) Debt to EBITDA 44.3 44.3 3.2x 3.8x 48.4 48.5 4.6x 4.4x 41.4 3.4x 2016 2017 2018 2019 2020 Normalised Profit after Tax ($ millions)4,6 Free Cash Flow ($ millions) 789 781 2,184 382 382 264 1,828 1,095 670 600 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 CAPEX ($ millions)3 944 851 861 Dividend Yield and Normalised EPS4 600 419 49 49 7.3% 6.7% 24 16 1.7% 0.0% 24 1.3% 1,800 1,773 1,765 1,602 1,564 2,335 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 2,282 2,268 3,074 2016 3,019 2017 2,986 2018 3,149 2019 3,055 2020 2016 2017 2018 2019 2020 Normalised Revenue ($ millions)4 Normalised EBIT ($ millions)4 Working Capital Days 83 83 85 77 75 Return on Capital (including intangibles and EAI)5 9.2% 8.3% 6.3% 5.8% 6.7% 19,214 17,199 20,431 19,920 20,975 1,358 1,155 902 812 879 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 KatKatKatKatKatatKaa hryhhryhryhryryryhryhhhhryh yyn, n, n, n,nn, n, n, n,nn, nn, CenCenCenCenCenCenCenCenCenCenCenCeenCenntratratratrtratratratttratt l Tl Tl TTTTT TTaraaaraararanaknaknaknaknaknaknaknaknakn iiiiiii (cid:23)(cid:21) 2016 2017 2018 2019 2020 2016 2017 2018 2019 2020 Includes non-controlling interests. 1 Does not add to total due to inter-group eliminations. Consumer and Foodservice and Ingredients exclude Discontinued Operations. 2 3 Capital expenditure comprises purchases of property, plant and equipment and intangible assets, net purchases of livestock, and includes Discontinued Operations. 4 FY19 has been restated. Refer to Note 28 in the FY20 Financial Statements. 5 Capital employed is calculated as the average for the period of: net assets excluding net interest-bearing debt and deferred tax balances, and including brands, goodwill and equity accounted investments (EAI). 6 Normalised profit after tax attributable to equity holders of the Co-operative. 43 Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) W e exceeded our financial targets for the year. Our reported profit after tax was $659 million, up $1.3 billion over last year. We significantly reduced our economic net interest-bearing debt, down $1.1 billion, improved our cash flow, and recommenced dividends. Group Overview HOW FONTERRA IS MAKING THIS HAPPEN We are working together to deliver a sustainable business. TO DO THIS WE WILL Support healthy, sustainable livelihoods for our farmers by returning the most value from every drop of milk. Build a strong co-operative by ensuring our business, including investments, delivers long- term value. Meet the changing needs of customers and consumers by leveraging our unique strengths and innovating to create sustainable value for them and us. EXCEEDED OUR 2020 FINANCIAL TARGETS Debt to EBITDA 3.4 x Better than our target of no more than 3.75x Total Group capital expenditure $419m Better than our target of no more than $500 million Total Group normalised gross profit Normalised EPS $3.2 bn Better than our target of in excess of $3 billion 24 cents Top end of 15-25 cents per share earnings guidance range To provide a complete view of our performance for the 2020 financial year, the Total Group figures presented in this Group Overview section are inclusive of both Continuing and Discontinued Operations. During the 2020 financial year we implemented a new customer-led operating model. However, the following business performance section has been prepared on the same basis as previous communications to allow for better comparability. Our Total Group EBIT was $1,147 million for the 2020 financial year, an increase of $1,164 million compared to last year. This included a net amount of $268 million from items relating to the asset portfolio review and from other normalisations. Taking out the normalised items to provide a better comparative view of earnings, our Total Group normalised EBIT was $879 million, an increase of $67 million compared to the prior year. Improved performance from Ingredients and Foodservice contributed to this increase. Our Foodservice business had a significantly improved first half of the year, in particular in Greater China, but this was partially offset by the disruption of Covid-19 during the second half. Our Ingredients’ earnings were down for the first six months relative to the prior year. However, the second half of the year benefited from favourable product price movements and our offshore Ingredients businesses benefited from continued implementation of cost efficiencies. Our Consumer normalised EBIT was down compared to the prior year. This decrease was mainly due to business disruptions in Hong Kong and Chile plus $57 million of costs that relate to impairments of our Chesdale™ brand value and goodwill in our New Zealand Consumer business. We have reduced our economic net interest-bearing debt by $1.1 billion and our ratio of Debt to EBITDA from 4.4 times to 3.4 times. We have achieved this through improved business performance, continued financial discipline and the divestment of non-core assets. In the first half of the 2020 financial year we completed the sale of DFE Pharma and foodspring® and received cash proceeds of $623 million. The divestments have also resulted in a gain on sale of $467 million. Our Free Cash Flow has improved by $733 million to $1.8 billion. We have maintained our focus on strong financial discipline. In addition to reducing Debt, our Total Group normalised operating expenses were down from $2,282 million to $2,268 million. Total Group capital expenditure for the year was $419 million, $181 million down on last year and $81 million under our target of no more than $500 million for the year. We continue to make progress on implementing our portfolio review. The sales processes are continuing for the Fonterra- owned China Farms and our interest in DPA Brazil. Based on the additional information and further insights we have gained through the sales process and strategic reviews for the Fonterra-owned China Farms and DPA Brazil, we have reduced the valuation of these two assets and the China Farming joint venture by a total of $232 million. The proposed divestments of our Fonterra-owned China Farms and DPA Brazil have impacted how the financial statements are presented. The sales processes for these businesses are at the point that they meet the accounting requirements to be classified as ‘held for sale’ on the Statement of Financial Position, on the basis that a sale is considered highly probable. Furthermore, because both businesses are considered to be major businesses in one of our segments and/or geographical regions, their results are classified as ‘Discontinued Operations’ within the Income Statement. The segment note within our financial statements excludes these businesses, and therefore reflects the Group’s Continuing Operations only. Therefore, the business segments in the following pages reflect only the Continuing Operations with further detail on page 62 on the performance of our Fonterra- owned China Farms. The normalised EBIT of our businesses classified as Discontinued Operations improved from a loss to a profit of $32 million. Reported profit after tax Up $1.3 billion $659m Total Group normalised gross profit Up $200 million $3,208m BREAKDOWN OF TOTAL GROUP PERFORMANCE (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:3)(cid:3) (cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) (cid:38)(cid:50)(cid:49)(cid:55)(cid:44)(cid:49)(cid:56)(cid:44)(cid:49)(cid:42)(cid:3) (cid:50)(cid:51)(cid:40)(cid:53)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49)(cid:54)1 (cid:39)(cid:44)(cid:54)(cid:38)(cid:50)(cid:49)(cid:55)(cid:44)(cid:49)(cid:56)(cid:40)(cid:39)(cid:3) (cid:50)(cid:51)(cid:40)(cid:53)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49)(cid:54)1 (cid:55)(cid:50)(cid:55)(cid:36)(cid:47)(cid:3) (cid:42)(cid:53)(cid:50)(cid:56)(cid:51) (cid:38)(cid:50)(cid:49)(cid:55)(cid:44)(cid:49)(cid:56)(cid:44)(cid:49)(cid:42)(cid:3) (cid:50)(cid:51)(cid:40)(cid:53)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49)(cid:54)1 (cid:39)(cid:44)(cid:54)(cid:38)(cid:50)(cid:49)(cid:55)(cid:44)(cid:49)(cid:56)(cid:40)(cid:39) (cid:50)(cid:51)(cid:40)(cid:53)(cid:36)(cid:55)(cid:44)(cid:50)(cid:49)(cid:54)1 (cid:55)(cid:50)(cid:55)(cid:36)(cid:47)(cid:3) (cid:42)(cid:53)(cid:50)(cid:56)(cid:51) Volume (‘000 MT) Revenue 3,938 19,255 214 665 4,152 19,920 3,842 20,282 227 693 4,069 20,975 Cost of goods sold (16,349) (563) (16,912) (17,236) (531) (17,767) Gross profit Operating expense Other2 Normalised EBIT Normalisations3 EBIT 2,906 (2,143) 70 833 (483) 350 102 3,008 (139) (2,282) 16 (21) (346) (367) 86 812 (829) (17) Gross margin 15.1% 15.3% 15.1% 3,046 (2,139) (60) 847 435 1,282 15.0% 162 3,208 (129) (2,268) (1) 32 (167) (135) (61) 879 268 1,147 23.4% 15.3% 1 Refer to Note 1a and 2c of the FY20 Financial Statements. 2 Consists of other operating income and expenses, which include net foreign exchange gains and losses, share of profit or loss on equity accounted investees and impairment of intangible assets not included in the strategic review. 3 Refer to the Non-GAAP Measures section in the FY20 Annual Statements. 44 45 Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) Our reported profit after tax was $659 million, up $1,269 million compared to last year. After adjusting for non-controlling interests, this represents a reported earnings per share of 43 cents. Our normalised profit after tax attributable to equity holders of the Co-operative was $382 million, an increase of $118 million over the same period last year, which represents normalised earnings per share of 24 cents. Our financial performance has improved – earnings have increased, cash flow has improved and leverage has reduced. As a result, the Board has confirmed a 5-cent dividend. TOTAL GROUP PERFORMANCE1 EBIT Net finance costs Tax Expense Reported profit/(loss) after tax Less: Loss attributable to non-controlling interest Reported profit/(loss) attributable to equity holders of the Co-operative Reported earnings per share (cents) Normalisation adjustments4 Normalised profit after tax attributable to equity holders of the Co-operative Normalised earnings per share (cents) Dividend per share (cents) Return on Capital5 Debt to EBITDA6 Gearing ratio7 Free Cash Flow (NZD Million)8 Capital expenditure (NZD Million)9 (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28)(cid:21) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)3(cid:3) (17) (418) (175) (610) (48) (562) (35) 826 264 16 – 5.8% 4.4x 48.5% 1,095 (600) 1,147 (332) (156) 659 (27) 686 43 (304) 382 24 5 6.7% 3.4x 41.4% 1,828 (419) – 21% 11% – 45% – – – 44% 44% – – – 67% 30% Includes Continuing and Discontinued Operations. 1 2 FY19 has been restated. Refer to Note 28 in the FY20 Financial Statements. 3 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. 4 Refer to the Non-GAAP Measures section in the FY20 Annual Report. 5 Return on Capital is calculated as normalised EBIT less a notional tax charge, divided by capital employed including brands, goodwill and equity-accounted investments. 6 Debt to EBITDA is calculated as total borrowings, plus bank overdraft, plus the effect of debt hedging, less a cash allowance of 75% of cash and cash equivalents, divided by normalised earnings before interest, tax, depreciation and amortisation (normalised EBITDA) excluding share of loss/profit of equity accounted investees and net foreign exchange losses/gains. Both Debt and EBITDA are adjusted to include amounts relating to businesses classified as held for sale and Discontinued Operations. Prior years restated to align with credit rating methodology. 7 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. It excludes the borrowings attributed to Discontinued Operations. 8 Free Cash Flow is the total of net cash flows from operating activities and net cash flows from investing activities and includes proceeds from asset divestments. 9 Capital expenditure comprises purchases of property, plant and equipment and intangible assets, net purchases of livestock, and includes Discontinued Operations. Our Total Group sales volumes were down 2% to 4.07 million MT. This was mainly due to a small decrease in volume in our Ingredients business. Our Total Group sales revenue increased by 5% or $1.1 billion to $21 billion, mainly due to improved Ingredients pricing and the product mix we sold. Our Greater China Foodservice business also contributed an additional $166 million in revenue despite the disruption of Covid-19. Our Total Group normalised gross margin increased from 15.1% last year to 15.3%, predominantly due to improved pricing in our Ingredients business, an improvement in our Greater China Foodservice business’ margins, and improved performance of the discontinued businesses. Total Group normalised gross profit increased by 7%, or $200 million, to $3,208 million driven by improved gross margins in the Ingredients and Foodservice businesses. Ingredients’ normalised gross profit increased by $165 million due to the improved pricing across all of our Ingredients businesses – New Zealand, Australia and Prolesur in Chile. Our Greater China Foodservice normalised gross profit increased by $62 million to $259 million, mainly due to a recovery in butter sales and margins as well as selling more products with higher gross margins, such as Anchor Food Professionals™, whipping cream and Anchor Food Professionals™ cream cheese. Overall, our total Foodservice normalised gross profit was up $17 million, with Greater China’s improved performance being partially offset by the other regions’ performances being impacted by Covid-19 in the fourth quarter. Our normalised gross profit for our Consumer business was down $77 million to $1,001 million, predominantly due to the sale of Tip Top and our Venezuelan business during the 2019 financial year. When we adjust for these divestments and take them out of our 2019 financial performance for comparative purposes, our Consumer normalised gross profit reduced to $28 million and this was mainly due to the disruption of sales from the civil unrest in Hong Kong and Chile during the year. Debt reduction Free Cash Flow Up $733 million Debt to EBITDA 3.4x Improved from 4.4x During the year we shifted to a new customer- led operating model. Our new operating model reflects our new strategy and has resulted in three regional customer-facing businesses: APAC, Greater China and AMENA. Our commentary in this section reflects our previous operating model, which centered around our Global Ingredients and Consumer and Foodservice businesses. This approach is consistent with how we have communicated the performance of the business during the 2020 financial year and also allows for better comparability with prior year commentary. We intend to provide commentary based on the new operating model for the 2021 financial year and onwards. To provide greater transparency of the performance of our Consumer and Foodservice business, we have provided an overview of the individual performance of Consumer and Foodservice separately. $1.1 bn $1,828m The businesses classified as Discontinued Operations and not included in our reported segments, China Farms and DPA Brazil, had a total normalised gross profit improvement of $60 million to $162 million. Overall, our Total Group normalised operating expenses have decreased $14 million, or 1%, to $2,268 million, and this reflects our continued focus on strong financial discipline, particularly as the comparative numbers in the previous financial year benefited from not paying employee performance incentives. Our Foodservice and Consumer businesses reduced operating expenses by 3% and 9%, respectively. Australia Ingredients and Prolesur also reduced operating expenses from a continued focus on cost efficiencies. These improvements were partially offset by an increase in New Zealand Ingredients’ operating expenses, which increased our total Ingredients’ operating expenses by 3% relative to the prior year, mainly due to 2019 financial year benefiting from not paying employee performance incentives. Our improved gross profit in Ingredients, Foodservice and our businesses classified as Discontinued Operations, combined with a small reduction in our operating expenses resulted in our Total Group normalised EBIT increasing $67 million to $879 million compared to the prior year. Strong financial discipline continues to be a priority. In the financial year this resulted in improved cash flows and lower leverage. Our Free Cash Flow, being the cash flow that is available to pay interest and dividends and to reduce economic net interest- bearing debt, increased by $733 million to $1,828 million. We achieved this significant increase through improved earnings, lower capital expenditure, the sale proceeds from divesting DFE Pharma and foodspring® and reducing our Beingmate shareholding. Our Total Group Capital expenditure of $419 million this year was $181 million lower than last year. As at 31 July 2020, our economic net interest-bearing debt was $4.7 billion, down $1.1 billion on the same period last year, and we have improved our gearing ratio to 41.4% from 48.5%. This measure of Debt includes the capitalised amount of operating leases following changes to the accounting standard, and transitioning to this new accounting standard added $581 million to our measurement of Debt. This was partially offset by the transfer from economic net interest-bearing debt to disposal groups held for sale of $266 million relating to DPA Brazil and China Farms, as a result of being classified as Discontinued Operations. We decreased our Total Group net finance costs 21% from the prior year due to lower average Debt and lower interest rates. Our working capital days increased from 83 to 85 days. Our receivables days decreased as a result of more sales to customers on shorter payment terms as we prudently manage receivables in the current environment, but this improvement was offset by reduced payables days reflecting the lower payables associated with the reduction in capital expenditure. Our main measure of leverage is the ratio Debt to EBITDA, where the measure is adjusted to include amounts relating to businesses classified as Discontinued Operations. This leverage measure improved from 4.4 times to 3.4 times and reflected the combination of increased earnings and less economic net interest-bearing debt. 46 47 (cid:50)(cid:88)(cid:85)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72) Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) INGREDIENTS PERFORMANCE1,2 (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:37)(cid:36)(cid:54)(cid:44)(cid:54)3(cid:3)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)4 Volume (‘000 MT) Sales revenue Cost of goods sold Gross profit Operating expense Other5 Normalised EBIT Gross margin Discontinued Operations EBIT6 3,149 16,291 3,055 17,365 (14,845) (15,754) 1,446 (762) 106 790 8.9% (14) 1,611 (782) (2) 827 9.3% – (3)% 7% (6)% 11% (3)% – 5% – – 1 FY20 Ingredients performance represents Continuing Operations. It excludes any performance derived from the Fonterra-owned China Farms. China Farms is classified as a Discontinued Operation. FY19 has been restated to provide a year-on-year comparative. Includes sales to other strategic platforms. 2 3 Refer to the Non-GAAP Measures section in the Annual Report. 4 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. 5 Consists of other operating income and expenses, which includes net foreign exchange gains and losses, share of profit or loss on equity accounted investees and impairment of intangible assets not included in the strategic review. 6 Represents losses from selling China Farms milk. China Farms is classified as a Discontinued Operations and is presented separately in the Discontinued Operations section. Total Ingredients’ gross margin increased from 8.9% to 9.3%, due to favourable product mix and pricing in the second half of the financial year. This led to our Ingredients’ normalised gross profit increasing $165 million to $1,611 million, with all three businesses, New Zealand Ingredients, Australia Ingredients and Prolesur, contributing to this increase. Australia Ingredients and Prolesur reduced their operating expenses through improved cost efficiencies but Total Ingredients’ normalised operating expenses increased 3% to $782 million due to an increase in New Zealand Ingredients’ operating expenses as the prior year benefited from not incurring employee performance incentives. Ingredients’ other income was down on the prior year, with last year’s performance including earnings of $44 million from the divested business DFE Pharma. INGREDIENTS GROSS PROFIT PERFORMANCE1 (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:37)(cid:36)(cid:54)(cid:44)(cid:54)(cid:3)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40) New Zealand Reference products Non-reference products Other New Zealand Ingredients Australia Ingredients Other Total Ingredients 1 Represents Continuing Operations. 626 701 24 648 727 107 1,351 1,482 10 85 31 98 1,446 1,611 4% 4% 346% 10% 222% 16% 11% Total Ingredients’ normalised EBIT increased $37 million to $827 million due to the improved gross profit. DFE Pharma has been sold so its earnings are not included in the current year. Removing DFE Pharma from our 2019 financial performance for comparative purposes. Total Ingredients’ normalised EBIT would have increased by $81 million. Australia Ingredients reduced its EBIT loss by $27 million on last year, reporting a full year normalised loss of $25 million. This improvement came through continued focus on managing product mix, price realisation and cost leadership through an integrated business model under the new customer-led operating model. Prolesur improved its normalised EBIT by $16 million to break even through cost efficiencies and an improvement in its price agreement with Soprole. New Zealand Ingredients’ normalised EBIT was stable at $842 million, compared to $843 million the prior year. Removing DFE Pharma from New Zealand Ingredients’ 2019 financial performance for comparative purposes, it improved its EBIT performance by $43 million. Our New Zealand milk collections for the 2019/20 Season, 1 June 2019 to 31 May 2020, were 1,517 million kgMS, which was 0.4% down on last season. North Island collections were down 2.1% due to pasture growth rates impacted by dry weather. South Island collections were up a similar percentage due to favourable weather conditions across Canterbury resulting in good pasture growth and strong milk production. Our New Zealand Ingredients business’ sales volumes were down 70,000 MT, or 2%, to 2.88 million MT. Our sales volumes from our New Zealand Ingredients’ Global Sourcing business were down mainly due to lower milk collections in Australia. In addition, we decided to hold slightly more year-end inventory to align with our customers’ demand profiles over year-end and into the first quarter of the next year. Ingredients’ normalised gross profit Up $165 million $1,611m Ingredients’ normalised EBIT Up $37 million $827m O ur Ingredients’ normalised gross profit increased $165 million to $1,611 million, predominantly due to New Zealand and Australia normalised gross profit increasing $131 million and $21 million, respectively. The improved gross profit was partially offset by lower other operating income and increased operating expenses, resulting in normalised EBIT increasing $37 million to $827 million. Our Ingredients’ sales volumes declined by 3% to 3.06 million MT. This was mainly due to our Australia Ingredients’ milk collections declining 12%, which impacted Australia Ingredients sales volumes and New Zealand Ingredients’ Global Sourcing sales volumes. In addition, we decided to hold slightly more year-end inventory to align with our customers’ demand profiles over year-end and into the first quarter of the next year. 48 (cid:23)(cid:28) Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) compared to $843 million the prior year. Adjusting 2019 EBIT for the earnings received from the divested DFE Pharma business, our New Zealand Ingredients’ normalised EBIT improved $43 million year-on-year. Australia Ingredients’ sales volumes declined 18% to 269,000 MT predominantly as a result of reduced milk supply. Milk collections have been impacted by a combination of drought, high on-farm input costs and a highly competitive milk supply market which has seen losses primarily to milk brokers. Fonterra Australia has also made the conscious decision to purchase less third-party milk and to prioritise a value-add product mix from its own milk collections. Overall, our Australian milk collections from all sources declined 12% to 107.8 million kgMS. We increased our Australia Ingredients’ gross profit from $10 million to $31 million through reduced costs as a result of closing the Dennington site, better utilisation of our Stanhope site, and allocating more milk to higher-returning cheddar and mozzarella products, rather than the lower-returning liquid and whole milk powder products. Relative to the prior year, the Australian dollar has declined against the US dollar, which is favourable for our US dollar denominated export sales. Coupled with improved product pricing, it has offset the increased milk price in Australia. Despite the ongoing challenges in Australia, our Ingredients business has reduced its full year loss by $27 million from a loss of $52 million to a loss of $25 million, through continued focus on managing product mix, price realisation and cost reductions. In December 2019, we purchased Fundación Isabel Aninat’s 13.6% shareholding in Prolesur, our Chilean Ingredients business, and this took our ownership to 99.9%. The acquisition of the Fundación shareholding cost $29.3 million and has enabled us to integrate our two Chilean businesses (Prolesur and Soprole) to generate operating efficiencies across the supply chain from milk collection, processing and administration. Prolesur has also achieved additional cost efficiencies from increasing its milk collections. Like Soprole, Prolesur’s recent performance has been impacted by challenging market conditions in Chile. NEW ZEALAND INGREDIENTS VOLUME1,2 Production volume (‘000 MT) Reference products Non-reference products Sales volume (‘000 MT) Reference products Non-reference products (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40) 1,881 768 1,864 774 1,839 807 1,820 794 (2)% 5% (2)% 3% Includes sales to other strategic platforms. 1 2 Table excludes bulk liquid milk. The bulk liquid milk volume for the year ended 31 July 2020 was 69,000 MT of kgMS equivalent (year ended 31 July 2019 was 73,000 MT of kgMS equivalent). Our New Zealand Ingredients’ normalised gross profit increased $131 million, or 10%, to $1,482 million, made up of a $48 million increase from our New Zealand Ingredients’ products and an $83 million increase from our non-New Zealand product and bulk liquid milk. Our New Zealand Ingredients business manufactures five ingredient products that inform the Farmgate Milk Price range. These are referred to as reference products, while all other products are referred to as non-reference products. The strong growth in our Foodservice sales volumes over the first half of the year impacted our product mix of our Ingredients’ products. New Zealand Ingredients’ production volumes and sales volumes from New Zealand sourced milk for non- reference products increased 5% and 3%, respectively. This was offset by lower production and sales for New Zealand sourced milk for reference products. As the five reference products drive the cost of milk used to make non-reference products, the relative price differences and movements of the two sets of products is an important contributor to our EBIT performance. NEW ZEALAND INGREDIENTS REVENUE AND PROFIT MARGIN1,2 (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:7)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) (cid:7)(cid:3)(cid:51)(cid:40)(cid:53)(cid:3)(cid:48)(cid:55) $ MILLION $ PER MT 8,833 4,202 (6,673) (2,398) 626 701 4,739 5,427 (3,580) (3,098) 336 905 9,540 4,770 (7,207) (2,829) 648 727 5,192 6,006 (3,959) (3,562) 356 916 Revenue Reference products Non-reference products Cost of milk Reference products Non-reference products Gross profit Reference products Non-reference products Includes sales to other strategic platforms. 1 2 Table excludes bulk liquid milk sales. Compared to the prior year, non-reference product revenue per metric tonne has increased by $126 per MT more than reference product revenue increased, reflecting the strong demand and higher market pricing for Casein, Milk Protein Concentrate (MPC) and Whey Protein Concentrate (WPC). Whilst non-reference gross profit per metric tonne has improved on the prior year, the milk cost of protein has increased by proportionally more than the milk cost of fat. This has impacted the gross profit of the non-reference products’ portfolio, as this portfolio is weighted to protein products such as Casein, MPC and WPC. Likewise, the lower relative milk cost of fat has had a favourable impact on the gross profit for the reference products’ portfolio. In addition to the increased cost of milk, we also had higher operational costs this year at our manufacturing sites. In total, our gross profit contribution from our New Zealand Ingredients’ products increased $48 million, $22 million and $26 million from our reference and non-reference products, respectively. The gross profit contribution from non-New Zealand product increased by $83 million due to favourable phasing of logistic costs, higher margins within our Global Sourcing business and our bulk liquid margins improved as a result of declining milk costs during the second half of the financial year relative to the prior year. Our New Zealand Ingredients’ business’ operating expenses were up on last year, due to 2019 benefiting from not paying employee performance incentives. Our Fonterra-owned China Farms are classified as a Discontinued Operation. Therefore, our China Farming joint venture performance is reported in our New Zealand Ingredients’ results. The China Farming joint venture has reduced its full year loss from a $19 million loss last year to a loss of $12 million for the current year. Reduced animal husbandry costs have assisted this improvement. The favourable pricing impact to gross profit received in the second half was offset by the increase in operating expenses, resulting in a stable New Zealand Ingredients’ normalised EBIT performance, at $842 million 50 51 F(cid:82)(cid:81)(cid:87)(cid:72)(cid:85)(cid:85)(cid:68)(cid:3)(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:21)(cid:19)(cid:21)(cid:19) (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) (cid:50)(cid:88)(cid:85)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72) Consumer & Foodservice T he combined normalised earnings performance of our Consumer and Foodservice businesses were stable despite the disruption of Covid-19, and after excluding impairments of $57 million included in our Consumer business. The combined normalised EBIT of our Consumer and Foodservice businesses for the first six months of the year was $263 million, up 105% on the prior year. After adjusting for the impairments included in Consumer, the combined normalised EBIT in the second half was $151 million. The strong first half was due to growth in our Greater China and Asia Foodservice businesses and reduced operating expenses in our Consumer business. Our Foodservice business was significantly impacted by the emergence of Covid-19 during the second half. Our gross profit in Greater China rebounded quickly during the third quarter, but Asia, Oceania and Latin America were impacted in the fourth quarter. In addition, challenging trading environments throughout the year in Chile and Hong Kong have impacted our Latin America Consumer and Foodservice and Greater China Consumer businesses. In the subsequent pages, 54-61, we have presented the performance of the Consumer and Foodservice businesses separately and by region to provide greater transparency and understanding of the key performance drivers in each of the businesses. CONSUMER AND FOODSERVICE PERFORMANCE1,2 (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:37)(cid:36)(cid:54)(cid:44)(cid:54)3(cid:3)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)4(cid:3) Volume (‘000 MT) Sales revenue Cost of goods sold Gross profit Operating expense Other5,6 Normalised EBIT Gross margin Discontinued Operations EBIT 1,602 6,896 (5,398) 1,498 (1,089) 2 411 21.7% (8) 1,564 6,902 (5,465) 1,437 (1,009) (71) 357 20.8% 21 (2)% 0% (1)% (4)% 7% – (13%) – – 1 FY19 has been restated. Refer to Note 28 of the FY20 Financial Statements. 2 FY20 Consumer and Foodservice performance represents Continuing Operations. It excludes any performance derived from DPA Brazil. DPA Brazil is classified as a Discontinued Operation. FY19 has been restated to provide a year-on-year comparative. 3 Refer to the Non-GAAP Measures section in the FY20 Annual Report. 4 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. 5 Consists of other operating income and expenses, which includes net foreign exchange gains and losses, share of profit or loss on equity accounted investees and impairment of intangible assets not included in the strategic review. Includes impairments of $57 million. Refer to Note 17 of the FY20 Financial Statements. 6 Consumer and Foodservice normalised gross margin 20.8% Consumer and Foodservice normalised gross profit $1,437m Consumer and Foodservice normalised EBIT $357m (cid:24)(cid:21) 53 Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) (cid:50)(cid:88)(cid:85)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72) Foodservice O ur Foodservice normalised EBIT increased 14% to $209 million. After a strong first half performance, our Foodservice business was significantly impacted by the emergence of Covid-19 during the second half. Greater China’s normalised gross profit rebounded quickly during the third quarter, but Asia, Oceania and Latin America were impacted in the fourth quarter. Overall, our Foodservice sales volumes decreased 5% to 444,000 MT due to the impact of Covid-19 related lockdowns in Asia and Oceania. Greater China was impacted by Covid-19 early in the third quarter but its gross profit rebounded quickly, and as a result this only partially offset its improved performance in the first half from the strong demand for our products from bakery and beverage house customers. The impact of Covid-19 in the second half of the year in Asia, Oceania and Latin America partially offset Greater China’s overall improved performance, with all three regions making EBIT losses in the second half and finishing the year down on the prior year as the tourism and hospitality industries were significantly impacted by the restrictions put in place to manage the pandemic. FOODSERVICE PERFORMANCE1 (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:37)(cid:36)(cid:54)(cid:44)(cid:54)(cid:21)(cid:3)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)(cid:3) Volume (‘000 MT) Sales revenue Cost of goods sold Gross profit Operating expense Other4 Normalised EBIT Gross margin Discontinued Operations EBIT 465 2,673 (2,253) 420 (233) (3) 184 15.7% – 444 2,652 (2,215) 437 (226) (2) 209 16.5% – (5)% (1)% 2% 4% 3% 43% 14% – – 1 FY19 has been restated. Refer to Note 28 of the FY20 Financial Statements. 2 Refer to the Non-GAAP Measures section in the FY20 Annual Report. 3 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. 4 Consists of other operating income and expenses, which includes net foreign exchange gains and losses, share of profit or loss on equity accounted investees and impairment of intangible assets not included in the strategic review. Our Foodservice normalised gross margin improved from 15.7% to 16.5% and normalised gross profit increased $17 million to $437 million. This was mainly due to Greater China’s improved butter sales volumes and margins, combined with growth in the sales of higher margin products. Overall, Foodservice operating expenses were down $7 million, or 3%, and normalised EBIT was up $25 million to $209 million. FOODSERVICE REGIONAL PERFORMANCE1 (cid:54)(cid:36)(cid:47)(cid:40)(cid:54)(cid:3)(cid:57)(cid:50)(cid:47)(cid:56)(cid:48)(cid:40)(cid:3)(cid:11)(cid:581)(cid:19)(cid:19)(cid:19)(cid:3)(cid:48)(cid:55)(cid:12) (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:40)(cid:37)(cid:44)(cid:55)(cid:21)(cid:3)(cid:11)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49)(cid:12) (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)3 (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)3 Foodservice Greater China4 Asia Oceania Latin America 465 237 93 104 32 444 257 81 76 30 (5)% 9% (12)% (27)% (8)% 184 114 36 28 6 209 169 23 16 0 14% 49% (35)% (43)% (91)% 1 Summing of individual numbers from the regional and divisional breakdown may not add up to the totals in each category due to rounding. 2 Refer to the Non-GAAP Measures section in the FY20 Annual Report. 3 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. 4 FY19 has been restated. Refer to Note 28 of the FY20 Financial Statements. Asia Foodservice normalised gross margin 14.9% from 15.8% Greater China Foodservice normalised gross margin 16.3% from 13.8% 54 55 Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) GREATER CHINA ASIA Our Greater China Foodservice normalised EBIT increased 49% to $169 million, comprising $101 million in a strong first half performance and $68 million in the second half. Sales volumes increased 9% on last year to 257,000 MT. Despite the disruption of Covid-19, China’s Foodservice business grew as we continued to target dairy conversion into traditional Chinese foods. Our continual development of applying dairy in traditional foods created approximately 270 new food applications over the last 12 months, expanding our product offerings into food types such as cream for Daifuku and chilled cream buns, cream cheese into cheese moon cakes and beverage macchiatos, and mozzarella into cheese shrimp balls. We have entered into new Chinese dining channels, such as hot pot restaurants and continued our city expansion, now in 350 cities compared to 300 cities last year. This has driven strong market demand for our Anchor Food Professionals™ UHT whipping cream and Anchor Food Professionals™ cream cheese in Mainland China. Covid-19 related restrictions in Mainland China impacted our gross profit in the early part of the third quarter. Our team reacted quickly to these restrictions by introducing live streaming of product demonstrations with 20 live sessions created on our own platforms that attracted approximately 1.9 million viewers and ensured a connection of our Anchor Food Professionals™ team with our customers. Normalised gross margin increased significantly from 13.8% to 16.3%, due to a recovery in butter margins as well as selling more products with higher gross margins, such as Anchor Food Professionals™ whipping cream and Anchor Food Professionals™ cream cheese. The improved margins are reflected in the $62 million, or 31%, increase in normalised gross profit to $259 million. Our operating expenses in Greater China were stable. Our Asia Foodservice business recorded growth in several key markets during the first three quarters of the financial year. However, towards the end of the third quarter as Covid-19 spread through Asia and governments closed borders and put restrictions in place to manage the outbreak, the foodservice sector was significantly impacted in the fourth quarter. Our sales volumes in Asia Foodservice decreased 12% to 81,000 MT on the prior year after being 13% up in the first half, with fourth quarter sales volume down 50% on the same period last year. Gross profit in the Middle East, Philippines and Thailand was impacted the most, as the tourism trade is an important part of these businesses and the Covid-19 related border closures impacted tourism significantly. First half gross profit was 58% up on the prior year predominantly due to improvements from Indonesia and the Philippines. Indonesia had grown its gross profit with a focus on high margin products and revenue growth management, and the Philippines had improved gross profit mainly through growing volumes as a result of winning new customers in the bakery and beverage channels. These strong first half performances were impacted in the fourth quarter due to Covid-19 lockdowns. Our full year normalised gross profit for our Asia Foodservice business was down $13 million, or 14%, to $80 million due to the lower sales volumes and to a lesser extent reduced pricing to move short shelf-life stock that had aged during the period of complete Covid-19 lockdown. The need to reduce pricing impacted our normalised gross margin, which had previously been ahead of the prior year for the first three quarters, from 15.8% in the prior year to 14.9%. Our normalised gross profit for the fourth quarter was a loss of $1 million. Despite the impact of Covid-19, our Indonesia Foodservice business was able to grow its gross profit and earnings due to focusing on higher margin foodservice products such as Anchor Food Professionals™ butter sheets. Operating expenses in Asia were relatively stable with lower costs associated with the lower sales volumes offset by increased provisions for doubtful debts due to Covid-19. As a result of these sales volumes and reduced gross margins, our Asia Foodservice normalised EBIT decreased $13 million to $23 million. Our Asia markets remain challenging as many borders remain closed due to Covid-19. Our teams continue to optimise their product portfolios to suit the current market and work closely with customers to understand demand and manage inventory. We expect the recovery in our Asia markets will be slower than what we experienced in our Greater China Foodservice business. OCEANIA Our Oceania Foodservice sales volumes decreased 27% to 76,000 MT year on year. First half sales volumes were down 6%, predominantly due to reduced sales volumes of low margin bulk product following industry consolidation in New Zealand. Second half sales volumes were down 44% as New Zealand Greater China Foodservice normalised gross profit Up 31% $259m Greater China Foodservice normalised EBIT Up 49% $169m and Australian borders were closed to international tourism and varying levels of country-wide restrictions were implemented within each country to manage the Covid-19 outbreak, and these restrictions significantly impacted the hospitality and tourism industry. Oceania Foodservice normalised gross profit was down 26% to $72 million, reflecting the decline in sales volume and higher dairy input costs in New Zealand. New Zealand was able to partially offset the impact of lower volumes and increased input costs through reduced distribution costs and other operating efficiencies, and Australia’s operating expenses remained stable. Overall Oceania Foodservice normalised EBIT declined $12 million, or 43%, to $16 million. Our Oceania Foodservice businesses worked closely with their customers during this challenging period, which was reflected in the Australian business being recognised by distributors for best in class and industry leading customer engagement in the Independent Advantage customer satisfaction survey. LATIN AMERICA Our Latin American Foodservice business normalised EBIT was less than $1 million for the year, down $6 million on the prior year. At the end of the third quarter normalised EBIT was up $5 million on the prior year, at $7 million. However, the impact of Covid-19 in the last quarter was significant, with the loss for the quarter offsetting the earnings of the first nine months. Soprole is the largest contributor to our Latin America Foodservice business with dairy desserts being the main category. In the first half the profitability of this business was impacted by the civil unrest relating to the increased cost of living, privatisation and social inequality. The civil unrest escalated to vandalism of city infrastructure, including supermarkets, and impacted sales. The third quarter had seen growth, but this was offset by the loss recorded in the fourth quarter as the Government took measures to manage the outbreak of Covid-19. FOODSERVICE NORMALISED EBIT1: KEY PERFORMANCE DRIVERS (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:37)(cid:36)(cid:54)(cid:44)(cid:54)(cid:21)(cid:3)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)3 EBIT prior year Volume Price Cost of goods sold Operating expenses and other EBIT 168 43 (81) 70 (16) 184 184 (19) 102 (66) 8 209 10% – – – – 14% 1 FY19 has been restated. Refer to Note 28 of the FY20 Financial Statements. 2 Refer to the Non-GAAP Measures section in the FY20 Annual Report. 3 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. 56 57 (cid:50)(cid:88)(cid:85)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72) F(cid:82)(cid:81)(cid:87)(cid:72)(cid:85)(cid:85)(cid:68)(cid:3)(cid:36)(cid:81)(cid:81)(cid:88)(cid:68)(cid:79)(cid:3)(cid:53)(cid:72)(cid:83)(cid:82)(cid:85)(cid:87)(cid:3)(cid:21)(cid:19)(cid:21)(cid:19) (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) Consumer normalised revenue Up $28 million $4,251m Consumer normalised gross profit Down $77 million $1,001m Consumer normalised operating expenses Down $73 million $783m JesJess, s, AucAu kland 58 O ur Oceania and Asia Consumer normalised EBIT improved despite the disruption of Covid-19, after excluding 2020 impairments and earnings from 2019 divested businesses. Latin America continues to be impacted by challenges in Chile, and Greater China earnings were down due to challenges in Hong Kong offsetting earnings growth in Mainland China. Overall, Consumer sales volumes were down 1% on last year to 1.12 million MT. This was mainly due to lower sales in Soprole where the civil unrest and vandalism of supermarkets in Chile impacted Soprole’s dessert, yoghurt and mature cheese sales volumes. The sales in the 2019 financial year included Tip Top and our Venezuelan business which we have since sold. Removing the Tip Top and Venezuelan sales volume in 2019 for comparative purposes, shows the year-on-year total Consumer sales volume increased 1%. Total Consumer normalised gross profit was down 7% on last year to $1,001 million. Consumer normalised gross margin decreased by 2% year-on-year from 25.5% to 23.5%. This was predominantly due to reduced sales of our high margin products in Hong Kong, and Soprole’s gross margin reducing in the second half due to increased input costs after a realignment of the price agreement it has with Prolesur for ingredient products. CONSUMER PERFORMANCE1 The normalised operating expenses were down a total of $73 million to $783 million. For comparative purposes, removing the Tip Top and Venezuelan operating expenses from the 2019 financial year sees Consumer’s reduction in normalised operating expenses go from $73 million to $28 million year-on-year. Our Consumer normalised EBIT includes $57 million of costs that relate to impairments of intangible assets. Our New Zealand Consumer business had a goodwill impairment of $21 million, and our Asia and Greater China Consumer businesses each incurred half of a $36 million impairment to our Chesdale™ brand. This impairment was not normalised. If these impairments were not included, our Consumer normalised EBIT would have shown a decrease of 10% year-on-year, with the decrease mainly due to the challenges in Hong Kong and Chile. Tip Top’s earnings and the Venezuelan business’ losses offset at a total Consumer EBIT level so adjusting for the divestments undertaken in the 2019 financial year has minimal impact. Including the impairments results in our Consumer normalised EBIT decreasing 35% from $227 million to $149 million. The Consumer segment results do not include the Discontinued Operations of DPA Brazil, which improved its EBIT from a loss of $8 million to a profit of $21 million. This is presented on page 62. (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:37)(cid:36)(cid:54)(cid:44)(cid:54)(cid:21)(cid:3)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)(cid:3) Volume (‘000 MT) Sales revenue Cost of goods sold Gross profit Operating expense Other4 Normalised EBIT Gross margin Discontinued Operations EBIT 1,137 4,223 (3,144) 1,078 (856) 5 227 25.5% (8) 1,120 4,251 (3,250) 1,001 (783) (69) 149 23.5% 21 (1)% 1% (3)% (7)% 9% – (35)% – – 1 FY20 Consumer performance represents Continuing Operations. It excludes any performance derived from DPA Brazil. DPA Brazil is classified as a Discontinued Operation. FY19 has been restated to provide a year-on-year comparative. 2 Refer to the Non-GAAP Measures section in the FY20 Annual Report. 3 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. 4 Consists of other operating income and expenses, which includes net foreign exchange gains and losses, share of profit or loss on equity accounted investees and impairment of intangible assets not included in the strategic review. (cid:24)(cid:28) Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) Asia normalised EBIT Down $15 million $103m ASIA Asia Consumer sales volumes were down 3% to 198,000 MT, predominantly due to the timing of shipments to Sri Lanka. We improved our gross profit in the Middle East through improved gross margins on our consumer powders, and in Thailand due to lower import costs and improved revenue management in the second half of the year. These gains were offset by the other markets reporting small declines on the prior year due to the disruption caused by Covid-19 in the fourth quarter. Overall, our normalised gross profit was down $2 million, or 1%, to $357 million. Most markets within our Asia Consumer business reduced operating expenses. However, the Asia Consumer businesses incurred half of a $36 million impairment to our Chesdale™ brand, as the latest forecast earnings attributable to the brand are lower than previously forecast. The other half was incurred in our Greater China business. Adjusting for the impairment, normalised EBIT increased $3 million to $121 million. Not adjusting for the impairment our Asia Consumer normalised EBIT decreased $15 million to $103 million. OCEANIA Our Oceania Consumer business performance was largely unimpacted by the Covid-19 outbreak in the region and our teams in both New Zealand and Australia worked closely with their customers to help reduce the impact on their businesses. This was recognised by our New Zealand business being ranked number one supplier to New Zealand grocery outlets out of 28 suppliers in the Independent Advantage customer satisfaction survey. This is a significant improvement from previous rankings, where in 2018 and 2019 we were ranked 26 and 13, respectively. Our Oceania Consumer sales volume increased 3% to 527,000 MT after adjusting the 2019 financial year for the sale of Tip Top. Our Australia business improved sales volumes predominantly due to demand growth in private label beverages, spreads and across all our cheese brands. Our New Zealand Consumer business has chosen to operate a leaner product mix focusing on higher margin products. Not adjusting for the sale of Tip Top, our sales volume increased 3,000 MT, or 1%. Our Australian Consumer business improved its gross margin due to a focused revenue growth strategy in all categories, particularly in chilled spreads, where Western 60 Star™ continues to lead the market in both volume and value market share. Australia’s improved performance was offset by our New Zealand Consumer business as it adjusts to a leaner business model focusing on our core brands and working with our customers to execute a more profitable range. After adjusting for the sale of Tip Top, our Oceania Consumer normalised gross profit increased $23 million to $298 million due to Australia’s increased volume and improved pricing effectiveness. Not adjusting for the sale of Tip Top, our normalised gross profit decreased $26 million. Rationalising our operations within our New Zealand business, as part of managing a leaner product mix, resulted in operating expenses in our Oceania Consumer business decreasing. Operating expenses in Australia were slightly higher due to the prior year benefiting from not incurring employee performance incentives. In addition, our New Zealand business results included a $21 million impairment of Fonterra Brands New Zealand’s goodwill. Adjusting for Tip Top and the goodwill impairment, Oceania Consumer normalised EBIT increased $14 million, or 31%, to $59 million. The improved performance reflects the strong growth in Australia gross profit. Not adjusting the 2019 financial year for the sale of Tip Top or the New Zealand Brands’ goodwill impairment in the current year, shows that our Oceania Consumer normalised EBIT decreased $16 million to $38 million. CONSUMER REGIONAL PERFORMANCE1,2 (cid:54)(cid:36)(cid:47)(cid:40)(cid:54)(cid:3)(cid:57)(cid:50)(cid:47)(cid:56)(cid:48)(cid:40)(cid:3)(cid:11)(cid:581)(cid:19)(cid:19)(cid:19)(cid:3)(cid:48)(cid:55)(cid:12) (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:40)(cid:37)(cid:44)(cid:55)3(cid:3)(cid:11)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49)(cid:12) (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)4 (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)(cid:596) Consumer 1,137 1,120 Asia Oceania Latin America² Greater China 204 524 333 76 198 527 322 73 (1)% (3)% 1% (3)% (4)% 227 118 54 36 19 149 103 38 28 (21) (35)% (12)% (28)% (22)% – 1 Summing of individual numbers from the regional and divisional breakdown may not add up to the totals in each category due to rounding. 2 FY20 Consumer performance represents Continuing Operations. It excludes any performance derived from DPA Brazil. DPA Brazil is classified as a Discontinued Operation. FY19 has been restated to provide a year-on-year comparative. 3 Refer to the Non-GAAP Measures section in the FY20 Annual Report. 4 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. LATIN AMERICA At half year we reported the sale process for DPA Brazil, our Consumer business in Brazil, was well underway, and had advanced to the point that the business met the requirements to be classified as ‘held for sale’ in our financial statements. Furthermore, it met the definition of a Discontinued Operation because it is a separate major geographical area of operation. The outbreak of Covid-19 in Brazil has slowed the sale process but the business remains a Discontinued Operation, and as a result, the segment note within our financial statements has been prepared excluding DPA Brazil. Our Latin America Consumer performance continues to be impacted by the challenging trading conditions in Chile. In the last quarter of the 2019 financial year, Soprole, our Consumer business in Chile, showed signs of recovery from a ‘buy local’ marketing campaign, which impacted the sales and earnings of a number of foreign- owned companies. However, civil unrest and vandalism of supermarkets, mainly during the first half of this financial year, has meant a reduction in Soprole’s dessert, yoghurt and mature cheese sales volumes. Overall, Latin America sales volume compared to the prior year decreased 11,000 MT to 322,000 MT. Our sales volumes last year include those from our Venezuelan business, which we have since sold. Removing the Venezuelan volumes from our 2019 financial performance for comparative purposes, the year-on-year decline is 4,000 MT. Our Latin America Consumer normalised gross profit decreased $19 million to $232 million because of lower Soprole sales volumes in the first half and a decline in gross margin in the second half. The decline in Soprole’s gross margin in the second half is due to higher input costs from a weakening of the Chilean peso to the US dollar and a realignment of the price agreement between our now integrated Chilean businesses, Soprole and Prolesur. The change in the price agreement is neutral at a Group level because Prolesur’s increased income offsets the increased expense to Soprole. In the 2019 financial year, Soprole made a $15 million payment to Prolesur, our Ingredients business in Chile. This related to a prior year one-off milk cost. At a Group level this one-off payment between the two business units had minimal impact. This payment was lower in this year, which was the main reason for reduced operating expenses in our Latin America Consumer business. Latin America Consumer normalised EBIT decreased $8 million to $28 million, due to the lower Soprole sales volume and increased input costs. Adjusting the 2019 financial performance for the Venezuelan business increases the year-on- year decrease to $18 million. FONTERRA BRANDS NEW ZEALAND RANKED #1 IN INDEPENDENT ADVANTAGE CUSTOMER SURVEY GREATER CHINA Our Greater China Consumer performance continues to be impacted by the challenging trading conditions in Hong Kong, and performance has been impacted further by the travel restrictions put in place to manage Covid-19, which impacted sales volume that are usually generated through Chinese tourism. In addition, Greater China Consumer included half of the $36 million impairment of the Chesdale™ brand. This impairment was not normalised. Our Mainland China and Taiwan Consumer businesses focused on value growth strategies. China Consumer had a quick turnaround from the initial disruption of Covid-19, leveraging strong connections through our e-commerce platforms, whilst Taiwan delivered gross profit similar to last year despite the Covid-19 disruption. Overall, Greater China sales volumes declined 4% to 73,000 MT, partly due to the challenges in Hong Kong but also due to lower sales in Mainland China as we changed distribution models in some channels to align with our new strategy. Our normalised gross profit decreased $31 million to $114 million. The majority of the decline is due to reduced sales of our higher margin Anlene™ and Anmum™ products in Hong Kong, which is reflected in our Greater China normalised gross margin decreasing from 40.1% to 32.8%. Operating expenses were favourable to last year as we responded to challenging conditions in Hong Kong and the Covid-19 pandemic. Adjusting for the impairment of the Chesdale™ brand, our Greater China normalised EBIT declined $22 million to a loss of $3 million. Not adjusting for the brand impairment, our Greater China Consumer normalised EBIT decreased $40 million to a loss of $21 million. CONSUMER NORMALISED EBIT1: KEY PERFORMANCE DRIVERS (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:37)(cid:36)(cid:54)(cid:44)(cid:54)(cid:21)(cid:3)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) (cid:22)(cid:20)(cid:3)(cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) 31 JULY 2020 (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)3 EBIT prior year Volume Price Cost of goods sold Operating expenses and other EBIT 316 (15) (122) 53 (5) 227 227 (16) 91 (152) (1) 149 (28)% (6)% – – 60% (35)% 1 FY20 Consumer performance represents Continuing Operations. It excludes any performance derived from DPA Brazil. DPA Brazil is classified as a Discontinued Operation. FY19 has been restated to provide a year-on-year comparative. 2 Refer to the Non-GAAP Measures section in the FY20 Annual Report. 3 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. 61 Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) (cid:50)(cid:88)(cid:85)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72) Discontinued Operations Discontinued Operations normalised gross profit1 $162m from $102 million Discontinued Operations normalised EBIT1 $32m from $(21) million 1 Accounting standards require that we cease deducting depreciation costs when China Farms and DPA Brazil were classified as ‘held for sale’ as at 31 January 2020. For the six months to 31 July 2020, this was $6 million and $5 million, respectively, for China Farms and DPA Brazil. T he normalised EBIT from our two businesses classified as Discontinued Operations improved from a loss of $21 million to a profit of $32 million. The proposed divestments of our Fonterra-owned China Farms and our interest in DPA Brazil have impacted how the financial statements are presented. The sales processes for these businesses are at the point that they meet the accounting requirements to be classified as ‘held for sale’ on the Statement on Financial Position, on the basis that a sale is considered highly probable. Furthermore, because both businesses are considered to be major businesses in one of our segments and/or geographical regions, their results are classified as ‘Discontinued Operations’ within the Income Statement. The segment note within our financial statements excludes these businesses, and therefore reflect the Group’s Continuing Operations only. As at 31 January 2020, when China Farms and DPA Brazil were classified as ‘held for sale’ the accounting standards required that we cease deducting depreciation costs. This meant that from 1 February 2020 to 31 July 2020 normalised EBIT for the China Farms and DPA Brazil businesses was $6 million and $5 million higher, respectively, than if they had not been classified as ‘held for sale’. The sales processes are continuing for China Farms and our interest in DPA Brazil. Based on the additional information and further insights we have gained through the sales process and strategic reviews for China Farms and DPA Brazil, we have reduced the valuation of these two assets by a total of $167 million. DPA BRAZIL In the first half of this year, the DPA Brazil business had increased sales volumes due to the local economy improving and increasing its market share in both value and volume. The disruption of Covid-19 during the second half of the year impacted sales, and sales volume and revenue ended the year down on the prior year. DPA Brazil has been able to maintain the 1% increase in market share value it gained during the first half to 17.5%. DPA Brazil’s gross profit benefited from lower input costs, and combined with lower operating expenses, normalised EBIT improved from a loss of $8 million to a profit of $21 million. Despite the improved performance, Brazil continues to remain a challenging market to operate in. In the 2019 financial year, we wrote down the value of the business by $143 million and the divestment process has resulted in a further impairment of $104 million before tax. This business in Brazil is a joint venture and the loss is shared with our joint venture partner. Therefore, at the level of profit after tax attributable to equity holders of the Co- operative, the impact of the impairment is $45 million. CHINA FARMS As a result of our Fonterra-owned China Farms being classified as a Discontinued Operation, the China Farms segment note in our financial statements is no longer presented. To provide a complete view of our performance during the 2020 financial year, we have continued to report China Farms’ performance in this section. Our sales volumes increased 8% to 22,000 MT due to last year’s volumes being impacted by continuous rainstorms and flooding in Yutian. Improved feed management and increased productivity per cow has also helped increase sales volumes. CHINA FARMS FINANCIAL PERFORMANCE (cid:49)(cid:50)(cid:53)(cid:48)(cid:36)(cid:47)(cid:44)(cid:54)(cid:40)(cid:39)(cid:3)(cid:37)(cid:36)(cid:54)(cid:44)(cid:54)1(cid:3)(cid:49)(cid:61)(cid:39)(cid:3)(cid:48)(cid:44)(cid:47)(cid:47)(cid:44)(cid:50)(cid:49) Volume3 (‘000 MT) Revenue Cost of goods sold Gross profit Operating expenses Other4 China Farms normalised EBIT Gross margin (cid:21)(cid:19)(cid:20)(cid:28) 20 247 (261) (14) (16) 16 (14) 2020 22 282 (249) 33 (23) 1 11 (5.7)% 11.9% (cid:38)(cid:43)(cid:36)(cid:49)(cid:42)(cid:40)(cid:21) 8% 14% 5% – (46)% (91)% – – 1 Refer to the Non-GAAP Measures section in the FY20 Annual Report. 2 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 sales to other strategic platforms. 3 4 Consists of other operating income and expenses, which includes net foreign exchange gains and losses, share of profit or loss on equity accounted investees and impairment of intangible assets not included in the strategic review. Our China Farms’ normalised gross profit improved $47 million from a loss of $14 million to a profit of $33 million. This was driven by strong market demand and a focus on customer portfolio optimisation, enabling us to achieve higher external milk prices. During the 2020 financial year, the average milk price was RMB 3.91 per kg, up from RMB 3.67 the prior year and the highest achieved annual average price over the past five years. The higher milk prices achieved were also supported by a more focused breeding program enabling a flatter milk supply curve through the year. Operating expenses increased $7 million to $23 million due to rightsizing our herd. Livestock removed from the herd were sold below fair value. Last year our China Farms livestock increased in value and this increased value was reported in other income. It was not repeated this year and Other, which includes other income, was down $15 million to $1 million. China Farms’ EBIT increased $25 million from a loss of $14 million to a profit of $11 million, driven by the improved gross profit. (cid:25)(cid:21) 63 Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) (cid:50)(cid:88)(cid:85)(cid:3)(cid:51)(cid:72)(cid:85)(cid:73)(cid:82)(cid:85)(cid:80)(cid:68)(cid:81)(cid:70)(cid:72) Historical Financial Summary Market Statistics Total Group Overview11,12,13 (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) JULY 2020 (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:25) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) JULY 2020 Fonterra Seasonal Statisitics1 Total New Zealand milk collected (million litres) Highest daily volume collected (million litres) New Zealand shareholder supply milk solids collected (million kgMS)2 New Zealand contract supply milk solids collected (million kgMS)2 New Zealand milk solids collected (million kgMS) Total number of shareholders at 31 May Total number of sharemilkers at 31 May Total number of shares on issue at 31 May (million) Shareholder Supplier Returns Farmgate Milk Price (per kgMS)3 Dividend (per share) Dividend yield (%)4 Cash payout (per share)5 Retentions (per share)6 Weighted average share price ($ NZD)7 Weighted Average Commodity Prices ($ USD per MT FOB) Whole Milk Powder8 Skim Milk Powder8 Butter8 Cheese9 Fonterra’s average NZD/USD conversion rate10 Staff Employed Total staff employed (000s, permanent full-time equivalents) New Zealand Overseas 64 17,585 17,051 16,932 17,123 16,876 86.9 1,453 113 1,566 80.1 1,417 109 1,526 82.0 1,404 101 1,505 10,579 10,267 10,162 3,098 1,602 2,722 1,607 2,712 1,612 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 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 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 85.4 1,430 93 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 82.6 1,429 87 1,517 9,461 2,451 1,612 7.14 0.05 1.3 7.19 0.38 3.79 3,110 2,755 4,140 4,011 0.66 19.6 11.5 8.1 Income Volume (000s MT) Normalised sales revenue ($ million) Normalised EBITDA ($ million)14 Normalised EBIT ($ million)15 Normalised profit after tax ($ million)16 Reported earnings per share Normalised earnings per share Revenue Margin Analysis EBITDA17 EBIT18 Profit after tax19 Cash Flow ($ million) Operating cash flow20 Free Cash Flow20 Net working capital21 Capital Measures Total equity excluding hedge reserves ($ million) Economic net interest-bearing Debt ($ million)22 Gearing Ratio23 Debt to EBITDA24 Capital employed (including intangibles and EAI) ($ million)25 Capital employed (excluding intangibles and EAI) ($ million)26 Capital expenditure ($ million)27 Return on capital (including intangibles and EAI)28 Return on capital (excluding intangibles and EAI)29 4,313 17,199 1,928 1,358 789 0.51 0.49 11.2% 7.9% 4.6% 3,278 2,184 2,159 6,883 5,473 44.3% 3.2x 13,188 9,392 944 9.2% 12.4% 4,180 19,214 1,681 1,155 781 0.46 0.49 8.7% 6.0% 4.1% 1,376 670 3,055 7,056 5,601 44.3% 3.8x 12,717 9,093 851 8.3% 11.1% 4,123 20,431 1,446 902 382 (0.14) 0.24 7.1% 4.4% 1.9% 1,548 600 3,432 6,616 6,199 48.4% 4.6x 13,052 9,552 861 6.3% 8.0% 4,152 19,920 1,373 812 264 (0.35) 0.16 6.9% 4.1% 1.3% 1,123 1,095 3,122 6,102 5,749 48.5% 4.4x 12,872 9,617 600 5.8% 7.6% 4,069 20,975 1,506 879 382 0.43 0.24 7.2% 4.2% 1.8% 1,492 1,828 3,417 6,602 4,659 41.4% 3.4x 11,961 9,806 419 6.7% 7.3% 65 Historical Group Summary CONTINUED Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) Ingredients11,12, 30 Ingredients Volume (000s MT)31 Normalised sales revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Normalised earnings ($ million) Normalised earnings margin %33 Divisional Breakdown – Ingredients11,12,34 New Zealand Ingredients Sales Volume (000 MT)35 Reference Products Non-reference Products Total Volume (000s MT)31 Revenue ($/MT)35 Reference Products Non-reference Products Total Revenue ($ million) Gross Profit ($/MT)35 Reference Products – Margin Non-reference Products – Margin Normalised gross profit ($ million) Normalised gross margin %32 Fonterra Ingredients Australia Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Other and Eliminations Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) 66 (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) JULY 2020 (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) JULY 2020 Regional Breakdown – Consumer and Foodservice11,12,13,34,36 3,019 15,266 1,473 9.7% 943 6.2% 2,986 16,306 1,472 9.0% 879 5.4% 3,149 16,291 1,446 8.9% 790 4.8% 3,055 17,365 1,611 9.3% 827 4.8% (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) JULY 2020 1,841 696 2,879 4,262 5,567 14,087 232 5.4% 1,165 20.9% 1,333 9.5% 305 1,522 78 5.1% (165) (343) 62 1,794 620 2,778 4,851 5,637 14,564 309 6.4% 1,275 22.6% 1,297 8.9% 350 1,877 77 4.1% (142) (135) 98 1,864 774 2,951 4,739 5,427 14,896 336 7.1% 905 16.7% 1,351 9.1% 328 1,760 10 0.6% (130) (365) 85 1,820 794 2,881 5,192 6,006 15,858 356 6.9% 916 15.2% 1,482 9.3% 269 1,509 31 2.1% (95) (2) 98 Oceania Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Normalised earnings ($ million) Normalised earnings margin %33 Asia Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Normalised earnings ($ million) Normalised earnings margin %33 Greater China Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Normalised earnings ($ million) Normalised earnings margin %33 Latin America37 Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Normalised earnings ($ million) Normalised earnings margin %33 Total Consumer and Foodservice13,37 Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Normalised earnings ($ million) Normalised earnings margin %33 636 1,952 438 22.4% 87 4.5% 300 1,810 501 27.7% 194 10.7% 237 1,277 359 28.1% 204 16.0% 600 1,478 446 30.2% 91 6.1% 1,773 6,517 1,744 26.8% 576 8.8% 623 2,159 433 20.1% 67 3.1% 298 1,865 456 24.5% 176 9.4% 266 1,564 335 21.4% 165 10.5% 578 1,534 459 29.9% 117 7.6% 1,765 7,122 1,683 23.6% 525 7.4% 627 2,159 422 19.5% 81 3.8% 297 1,862 451 24.2% 153 8.2% 313 1,787 342 19.2% 133 7.4% 365 1,088 283 26.0% 44 4.0% 1,602 6,896 1,498 21.7% 411 6.0% 603 2,093 371 17.7% 54 2.6% 279 1,833 436 23.8% 126 6.9% 330 1,937 372 19.2% 149 7.7% 352 1,039 258 24.9% 28 2.7% 1,564 6,902 1,437 20.8% 357 5.2% 67 Historical Group Summary CONTINUED Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) Regional Breakdown – Foodservice11,12,13,34,36 Regional Breakdown – Consumer11,12,13,34,36 (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) JULY 2020 (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) JULY 2020 Oceania Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Asia Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Greater China Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Latin America Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Total Foodservice13 Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 68 98 444 83 18.8% 90 526 99 18.8% 179 1,008 239 23.7% 32 115 32 27.8% 399 2,093 453 21.7% 98 515 93 18.1% 98 627 79 12.6% 195 1,221 186 15.2% 28 116 30 25.9% 419 2,479 388 15.7% 104 518 98 18.9% 93 586 93 15.8% 237 1,426 197 13.8% 32 143 32 22.7% 465 2,673 420 15.7% 76 416 72 17.3% 81 534 80 14.9% 257 1,592 259 16.3% 30 110 27 24.1% 444 2,652 437 16.5% Oceania Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Asia Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Greater China Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Latin America37 Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Total Consumer37 Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 538 1,508 355 23.5% 209 1,284 402 31.3% 58 269 120 44.6% 569 1,363 414 30.4% 1,373 4,424 1,291 29.2% 525 1,644 340 20.7% 201 1,238 377 30.5% 71 343 149 43.5% 550 1,418 429 30.3% 1,347 4,643 1,295 27.9% 524 1,641 324 19.7% 204 1,276 359 28.1% 76 361 145 40.1% 333 945 251 26.6% 1,137 4,223 1,078 25.5% 527 1,676 298 17.8% 198 1,299 357 27.5% 73 346 114 32.8% 322 929 232 25.0% 1,120 4,251 1,001 23.5% (cid:25)(cid:28) Historical Group Summary CONTINUED Fonterra Annual Report 2020 (cid:43)(cid:72)(cid:68)(cid:79)(cid:87)(cid:75)(cid:92)(cid:3)(cid:37)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) Discontinued Operations11,12,38 China Farms Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Normalised earnings ($ million) DPA Brazil Volume (000s MT)31 Revenue ($ million) Normalised gross profit ($ million) Normalised gross margin %32 Normalised earnings ($ million) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:26) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:27) (cid:45)(cid:56)(cid:47)(cid:60)(cid:3)(cid:21)(cid:19)(cid:20)(cid:28) JULY 2020 26 268 21 7.8% 4 193 468 135 28.8% (13) 22 248 (23) (9.5)% (33) 191 435 132 30.3% 1 20 247 (14) (5.7)% (14) 194 419 116 27.7% (8) 22 282 33 11.9% 11 205 411 128 31.2% 21 70 18. Normalised EBIT divided by normalised 28. Return on capital is calculated as 1. 2. 3. All season statistics are based on the 12-month milk season of 1 June to 31 May. FY19 has been restated to correct supply milk solids collected. 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. sales revenue. 19. Normalised profit after tax attributable to equity holders of the Co-operative, divided by normalised sales revenue. 20. Refer to Cash Flow Statement for detail on Operating cash flow. Free Cash Flow is the total of net cash flows from operating activities and net cash flows from investing activities. 4. Dividend yield is dividend (per share) over 21. Net working capital is calculated as 5. 6. volume weighted average share price for the period 1 August to 31 July. Average payout for a 100% share-backed supplier. Retentions (per share) are calculated as profit after tax attributable to equity holders of the Co-operative 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. 7. 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 to 31 July. 8. 9. Source: Fonterra Farmgate Milk Price Statement representing the weighted- average United States Dollar contract prices of Reference Commodity Products. Source: Oceania Export Series, Agricultural Marketing Service, US Department of Agriculture. 10. 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. 11. 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. 12. Includes normalisation adjustments. 13. FY19 has been restated. Refer to Note 28 in the FY20 Financial Statements. 14. Normalised EBITDA is calculated as profit for the period before net finance costs, tax, depreciation and amortisation, adjusted for normalisations. 15. Normalised EBIT is calculated as profit for the period before net finance costs and tax, adjusted for normalisations. 16. Normalised profit after tax attributable to equity holders of the Co-operative. 17. Normalised EBITDA divided by normalised sales revenue. total trade and other receivables plus inventories, less trade and other payables. It excludes amounts owing to suppliers and employee entitlements. 22. Economic net interest-bearing debt reflects total borrowings plus bank overdraft less cash and cash equivalents and non-current interest-bearing advances, adjusted for derivatives used to manage changes in hedged risks on Debt instruments. It excludes net borrowings attributed to Discontinued Operations. 23. 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. It excludes net borrowings attributed to Discontinued Operations. 24. Debt to EBITDA is calculated as total borrowings, plus bank overdraft, plus the effect of debt hedging, less a cash allowance of 75% of cash and cash equivalents, divided by normalised earnings before interest, tax, depreciation and amortisation (normalised EBITDA) excluding share of loss/profit of equity accounted investees and net foreign exchange losses/ gains. Both Debt and EBITDA are adjusted to include amounts relating to businesses classified as held for sale and Discontinued Operations. Prior years restated to align with credit rating methodology. 25. Capital employed is calculated as the average for the period of: net assets excluding net interest-bearing debt and deferred tax balances, and including brands, goodwill and equity accounted investments. 26. Capital employed is calculated as the average for the period of: net assets excluding net interest-bearing debt, deferred tax balances, brands, goodwill and equity accounted investments. 27. Capital expenditure comprises purchases of property, plant and equipment and intangible assets, net purchases of livestock, and includes Discontinued Operations. normalised EBIT less a notional tax charge, divided by capital employed including brands, goodwill and equity accounted investments. 29. Return on capital is calculated as normalised EBIT less a notional tax charge, divided by capital employed excluding brands, goodwill and equity accounted investments. 30. FY20 Ingredients performance represents Continuing Operations. It excludes any performance derived from the Fonterra- owned China Farms. China Farms is classified as a Discontinued Operation. FY19 has been restated to provide a year- on-year comparative. 31. Includes sales to other strategic platforms. 32. Normalised gross margin divided by normalised sales revenue. 33. Normalised earnings divided by normalised sales revenue. 34. Summing of individual numbers from the regional and divisional breakdown may not add up to the totals in each category due to rounding. 35. Figures exclude bulk liquid milk. The bulk liquid milk volume for the year ended 31 July 2020 was 69,000 MT of kgMS equivalent (year ended 31 July 2019 was 73,000 MT of kgMS equivalent). 36. Regions include share of Consumer and Foodservice overhead allocations, the total impact of which is $104 million for FY20. 37. FY20 Latin America Consumer performance represents Continuing Operations and excludes DPA Brazil performance. DPA Brazil is classified as a Discontinued Operation. FY19 has been restated to provide a year-on-year comparative. 38. The proposed divestments of our Fonterra- owned China Farms and DPA Brazil have impacted how the financial statements are presented. The sales processes for these businesses are at the point that they meet the accounting requirements to be classified as ‘held for sale’ on the Statement on Financial Position, on the basis that a sale over the next 12 months is considered highly probable. Furthermore, because both businesses are considered to be major businesses in one of our segments and/or geographical regions, their results are classified as ‘Discontinued Operations’ within the Income Statement. The segment note within our financial statements excludes these businesses, and therefore reflects the Group’s Continuing Operations only. 71 Fonterra Annual Report 2020 Annual Financial Results 2020 Annual Financial Results FOR THE YEAR ENDED 31 JULY 2020 FONTERRA CO-OPERATIVE GROUP LIMITED 72 73 Contents DIRECTORS’ STATEMENT FINANCIAL STATEMENTS INCOME STATEMENT STATEMENT OF COMPREHENSIVE INCOME STATEMENT OF FINANCIAL POSITION STATEMENT OF CHANGES IN EQUITY CASH FLOW STATEMENT BASIS OF PREPARATION NOTES TO THE FINANCIAL STATEMENTS INDEPENDENT AUDITOR’S REPORT OTHER INFORMATION NON-GAAP MEASURES GLOSSARY STATUTORY INFORMATION 75 76 77 78 79 80 82 83 144 149 151 152 Fonterra Annual Report 2020 Directors’ Statement Directors’ Statement FOR THE YEAR ENDED 31 JULY 2020 The Directors of Fonterra Co-operative Group Limited (Fonterra) present to Shareholders the Annual Report and financial statements for Fonterra and its subsidiaries (together the Group) and the Group’s interests in its equity accounted investments for the year ended 31 July 2020. The Directors present financial statements for each financial year which fairly present the financial position of the Group and its financial performance and cash flows for the year. The Directors consider that the financial statements of the Group have been prepared using accounting policies which have been consistently applied and supported by reasonable judgements and estimates, and that all relevant financial reporting and accounting standards have been followed. The Directors believe that proper accounting records have been kept which enable, with reasonable accuracy, the determination of the financial position of the Group and facilitate compliance of the financial statements with the Financial Markets Conduct Act 2013. The Directors consider that they have taken adequate steps to safeguard the assets of the Group, and to prevent and detect fraud and other irregularities. The Directors hereby approve and authorise for issue the Annual Report for the year ended 31 July 2020. For and on behalf of the Board: John Monaghan Chairman 17 September 2020 Bruce Hassall Director 17 September 2020 74 75 Income Statement FOR THE YEAR ENDED 31 JULY 2020 Statement of Comprehensive Income FOR THE YEAR ENDED 31 JULY 2020 Fonterra Annual Report 2020 Financial Statements Profit/(loss) after tax Items that may be reclassified subsequently to the Income Statement: Cash flow hedges and other costs of hedging, net of tax Net investment hedges and translation of foreign operations, net of tax Hyperinflation losses attributable to equity holders Foreign currency translation reserve losses transferred to the Income Statement Hyperinflation reserve gains transferred to the Income Statement Share of equity accounted investees’ movement in reserves Other reserve movements Total items that may be reclassified subsequently to the Income Statement Items that will not be reclassified subsequently to the Income Statement: Net fair value gains/(losses) on investments in shares Foreign currency translation gains attributable to non-controlling interests Non-controlling interest other reserve movements Total items that will not be reclassified subsequently to the Income Statement Total other comprehensive income recognised directly in equity Total comprehensive income/(expense) Total comprehensive income/(expense) is attributable to: Equity holders of the Co-operative Non-controlling interests Total comprehensive income/(expense) Total comprehensive income/(expense) arises from: Continuing operations Discontinued operations Total comprehensive income/(expense) GROUP $ MILLION 31 JULY 2020 659 354 (67) – 21 – (6) (35) 267 2 3 (13) (8) 259 918 955 (37) 918 1,054 (136) 918 Continuing Operations Revenue from sale of goods Cost of goods sold Impact of strategy review Gross profit Other operating income Selling and marketing expenses Distribution expenses Administrative expenses Other operating expenses Impairment of intangible assets not included in strategic review Share of (loss)/profit of equity accounted investees Impact of strategy review: – Gain on sale of investment in DFE Pharma – Gain on sale of investment in Goodminton – Falcon China Farms joint venture impairment – New Zealand consumer and foodservice business impairment and Tip Top disposal – Disposal of Venezuelan operations – Other impact of strategic review Profit before net finance costs and tax Finance income Finance costs Net finance costs Profit/(loss) before tax Tax expense Profit/(loss) after tax from continuing operations Discontinued Operations Loss after tax from discontinued operations Profit/(loss) after tax Profit/(loss) after tax is attributable to: Loss attributable to non-controlling interests Profit/(loss) attributable to equity holders of the Co-operative Profit/(loss) after tax Earnings per share: Basic and diluted earnings/(loss) per share from continuing operations Basic and diluted loss per share from discontinued operations Basic and diluted earnings/(loss) per share GROUP $ MILLION NOTES 31 JULY 2020 31 JULY 20191 RESTATED 3 4 2 17 18 2 2 2 2 6 10 10 20 2 5 5 5 20,282 (17,236) 16 3,062 62 (551) (482) (835) (377) (55) (6) 401 66 (65) – – 62 1,282 13 (317) (304) 978 (175) 803 (144) 659 (27) 686 659 19,255 (16,349) (32) 2,874 74 (543) (514) (748) (338) (29) 25 – – – (237) (134) (80) 350 15 (407) (392) (42) (80) (122) (488) (610) (48) (562) (610) GROUP $ 31 JULY 2020 31 JULY 20191 RESTATED 0.48 (0.05) 0.43 (0.09) (0.26) (0.35) 1 The Income Statement for the year ended 31 July 2019 includes re-presentations and restatements. Please see Note 28 Re-presentations and prior period restatements for further details. 1 The Statement of Comprehensive Income for the year ended 31 July 2019 includes re-presentations and restatements. Please see Note 28 Re-presentations and prior period restatements for further details. 76 31 JULY 20191 RESTATED (610) (1) (12) (10) 193 (12) – – 158 (1) 1 – – 158 (452) (420) (32) (452) 28 (480) (452) 77 Statement of Financial Position AS AT 31 JULY 2020 Statement of Changes in Equity FOR THE YEAR ENDED 31 JULY 2020 Fonterra Annual Report 2020 Financial Statements ATTRIBUTABLE TO EQUITY HOLDERS OF THE CO-OPERATIVE SUBSCRIBED EQUITY RETAINED EARNINGS FOREIGN CURRENCY TRANSLATION RESERVE HEDGE RESERVES OTHER RESERVES GROUP $ MILLION As at 1 August 2019 NZ IFRS 16 transition adjustment (Note 27) As at 1 August 2019 adjusted Profit/(loss) after tax Transferred between reserves Other comprehensive (expense)/income Total comprehensive income/(expense) 5,887 – 5,887 – – – – 313 (20) 293 686 (15) (31) 640 Transactions with equity holders in their capacity as equity holders: Dividend paid to non-controlling interests As at 31 July 2020 As at 1 August 2018 Prior period restatement1 – 5,887 5,887 – As at 1 August 2018 adjusted (restated) 5,887 Loss after tax (restated)1 Other comprehensive (expense)/income Total comprehensive (expense)/income (restated) – – – – 933 934 (42) 892 (562) (17) (579) Transactions with equity holders in their capacity as equity holders: Equity instruments issued Dividend paid to non-controlling interests As at 31 July 2019 (restated) – – 5,887 – – 313 (183) (268) – – (183) (268) – – (46) (46) – (229) (364) – (364) – 181 181 – – – 15 354 369 – 101 (267) – (267) – (1) (1) – – (183) (268) 8 – 8 – – (8) (8) – – 29 – 29 – (21) (21) – – 8 NON- CONTROLLING INTERESTS 77 – 77 (27) – (10) (37) (29) 11 130 – 130 (48) 16 (32) 1 (22) 77 TOTAL 5,757 (20) 5,737 686 – 269 955 – 6,692 6,219 (42) 6,177 (562) 142 (420) – – 5,757 TOTAL EQUITY 5,834 (20) 5,814 659 – 259 918 (29) 6,703 6,349 (42) 6,307 (610) 158 (452) 1 (22) 5,834 ASSETS Current assets Cash and cash equivalents Trade and other receivables Inventories Tax receivable Derivative financial instruments Investment in Beingmate Other current assets Assets of disposal groups held for sale Total current assets Non-current assets Property, plant and equipment Right-of-use assets Equity accounted investments Livestock Intangible assets Deferred tax assets Derivative financial instruments Investment in Beingmate Long-term advances 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 Liabilities of disposal groups held for sale Total current liabilities Non-current liabilities Borrowings Derivative financial instruments Provisions Deferred tax liabilities Other non-current liabilities Total non-current liabilities Total liabilities Net assets EQUITY Subscribed equity Retained earnings Foreign currency translation reserve Hedge reserves Other reserves Total equity attributable to equity holders of the Co-operative Non-controlling interests Total equity GROUP $ MILLION NOTES 31 JULY 2020 31 JULY 20191 RESTATED 11 12 2 2 15 16 18 17 20 2 9 13 14 21 2 9 21 20 19 19 788 1,832 3,268 44 452 157 73 1,005 7,619 6,006 569 96 6 2,240 421 664 – 220 75 10,297 17,916 31 764 2,004 1,588 88 113 68 54 603 5,313 5,277 483 64 20 56 5,900 11,213 6,703 5,887 933 (229) 101 – 6,692 11 6,703 550 1,871 3,165 45 48 – 116 229 6,024 6,512 – 202 295 2,597 610 440 234 142 228 11,260 17,284 34 1,175 2,107 1,534 61 215 63 71 – 5,260 5,380 537 117 99 57 6,190 11,450 5,834 5,887 313 (183) (268) 8 5,757 77 5,834 1 The Statement of Financial Position as at 31 July 2019 includes re-presentations and restatements. Please see Note 28 Re-presentations and prior period restatements for further details. 1 For details on the impact of prior period restatements refer to Note 28 Re-presentations and prior period restatements. 78 79 Fonterra Annual Report 2020 Financial Statements Cash Flow Statement FOR THE YEAR ENDED 31 JULY 2020 The Cash Flow Statement presents total Group cash flows including continuing and discontinued operations. GROUP $ MILLION 31 JULY 2020 31 JULY 20191 RESTATED Cash flows from operating activities Profit before net finance costs and tax from continuing operations Loss before net finance costs and tax from discontinued operations Profit/(loss) before net finance costs and tax Adjustments for: – Foreign exchange losses/(gains) – Depreciation and amortisation – Gain on sale of investment in DFE Pharma – Gain on sale of investment in Goodminton – Falcon China Farms joint venture impairment – China Farms impairment – New Zealand consumer and foodservice business impairment and Tip Top disposal – Brazil consumer and foodservice business impairment – Disposal of Venezuelan operations – Other (Increase)/decrease in working capital: Trade and other receivables Inventories Trade and other payables Owing to suppliers 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 non-controlling interest – 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 1,282 (135) 1,147 37 627 (401) (66) 65 63 – 104 – 95 524 (105) (180) 100 54 25 (106) 1,565 (73) 1,492 624 36 40 127 – – (29) (355) (36) (49) (8) (13) (1) 336 350 (367) (17) (29) 561 – – – 203 214 149 134 42 1,274 341 126 (211) (222) (112) (78) 1,179 (56) 1,123 396 32 28 7 177 25 – (541) (37) (82) (10) (6) (17) (28) 1 The Cash Flow Statement for the year ended 31 July 2019 includes restatements. Please see Note 28 Re-presentations and prior period restatements for further details. The adjustments had no impact on net cash flows. 80 GROUP $ MILLION 31 JULY 2020 31 JULY 20191 RESTATED 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 – Other cash outflows Net cash flows from financing activities Net increase in cash Opening cash Effect of exchange rate changes Closing cash Reconciliation of closing cash balances to the Statement of Financial Position: Cash and cash equivalents Bank overdraft Cash balances included in held for sale Closing cash 2,286 11 (395) (3,381) (29) (31) (1,539) 289 516 (25) 780 788 (31) 23 780 4,286 14 (427) (4,689) (22) (12) (850) 245 285 (14) 516 550 (34) – 516 81 Fonterra Annual Report 2020 Basis of Preparation Basis of Preparation FOR THE YEAR ENDED 31 JULY 2020 A) GENERAL INFORMATION E) COVID-19 PANDEMIC 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 financial statements comprise Fonterra and its subsidiaries (together referred to as the Group) and the Group’s interests in its equity accounted investments. The Group operates predominantly in the international dairy industry. The Group is primarily involved in the collection, manufacture and sale of milk and milk-derived products and in fast-moving consumer goods (FMCG) and foodservice businesses. B) BASIS OF PREPARATION These financial statements comply with International Financial Reporting Standards (IFRS). These financial statements also comply with New Zealand Equivalents to International Financial Reporting Standards (NZ IFRS) and have been prepared in accordance with Generally Accepted Accounting Practice applicable to for-profit entities. These financial statements are prepared on a historical cost basis except for assets and liabilities of disposal group held for sale which are measured at the lower of fair value less costs to sell and carrying value, and the following items which are measured at fair value: – Livestock – Investment in shares – Derivative financial instruments – Hedged risks on certain debt instruments These financial statements are presented in New Zealand dollars ($ or NZD), which is the Group’s functional currency, and rounded to the nearest million, except where otherwise stated. Certain comparative period information has been re-presented and restated. Refer to Note 28 Re-presentations and prior period restatements for further details. C) SIGNIFICANT ACCOUNTING POLICIES Significant accounting policies which are relevant to an understanding of the financial statements are provided throughout the notes in teal shading. D) SIGNIFICANT JUDGEMENTS AND ESTIMATES In the process of applying the Group’s accounting policies and the application of accounting standards, a number of judgements and estimates have been made. Accordingly, actual outcomes may differ to these estimates. Information about judgements, estimates and assumptions which are relevant to an understanding of the financial statements are disclosed in the relevant notes as follows. – Recoverable amount assessments (Note 2 Strategy review update and Note 17 Intangible assets) – Classification of disposal groups held for sale and discontinued operations (Note 2 Strategy review update) – Revenue recognition (Note 3 Revenue from sale of goods) – Measurement of deferred tax assets and liabilities (Note 20 Taxation) – Provisions and contingent liabilities (Note 21 Contingent liabilities, provisions and commitments) 82 The Group’s global supply chain has remained resilient throughout the Covid-19 pandemic. The Group’s diverse product range and customer base have helped to minimise the impact on the business. Milk has continued to be collected and processed in New Zealand, Australia and Chile. To ensure ongoing impacts of Covid-19 have been appropriately reflected in the financial statements, Fonterra has assessed the impact of Covid-19 on the Group’s assets and liabilities. – The assumptions about the future impacts of the Covid-19 pandemic have been considered when measuring investments classified as held for sale. – The forecasts used for impairment testing include Fonterra’s best estimates of the potential future impacts from the Covid-19 pandemic. Cash flow projections have been adjusted to reflect a range of possible outcomes, weighted by their expected occurrence. – As part of the New Zealand Government’s Covid-19 relief package tax depreciation deductions have been reintroduced for certain qualifying buildings owned by the Group. This has resulted in an increase to the deferred tax assets of $30 million. It has also resulted in a reduction to tax expense of $30 million. – Debtor collectability continues to be closely monitored. A material change in the provision for impairment of trade receivables as a result of Covid-19 has not been identified. – No onerous contracts or additional provisions have been recognised as a direct impact of Covid-19. – Fonterra has not applied for the wage subsidy scheme available from the New Zealand Government. The Group continues to monitor the risks and the ongoing impacts from Covid-19 on the business. F) BASIS OF CONSOLIDATION In preparing these financial statements, subsidiaries are consolidated from the date the Group gains control until the date on which control ceases. The Group’s share of results of equity accounted investments is included in the consolidated financial statements from the date that significant influence or joint control commences, until the date that significant influence or joint control ceases. All intercompany transactions are eliminated. Translation of the financial statements into NZD The assets and liabilities of Group companies whose functional currency is not NZD are translated into NZD at the year-end exchange rate. The revenue and expenses of these companies are translated into NZD at rates approximating those at the dates of the transactions. Exchange differences arising on this translation are recognised in the foreign currency translation reserve (FCTR). On disposal or partial disposal of an entity, the related exchange differences that were recorded in equity are recognised in the Income Statement as part of the gain or loss on sale. G) NEW AND AMENDED INTERNATIONAL FINANCIAL REPORTING STANDARDS Impact of adopting NZ IFRS 16 Leases The Group adopted NZ IFRS 16 on 1 August 2019. NZ IFRS 16 requires a lease liability reflecting future lease payments, and a right-of-use asset, to be recognised for most lease contracts where the Group is a lessee. This includes many of the Group’s leases that were previously classified as operating leases. No asset or liability was reflected in the Statement of Financial Position under previous accounting requirements for operating leases. The adoption of NZ IFRS 16 does not have a significant impact on the Group’s net profit after tax. However, there is an increase in profit before net finance costs and tax, because a portion of the lease costs that were previously reported in cost of goods sold or operating expenses are now recorded as finance costs. Following adoption of NZ IFRS 16, the presentation of lease payments in the Cash Flow Statement changed from Operating activities to Financing activities, except for short term and low value leases which are included within Operating activities. On transition to NZ IFRS 16 at 1 August 2019, the Group recognised right-of-use assets of $621 million and a lease liability of $652 million. The lease liability is recognised within Borrowings in the Statement of Financial Position. Disclosures relating to leases are located in the following notes: – Note 6 Profit before net finance costs and tax – Note 9 Borrowings – Note 10 Net finance costs – Note 16 Right-of-use assets – Note 27 Impact of transition to NZ IFRS 16 Leases Impact of adopting NZ IFRIC 23 Uncertainty over Income Tax Treatments NZ IFRIC 23 clarifies how to recognise and measure tax balances when there is uncertainty over income tax treatments. The Group’s uncertain tax positions predominantly relate to judgements regarding transfer pricing. The Group adopted NZ IFRIC 23 from 1 August 2019 and has applied the interpretation retrospectively. In applying the interpretation there was no impact on the measurement of tax balances. However, the presentation of the provision for taxes in the Statement of Financial Position changed from Provisions to Tax payable. The impact of this change was to reclassify the tax provision of $24 million from Provisions to Tax payable as at 31 July 2019. Accounting standards issued but not yet effective There are no new or amended standards that are issued but not yet effective that are expected to have a material impact to the Group. Notes to the Financial Statements FOR THE YEAR ENDED 31 JULY 2020 NOTE Performance 1 2 3 4 5 6 Segment reporting Strategy review update Revenue from sale of goods Cost of goods sold Earnings per share Profit before net finance costs and tax Debt and equity 7 Subscribed equity instruments 8 Dividends 9 Borrowings 10 Net finance costs Working capital 11 Trade and other receivables 12 Inventories 13 Trade and other payables 14 Owing to suppliers Long-term assets 15 Property, plant and equipment 16 Right-of-use assets 17 Intangible assets Investments 18 Equity accounted investments Financial risk management 19 Financial risk management Other 20 Taxation 21 Contingent liabilities, provisions and commitments 22 Related party transactions 23 Subsidiaries 24 Fair value measurement 25 Offsetting of financial assets and liabilities 26 Net tangible assets per quoted equity security 27 Impact of transition to NZ IFRS 16 Leases 28 Re-presentations and prior period restatements PAGE 84 84 90 96 97 97 98 99 99 100 100 105 106 106 107 107 107 108 108 110 111 115 115 116 116 129 129 132 134 136 138 140 140 141 142 83 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 PERFORMANCE This section focuses on the Group’s financial performance and the returns provided to equity holders. This section includes the following notes: Note 1: Segment reporting Note 2: Strategy review update Note 3: Revenue from sale of goods Note 4: Cost of goods sold Note 5: Earnings per share Note 6: Profit before net finance costs and tax 1 SEGMENT REPORTING Operating segments reflect the way financial information is regularly reviewed by the Fonterra Management Team (FMT). The FMT is considered to be the Chief Operating Decision Maker (CODM). The FMT consists of the Group CEO, CFO and COO, the CEOs of the three customer-facing regional business units (Asia Pacific, AMENA – Africa, Middle East, Europe, North Asia, Americas, and Greater China), the Director Office of the CEO and the MD Co-operative Affairs. 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. a) The previous operating model CONTINUED Continuing Operations Normalised segment Income Statement External revenue Inter-segment revenue Revenue from sale of goods Cost of goods sold GROUP $ MILLION 31 JULY 2020 INGREDIENTS CONSUMER AND FOODSERVICE OCEANIA ASIA GREATER CHINA LATIN AMERICA TOTAL UNALLOCATED COSTS AND ELIMINATIONS TOTAL 13,590 3,775 17,365 1,917 176 2,093 1,801 1,937 1,037 32 – 2 1,833 1,937 1,039 (15,754) (1,722) (1,397) (1,565) 6,692 210 6,902 (5,465) 1,437 – 20,282 (3,985) – (3,985) 20,282 3,983 (17,236) (2) 3,046 (781) 258 At 31 July 2019, the Group’s operating segments were based around the Global Ingredients and Consumer and foodservice businesses. Segment gross profit/(loss) 1,611 371 436 372 In September 2019, Fonterra announced a new strategy and operating model. The Group’s new operating model is based around the three regional business units, supported by a shared infrastructure (the office of the COO – oCOO) that includes New Zealand milk collection and processing operations and assets, a central portfolio management function, Group IT and Innovation functions. At 31 July 2020, the new operating model formed the basis for the Group’s operating segments. Under the new operating model, the business is managed as a matrix form of organisation, whereby regional business unit CEOs and the COO have overlapping responsibility for the performance of operating segments. Information about the performance of oCOO is reported to the FMT both separately and attributed to each of the regional business units. Fonterra has determined that its operating segments are Asia Pacific, AMENA, Greater China and oCOO. As a result of the Group’s matrix structure, the Group’s reportable segments are Asia Pacific, AMENA and Greater China, inclusive of their respective attribution of oCOO. This presentation provides a full end-to-end view of performance for each of the customer facing regional business units. Unallocated costs represent corporate costs including Co-operative Affairs and Group functions. Due to the significant operating model changes, and the resulting changes in systems and processes used to report financial information to the FMT, comparative information in respect of the new operating model is not available. This note therefore includes information in respect of the current and comparative financial years under the previous operating model. This note presents information for: a) The previous operating model b) The new operating model c) Geographical analysis of revenue d) Geographical analysis of non-current assets a) The previous operating model Segment information presented under the previous operating model for the current year and comparative period has been provided in this section. The Group’s reportable segments for the year ended 31 July 2020 are based on Fonterra’s new operating model (see Section b) The new operating model). PREVIOUS REPORTABLE SEGMENTS DESCRIPTION Ingredients Consumer and foodservice – Oceania – Asia – Greater China – Latin America Represents the collection, processing and distribution of the ingredients business in New Zealand, global sales and marketing of New Zealand and non-New Zealand ingredients products, Fonterra Farm Source™ stores, the Falcon China Farms joint venture and the Australian and South American ingredients businesses. 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 Chile and the Caribbean. Transactions between reportable segments are based on estimated market prices. The strategic reviews of the Group’s China Farms and Brazil consumer and foodservice businesses have advanced such that both businesses meet the requirements to be classified as held for sale at 31 July 2020 and are considered to be discontinued operations. As a result, comparative information in the segment note has been restated to exclude these businesses and reflect the Group’s continuing operations only. The Group’s investment in the Falcon China Farms joint venture (Falcon China Farms JV) was previously included within a ‘China Farms’ segment. The Falcon China Farms JV is considered separately from China Farms. The investment and the share of equity accounted losses it has generated have been included in the Ingredients segment on the basis that its customers are most closely aligned with other Ingredients customers. Comparative information in the segment note has been restated to reflect this change. 84 Impairment of intangible assets not included in strategic review Operating expenses Net other operating income Net foreign exchange (losses)/gains Share of (loss)/profit of equity accounted investees Normalised segment earnings before net finance costs and tax Normalisation adjustments: – Disposal of investment in DFE Pharma – Disposal of investment in Goodminton – Falcon China Farms JV impairment – Beingmate – Other Segment earnings before net finance costs and tax Finance income Finance costs Profit before tax from continuing operations Other segment information: Volume1 (metric tonnes, thousand) Depreciation and amortisation ($ million) Capital expenditure2 Equity accounted investments (1) (782) 51 (43) (9) 827 427 60 (65) – (15) (21) (294) – (2) – 54 – – – – – (18) (282) 2 (10) (2) (18) (204) – (1) – 126 149 – – – – – – – – 50 (14) – (57) 3 (55) (229) (1,009) (348) (2,139) 3 (7) 3 28 – – – – – 5 (20) 1 – 8 2 56 (55) (6) 357 (337) 847 – – – 50 (14) – 6 – – (14) 427 66 (65) 50 (43) 1,234 54 126 185 28 393 (345) 1,282 3,055 (458) 328 77 603 (37) 27 – 279 (16) 3 – 330 (7) 1 – 352 (29) 19 11 1,564 (89) 50 11 (777) (66) 33 8 13 (317) 978 3,842 (613) 411 96 The total segment gross profit shown above is different to the reported gross profit as a result of certain normalisation adjustments recognised in gross profit. Reconciliation of reported to segment gross profit for the year ended 31 July 2020: GROUP $ MILLION Segment gross profit Normalisation adjustments – DFE Pharma dividend received – Other impact of strategy review Reported gross profit Includes intra and inter-segment sales. Total column represents total external sales. 1 2 Capital expenditure comprises purchases of property, plant and equipment and intangible assets. FOR THE YEAR ENDED 31 JULY 2020 3,046 26 (10) 3,062 85 Fonterra Annual Report 2020 Notes to the Financial Statements a) The previous operating model CONTINUED The total segment gross profit shown above is different to the reported gross profit as a result of certain normalisation adjustments recognised in gross profit. Reconciliation of reported to segment gross profit for the year ended 31 July 2019: GROUP $ MILLION Segment gross profit Normalisation adjustments – Australian strategic reset – New Zealand consumer and foodservice business strategic review impact – Other strategic reset costs Reported gross profit FOR THE YEAR ENDED 31 JULY 2019 RESTATED 2,906 (23) (7) (2) 2,874 Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 a) The previous operating model CONTINUED GROUP $ MILLION 31 JULY 20191 RESTATED INGREDIENTS CONSUMER AND FOODSERVICE OCEANIA ASIA GREATER CHINA LATIN AMERICA TOTAL UNALLOCATED COSTS AND ELIMINATIONS TOTAL Segment gross profit/(loss) 1,446 422 451 342 12,584 3,707 16,291 1,989 170 2,159 1,814 48 1,862 1,785 1,083 2 5 1,787 1,088 (14,845) (1,737) (1,411) (1,445) 6,671 225 6,896 (5,398) 1,498 – 19,255 (3,932) (3,932) – 19,255 3,894 (16,349) (38) 2,906 – – (246) (1,089) (29) (292) (29) (2,143) Continuing Operations Normalised segment Income Statement External revenue Inter-segment revenue Revenue from sale of goods Cost of goods sold Impairment of intangible assets not included in strategic review 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 – Disposal of Venezuelan operations – Australian strategic reset – Other strategic reset costs – Beingmate Segment earnings before net finance costs and tax Finance income Finance costs Loss before tax from continuing operations Other segment information: Volume2 (metric tonnes, thousand) Depreciation and amortisation ($ million) Capital expenditure3 Equity accounted investments – (762) 67 16 23 – (344) 3 – – – (289) 1 (8) (2) – (210) 4 (2) (1) 790 81 153 133 – – (22) (68) (6) – (204) (25) – – (2) – – – – – – – – – – – – (12) 694 (150) 153 121 (73) (805) 283 4 (1) 4 44 – – (112) – (5) – 12 (11) 1 411 (204) (25) (112) – (7) (12) 51 3,149 (408) 446 181 627 (27) 43 – 297 (12) 10 – 313 (2) 1 – 365 (23) 17 12 1,602 (64) 71 12 (5) (5) 1 74 – 25 (368) 833 – (15) – – (12) – (395) (813) (54) 49 9 (204) (40) (134) (68) (25) (12) 350 15 (407) (42) 3,938 (526) 566 202 1 Certain comparative information has been restated to ensure consistency with presentation in the current period. 2 3 Capital expenditure comprises purchases of property, plant and equipment and intangible assets. Includes intra and inter-segment sales. Total column represents total external sales. 86 87 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 b) The new operating model Fonterra’s reportable segments are Asia Pacific, AMENA and Greater China. Comparative segment information is not available under the new operating model. Segment information has been presented for the current year and comparative period under the previous operating model in Section a) The previous operating model. REPORTABLE SEGMENTS DESCRIPTION Asia Pacific AMENA Represents the ingredients, foodservice and FMCG businesses in New Zealand, South East Asia and Australia (including export to the Pacific Islands) and Sri Lanka and Indian sub-continent, and Fonterra Farm Source™ stores. Represents the ingredients, foodservice and FMCG businesses in Africa, Middle East, Europe, North Asia and Americas (including Latin America). Greater China Represents the ingredients, foodservice and FMCG businesses in Greater China, and the Falcon China Farms JV. Transactions between reportable segments follow underlying business rules that determine how each segment records a transaction. These rules have been designed to reflect the end-to-end contribution of each segment. Where there is common activity amongst segments and there is a distribution of those revenues and costs across segments, the attribution is based on a number of principles, including: – Activity based allocation where appropriate. – Volumes of product sold/manufactured in the segment. – The segments proportion of New Zealand sourced milk sales. GROUP $ MILLION 31 JULY 2020 ASIA PACIFIC AMENA GREATER CHINA UNALLOCATED COSTS AND ELIMINATIONS 3,505 893 2,691 7,089 190 7,279 (6,043) 1,236 (941) 16 (20) 1 292 – – – – 5 297 6,616 154 1,061 7,831 12 7,843 (6,804) 1,039 (629) 26 (24) 7 419 427 60 – – (13) 893 3,469 1,552 341 5,362 – 5,362 (4,593) 769 (386) 21 (17) (12) 375 – – (65) 50 (22) 338 – – – – (202) (202) 204 2 (238) (7) 6 (2) (239) – 6 – – (13) (246) 1,381 (235) 1,433 (222) 1,043 (133) (15) (23) TOTAL 13,590 2,599 4,093 20,282 – 20,282 (17,236) 3,046 (2,194) 56 (55) (6) 847 427 66 (65) 50 (43) 1,282 13 (317) 978 3,842 (613) Continuing Operations Normalised Income Statement Ingredients channel revenue Foodservice channel revenue Consumer channel revenue Total external revenue Inter-segment revenue Revenue from sale of goods Cost of goods sold Gross profit Operating expenses Net other operating income Net foreign exchange (losses)/gains Share of profit/(loss) of equity accounted investees Normalised earnings before net finance costs and tax Normalisation adjustments: – Disposal of investment in DFE Pharma – Disposal of investment in Goodminton – Falcon China Farms JV impairment – Beingmate – Other Earnings before net finance costs and tax Finance income Finance costs Profit before tax from continuing operations Other segment information: Volume1 (metric tonnes, thousand) Depreciation and amortisation ($ million) 1 Includes intra and inter-segment sales. Total column represents total external sales. 88 c) Geographical analysis of revenue NEW ZEALAND AUSTRALIA REST OF ASIA PACIFIC UNITED STATES LATIN AMERICA REST OF AMENA CHINA TOTAL GROUP $ MILLION Geographical external revenue: Year ended 31 July 2020 Year ended 31 July 2019 (restated) 1,658 1,676 1,670 1,776 5,881 5,590 949 931 1,604 1,715 3,322 3,215 5,198 4,352 20,282 19,255 Revenue is analysed by geography on the basis of the destination of the goods sold. d) Geographical analysis of non-current assets Geographical non-current assets: As at 31 July 2020 As at 31 July 2019 GROUP $ MILLION NEW ZEALAND AUSTRALIA REST OF ASIA PACIFIC AMENA CHINA TOTAL 6,546 6,223 1,043 1,007 842 840 714 1,196 67 944 9,212 10,210 Reconciliation of geographical non-current assets to total non-current assets: Geographical non-current assets Deferred tax assets Derivative financial instruments Total non-current assets GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 RESTATED 9,212 10,210 421 664 610 440 10,297 11,260 89 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 2 STRATEGY REVIEW UPDATE During the year ended 31 July 2019 Fonterra announced and began the implementation of a Group-wide strategy review. This note explains the accounting impact of the strategy review on the financial statements for the year ended 31 July 2020. Since 31 July 2019 progress of the strategy review includes completion of the sales processes relating to the Group’s investments in Goodminton AG (Goodminton) and DMV Fonterra Excipients GmbH & Co. KG (DFE Pharma), and the sale of Dennington manufacturing site. The Group’s holdings of Beingmate Baby & Child Food Co., Ltd. (Beingmate) shares continue to be held for trading with an active sales process in place. During the year the Group reduced its holdings in Beingmate from 18.82 per cent down to 9.11 per cent at 31 July 2020. The Group expects to sell its remaining investment within 12 months of balance date. The strategic reviews of the China Farms and Brazil consumer and foodservice businesses have advanced such that the businesses meet the requirements to be classified as held for sale at 31 July 2020. Both the China Farms and Brazil consumer and foodservice businesses are considered to be discontinued operations. Challenges with the operational performance of the Falcon China Farms JV led to the reassessment of the carrying value of the investment. The most significant impacts of the 2019 strategy review on the Group’s net profit after tax as presented in the Group’s Income Statement for the year ended 31 July 2020 are set out below: a) Disposals CONTINUED The gain on sale is shown below: Sales proceeds received in cash Impact of foreign currency hedge Total sale proceeds received in cash Investment disposed of FCTR recycled Gain on sale Goodminton was included in the AMENA reportable segment. Disposal of investment in DMV Fonterra Excipients GmbH & Co.KG $ MILLION 96 (2) 94 (34) 6 66 GROUP $ MILLION On 23 January 2020 Fonterra completed the sale of its 50 per cent share of DFE Pharma. As at 31 July 2019, this investment was classified as held for sale. PRESENTED IN IMPACT OF STRATEGY REVIEW PRESENTED IN DISCONTINUED OPERATIONS DFE PHARMA SALE (NOTE 2A) GOODMINTON INVESTMENT SALE (NOTE 2A) DENNINGTON SALE (NOTE 2A) BEINGMATE (NOTE 2B) FALCON CHINA FARMS JV IMPAIRMENT (NOTE 2D) OTHER STRATEGY RESET COSTS TOTAL CHINA FARMS IMPAIRMENT (NOTE 2C) BRAZIL CONSUMER AND FOODSERVICE IMPAIRMENT (NOTE 2C) TOTAL The transaction resulted in a gain on sale of $401 million. The gain on sale includes a debit balance of $16 million relating to DFE Pharma that was recycled from the foreign currency translation reserve and recognised as part of the net gain on sale. Sale proceeds of $620 million were received which was made up of cash of $527 million and an interest-bearing loan of $93 million. The sale and purchase agreement also contains earnout clauses in relation to earnings before interest, tax, depreciation and amortisation of DFE Pharma for the 2020 calendar year, and specifies completion adjustments, which are not included in the sales price of $620 million. The gain on sale is shown below: – – – 66 – – 66 – – 66 – 66 – – – 12 – – 12 – (6) 6 – 6 – – – – – 50 50 – – 50 – 50 – – – – (65) – – (10) (10) – – – 26 (10) 16 479 (65) 50 (65) (10) 480 – – (65) – – – – (6) (10) 474 – – (65) (10) 474 – – – – – – – (63) – (63) – (63) – – – – – – – – – – – – – – (104) (167) 16 16 (88) (151) 43 43 (45) (108) 26 – 26 401 – – 427 – – 427 – 427 Revenue Cost of goods sold Gross profit Gain on sale Impairment Other Total net profit/(loss) before tax Discontinued operations Tax impact Profit/(loss) after tax Non-controlling interests Profit/(loss) attributable to shareholders a) Disposals Disposals On disposal of an investment or a cash generating unit (CGU), or portion of a CGU, the related assets are derecognised. A gain or loss is recognised as the difference between the carrying value of the assets at the date of disposal and the net disposal proceeds. Any related exchange differences recorded in equity are recognised in the Income Statement as part of the gain or loss on sale. Disposal of investment in Goodminton AG On 3 September 2019 Fonterra completed the sale of its investment in Goodminton. As at 31 July 2019, this investment was classified as held for sale. The transaction resulted in a gain on sale of $66 million. The gain on sale includes a credit balance of $6 million relating to Goodminton that was recycled from the foreign currency translation reserve and recognised as part of the net gain on sale. 90 Sales proceeds received in cash Interest-bearing loan (included within Long-term advances) Total sale proceeds received Investment disposed of FCTR recycled Transaction costs Gain on sale $ MILLION 527 93 620 (193) (16) (10) 401 DFE Pharma was included in the AMENA reportable segment. In addition to the gain on sale of $401 million, Fonterra received $26 million of dividends from DFE Pharma during the year ended 31 July 2020 which have been recognised as revenue. Disposal of Dennington On 29 May 2020 Fonterra completed the sale of the Dennington manufacturing site. The transaction resulted in a gain on sale of $12 million. Dennington was included in the Asia Pacific reportable segment. b) Beingmate Baby & Child Food Co., Ltd. At 31 July 2020, the Group’s investment in Beingmate has been presented as a current asset as the Group expects to sell its remaining investment within 12 months of balance date. At 31 July 2019 the investment in Beingmate was presented as a non-current asset. The Group’s investment in Beingmate is classified as “Held for Trading” in accordance with NZ IFRS 9 Financial Instruments and measured at fair value, with changes in fair value recognised in the Income Statement. Beingmate shares are listed on the Shenzhen Stock Exchange. Listing rules over Beingmate shares limit Fonterra to selling a maximum of one per cent of total shares of Beingmate on-market and two per cent through block trading in each 90-day period. Future sales of Fonterra’s Beingmate shares will be transacted at the selling price achieved at the disposal date. During the year ended 31 July 2020 Fonterra has been actively selling the shares held in Beingmate. The details of those sales are summarised in the table below: As at 31 July 2019 Sales for the year As at 31 July 2020 % SHARES 18.82 9.71 9.11 PRICE RMB 5.54 4.45–8.22 7.92 $ MILLION 234 127 157 The normalisation gain of $50 million (31 July 2019: loss of $12 million) relating to Beingmate in Note 1 Segment reporting includes realised and unrealised fair value and foreign exchange movements. 91 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 c) Discontinued operations Disposal groups classified as held for sale A disposal group is a group of assets and liabilities to be disposed of (by sale or otherwise) in a single transaction. A disposal group is classified as held for sale if it is available for immediate sale in its present condition and its sale is highly probable. Judgement is required to determine if the sale of an investment is highly probable. Disposal groups classified as held for sale are measured at the lower of their carrying amount and fair value less costs to sell. Immediately prior to being classified as held for sale, the carrying amounts of assets and liabilities in the disposal group are measured in accordance with the applicable accounting policy. Impairment losses on initial classification as held for sale and subsequent gains and losses on remeasurement are recognised in the Income Statement. Assets of disposal groups held for sale are presented in a single line item within Current assets, and Liabilities of disposal groups held for sale are presented in a single line item within Current liabilities. Comparative period information in the Statement of Financial Position has not been re-presented. Discontinued operations An investment that meets the criterion to be classified as held for sale (or has been sold) is a discontinued operation if it represents, or is part of a single co-ordinated plan to dispose of, a separate major line of business or geographical area of operations, or is a subsidiary acquired exclusively with a view to resale. Discontinued operations are presented in a single line item in the Income Statement for both the current and comparative year. China Farms During the year a sales process commenced for the China Farms business, which has advanced to the point that the business met the requirements to be classified as held for sale at 31 January 2020, and continues to do so at 31 July 2020. The divestment of the business also meets the definition of a discontinued operation because it is a separate line of business and a major geographical area of operation. The Group expects to complete the sale within one year of the reporting date. As a result of the classification of the business as held for sale, the net assets of the business are measured at the lower of carrying value or fair value less costs to sell. The fair value of the China Farms business has been assessed based on information received through the sales process. On initial classification, the fair value was lower than the carrying value of the net assets of the business, which has resulted in an impairment of $63 million. The Group has reassessed the fair value less costs to sell of the business at 31 July 2020 and no further impairment has been identified. The China Farms business was previously presented as a separate reportable segment. At 31 July 2020 the foreign currency translation reserve balance attributable to the China Farms business was a credit balance of $31 million. Brazil consumer and foodservice business During the year a sales process commenced for the Brazil consumer and foodservice business which had advanced to the point that the business met the requirements to be classified as held for sale at 31 January 2020. The divestment of the business also meets the definition of a discontinued operation because it is a separate major geographical area of operation. As at 31 July 2020, despite the ongoing impact of the Covid-19 pandemic on the economic environment in Brazil, the Group remains committed to the sale of the business and expects to complete the sale within one year of the reporting date. As a result of the classification of the business as held for sale, the net assets of the business are measured at the lower of carrying value or fair value less costs to sell. On initial classification, the fair value was lower than the carrying value of the net assets of the business, which has resulted in an impairment of $61 million (after tax), of which $31 million is attributable to Fonterra’s equity holders. The Group has reassessed the fair value less costs to sell of the business at 31 July 2020 and recognised a further write-down of $27 million, of which $14 million is attributable to Fonterra’s equity holders. The fair value of the Brazil consumer and foodservice business has been assessed based on information received through the sales process. The Brazil consumer and foodservice business was previously included in the AMENA reportable segment. At 31 July 2020 the foreign currency translation reserve balance attributable to the Brazil consumer and foodservice business was a debit balance of $66 million. c) Discontinued operations CONTINUED Financial performance of the discontinued operations The summarised financial performance of the China Farms and Brazil consumer and foodservice businesses are shown in the table below: DISCONTINUED OPERATIONS Revenue from sale of goods Cost of goods sold China Farms impairment Gross profit/(loss) Other operating income Total operating expenses and other Brazil consumer and foodservice impairment Loss before net finance costs and tax Net finance costs Loss before tax Tax credit/(expense) Loss after tax from discontinued operations Non-controlling interests Loss after tax attributable to equity holders Movement in exchange differences on translation of discontinued operations Other reserve movements Total comprehensive expense from discontinued operations Net cash inflow/(outflow) from operating activities Net cash outflow from investing activities Net cash outflow from financing activities Net increase/(decrease) in cash generated by the discontinued operations Assets and liabilities held for sale The major classes of assets and liabilities held for sale are shown in the table below: ASSETS AND LIABILITIES HELD FOR SALE Trade receivables Inventory Property, plant and equipment Livestock Intangible assets Other assets Total assets of disposal groups held for sale Borrowings Trade and other payables Provisions Other liabilities Total liabilities of disposal groups held for sale $ MILLION 31 JULY 2020 31 JULY 2019 693 (531) (63) 99 3 (133) (104) (135) (28) (163) 19 (144) 52 (92) 25 (17) (136) 77 (6) (1) 70 665 (563) (203) (101) 17 (140) (143) (367) (26) (393) (95) (488) 68 (420) 8 – (480) (6) (34) (48) (88) $ MILLION AS AT 31 JULY 2020 73 47 279 253 140 213 1,005 289 197 55 62 603 As at 31 July 2019, the assets held for sale amount of $229 million related to the Group’s investments in Goodminton and DFE Pharma. These investments were sold during the year ended 31 July 2020. 92 93 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 c) Discontinued operations CONTINUED China Farms Livestock As at 31 July 2020, the China Farms livestock balance of $253 million is presented in Assets of disposal groups held for sale. The China Farms livestock balance as at 31 July 2019 was $288 million and is presented in Livestock. The China Farms livestock balance primarily comprises dairy cows. Livestock is measured at fair value less costs to sell, with any change in fair value recognised in Loss after tax from discontinued operations in the Income Statement. The China Farms dairy cow herd comprises both young and mature livestock. Young livestock comprises dairy cows that are intended to be reared to maturity. These cows are held to produce milk or offspring but have not yet produced their first calf and begun milk production. Costs incurred in rearing young livestock are capitalised. Mature livestock includes dairy cows that have produced their first calf and begun milk production. Costs incurred in relation to mature livestock are recognised in Loss after tax from discontinued operations. The quantity of China Farms livestock is presented below: Young dairy cows Mature dairy cows Total livestock headcount The value of China Farms livestock is presented below: Opening balance Rearing costs of young livestock Change in fair value recognised in the Income Statement – Change in fair value – birth and growth – Change in fair value – price changes Subtotal change in fair value Disposal of livestock Effect of movements in exchange rates Closing balance Represented by: Young dairy cows Mature dairy cows Total livestock HEADCOUNT AS AT 31 JULY 2020 AS AT 31 JULY 2019 25,499 29,710 55,209 27,317 34,507 61,824 $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 288 38 8 9 17 (82) (8) 253 96 157 253 280 38 10 4 14 (49) 5 288 107 181 288 The change in fair values of China Farms livestock of $17 million (31 July 2019: $14 million) is reflected in Loss from discontinued operations in the Income Statement. Valuation techniques and significant unobservable inputs The fair value of young livestock is determined using a market approach, adjusted to reflect the age of the herd. The fair value of mature dairy cows is determined using a discounted cash flow methodology. The following table shows the relationship between the significant unobservable inputs and fair value measurement for mature dairy cows: SIGNIFICANT UNOBSERVABLE INPUTS VALUE ATTRIBUTED RELATIONSHIP BETWEEN KEY UNOBSERVABLE INPUTS AND FAIR VALUE MEASUREMENT Raw milk daily yield 25.5 kg per cow per day (31 July 2019: 25.4 kg per cow per day) A five per cent increase/(decrease) in the raw milk yield would result in an increase/(decrease) in fair value of $8 million (31 July 2019: $11 million). RMB 3.93 per kg (31 July 2019: RMB 3.78 per kg) A RMB 0.10 increase/(decrease) in the selling price of milk would result in an increase/(decrease) in fair value of $9 million (31 July 2019: $13 million). 11.0 per cent (31 July 2019: 11.34 per cent) An increase/(decrease) in the discount rate of 50 basis points would result in a decrease/(increase) in the fair value of $1.3 million (31 July 2019: $1.7 million). Milk price Discount rate 94 d) Falcon China Farms JV Fonterra accounts for its interest in the Falcon China Farms JV using the equity method of accounting (refer to Note 18 Equity accounted investments for further information about equity accounted investments). At 31 January 2020, Fonterra’s share of losses of the Falcon Farms JV, animal management costs and challenging farm conditions provided indicators of impairment, and an impairment test was performed. Using a value in use model the recoverable amount of the equity investment in the Falcon China Farms JV, after considering the value of the loan receivable, was $5 million, resulting in an impairment of $65 million. The post-tax discount rate applied was 10.1 per cent. Fonterra’s share of the loss of the Falcon China Farms JV for the year to 31 July 2020 was a loss of $12 million (31 July 2019: $19 million). The Group is committed to providing future funding to the Falcon China Farms JV of up to US$33 million (31 July 2019: US$40 million). The Group recognises the following balances in relation to the Falcon China Farms JV: Equity accounted investment Loan receivable (included within long-term advances) $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 – 51 69 60 95 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 3 REVENUE FROM SALE OF GOODS The Group recognises revenue from the sale of products when control of the products transfers to the customer. The amount of revenue recognised reflects the consideration that the Group expects to be entitled for providing the products to the customer. The Group sells products either directly to customers or through distributors. For transactions with distributors, judgement is required to assess whether: – Control of the products passes and therefore revenue is recognised when the products are transferred to the distributor, in which case the distributor is Fonterra’s customer; or – Fonterra retains control of the products after transfer to the distributor, in which case control of the products does not pass until the products reach the customer in the supply chain who does obtain control of the product. In this situation the customer, referred to as the ‘end customer’ may be a retailer, reseller or food manufacturer. As control of the product does not pass to the distributor, revenue is not recognised until the products are transferred to the end customer. The assessment of whether control of the products passes to the distributor is a significant judgement. In assessing control the following indicators are considered: – The ability to direct the use of the product. This includes consideration of who has the primary responsibility for providing the products to the end customer and whether Fonterra can restrict who the distributor sells the product to. – The transfer of inventory risk and demand risk. This includes consideration of the level of, or allowance for, product returns and who bears the residual risk of product expiry. – The level of support provided by Fonterra to assist the distributor to on-sell the product. This includes consideration of collaboration on marketing plans, financial support provided by Fonterra through pricing discounts or funding of promotional activity. Contractual terms vary across markets and sales channels. In most arrangements the contractual terms indicate that the distributor is responsible for providing the products to the end customer and has assumed the inventory risk. Fonterra often retains price risk through the provision of price discounts, funding promotional activity or influence over price setting. In general, these pricing mechanisms impact the amount of revenue recognised by Fonterra rather than indicating control of the products is retained. In order to conclude on the transfer of control of the products the contract must be assessed in its entirety, along with implied contractual terms based on commercial customary practices. The transfer of control of the products typically occurs at the following times: – Ingredient products (export sales) – once the products are loaded onto the ship. – Ingredient products (domestic sales) – on delivery of the products to the customer’s designated location. – Consumer and foodservice products – on delivery of the products to the customer’s designated location. Revenue is measured as the sales price specified in the contract adjusted for pricing adjustments, trade spend and rebates. Pricing adjustments, trade spend and rebates are recognised as deductions from revenue at the time that the related sale is recognised. The estimated amount of the deduction from revenue is based on historical experience and the specific terms of the contracts with customers so that it is highly probable that a significant reversal of revenue recognised will not occur. For export sales the Group sells a significant proportion of its products on terms that include freight and insurance to the destination port. For these sales the Group has a separate performance obligation to arrange freight and insurance services for the customers after the date at which control of the products passes to the customer. As Fonterra does not control the freight and insurance services before those services are transferred to the customer, Fonterra is acting as an agent. Therefore, Fonterra recognises the net agency fee as revenue when freight and insurance services are made available to customers, usually this is when the products are loaded onto the ship. The Group offers credit terms which are short-term in nature. In addition, as part of its normal trade terms, the Group receives payments in advance from certain customers. Contracts with customers do not contain significant financing components. Revenue is disaggregated by ingredients, foodservice and consumer channels across Fonterra’s reportable segments in Note 1b) Segment reporting. Sales to distributors where significant judgement is involved in determining the timing of revenue recognition are primarily in the foodservice channel. 4 COST OF GOODS SOLD Cost of goods sold is primarily made up of New Zealand sourced cost of milk. New Zealand sourced cost of milk includes the cost of milk supplied by farmer shareholders, supplier premiums paid, and the cost of milk purchased from contract milk suppliers during the financial year. New Zealand sourced cost of milk supplied by farmer shareholders comprises the volume of milk solids supplied at the Farmgate Milk Price as determined by the Board for the relevant season. In making that determination the Board takes into account the Farmgate Milk Price calculated in accordance with the Farmgate Milk Price Manual, which is independently assured. The Fonterra Farmgate Milk Price Statement sets out information about the Farmgate Milk Price, and how it is calculated. It can be found in the ‘Investors/Farmgate Milk Prices’ section of Fonterra’s website. Other costs include purchases of other products, raw materials and packing, direct labour costs, depreciation and other costs directly incurred to bring inventory to its final point of sale location. Opening inventory Cost of milk: – New Zealand sourced – Non-New Zealand sourced Other costs Closing inventory Total cost of goods sold 5 EARNINGS PER SHARE GROUP $ MILLION 31 JULY 2020 3,165 10,888 1,007 5,444 (3,268) 17,236 31 JULY 2019 RESTATED 2,917 9,748 966 5,883 (3,165) 16,349 Basic earnings per share is calculated by dividing the profit or loss attributable to equity holders of the Co-operative by the weighted average number of Co-operative shares outstanding during the period. Diluted earnings per share is determined by adjusting the profit or loss attributable to equity holders of the Co-operative and the weighted average number of Co-operative shares outstanding for the effects of all Co-operative shares with dilutive potential. There were no Co-operative shares with dilutive potential for either of the years presented. Basic and diluted earnings/(loss) per share from continuing operations ($) Basic and diluted loss per share from discontinued operations ($) Basic and diluted earnings/(loss) per share ($) Earnings attributable to equity holders of the Co-operative ($ million) Weighted average number of shares (thousands of shares) GROUP 31 JULY 2020 31 JULY 2019 RESTATED 0.48 (0.05) 0.43 (0.09) (0.26) (0.35) 686 1,612,076 (562) 1,611,980 96 97 Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 6 PROFIT BEFORE NET FINANCE COSTS AND TAX DEBT AND EQUITY Fonterra Annual Report 2020 Notes to the Financial Statements a) Items included in Profit before net finance costs and tax The following items have been included in Profit before net finance costs and tax: Operating lease expense recognised in accordance with NZ IAS 17 Lease related income and expenses recognised in accordance with NZ IFRS 16: – Short-term leases – Low value leases – Variable lease payments Depreciation and amortisation expense Research and development costs Total employee benefits expense Net foreign exchange losses Contributions to defined contribution plans included in employee benefits expense GROUP $ MILLION 31 JULY 2020 – 11 4 6 613 98 2,074 64 79 31 JULY 2019 RESTATED 106 – – – 526 96 1,962 – 80 b) Fees paid to the auditor and network firms The appointed auditor for the year ended 31 July 2020 is KPMG (31 July 2019: PricewaterhouseCoopers). The Board has overseen compliance with Fonterra’s Group Audit Independence Policy. KPMG has not provided any services during the year other than audit and audit-related services. The following table provides a breakdown of fees paid to the auditor and network firms which are included in Profit/(loss) after tax from continuing and discontinuing operations: Audit and review of the financial statements – New Zealand – Network firms of the auditor Total fees for the audit and review of the financial statements Audit-related services – Assurance services in respect of the Farmgate Milk Price Statement – Other assurance services Total fees for audit-related services Other services – Due diligence support – Strategic review support – Other services Total fees for other services Total fees paid to auditor GROUP $ MILLION 31 JULY 2020 31 JULY 2019 6.7 2.1 8.8 0.1 0.1 0.2 – – – – 9.0 7.1 2.0 9.1 0.1 0.1 0.2 0.6 0.3 0.2 1.1 10.4 This section outlines the Group’s capital structure and the related financing costs. It also provides details on how the funds that finance current and future activities are raised and on how the Group manages liquidity risk and interest rate risk. This section includes the following notes: Note 7: Subscribed equity instruments Note 8: Dividends Note 9: Borrowings Note 10: Net finance costs 7 SUBSCRIBED EQUITY INSTRUMENTS Subscribed equity instruments comprise Co-operative shares and units in the Fonterra Shareholders’ Fund (the Fund). Incremental costs directly attributable to equity transactions are recognised as a deduction from subscribed equity. a) Co-operative shares, including shares held within the Group Co-operative shares may only be held by a shareholder supplying milk to Fonterra (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 Fonterra are dependent on milk supply supported by Co-operative shares, these rights are also attached to vouchers when backed by milk supply (subject to limits). At 31 July 2020 there were 1,612,097,067 Co-operative shares on issue (31 July 2019: 1,611,991,722 shares). During the year ended 31 July 2020, Fonterra issued 105,345 shares under the Farm Source Rewards scheme (31 July 2019: 68,806 shares). The rights attaching to Co-operative shares are set out in Fonterra’s Constitution, available in the ‘Our Co-operative/Governance and Management’ section of Fonterra’s website. b) 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 2020, 104,581,516 Co-operative shares (31 July 2019: 102,934,582) were legally owned by the Custodian, on trust for the benefit of the Fund. During the year ended 31 July 2020, Fonterra issued 17,298,927 units (31 July 2019: 17,769,331 units) and surrendered 15,651,993 units (31 July 2019: 26,258,352 units). The rights attaching to units are set out in the Fonterra Shareholders’ Fund 2020 Annual Report, available in the ‘Investors/Fonterra Shareholder’s Fund’ section of Fonterra’s website. c) 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 the 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 New Zealand Exchange Limited (NZX) or Australian Securities Exchange (ASX). The Group provides returns to farmer shareholders through a milk price, and to equity holders through dividends and changes in Fonterra’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. As at 31 July 2020, the Actual Fund Size relative to total Fonterra shares on issue was below the target range specified in the Fund Size Risk Management Policy. The Group has taken no specific actions to address this as it expects the Fund size to increase over time as Fonterra’s performance improves. d) Market capitalisation At 31 July 2020, Fonterra’s share and unit prices were below the book value of the Group’s consolidated net assets. Fonterra determined that this was not an indicator of impairment and did not require further impairment testing for all, or for further components of Fonterra’s business. This determination considered Fonterra’s view that the share and unit price does not fully reflect the fair value of Fonterra’s business as a whole. A key factor is that Fonterra shares and units trade without a full control premium. 98 99 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 8 DIVIDENDS All Co-operative shares, including those held by the Custodian, are eligible to receive dividends if declared by the Board. Dividends are recognised as a liability in the Group’s financial statements in the period in which they are declared by the Board. No dividend was paid during the year ended 31 July 2020 (31 July 2019: nil). Dividends declared after balance date On 17 September 2020, the Board declared a final dividend of 5 cents per share, to be paid on 15 October 2020 to all Co-operative shares on issue at 25 September 2020. Fonterra has a Dividend Reinvestment Plan, where eligible shareholders can choose to reinvest all or part of their future dividend in additional Co-operative shares. The Dividend Reinvestment Plan applies to this dividend. Participation in the Dividend Reinvestment Plan requires shareholders to submit an election notice for participation by 28 September 2020. Full details of the Dividend Reinvestment Plan are available in the ‘Investors/Dividends’ section of Fonterra’s website. 9 BORROWINGS The Group borrows in the form of bonds, bank facilities and other financial instruments. The Group also recognises lease liabilities within borrowings. The interest expense incurred on the Group’s borrowings is shown in Note 10 Net finance costs. Borrowings (excluding lease liabilities) are recognised initially at fair value, net of transaction costs incurred. Borrowings are subsequently measured at amortised cost using the effective interest method, with the hedged risks on certain debt instruments measured at fair value. Details of the Group’s hedge accounting policies are included in Note 19 Financial risk management. Lease liabilities are recognised at the commencement date of the lease as the present value of the lease payments over the lease term. The lease payments include the exercise price of a purchase option where the Group is reasonably certain to exercise the option. The lease payments are discounted using the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. The lease term is the non-cancellable period, plus renewal options if they are reasonably certain to be exercised. Once a lease has commenced, the Group will only reassess the lease term on the occurrence of a significant event or change in circumstance that is within its control and affects its ability to exercise, or not exercise, an option not previously included in the lease term. a) Economic net interest-bearing debt Economic net interest-bearing debt reflects the carrying value of the Group’s net interest-bearing debt after incorporating the effect of debt hedging in place at balance date. Net interest-bearing debt position Total borrowings Cash and cash equivalents Interest-bearing advances Bank overdraft Net interest-bearing debt Value of derivatives used to manage changes in hedged risks on debt instruments Economic net interest-bearing debt GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 RESTATED 6,041 (788) (220) 31 5,064 (405) 4,659 6,555 (550) (142) 34 5,897 (148) 5,749 a) Economic net interest-bearing debt CONTINUED Total borrowings are represented by: GROUP $ MILLION BALANCE AS AT 1 AUGUST 2019 PROCEEDS NEW LEASE CONTRACTS REPAYMENTS FOREIGN EXCHANGE MOVEMENT CHANGES IN FAIR VALUES TRANSFERRED TO LIABILITIES OF DISPOSAL GROUPS HELD FOR SALE BALANCE AS AT 31 JULY 2020 OTHER Commercial paper Bank loans Lease liabilities1 Capital notes2 NZX-listed bonds Medium-term notes Total borrowings3 259 619 652 35 600 4,971 7,136 333 1,953 – – – – – – 123 – – – (594) (2,186) (161) – – (440) 2,286 123 (3,381) – (88) – – – 87 (1) – – – – – 165 165 – (278) (11) – – – (289) 2 – 1 – – (1) 2 – 20 604 35 600 4,782 6,041 Commercial paper Bank loans Finance leases recognised in accordance with NZ IAS 171 Capital notes2 NZX-listed bonds Medium-term notes Total borrowings3 GROUP $ MILLION BALANCE AS AT 1 AUGUST 2018 RESTATED 304 1,128 131 35 500 4,659 6,757 PROCEEDS REPAYMENTS FOREIGN EXCHANGE MOVEMENT CHANGES IN FAIR VALUES BALANCE AS AT 31 JULY 2019 RESTATED OTHER 1,219 2,574 – – 100 393 4,286 (1,271) (3,087) (60) – – (271) (4,689) – 4 – – – (27) (23) – – – – – 214 214 7 – – – – 3 10 259 619 71 35 600 4,971 6,555 1 From 1 August 2019 this amount includes leases recognised following the adoption of NZ IFRS 16 Leases. For details on the impact of the change in the lease accounting refer to Note 27 Impact of transition to NZ IFRS 16 Leases. 2 Capital notes are unsecured subordinated borrowings. 3 All borrowings other than lease liabilities and capital notes are unsecured and unsubordinated. Included in the Statement of Financial Position as follows: Total current borrowings Total non-current borrowings Total borrowings1 GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 RESTATED 764 5,277 6,041 1,175 5,380 6,555 1 The 31 July 2020 balance excludes $289 million of borrowings directly attributable to the China Farms and Brazil consumer and foodservice businesses. These borrowings are presented in Liabilities of disposal groups held for sale (refer Note 2c). Borrowings directly attributable to China Farms and Brazil consumer and foodservice businesses at 31 July 2019 were $339 million and have not been re-presented. 100 101 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 b) Leverage ratios The Board closely monitors the Group’s leverage ratios. The primary ratios monitored by the Board are as follows. Debt payback The main debt payback ratio, Debt to EBITDA, is a key ratio considered by the credit rating agencies when determining Fonterra’s credit rating. Debt to EBITDA is calculated as Total borrowings, plus bank overdraft, plus the effect of debt hedging, less a cash allowance of 75% of Cash and cash equivalents, divided by normalised earnings before interest, tax, depreciation and amortisation (normalised EBITDA) excluding Share of loss/profit of equity accounted investees and net foreign exchange losses/gains. Both Debt and EBITDA are adjusted to include amounts relating to businesses classified as held for sale. The debt payback ratio as at 31 July 2020 was 3.4x (31 July 2019: 4.4x). The Board approved Debt Policy determines a long-term target Debt to EBITDA payback ratio range of 2.5x to 3.0x. 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 2020 was 41.4 per cent (31 July 2019: 48.5 per cent). The Group is not subject to externally imposed capital requirements. c) 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 Fonterra’s constitution, Fonterra 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. The Group’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 $3,210 million (31 July 2019: $3,149 million). Liquidity and refinancing risks are also managed by ensuring that the Group can maintain access to funding markets throughout the world. To that end, the Group maintains debt issuance programmes in a number of key markets and manages relationships with international investors. The concentration of NZX-listed bonds and medium-term notes by currency is shown below: New Zealand Dollar Australian Dollar United States Dollar British Pound European Euro Chinese Renminbi Total GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 1,020 1,359 1,699 502 632 170 5,382 1,163 1,295 1,631 485 602 395 5,571 c) Liquidity risk CONTINUED Exposure to liquidity risk The following tables show the timing of the gross contractual cash flows of the Group’s financial instruments. GROUP $ MILLION AS AT 31 JULY 2020 CARRYING AMOUNT CONTRACTUAL CASH FLOWS 3 MONTHS OR LESS 3–12 MONTHS 1–5 YEARS MORE THAN 5 YEARS Non-derivative financial liabilities Borrowings – Bank loans – Lease liabilities – Capital notes – NZX-listed bonds – Medium-term notes Bank overdraft Owing to suppliers Trade and other payables (excluding employee entitlements) Other financial liabilities Financial guarantees issued1 (20) (604) (35) (600) (21) (611) (39) (665) (4,782) (5,253) (31) (1,588) (1,683) (80) – (31) (1,588) (1,683) (80) (1) (4) (27) – (11) (27) (31) (1,588) (1,683) (8) (1) Total non-derivative financial liabilities (9,423) (9,972) (3,380) Derivative financial instruments Gross settled derivatives – Inflow – Outflow Total gross settled derivative financial instruments Net settled derivatives 20,938 (20,334) 604 (81) 9,667 (9,600) 67 (23) 636 (116) Total financial liabilities and derivatives (8,903) (9,449) (3,336) 1 Maximum cash flows under guarantees provided by the Group. (10) (79) (1) (15) (7) (292) (3) (537) – (213) (35) (102) (792) (2,386) (2,048) – – – (16) – (913) 7,368 (7,106) 262 (36) (687) – – – (55) – – – – (1) – (3,280) (2,399) 2,290 (2,286) 4 (47) 1,613 (1,342) 271 25 (3,323) (2,103) 102 103 Fonterra Annual Report 2020 Notes to the Financial Statements 10 NET FINANCE COSTS Interest income and expense is recognised on an accrual basis in the Income Statement, using the effective interest method. Finance costs also include the changes in fair value relating to derivatives used to manage interest rate risk, and the associated changes in fair value of the borrowings designated in a hedge relationship attributable to the hedged risk. Details of the Group’s hedge accounting policies are included in Note 19 Financial risk management. Finance income Total interest expense1,2 Changes in fair value relating to: – Borrowings designated in a hedge relationship – Derivatives designated in a hedge relationship – Derivatives where hedge accounting has not been applied Total interest income/(expense) from fair value movements Finance costs Net finance costs GROUP $ MILLION 31 JULY 2020 31 JULY 2019 RESTATED 13 (354) (158) 199 (4) 37 (317) (304) 15 (388) (201) 194 (12) (19) (407) (392) 1 2 Includes interest expense of $4 million (31 July 2019: $9 million) relating to derivatives where hedge accounting has not been applied. Includes interest expense relating to leases of $23 million recognised in accordance with NZ IFRS 16 Leases (31 July 2019: $8 million recognised in accordance with NZ IAS 17 Leases). For details on the impact of the change in the lease accounting on recognition of lease liabilities refer to Note 27 Impact of transition to NZ IFRS 16 Leases. Interest rate risk Details of how the Group manages interest rate risk are included in Note 19 Financial risk management. Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 c) Liquidity risk CONTINUED Non-derivative financial liabilities Borrowings – Commercial paper – Bank loans – Finance leases recognised in accordance with NZ IAS 17 – Capital notes – NZX-listed bonds – Medium-term notes1 Bank overdraft Owing to suppliers Trade and other payables (excluding employee entitlements) Other financial liabilities Financial guarantees issued2 GROUP $ MILLION AS AT 31 JULY 2019 RESTATED CARRYING AMOUNT CONTRACTUAL CASH FLOWS 3 MONTHS OR LESS 3–12 MONTHS 1–5 YEARS MORE THAN 5 YEARS (259) (619) (71) (35) (600) (4,971) (34) (1,534) (1,914) (81) – (260) (649) (78) (41) (691) (5,979) (34) (1,534) (1,914) (82) (1) (260) (92) (2) – (11) (32) (34) (1,534) (1,914) (10) (1) – (321) (67) (1) (15) (606) – – – (15) – – (236) (6) (5) (559) (2,335) – – – (57) – – – (3) (35) (106) (3,006) – – – – – Total non-derivative financial liabilities (10,118) (11,263) (3,890) (1,025) (3,198) (3,150) Derivative financial instruments Gross settled derivatives – Inflow – Outflow Total gross settled derivative financial instruments Net settled derivatives 16,585 (16,807) (222) (87) 6,182 (6,244) (62) (35) 6,322 (6,468) (146) (11) 2,085 (2,379) (294) (61) 1,996 (1,716) 280 20 (139) (125) Total financial liabilities and derivatives (10,382) (11,572) (3,987) (1,182) (3,553) (2,850) 1 Comparatives have been restated to ensure consistency with the current year presentation. 2 Maximum cash flows under guarantees provided by the Group. d) Lease liabilities Total lease liabilities included within borrowings in the Statement of Financial Position are shown below: Current lease liabilities Non-current lease liabilities Total lease liabilities GROUP $ MILLION AS AT 31 JULY 2020 104 500 604 During the year, total cash payments for leases were $201 million. In addition to the lease liability recognised, the Group’s lease arrangements include renewal options, termination options and residual guarantees that have been assessed as unlikely to result in cash payments. As at 31 July 2020, the Group has entered into a number of lease arrangements that have not yet commenced. The total lease liability that will be recognised on commencement of these leases in the next 12 months is $3 million. There has been no change in the Group’s funding strategy that would result in a significantly different profile of short-term or low-value leases. 104 105 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 WORKING CAPITAL This section provides information about the primary elements of the Group’s working capital. Working capital represents the short-term operating assets and liabilities generated by the Group. Movements in these items have a direct impact on the net cash flows generated from operating activities. This section includes the following notes: Note 11: Trade and other receivables Note 12: Inventories Note 13: Trade and other payables Note 14: Owing to suppliers 11 TRADE AND OTHER RECEIVABLES Trade receivables are amounts due from customers for products sold and services provided. Trade receivables are recognised initially at their transaction price and subsequently measured at the amount expected to be collected. Estimates are used in determining the level of receivables that may not be collected. The Group recognises a provision for impairment on trade receivables based on the lifetime expected credit loss at each reporting date. Trade receivables Less: provision for impairment of trade receivables Trade receivables net of provision for impairment Receivables from related parties Other receivables Total receivables Prepayments Total trade and other receivables GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 RESTATED 1,623 (12) 1,611 24 140 1,775 57 1,832 1,730 (24) 1,706 25 93 1,824 47 1,871 Amounts received in advance from customers of $32 million (31 July 2019: $28 million) have been recognised in trade and other payables. The Group has a receivables management programme. At 31 July 2020 the Group’s exposure was $18 million, which reflects the first loss component of amounts managed at balance date. Refer to Note 22 Related party transactions for details of receivables from related parties. Credit risk Details of how the Group manages credit risk are included in Note 19 Financial risk management. The ageing profile of the Group’s trade and other receivables (excluding prepayments) is as follows: GROUP $ MILLION As at 31 July 2020 As at 31 July 2019 CURRENT 1,557 1,553 LESS THAN 1 MONTH PAST DUE MORE THAN 1 MONTH BUT LESS THAN 3 MONTHS PAST DUE 100 145 46 85 MORE THAN 3 MONTHS PAST DUE 72 41 TOTAL 1,775 1,824 12 INVENTORIES Inventories are stated at the lower of cost or net realisable value on a first-in-first-out basis. In the case of manufactured inventories, cost includes all direct costs plus the portion of fixed and variable production overheads incurred in bringing inventories to their present location and condition. Net realisable value is the estimated selling price, less the costs of completion and selling expenses. Raw materials Finished goods Less: provision for impairment of inventories Total inventories 13 TRADE AND OTHER PAYABLES GROUP $ MILLION AS AT 31 JULY 2020 626 2,693 (51) 3,268 AS AT 31 JULY 2019 RESTATED 678 2,522 (35) 3,165 Trade and other payables are recognised at the amount invoiced by the supplier. Due to their short-term nature, they are not discounted. Amounts owing to farmer shareholders and New Zealand contract milk suppliers are recognised in Owing to Suppliers (refer to Note 14 Owing to suppliers). Trade payables Amounts due to related parties Other payables Total trade and other payables (excluding employee entitlements) Employee entitlements Total trade and other payables Refer to Note 22 Related party transactions for details of payables to related parties. 14 OWING TO SUPPLIERS GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 RESTATED 1,526 29 128 1,683 321 2,004 1,753 31 130 1,914 193 2,107 Amounts owing to suppliers are amounts Fonterra owes to farmer shareholders and New Zealand contract milk suppliers for the collection of milk, which includes end of season adjustments, offset by amounts owing from farmer shareholders for goods and services provided to them by Fonterra. These amounts are recognised at the amount due to the supplier for the milk provided. Due to their short-term nature, they are not discounted. 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) Details relating to the season ended 31 May are shown below: Farmgate Milk Price1 (per kgMS) – 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 GROUP AS AT 31 JULY 2020 1,588 $7.14 $6.15 $0.99 86% AS AT 31 JULY 2019 1,534 $6.35 $5.40 $0.95 85% 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 Fonterra’s website. 106 107 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 LONG-TERM ASSETS This section provides information about the investments the Group has made in long-term assets to operate the business and generate returns to equity holders. These assets include physical assets such as land and buildings, and non-physical assets such as right-of-use assets, brands and goodwill. This section also explains the estimates and judgements applied in the measurement of these assets. This section includes the following notes: Note 15: Property, plant and equipment Note 16: Right-of-use assets Note 17: Intangible assets 15 PROPERTY, PLANT AND EQUIPMENT Items of property, plant and equipment are measured at cost less accumulated depreciation and any impairment losses. Cost includes the purchase consideration and those costs directly attributable to bringing the asset to the location and condition necessary for its intended use. It also includes financing costs directly attributable to the acquisition, production or construction of the asset. Subsequent costs are capitalised only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. The carrying amount of any replaced part is derecognised. All other repairs and maintenance costs are charged to the Income Statement during the financial period in which they are incurred. The assets’ residual values and useful lives are reviewed and adjusted, where required, each financial year. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount, and are recognised in the Income Statement. Depreciation Depreciation is calculated on a straight-line basis to allocate the cost of the asset, less any residual value, over its estimated useful life. The range of estimated useful lives for each class of property, plant and equipment is as follows: – Land Indefinite – Buildings and leasehold improvements 2–55 years – Plant, vehicles and equipment 2–50 years As at 31 July 2020 Cost Accumulated depreciation and impairment Net book value at 31 July 2020 As at 31 July 2019 Cost Accumulated depreciation and impairment Net book value at 31 July 2019 GROUP $ MILLION BUILDINGS AND LEASEHOLD IMPROVEMENTS PLANT, VEHICLES AND EQUIPMENT CAPITAL WORK IN PROGRESS 2,576 (1,053) 1,523 2,965 (1,200) 1,765 8,145 (4,335) 3,810 8,553 (4,455) 4,098 316 – 316 295 – 295 LAND 357 – 357 354 – 354 TOTAL 11,394 (5,388) 6,006 12,167 (5,655) 6,512 15 PROPERTY, PLANT AND EQUIPMENT CONTINUED Net book value As at 1 August 2019 Finance leases transferred to Right-of-use assets1 Adjusted balance as at 1 August 2019 Additions2 Transferred from Right-of-use assets Transferred from capital work in progress Depreciation charge Impairment3 Disposals Transferred to Assets of disposal groups held for sale Foreign currency translation As at 31 July 2020 Net book value As at 1 August 2018 Additions2 Transferred from capital work in progress Depreciation charge Impairment Disposals Foreign currency translation As at 31 July 2019 GROUP $ MILLION BUILDINGS AND LEASEHOLD IMPROVEMENTS LAND PLANT, VEHICLES AND EQUIPMENT CAPITAL WORK IN PROGRESS 4,098 (9) 4,089 6 4 274 (330) (50) (28) (138) (17) 295 – 295 364 – (336) – – (1) (5) (1) TOTAL 6,512 (56) 6,456 370 47 – (422) (96) (35) (279) (35) 3,810 316 6,006 3,990 75 603 (361) (134) (59) (16) 721 483 (869) – – (29) (11) 295 6,810 583 – (458) (233) (146) (44) 6,512 1,765 4,098 354 (5) 349 – 5 7 – – (3) (1) – 357 354 5 30 – – (31) (4) 354 1,765 (42) 1,723 – 38 55 (92) (46) (3) (135) (17) 1,523 1,745 20 236 (97) (99) (27) (13) 1 On the adoption of IFRS 16 Leases, finance leases included in property, plant and equipment were transferred to Right-of-use assets. For further details on the impact of the change in lease accounting refer to Note 27 Impact of transition to NZ IFRS 16 Leases. 2 Additions include borrowing costs of $3 million (2019: $6 million) capitalised using a weighted average interest rate of 5.24 per cent (2019: 5.21 per cent). 3 Impairment of $89 million relates to building and leasehold improvements and plant, vehicles and equipment of the China Farms and Brazil consumer and foodservice businesses which have been transferred to Assets of disposal groups held for sale. New Zealand Ingredients manufacturing assets Fonterra’s New Zealand Ingredients manufacturing sites are utilised as a single network for processing raw milk supply, including meeting peak milk processing requirements. The Group considers there are no indicators of impairment for Fonterra’s New Zealand Ingredients manufacturing sites. 108 109 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 16 RIGHT-OF-USE ASSETS Right-of-use assets are initially measured at cost, less any accumulated depreciation and any impairment losses. Cost is calculated as the initial amount of the lease liability plus any initial direct costs incurred and an estimate of costs required to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located. Right-of-use assets are depreciated on a straight-line basis over the lease term, unless the useful life of the asset is less than the lease term or if the Group will own the asset at the end of the lease term, in which situations the right-of-use asset is depreciated over the useful life of the asset, which is determined on the same basis as those of property, plant and equipment. Right-of-use assets are also adjusted for any impairment losses and certain remeasurements of the lease liability. The Group enters into lease arrangements for land and buildings with options for renewal that typically run for a period of three to ten years, however some property leases can run up to a period of 50 years. Lease payment changes are renegotiated at periods specified in the lease contracts, and are usually based on local price indices or market rental rates. Leases for plant, vehicles and equipment typically run for a period of two to five years. The Group has elected not to recognise right-of-use assets and lease liabilities for leases of low-value assets and short-term leases. These lease costs are recognised as an expense as incurred. Information about Right-of-use assets from leases for which the Group is a lessee is presented below: Land Buildings Plant, vehicles and equipment Total Additions to Right-of-use assets during the year were $124 million. GROUP $ MILLION NET BOOK VALUE AS AT 31 JULY 2020 DEPRECIATION CHARGE FOR THE YEAR ENDED 31 JULY 2020 24 383 162 569 2 62 42 106 17 INTANGIBLE ASSETS The significant intangible assets recognised by the Group are goodwill, brands and software assets. Goodwill Goodwill represents the premium paid by the Group over the fair value of the Group’s share of the net identifiable assets of an acquired subsidiary at the date of acquisition. Goodwill is initially recognised at cost and subsequently measured at cost less accumulated impairment losses. Goodwill is not amortised. Brands Brands that are purchased by the Group are initially recognised at cost, or at their fair value if acquired as part of a business combination. A brand is determined to have an indefinite life where there is an intention to maintain and support the brand for an indefinite period. Indefinite life brands are not amortised. They are subsequently measured at cost less any impairment losses. Software assets Software assets, both purchased and internally developed, are capitalised provided there is an identifiable asset that will generate future economic benefits through cost savings or supporting revenue generation. Subsequent costs are capitalised if they extend the useful life or enhance the functionality of the asset. Software assets are amortised on a straight-line basis over their estimated useful lives (three to 14 years). Impairment testing Goodwill and indefinite life brands are tested for impairment annually, or more frequently if there is an indicator of impairment. Indefinite life brands that have been impaired are reviewed for possible reversal of impairment annually. A reversal of an impairment loss shall not exceed the carrying amount that would have been recognised had no impairment loss occurred in prior years. Software assets are tested for impairment when an indicator of impairment exists. A cash-generating unit (CGU) is tested for impairment when there are indicators of impairment. An impairment test is also completed on an annual basis when a CGU has goodwill or indefinite life intangibles allocated to it. To determine if an asset or CGU is impaired, the carrying amount of the asset or CGU is compared to its recoverable amount, being the higher of its value in use and fair value less costs to dispose. If the carrying amount is higher than recoverable amount the CGU is impaired to its recoverable amount. Value in use is determined as the present value of the future cash flows expected to be derived from the CGU. The value in use calculation requires the Group to estimate future cash flows, pre-tax discount rates and terminal growth rates. Fair value less costs to dispose reflects the price that would be received to sell the CGU in an orderly transaction between market participants at the measurement date less the costs of disposal. As at 31 July 2020 Cost Accumulated amortisation and impairment Net book value at 31 July 2020 As at 31 July 2019 Cost Accumulated amortisation and impairment Net book value at 31 July 2019 GROUP $ MILLION GOODWILL BRANDS SOFTWARE SOFTWARE WIP OTHER 854 (317) 537 892 (331) 561 1,424 (177) 1,247 1,641 (97) 1,544 1,527 (1,173) 354 1,492 (1,090) 402 40 – 40 36 – 36 78 (16) 62 70 (16) 54 TOTAL INTANGIBLES 3,923 (1,683) 2,240 4,131 (1,534) 2,597 110 111 Notes to the Financial Statements CONTINUED Fonterra Annual Report 2020 Notes to the Financial Statements GOODWILL BRANDS SOFTWARE SOFTWARE WIP OTHER TOTAL INTANGIBLES GROUP $ MILLION As described in Note 1 Segment reporting the Group’s reportable segments for the year ended 31 July 2020 have changed from the prior year reportable segments. The change in reportable segments has led to a reconsideration of the Group’s CGUs. The allocation of goodwill and brands across the Group’s reportable segments as at 31 July 2020 are shown in the table below: 17 INTANGIBLE ASSETS CONTINUED Goodwill and indefinite life brands FOR THE YEAR ENDED 31 JULY 2020 17 INTANGIBLE ASSETS CONTINUED Net book value As at 1 August 2019 Additions Transferred from work in progress Amortisation Impairment Impairment reversal Disposals Transferred to assets of disposal groups held for sale Foreign currency translation As at 31 July 2020 Net book value As at 1 August 2018 Additions Transferred from work in progress Amortisation Impairment Disposals Foreign currency translation As at 31 July 2019 561 1,544 – – – (21) – – – (3) 537 – – – (85) – – (140) (72) 1,247 1,081 1,638 – – – (327) (176) (17) 561 – – – (4) (107) 17 1,544 402 1 44 (97) – 3 (1) – 2 354 396 2 138 (101) (29) (2) (2) 402 36 51 (44) – – – (3) – – 40 96 78 (138) – – – – 36 54 13 – (2) – – (3) – – 62 16 40 – (2) – – – 54 2,597 65 – (99) (106) 3 (7) (140) (73) 2,240 3,227 120 – (103) (360) (285) (2) 2,597 Amortisation is recognised in Other operating expenses in the Income Statement. Reconciliation of impairment of intangible assets in the above table to the amount reported in the Income Statement: GROUP $ MILLION Net impairment of intangible assets Brazil consumer and foodservice business brand impairment included in Loss after tax from discontinued operations Impairment of intangible assets not included in strategic review FOR THE YEAR ENDED 31 JULY 2020 103 (48) 55 GROUP $ MILLION AS AT 31 JULY 2020 GOODWILL BRANDS TOTAL Asia Pacific reportable segment – New Zealand consumer and foodservice CGU – Australia CGU – Asia brands – NZMP brand AMENA reportable segment – Chile CGU Other CGUs Total 229 134 – – 101 73 537 283 148 674 120 22 – 1,247 The allocation of goodwill and brands across the Group’s reportable segments as at 31 July 2019 are shown in the table below: Ingredients CGUs Consumer and Foodservice CGUs – Australia – New Zealand – Asia – Brazil – Chile Total GROUP $ MILLION AS AT 31 JULY 2019 GOODWILL BRANDS 67 128 250 5 – 111 561 120 148 283 718 250 25 1,544 512 282 674 120 123 73 1,784 TOTAL 187 276 533 723 250 136 2,105 Impairment testing of goodwill and indefinite life brands Impairment testing is performed annually at the same time each year. Where appropriate, based on the market dynamics and go-to-market strategies, impairment testing is performed at a CGU level for both goodwill and indefinite life brands attributed to that CGU. Cash flows are based on approved forecasts which are consistent with the Board approved strategy. Cash flows do not exceed five years. The forecasts include assumptions made about the potential future impacts of the Covid-19 pandemic. Cash flow projections have been adjusted to reflect a range of possible outcomes, weighted by their expected occurrence. Discount rates are based on external data where possible. All brands recognised in the table above have indefinite lives (this was the same as at 31 July 2019). The impairment tests performed for the Australia CGU, the Chile CGU, NZMP brand and Other CGUs have not resulted in any impairment. A reasonable possible change in key assumptions would not result in impairment. The following impairment tests have resulted in an impairment or limited headroom between the carrying amount and recoverable amount. 112 113 Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 a) New Zealand consumer and foodservice business INVESTMENTS Fonterra Annual Report 2020 Notes to the Financial Statements The recoverable amount of the New Zealand consumer and foodservice business was assessed to be $699 million. This was lower than the carrying value of the business, resulting in an impairment of the goodwill attributed to the business of $21 million (31 July 2019: $185 million). The New Zealand consumer and foodservice business earnings for the year ended 31 July 2020 were above the amounts forecast in the 2019 impairment test. However, expectations of future growth are lower than they were 12 months ago, driven by uncertainty about future long-term growth in the domestic and global economy. 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 model uses a five-year cash flow forecast based on the three-year business plan approved by the Board. Cash flows for years four and five have been prepared based on growth expectations for the business. The key drivers for the business to achieve its performance targets are to continue to deliver productivity gains and to effectively manage operational costs. The long-term growth rate applied to the future cash flows after year five of the forecast was 1.5 per cent (31 July 2019: 2.7 per cent). This reflects the expected long-term economic growth rate for New Zealand. The post-tax discount rate was 7.4 per cent (31 July 2019: 8.1 per cent). The pre-tax discount rate was 9.77 per cent (31 July 2019: 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 productivity savings (manufacturing and supply chain efficiencies) (by year five) $17 million An increase/(decrease) in productivity savings of $3 million results in an increase/(decrease) in the recoverable amount of $30 million. Long-term growth rate 1.5 per cent Discount rate (post-tax) 7.4 per cent An increase/(decrease) in the long-term growth rate of 0.5 of a per cent would result in an increase/(decrease) in the recoverable amount of $49 million/ ($42 million). An increase/(decrease) in the discount rate of 0.5 of a per cent would result in a (decrease)/increase in the recoverable amount of ($59 million)/$69 million. The fair value less costs to dispose was also considered when determining the recoverable amount to ensure the higher of fair value less costs to dispose and value in use was applied. b) Asia brands Asia brands represent the Group’s trademarks and other intellectual property in territories outside of New Zealand and Australia, relating to Anchor, Anmum, Anlene and Chesdale. The relief from royalty method has been used to calculate the recoverable amounts of the Asia brands. This reflects a change from the year ended 31 July 2019, where the recoverable amounts were determined using the present value of future cash flows expected to be derived from the brand. The relief from royalty methodology is a value in use calculation which determines the recoverable amount by calculating the present value of what a licensee would theoretically pay as a royalty to use the brands. The royalty rates applied in the calculation are determined based on comparable market data and range from two to seven per cent. The key assumption used in the relief from royalty method is forecast sales growth. The value attributed to the assumption is based on the business forecasts over the five-year period. For the Asia brands other than Chesdale, the five-year compound annual growth rates used in the valuation model range from five to nine per cent and the range of discount rates (post tax) that have been applied in the valuation model range from five to 22 per cent (31 July 2019: nine to 16 per cent), country dependent. The recoverable amount of these brands is in excess of the carrying amount and reasonably possible changes in assumptions would not result in elimination of the headroom. Chesdale brand The recoverable amount of the Chesdale brand was assessed to be $28 million. This was lower than the carrying value of the brand, resulting in an impairment of $36 million. The impairment is a result of a reduction in forecast attributable to the brand. As the brand is sold across a number of markets, all with different characteristics, the range of post-tax discount rates applied was six to 13 per cent (31 July 2019: eight to 14 per cent). The range of pre-tax discount rates was seven to 18 per cent (31 July 2019: 10 to 18 per cent). The key assumption used in the model is the ability of the business to meet forecast sales levels. The model uses a five-year compound annual growth rate of two per cent, reflecting the business forecasts over the five-year period. The fair value less costs to dispose of the Chesdale brand is not considered to be materially different than the relief from royalty calculation. This section provides information about the Group’s interest in equity accounted investments. This section includes the following note: Note 18: Equity accounted investments 18 EQUITY ACCOUNTED INVESTMENTS Associates and joint ventures Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. Joint ventures are those arrangements in which the Group has contractually agreed to share control and where the Group has rights to the net assets rather than rights to the assets and obligations for the liabilities. For joint ventures and associates the Group applies the equity method of accounting. Under the equity method, the Group recognises its initial investment at cost (including any goodwill identified on acquisition) and subsequently adjusts this for its share of the entities’ profits or losses after adjustments to align to the accounting policies of the Group. The Group’s share of profits and losses are recognised in the Income Statement and its share of movements in other comprehensive income is recognised in the Statement of Comprehensive Income. Dividends received from equity accounted investees reduce the carrying amount of the investment. When the Group’s share of losses exceeds its interest in an equity accounted investee, the carrying amount of that interest is reduced to nil and no further losses are recognised except to the extent the Group has an obligation or has made payments on behalf of the investee. The Group determines at each reporting date whether there is any objective evidence that its investments in equity accounted investees are impaired. If this is the case, the Group performs an impairment test and recognises any impairment in the Income Statement. Carrying amounts The Group holds investments in a number of joint ventures and associates, none of which are individually material. The aggregate amount of the Group’s share of these equity accounted investments is included in the table below: GROUP $ MILLION ASSOCIATES JOINT VENTURES TOTAL AS AT 31 JULY 2020 AS AT 31 JULY 2019 AS AT 31 JULY 2020 AS AT 31 JULY 2019 AS AT 31 JULY 2020 AS AT 31 JULY 2019 Carrying amount of investment (Loss)/profit from continuing operations Other comprehensive expense Total comprehensive (expense)/income 1 – – – 1 (4) – (4) 95 (6) (6) (12) 201 29 – 29 96 (6) (6) (12) 202 25 – 25 The Group has provided financial guarantees and is committed to providing further funding contributions to certain equity accounted investees, as set out in Note 22 Related party transactions. There are no contingent liabilities relating to the Group’s interests in joint ventures or equity accounted investees. Further information about transactions between the Group and equity accounted investees and outstanding balances at year end is provided in Note 22 Related party transactions. Falcon China Farms JV Refer to Note 2d) Strategy review update for information about the impairment of the Group’s investment in Falcon China Farms JV. 114 115 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 FINANCIAL RISK MANAGEMENT This section outlines the key risk management activities undertaken to manage the Group’s exposure to financial risk. This section includes the following note: Note 19: Financial risk management 19 FINANCIAL RISK MANAGEMENT Financial risks faced by the Group 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. A summary of the financial risks that impact the Group and how these risks are managed is presented below: FINANCIAL RISK Market risks Foreign exchange risk (Section a) Interest rate risk (Section b) Commodity price risk (Section c) Other risks Credit risk (Section d) Liquidity risk (Note 9) DESCRIPTION MANAGEMENT OF RISK Impact from changes in foreign exchange rates Foreign currency transactions For foreign currency transactions, the Group uses foreign currency forward contracts and foreign currency options to manage foreign exchange risk. Foreign operations For investments in foreign operations, the Group uses foreign currency denominated borrowings and foreign currency swaps to manage foreign exchange risk. Foreign currency denominated borrowings For foreign currency denominated borrowings, the Group uses cross-currency interest rate swaps to manage foreign exchange and interest rate risk combined. The Group uses interest rate swaps to achieve a target ratio of fixed and floating rate exposure on its borrowings. The Group uses commodity derivatives to manage its exposure to commodity price risk. The Group also uses its product mix and sales contract terms to manage the impact of changes in dairy commodity prices on its earnings. Impact from changes in interest rates Impact from changes in commodity prices Risk of loss to the Group due to customer or counterparty default The Group sets minimum credit quality requirements, credit limits and uses other credit mitigation tools to manage its credit risk. Risk that the Group will be unable to meet its financial obligations as they fall due 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. The Group actively manages its capital structure and monitors leverage and coverage ratios. The Fonterra Shareholders’ Fund removes the redemption risk associated with Co-operative shares. Capital management and structure (Note 7 and Note 9) The Group’s capital structure 19 FINANCIAL RISK MANAGEMENT CONTINUED Derivative financial instruments and hedge accounting Derivatives are measured at fair value. Refer to Note 24 Fair value measurement for details on how fair value is determined. The resulting gain or loss on re-measurement is recognised in the Income Statement immediately, unless the derivative is designated into an effective hedge relationship as a hedging instrument, in which case the timing of recognition in the Income Statement depends on the nature of the designated hedge relationship. The Group may designate derivatives as: – Fair value hedges (where the derivative is used to manage the variability in the fair value of recognised assets and liabilities); – Cash flow hedges (where the derivative is used to manage the variability in cash flows relating to recognised liabilities or forecast transactions); or – Net investment hedges (where borrowings or derivatives are used to manage the risk of fluctuation in the translated value of its foreign operations). Hedge accounting is discontinued when the hedging instrument expires, is terminated, is exercised, or no longer qualifies for hedge accounting. Fair value hedges For fair value hedges the following are recognised in the Income Statement: – The change in fair value of the hedging instruments; and – The change in the fair value of the underlying hedged item attributable to the hedged risk. If the hedge no longer meets the criteria for hedge accounting, hedge accounting is discontinued. The fair value adjustment to the carrying amount of the hedged item upon discontinuance is amortised and recognised in the Income Statement over the remaining term of the original hedge. If the hedged item is sold or extinguished any unamortised fair value adjustment is immediately recognised in the Income Statement. Cash flow hedges The effective portion of changes in the fair value of the hedging instruments are recognised in other comprehensive income in the Statement of Comprehensive Income and accumulated in a separate reserve in equity. Subsequently the cumulative amount is transferred to the Income Statement when the underlying transactions are recognised in the Income Statement. The ineffective portion of changes in the fair value of the hedging instruments are recognised immediately in the Income Statement. If the hedge no longer meets the criteria for hedge accounting, hedge accounting is discontinued. The cumulative gain or loss previously recognised in other comprehensive income remains there until the forecast transaction occurs, or is immediately recognised in the Income Statement if the transaction is no longer expected to occur. Net investment hedges The effective portion of changes in the fair value of the hedging instruments are recognised in the Statement of Comprehensive Income and transferred to the Income Statement when the foreign operation is disposed of or sold. The ineffective portion of changes in the fair value of the hedging instruments are recognised immediately in the Income Statement. Costs of hedging The change in fair value of a hedging instrument relating to the time-value of foreign currency options, and the foreign currency basis component of cross-currency interest rate swaps are recognised in other comprehensive income and accumulated in a separate reserve in equity. Subsequently, the cumulative amount is transferred to the Income Statement at the same time as the hedged item impacts the Income Statement. The following disclosures included in this note relate to the Group’s financial risk management: DISCLOSURE ITEM DESCRIPTION Impact to reserves in equity (Section e) Income Statement impact from derivatives not designated in a hedge relationship (Section f) Movements in the Group’s hedge reserves and foreign currency translation reserve. Movements recognised in the Income Statement from changes in the fair value of derivatives not designated in a hedge relationship. 116 117 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 a) Foreign exchange risk Nature and exposure of foreign exchange risk Net foreign exchange gains or losses Foreign currency transactions are translated using the exchange rate at the date of each respective transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the exchange rate at balance date. Any resulting foreign exchange gains and losses are recognised in the Income Statement, except when they relate to certain non-current advances to companies within the Group or a cash flow hedge or net investment hedge relationship. a) Foreign exchange risk CONTINUED The Group is exposed to foreign exchange risk through transactions denominated in foreign currencies and the translation of foreign currency denominated balances. The amounts shown below represent the Group’s exposure to foreign currency before applying the risk management strategies: HEDGING INSTRUMENT USED Cash flow hedging GROUP $ MILLION AS AT 31 JULY 20191 YEAR ENDED 31 JULY 20192 CARRYING AMOUNT HEDGE EFFECTIVENESS IN RESERVES HEDGE INEFFECTIVENESS NOMINAL AMOUNT3 DERIVATIVE ASSETS DERIVATIVE LIABILITIES ACCUMULATED COST OF HEDGING CHANGE IN VALUE USED TO CALCULATE HEDGE EFFECTIVENESS RECOGNISED IN OTHER COMPREHENSIVE INCOME (GAIN)/LOSS RECLASSIFIED TO THE INCOME STATEMENT (GAIN)/LOSS4 RECOGNISED IN INCOME STATEMENT GAIN/(LOSS) – The Group’s foreign currency transactions are predominantly denominated in United States Dollars. – The Group has net investments in foreign operations of $5,240 million (31 July 2019: $5,011 million). This amount is before considering borrowings held by the Group in the same currency as the investment. – The Group has borrowings denominated in foreign currency of $4,615 million (31 July 2019: $4,925 million). How foreign exchange risk is managed Forecast foreign currency transactions The Group enters into foreign currency forward contracts and foreign currency options for the following items: – Forecast cash receipts from foreign currency sales for a period of up to 18 months within limits approved by the Board; and – Up to 100 per cent of other forecast foreign currency transactions. Hedge ineffectiveness arises if the amount of the forecast transactions falls below the amount of the designated hedging instruments. The Group applies cash flow hedge accounting where derivatives are used to manage foreign exchange risk on forecast foreign currency transactions. The amount and maturity of the derivative and the forecast transaction is aligned to ensure that the hedge relationship remains effective, with any undesignated costs of hedging accounted for separately. The effect of the Group’s application of hedge accounting in managing foreign exchange risk related to forecast foreign currency transactions is presented in the table below: GROUP $ MILLION AS AT 31 JULY 20201 YEAR ENDED 31 JULY 20202 CARRYING AMOUNT HEDGE EFFECTIVENESS IN RESERVES HEDGE INEFFECTIVENESS NOMINAL AMOUNT3 DERIVATIVE ASSETS DERIVATIVE LIABILITIES ACCUMULATED COST OF HEDGING CHANGE IN VALUE USED TO CALCULATE HEDGE EFFECTIVENESS RECOGNISED IN OTHER COMPREHENSIVE INCOME (GAIN)/LOSS RECLASSIFIED TO THE INCOME STATEMENT (GAIN)/LOSS4 RECOGNISED IN INCOME STATEMENT GAIN/(LOSS) HEDGING INSTRUMENT USED Cash flow hedging Foreign currency forwards and options Maturity: 0-18 months Weighted average NZD:USD rate: 0.6427 Maturity: 0-12 months Weighted average USD:RMB rate: 7.115 Total 8,000 429 (45) 798 8,798 2 431 (2) (47) 6 (1) 5 359 – 359 (16) 460 4 (12) (5) 455 (61) – (61) 1 Life-to-date amounts as at balance date. 2 Year-to-date amounts recognised during the year. 3 Nominal amount represents forecast foreign currency transactions in cash flow hedge relationships, translated into New Zealand Dollars using the exchange rate at balance date. 4 Recognised in Revenue from sale of goods. 118 Foreign currency forwards and options Maturity: 0-18 months Weighted average NZD:USD rate: 0.6852 Maturity: 0-11 months Weighted average USD:RMB rate: 6.9117 Maturity: 2-11 months Weighted average NZD:EUR rate: 0.5890 Total 9,267 37 (182) (14) (144) (238) 309 491 97 9,855 4 – 41 (1) (1) – (183) – (15) 2 – (142) (2) (7) – (240) – 302 – – – – 1 Life-to-date amounts as at balance date. 2 Year-to-date amounts recognised during the year. 3 Nominal amount represents forecast foreign currency transactions in cash flow hedge relationships, translated into New Zealand Dollars using the exchange rate at balance date. 4 Recognised in Revenue from sale of goods. Net investments in foreign operations The Group’s net investments are designated in hedge relationships to the extent of: – Borrowings denominated in the same foreign currency; and – Foreign currency swaps directly attributed to the net investment. Hedge ineffectiveness arises if the carrying amount of the net investment falls below the amount of the designated hedging instruments. The effect of the Group’s hedge accounting policy in managing foreign exchange risk related to the Group’s net investments in foreign operations is presented in the table below: GROUP $ MILLION AS AT 31 JULY 2020 YEAR ENDED 31 JULY 2020 CARRYING AMOUNT NOMINAL AMOUNT1 HEDGE EFFECTIVENESS AMOUNT OF NET INVESTMENT HEDGED2 FOREIGN CURRENCY BORROWINGS FOREIGN CURRENCY SWAPS3 NET INVESTMENT GAIN/(LOSS) RECOGNISED IN OTHER COMPREHENSIVE INCOME BORROWINGS/SWAPS GAIN/(LOSS) RECOGNISED IN OTHER COMPREHENSIVE INCOME HEDGED NET INVESTMENTS AND HEDGING INSTRUMENTS USED Net investment hedging United States Dollar-denominated Maturity of borrowings: 11 months Australian Dollar-denominated Maturity of borrowings: 11-88 months Euro-denominated Maturity of borrowings: 52 months Chinese Renminbi-denominated Maturity of borrowings: 60 months Maturity of swaps: 3 months Total 75 516 171 229 991 (75) (516) (171) (170) (932) – – – (59) (59) 3 17 8 – 28 1 Nominal amount is the face value, converted into New Zealand Dollars using the exchange rate at balance date, of foreign currency swaps designated in net investment hedge relationships. 2 The carrying amount of the net investment designated into a net investment hedge relationship. 3 The carrying amount of foreign currency swaps at balance date was $1 million and is presented within derivative assets. (3) (17) (8) – (28) 119 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 a) Foreign exchange risk CONTINUED GROUP $ MILLION AS AT 31 JULY 2019 YEAR ENDED 31 JULY 2019 CARRYING AMOUNT NOMINAL AMOUNT1 HEDGE EFFECTIVENESS AMOUNT OF NET INVESTMENT HEDGED2 FOREIGN CURRENCY BORROWINGS FOREIGN CURRENCY SWAPS3 NET INVESTMENT GAIN/(LOSS) RECOGNISED IN OTHER COMPREHENSIVE INCOME BORROWINGS/SWAPS GAIN/(LOSS) RECOGNISED IN OTHER COMPREHENSIVE INCOME 140 499 163 (140) (499) (163) 588 1,390 (527) (1,329) – – – (61) (61) 3 (22) (3) 14 (8) (3) 22 3 (14) 8 HEDGED NET INVESTMENTS AND HEDGING INSTRUMENTS USED Net investment hedging United States Dollar-denominated Maturity of borrowings: 10–23 months Australian Dollar-denominated Maturity of borrowings: 23–100 months Euro-denominated Maturity of borrowings: 64 months Chinese Renminbi-denominated Maturity of borrowings: 8–72 months Maturity of swaps: 4–5 months Total 1 Nominal amount is the face value, converted into New Zealand Dollars using the exchange rate at balance date, of foreign currency swaps designated in net investment hedge relationships. 2 The carrying amount of the net investment designated into a net investment hedge relationship. 3 The carrying amount of foreign currency swaps at balance date was $1 million and was presented within derivative assets. Borrowings denominated in foreign currency The Group’s policy is to maintain its net exposure to a foreign currency within predefined limits. To the extent the Group has monetary assets in the same foreign currency as the borrowing, the Group has a reduced exposure to foreign exchange risk. The foreign currency gains and losses relating to these balances is offset in net foreign exchange losses in the Income Statement. To manage the net exposure to foreign currency borrowings, the Group enters into cross currency interest rate swaps (CCIRS). CCIRS are used to manage the combined foreign exchange risk and interest rate risk as they swap fixed rate foreign currency borrowings and interest payments into equivalent New Zealand Dollar-denominated amounts of principal with floating interest rates. The Group applies hedge accounting to foreign currency denominated borrowings that are managed by CCIRS. The amount and maturity of the CCIRS and the hedged debt is aligned to ensure that the hedge relationship remains effective, with any undesignated costs of hedging accounted for separately. The hedge relationship may be designated into separate cash flow hedges and fair value hedges to manage the different components of foreign currency and interest rate risk: – Fair value hedge relationship where CCIRS are used to manage the interest rate and foreign currency risk in relation to foreign currency denominated borrowings with fixed interest rates. – Cash flow hedge relationship where CCIRS are used to manage the variability in cash flows arising from interest rate movements on floating interest rate payments and foreign exchange movements on payments of principal and interest. Hedge ineffectiveness arises in relation to CCIRS that have been designated in hedge relationships after their initial recognition, or from changes in counterparty credit risk and cross currency basis spreads. a) Foreign exchange risk CONTINUED The effect of the Group’s hedge accounting policies in managing both its foreign exchange risk and interest rate risk related to borrowings denominated in foreign currency is presented in the table below: AS AT 31 JULY 20201 YEAR ENDED 31 JULY 20202 GROUP $ MILLION CARRYING AMOUNT³ HEDGE EFFECTIVENESS IN RESERVES HEDGE EFFECTIVENESS HEDGE INEFFECTIVENESS HEDGING INSTRUMENTS USED NOMINAL AMOUNT DERIVATIVE ASSETS DERIVATIVE LIABILITIES Cash flow hedging and fair value hedging Cross-currency interest rate swaps ACCUMULATED COST OF HEDGING CHANGE IN VALUE USED TO CALCULATE HEDGE EFFECTIVENESS CASH FLOW HEDGE (OCI) CASH FLOW HEDGE RECLASSIFIED TO INCOME STATEMENT4 FAIR VALUE HEDGE (INCOME STATEMENT) GAIN/(LOSS)4 RECOGNISED IN INCOME STATEMENT GAIN/(LOSS)4 USD 1,184 380 – (3) 398 (4) 5 136 (2) Maturity: 74-121 months Weighted average interest rate: floating Weighted average NZD:USD rate: 0.7604 GBP 623 61 (232) – (107) 29 (12) 20 Maturity: 41 months Weighted average interest rate: floating Weighted average NZD:GBP rate: 0.3610 EUR 386 61 – (9) 73 31 (29) – Maturity: 52 months Weighted average interest rate: floating Weighted average NZD:EUR rate: 0.6560 Fair value hedging Cross-currency interest rate swaps USD 31 8 – – 8 NA NA – Maturity: 11 months Weighted average interest rate: floating Weighted average NZD:USD rate: 0.8160 Total 510 (232) (12) 372 56 (36) 156 3 – – 1 1 Life-to-date amounts as at balance date. 2 Year-to-date amounts recognised during the year. 3 Nominal amount is the face value, converted using the weighted average foreign exchange rate, of foreign denominated borrowings in hedge relationships. For those borrowings in fair value hedges, the carrying amount includes the life-to-date fair value hedge adjustment which increases borrowings by $322 million. 4 Recognised in Net finance costs and Other operating expenses. 120 121 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 a) Foreign exchange risk CONTINUED a) Foreign exchange risk CONTINUED Net foreign exchange losses in the Income Statement GROUP $ MILLION The table below provides a breakdown of the net foreign exchange losses recognised in the Income Statement: AS AT 31 JULY 20191 RESTATED YEAR ENDED 31 JULY 20192 RESTATED CARRYING AMOUNT³ HEDGE EFFECTIVENESS IN RESERVES HEDGE EFFECTIVENESS HEDGE INEFFECTIVENESS HEDGING INSTRUMENTS USED NOMINAL AMOUNT DERIVATIVE ASSETS DERIVATIVE LIABILITIES Cash flow hedging and fair value hedging Cross-currency interest rate swaps ACCUMULATED COST OF HEDGING CHANGE IN VALUE USED TO CALCULATE HEDGE EFFECTIVENESS CASH FLOW HEDGE (OCI) CASH FLOW HEDGE RECLASSIFIED TO INCOME STATEMENT4 FAIR VALUE HEDGE (INCOME STATEMENT) GAIN/(LOSS)4 RECOGNISED IN INCOME STATEMENT GAIN/(LOSS)4 USD 1,184 252 – (2) 263 3 (6) 150 (2) Maturity: 86-133 months Weighted average interest rate: floating Weighted average NZD:USD rate: 0.7604 GBP 623 63 (278) – (145) (13) 16 (15) (1) Maturity: 53 months Weighted average interest rate: floating Weighted average NZD:GBP rate: 0.3610 EUR 386 39 – (7) 50 (15) 18 19 Maturity: 64 months Weighted average interest rate: floating Weighted average NZD:EUR rate: 0.6560 Fair value hedging Cross-currency interest rate swaps USD 31 8 – – 8 NA NA 2 Maturity: 23 months Weighted average interest rate: floating Weighted average NZD:USD rate: 0.8160 Total 362 (278) (9) 176 (25) 28 156 (3) 1 Life-to-date amounts as at balance date. 2 Year-to-date amounts recognised during the year. 3 Nominal amount is the face value, converted using the weighted average foreign exchange rate, of foreign denominated borrowings in hedge relationships. For those borrowings in fair value hedges, the carrying amount includes the life-to-date fair value hedge adjustment which increases borrowings by $179 million. 4 Recognised in Net finance costs and Other operating expenses. Receivables and payables denominated in foreign currency The Group enters into foreign currency forward contracts and foreign currency options for 100 per cent of its net foreign currency receivables and payables. Derivatives used to hedge the changes in the value of foreign currency receivables and payables are not hedge accounted. Changes in the fair value of these derivatives provide an offset to the changes in the value of foreign currency receivables and payables recognised in the Income Statement. These are recognised within Other operating expenses in the Income Statement. Relationships where hedge accounting has been applied Net foreign exchange (losses)/gains attributable to: – Foreign currency-denominated borrowings – Derivatives Relationships where hedge accounting has not been applied Net foreign exchange (losses)/gains attributable to: – Foreign currency denominated receivables – Foreign currency denominated payables and borrowings – Derivatives – Other net foreign exchange losses Net foreign exchange losses Sensitivity analysis of changes in foreign currency rates GROUP $ MILLION 31 JULY 2020 31 JULY 2019 (37) 29 (64) 23 (8) (7) (64) (17) 18 119 (80) (40) – – The table below presents the effect on profit or loss for the year and equity at reporting date if foreign currency rates had been higher, or lower, with all other variables held constant. Assets and liabilities of disposal groups held for sale have been excluded from the sensitivity analysis below: – – 10% strengthening of the NZD 10% weakening of the NZD b) Interest rate risk GROUP $ MILLION 31 JULY 2020 EQUITY 189 (189) PROFIT (5) 16 31 JULY 2019 RESTATED EQUITY 230 (266) PROFIT (6) 8 Nature and exposure of interest rate risk to the Group The Group is exposed to interest rate risk on its interest-bearing borrowings, included within economic net interest-bearing debt (refer Note 9 Borrowings). Changes in market interest rates expose the Group to: – changes in the fair value of borrowings subject to fixed interest rates (fair value risk); and – changes in future interest payments on borrowings subject to floating interest rates (cash flow risk). How the Group manages its exposure to interest rate risk The Group’s policy is to maintain a target ratio of fixed and floating interest rate exposure. To achieve this the Group considers its forecast debt over a specified time horizon and manages the interest rate exposure by: – issuing fixed rate debt; and – entering into interest rate swaps (IRS). The Group applies hedge accounting to the borrowings and the associated IRS, for movements in benchmark market interest rates (i.e. excluding any margin component). Hedge ineffectiveness arises in relation to IRS that have been designated to hedge relationships after their initial recognition or from changes in counterparty credit risk. The ineffectiveness of these hedges will continue until maturity. 122 123 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 b) Interest rate risk CONTINUED In specific situations, where changes in the fair value of fixed-to-floating IRS provide an offset to the changes in the fair value of other associated floating- to-fixed IRS, hedge accounting is not applied. The changes in fair values of these IRS offset each other and are recognised within Net finance costs in the Income Statement. The effect of the Group’s hedge accounting policies in managing interest rate risk is presented in the table below: GROUP $ MILLION AS AT 31 JULY 20201 YEAR ENDED 31 JULY 20202 CARRYING AMOUNT3 HEDGE EFFECTIVENESS IN RESERVES HEDGE EFFECTIVENESS HEDGE INEFFECTIVENESS NOMINAL AMOUNT DERIVATIVE ASSETS DERIVATIVE LIABILITIES CHANGE IN VALUE USED TO CALCULATE HEDGE EFFECTIVENESS CASH FLOW HEDGE (OCI) CASH FLOW HEDGE RECLASSIFIED TO THE INCOME STATEMENT4 FAIR VALUE HEDGE (INCOME STATEMENT) GAIN/(LOSS)4 RECOGNISED IN THE INCOME STATEMENT GAIN/(LOSS)4 HEDGING INSTRUMENTS USED Cash flow hedging Interest rate swaps on NZD borrowings Maturity: 1-64 months Weighted average interest rate: 3.51% Interest rate swaps on AUD borrowings Maturity: 47-49 months Weighted average interest rate: 3.34% Fair value hedging Interest rate swaps on NZD borrowings Maturity: 32-64 months Weighted average interest rate: floating Interest rate swaps on AUD borrowings Maturity: 71-88 months Weighted average interest rate: floating 516 Total 65 88 3,296 172 – – 250 23 (241) (93) (63) (16) (3) (3) – – (257) 18 NA 69 (9) NA (66) 29 – NA NA 29 NA NA 7 22 29 34 – 2 – 36 GROUP $ MILLION AS AT 31 JULY 20191 YEAR ENDED 31 JULY 20192 CARRYING AMOUNT3 HEDGE EFFECTIVENESS IN RESERVES HEDGE EFFECTIVENESS HEDGE INEFFECTIVENESS NOMINAL AMOUNT DERIVATIVE ASSETS DERIVATIVE LIABILITIES CHANGE IN VALUE USED TO CALCULATE HEDGE EFFECTIVENESS CASH FLOW HEDGE (OCI) CASH FLOW HEDGE RECLASSIFIED TO THE INCOME STATEMENT4 FAIR VALUE HEDGE (INCOME STATEMENT) GAIN/(LOSS)4 RECOGNISED IN THE INCOME STATEMENT GAIN/(LOSS)4 3,441 – (240) (65) (101) 20 NA (7) 325 499 18 43 61 – – (240) 8 NA 47 NA (10) (101) NA NA 20 13 59 72 1 – (6) HEDGING INSTRUMENTS USED Cash flow hedging Interest rate swaps on NZD borrowings Maturity: 8-62 months Weighted average interest rate: 4.19% Fair value hedging Interest rate swaps on NZD borrowings Maturity: 10-76 months Weighted average interest rate: floating Interest rate swaps on AUD borrowings Maturity: 83-100 months Weighted average interest rate: floating Total 1 Life-to-date amounts as at balance date. 2 Year-to-date amounts recognised during the year. 3 The nominal amount represents the principal amount of outstanding or forecast borrowings designated in hedge relationships, translated into New Zealand Dollars using the exchange rate at balance date. For those borrowings in fair value hedges, the carrying amount includes the life to date fair value hedge adjustment which increases borrowings by $90 million (2019: increased borrowings by $61 million). 4 Recognised in Net finance costs. 124 b) Interest rate risk CONTINUED Sensitivity analysis of changes in interest rates The table below presents the effect on profit or loss for the year and equity at reporting date if interest rates had been higher, or lower, with all other variables held constant. Assets and liabilities of disposal groups held for sale have been excluded from the sensitivity analysis below: 100 basis point increase 100 basis point decrease GROUP $ MILLION 31 JULY 2020 31 JULY 2019 EQUITY PROFIT EQUITY 50 (54) 12 (11) 54 (54) PROFIT 22 (19) A change in interest rates would also impact floating rate interest payments and receipts on the Group’s borrowing and derivatives held at balance date. The impact of a change in interest rates on one-year contracted cash flows is shown below: 100 basis point increase in interest rates 100 basis point decrease in interest rates c) Commodity price risk Nature and exposure of commodity price risk to the Group GROUP $ MILLION 31 JULY 2020 31 JULY 2019 (4) 4 (7) 7 The Group is exposed to dairy commodity price risk through changes in selling prices and the cost of milk purchased from dairy farmers. In addition, the Group is a large purchaser of electricity, diesel and sugar and is exposed to changes in the cost of these commodities. How the Group manages its exposure to commodity price risk Dairy commodity price risk The Group manages its exposure to dairy commodity price risk by: – determining the most appropriate mix of products to manufacture based on the supply curve and global demand for dairy products; – governing the length and terms of sales contracts so that sales revenue is reflective of current market prices and is, where possible, linked to Global Dairy Trade (GDT) prices; and – using dairy commodity derivative contracts to obtain an optimal price for future sales, or the cost of milk, to manage margin risk. The markets for dairy commodity derivatives are relatively limited, which reduces the ability to manage earnings volatility. As markets for these derivatives grow, the use of dairy commodity derivatives to manage dairy commodity price risk may increase. Other commodity price risk The Group manages its exposure to other commodity price risk through the use of derivative contracts, which are transacted at Board-approved levels, to hedge the cost of electricity, diesel and sugar. The Group has commenced cash flow hedge accounting where derivatives are used to manage commodity risk on certain forecast transactions. The amount and maturity of the derivative and the forecast transaction is aligned to ensure that the hedge relationship remains effective. Hedge ineffectiveness arises if the amount of the forecast transactions falls below the amount of the designated hedging instruments. 125 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 c) Commodity price risk CONTINUED d) Credit risk CONTINUED The effect of the Group’s application of hedge accounting in managing commodity price risk related to forecast transactions is presented in the table below: Trade and other receivables GROUP $ MILLION AS AT 31 JULY 20201 CARRYING AMOUNT YEAR ENDED 31 JULY 20202 HEDGE EFFECTIVENESS NOMINAL AMOUNT³ DERIVATIVE ASSETS DERIVATIVE LIABILITIES CHANGE IN VALUE USED TO CALCULATE HEDGE EFFECTIVENESS CASH FLOW HEDGE RECLASSIFIED TO THE INCOME STATEMENT CASH FLOW HEDGE (OCI) 13 318 69 400 – 2 – 2 (1) (1) (6) (8) (1) 1 (6) (6) (5) 1 (14) (18) 4 – 6 10 HEDGING INSTRUMENTS USED Cash flow hedging Fuel Maturity: 1-18 months Average Price: $54.73 Milk Price Maturity: 3-27 months Average Price: $6.68 Electricity Maturity: 1-27 months Average Price: $91.61 Total 1 Life-to-date amounts as at balance date. 2 Year-to-date amounts recognised during the year. 3 Nominal amount represents forecast transactions in cash flow hedge relationships, translated into New Zealand Dollars using the exchange rate at balance date. Sensitivity analysis of changes in commodity prices The table below presents the effect on profit or loss for the year and equity at reporting date if commodity prices had been higher, or lower, with all other variables held constant. Commodity price sensitivity arises from the revaluation of derivative assets and liabilities in the Statement of Financial Position at reporting date. 10% increase in commodity prices 10% decrease in commodity prices d) Credit risk GROUP $ MILLION 31 JULY 2020 31 JULY 2019 EQUITY PROFIT EQUITY 33 (33) 10 (11) 4 (4) PROFIT 30 (30) Nature and exposure of credit risk to the Group Credit risk is the risk of loss to the Group due to customer or counterparty default on the Group’s receivable balances. The Group’s maximum exposure to credit risk is represented by the carrying amounts of Cash and cash equivalents, Trade and other receivables, Long-term advances, Derivative assets, and other investments and receivables. The Group has no undue concentrations of credit risk. How the Group manages its exposure to credit risk The Group’s policy is to actively manage its exposure to credit risk through the following actions: Derivative contracts, cash and cash equivalents and other balances – Use of financial counterparties that have a credit rating of at least ‘A-’ from Standard & Poor’s (or equivalent). – Use of commodity counterparties that have a credit rating of at least ‘BBB-’ from Standard & Poor’s (or equivalent) for commodity derivative contracts. – Posting or receiving margin in respect of derivative contracts transacted on exchanges. The Group has posted $69 million (31 July 2019: $41 million) of margin as collateral for derivative financial instruments. 126 – Application of credit limits, and credit mitigation tools, such as letters of credit. – Trade and other receivable balances are included in Note 11 Trade and other receivables. Long-term advances – Counterparty creditworthiness is assessed before the commencement of any Long-term advances. Depending on the nature and amount of the advance, they are subject to Board approval. The collectability of Long-term advances is monitored on a regular basis. e) Impact to reserves in equity The impact of the Group’s hedge accounting policies on the reserves in equity is presented in the tables below: Hedge reserves Opening balance Movements attributable to cash flow hedges Change in value of effective derivative hedging instruments Reclassifications to the Income Statement: – As hedged transactions occurred Net change in the cost of hedging reserve Tax expense Transferred between reserves Total movement Closing balance1 GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 (268) (43) 518 17 (138) 15 369 101 (267) (365) 362 1 1 – (1) (268) 1 Included in the closing balance of the hedge reserves is $1 million (31 July 2019: $1 million) relating to hedge relationships for which hedge accounting is no longer applied. Foreign currency translation reserve Opening balance Movements attributable to net investments in foreign operations and net investment hedges GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 (183) (364) Net translation (loss)/gain on: – Borrowings and derivative hedging instruments – Net investments in foreign operations Reclassifications to the Income Statement: – Upon disposal of the Venezuelan operations – Upon the reclassification of the investment in Beingmate – Other disposals of foreign operations Tax expense Total movement Closing balance1 (36) (39) – – 21 8 (46) (229) 1 Included in the closing balance of the foreign currency translation reserve is $15 million (31 July 2019: $4 million) relating to hedge relationships for which hedge accounting is no longer applied. 8 (25) 146 30 17 5 181 (183) 127 Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 f) Income Statement impact from derivatives not designated in a hedge relationship OTHER Fonterra Annual Report 2020 Notes to the Financial Statements In addition to derivatives that are designated and qualify for hedge accounting, the Group also holds certain derivatives as economic hedges of foreign currency, commodity and interest rate exposure. The impact of non-designated derivatives are recognised in the Income Statement. The impact of derivatives not designated in a hedging relationship are presented in the table below: DERIVATIVES NOT DESIGNATED IN A HEDGING RELATIONSHIP LOCATION OF GAIN/(LOSS) IN INCOME STATEMENT AS AT 31 JULY 2020 AS AT 31 JULY 2019 GROUP $ MILLION Foreign currency contracts Foreign currency contracts Commodity contracts Commodity contracts Interest rate contracts Total Revenue from sale of goods1 Other operating expenses Cost of goods sold Other operating expenses Finance costs (53) (8) (21) (2) (8) (92) – (40) 30 (3) (21) (34) This section contains additional notes and disclosures that aid in understanding the Group’s position and performance but do not form part of the primary sections. This section includes the following notes: Note 20: Taxation Note 21: Contingent liabilities, provisions and commitments Note 22: Related party transactions Note 23: Subsidiaries Note 24: Fair value measurement Note 25: Offsetting of financial assets and liabilities Note 26: Net tangible assets per quoted equity security Note 27: Impact of transition to NZ IFRS 16 Leases Note 28: Re-presentations and prior period restatements 1 $61 million of losses on foreign exchange contracts recognised within Revenue from sale of goods relate to cash flow hedges where the forecast sales transactions are no longer expected to occur (31 July 2019: nil). 20 TAXATION Tax expense comprises current and deferred tax. Tax expense, including the tax consequences of distributions to farmer shareholders, is recognised in the Income Statement. The tax consequences of distributions to farmer shareholders are recognised in the year to which the distribution relates. Other than distributions to farmer shareholders, tax consequences of items recognised directly in equity are also recognised in equity. Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the balance date, and any adjustment to tax payable or receivable in respect of previous years. Deferred tax arises due to certain temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and those for taxation purposes. Deferred tax is measured at the tax rate that is expected to apply to the temporary differences when they reverse, based on laws that have been enacted or substantively enacted at balance date. Deferred tax is not recognised on the following temporary differences: – the initial recognition of goodwill; – the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable profit; and – differences relating to investments in subsidiaries and equity accounted investees to the extent that the timing of the reversal is controlled by the Group and it is probable that they will not reverse in the foreseeable future. In determining the probability of reversal, consideration is taken of whether the related assets are held for sale, future expectations of exiting, and if applicable, the impact any exit would have on the crystallisation of the deferred tax. Deferred tax assets are recognised to the extent it is probable that future taxable profits will be available against which the temporary differences can be utilised. a) Taxation – Income Statement The total Tax expense in the Income Statement is summarised as follows: GROUP $ MILLION 31 JULY 2020 31 JULY 2019 Current tax expense Prior period adjustments to current tax Deferred tax movements: – Origination and reversal of temporary differences Tax expense 90 8 77 175 80 7 (7) 80 129 128 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 a) Taxation – Income Statement CONTINUED The taxation charge that would arise at the standard rate of corporation tax in New Zealand is reconciled to the Tax expense as follows: Profit/(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 2020 31 JULY 2019 978 274 (11) 104 (183) 8 192 19.6% (19) 173 17.7% (1) 3 175 17.9% 20 48 (42) (12) (21) 148 (18) 7 104 NA – 104 NA (31) 7 80 NA 20 64 1 The effective tax rate is the Tax expense on the face of the Income Statement expressed as a percentage of the Profit before tax. The Group recorded a Loss before tax in the year ended 31 July 2019, so the calculation of an effective tax rate is not applicable. b) Taxation – Statement of Financial Position Deferred tax assets and deferred tax liabilities relate to the following: GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 RESTATED DEFERRED TAX ASSET DEFERRED TAX LIABILITY NET DEFERRED TAX ASSET DEFERRED TAX LIABILITY 1,596 – 162 – 80 65 75 428 241 7 2,654 (2,233) 421 (1,650) (388) (155) (30) – – – – – (30) (2,253) 2,233 (20) (54) (388) 7 (30) 80 65 75 428 241 (23) 401 – 401 1,661 – – 111 54 49 55 522 236 45 2,733 (2,123) 610 (1,724) (498) – – – – – – – – (2,222) 2,123 (99) NET (63) (498) – 111 54 49 55 522 236 45 511 – 511 Deferred tax Property, plant and equipment Intangible assets Right-of-use assets Derivative financial instruments Employee entitlements Inventories Receivables, payables and provisions New Zealand tax losses Offshore tax losses Other Total before offsetting Offset adjustment Total Movements for the year Opening balance Recognised in the Income Statement Recognised directly in other comprehensive income Implementation of NZ IFRS 16 Transferred to Liabilities of disposal groups held for sale Foreign currency translation Closing balance New Zealand tax losses GROUP $ MILLION 31 JULY 2020 31 JULY 2019 RESTATED 511 (58) (133) 7 47 27 401 594 (88) 6 – – (1) 511 The New Zealand tax consolidated group generated taxable income in the current year. The deferred tax asset relating to New Zealand tax losses of $428 million (31 July 2019: $522 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 40 per cent to 60 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. A reasonably possible change in the key assumptions does not change the carrying value of the deferred tax asset recognised. Offshore tax losses Gross tax losses of $48 million reflecting a deferred tax asset of $14 million (31 July 2019: $64 million gross, deferred tax asset of $19 million) relating to offshore entities have not been recognised as they may not be utilised. 130 131 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 b) Taxation – Statement of Financial Position CONTINUED Deferred tax liabilities Earnings made by foreign subsidiaries could be subject to withholding and other taxes on remittance. Deferred tax liabilities are not recognised in respect of unremitted earnings that are considered indefinitely reinvested in foreign subsidiaries. During the year, the Group reassessed the likelihood of earnings being remitted to New Zealand and recognised a deferred tax liability of $30 million relating to unremitted earnings previously considered to be indefinitely reinvested. As at 31 July 2020, unremitted earnings that are considered indefinitely reinvested in foreign subsidiaries amount to $131 million (31 July 2019: $1,085 million). The Group has made a judgement not to recognise deferred tax liabilities in respect of these amounts because it can control the timing and the manner in which the associated temporary difference will reverse. This includes controlling the timing of dividends, and in the event of divestments made because of the strategic review, the manner in which divestment proceeds are remitted (and therefore the associated tax consequences). Uncertain Tax Position In determining the amount of current and deferred tax, the Group takes into account the effect of uncertain tax positions and whether additional taxes, penalties and interest may be due. The Group operates in several different tax jurisdictions. This leads to complex tax issues. The ultimate decision regarding these complex tax issues is often outside the control of the Group and depends on the efficiency of the legal processes in the relevant tax jurisdiction. The Group believes that its accruals for tax liabilities are adequate for all open tax years based on its assessment of many factors, including interpretations of tax law and prior experience. This assessment relies on estimates and assumptions about future events. New information may become available that causes the Group to change its judgement regarding the adequacy of existing tax liabilities. Such changes to tax liabilities will affect tax expense in the period that such determination is made. 21 CONTINGENT LIABILITIES, PROVISIONS AND COMMITMENTS Provisions are recognised in the Statement of Financial Position only where the Group has a present legal or constructive obligation. This obligation must be the result of a past event, when it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made. Legal counsel or other experts are consulted on matters that may give rise to a provision or a contingent liability. Estimates and assumptions are made in determining the likelihood, amount and timing of cash outflows when the outcome is uncertain. a) 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 June 2020 a class action was filed in the Supreme Court of Victoria against Fonterra Australia Pty. Ltd., Fonterra Milk Australia Pty. Ltd. and Fonterra Brands (Australia) Pty. Ltd. (collectively, Fonterra Australia) by Geoffrey and Lynden Iddles on behalf of farmers who supplied milk to Fonterra Australia during the 2015/2016 season. The class action relates to actions taken by Fonterra Australia in connection with its milk price in the 2015/2016 season including the manner in which Fonterra Australia set its opening milk price and forecast closing milk price at the outset of that season, its communications with suppliers about the milk price throughout the season; and its reduction of the milk price in May 2016. The plaintiffs are alleging that Fonterra Australia breached its contracts with suppliers, engaged in misleading and deceptive conduct and engaged in unconscionable conduct in connection with these matters. Fonterra expects to vigorously defend these claims. Given the early stage of the litigation, it is not currently possible to estimate the amount of any potential exposure in connection with this class action. In April 2020, Fonterra resolved all outstanding claims from Danone relating to Fonterra’s Whey Protein Concentrate 80 (WPC80) precautionary recall in August 2013. Danone has withdrawn the New Zealand High Court proceedings against Fonterra which had been stayed pending separate Singapore arbitration proceedings against Fonterra in connection with the WPC80 precautionary recall. 132 b) Provisions As at 1 August 2019 Reclassification of tax provision to tax payable1 Adjusted balance as at 1 August 2019 Additional provisions Unused amounts reversed Charged to Income Statement Charged to equity Utilised during the year Transferred to liabilities of disposal groups held for sale Foreign currency translation As at 31 July 2020 Included in the Statement of Financial Position as follows: Current liabilities Non-current liabilities Total provisions GROUP $ MILLION EMPLOYEE RELATED PROVISIONS LEGAL CLAIMS PROVISIONS RESTRUCTURING PROVISIONS OTHER PROVISIONS TOTAL PROVISIONS 80 – 80 49 – 49 19 (3) (35) (14) 96 58 (24) 34 – (3) (3) – – (20) (9) 2 42 – 42 16 (3) 13 – (52) – – 3 24 – 24 34 (10) 24 – (17) – – 31 204 (24) 180 99 (16) 83 19 (72) (55) (23) 132 68 64 132 1 $24 million of legal claims provisions was reclassed from provisions to tax payable at 31 July 2019 as a result of the retrospective adoption of NZ IFRIC 23 Uncertainty over Income Tax Treatments. Refer to Basis of preparation for new and amended International Financial Reporting Standards. Employee related provisions include amounts payable to employees pending judicial interpretation of the requirements of legislation in New Zealand, defined benefit scheme obligations, other obligations that fall due on termination of employment, and long-term employee benefits. The timing and amount of settlement is uncertain as it primarily depends on the outcome of judicial proceedings or decisions relating to the employment of relevant employees. Legal claims provisions include obligations relating to customs and duties and legal matters arising in the normal course of business. The timing and amount of settlement is uncertain as it depends on the outcome of a number of judicial proceedings. Other provisions relate to product quality claims and other claims arising in the normal course of business. The timing and amount of settlement is uncertain as it depends on the outcome of the commercial negotiations relating to each individual claim. c) Commitments Capital expenditure contracted for at balance date but not recognised in the financial statements are as follows: GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 Buildings Plant, vehicles and equipment Software Total commitments 34 75 2 111 5 43 1 49 133 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 22 RELATED PARTY TRANSACTIONS The transactions with related parties that were entered into during the year, and the year end balances that arose from those transactions are shown below: a) Key management personnel remuneration Key management personnel comprise members of the Board and members of the Fonterra Management Team. Short-term employee benefits1 Long-term employee benefits Termination benefits Directors’ remuneration Total key management personnel remuneration GROUP $ MILLION 31 JULY 2020 31 JULY 2019 20 3 1 2 26 13 3 2 2 20 22 RELATED PARTY TRANSACTIONS CONTINUED c) Outstanding balances with related parties Equity accounted investees Total receivables arising from the sale of goods or services1 Total receivables arising from financing arrangements2 Total payables arising from the purchase of goods or services Total payables arising from financing arrangements Key management personnel Total payables arising from the sale or purchase of goods or services3 GROUP $ MILLION AS AT 31 JULY 2020 AS AT 31 JULY 2019 24 55 (29) (1) (22) 25 65 (31) (2) (18) 1 In addition, as at 31 July 2020 the Group recognised a provision of $2 million for former key management personnel in relation to pending judicial interpretation of the requirements of legislation in New Zealand. Includes $7 million provision for impairment of receivables from equity accounted investees (31 July 2019: nil). 1 2 Loans to related parties other than equity accounted investees are unsecured and repayable in cash on demand. Loans to equity accounted investees are unsecured and repayable over varying terms of between four years and nine years. 3 Payables to key management personnel relate to amounts owing for milk supplied by farmer shareholder Directors and are recognised in owing to suppliers. b) Transactions with related parties during the year Transactions with related parties are under normal trade terms and none of the balances are secured. Equity accounted investees Revenue from the sale of goods1 Sale of services2 Royalty and other income Dividends received Interest income from financing arrangements Purchases of goods3 Purchases of services4 Purchase of Darnum manufacturing plant from Beingmate5 Key management personnel Purchases of goods6 Sale of goods7 1 Goods sold are primarily commodity products. 2 Services provided include management fees. 3 Goods purchased are primarily commodity products. 4 Services provided are primarily freight services. 5 Beingmate was considered a related party until the Group lost significant influence in the second half of FY19. 6 Purchases from key management personnel primarily relate to milk supplied by farmer shareholder Directors. 7 Sales to key management personnel primarily related to sales through Farm Source™ stores. GROUP $ MILLION 31 JULY 2020 31 JULY 2019 104 10 2 33 1 (57) (162) – (154) 4 120 9 2 6 2 (56) (169) (126) (118) 4 d) Financial guarantees The Group provides financial guarantees for certain equity accounted investees. At 31 July 2020, the aggregate drawn down amount of equity accounted investees’ liabilities for which the Group is jointly and severally liable was nil (31 July 2019: $1 million). e) Transactions with related entities As part of the administration of Trading Among Farmers, the Group entered into an Authorised Fund Contract to provide administrative services in relation to the Fund and meet the operating expenses of the Fund. In addition, the Group has agreed to provide corporate facilities, support functions and other services at no cost to the Fund. f) Commitments In addition to the transactions disclosed above, the Group has: – Prospective commitments with related parties including contracts with associates and joint ventures for the supply of dairy products and energy, and the provision of various management services. – Other than the contractual commitment to provide future funding to the Falcon China Farms JV (refer to Note 2 Strategy review update) no other contractual commitments have been provided to related parties. 134 135 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 23 SUBSIDIARIES Subsidiaries are entities controlled by the Group. Subsidiaries are consolidated from the date the Group gains control until the date on which control ceases. Non-controlling interests are allocated their share of profit after tax in the Income Statement and are presented within equity in the Statement of Financial Position separately from equity attributable to equity holders. The effect of all transactions with non-controlling interests that change the Group’s ownership interest but do not result in a change in control are recorded in equity. Where control is lost, the remaining interest in the investment is remeasured to fair value and any surplus or deficit arising from that remeasurement is recognised in the Income Statement. The Group’s subsidiaries are involved in the marketing, distribution, processing, technology or financing of dairy products. All Group subsidiaries have a balance date of 31 July unless otherwise indicated. Subsidiaries with different balance dates from that of the Group are due to legislative requirements in the country the entities are domiciled. The Group holds investments in certain countries that have some limited restrictions on the repatriation of funds back to New Zealand. This does not result in any significant restriction on the flow of funds for the Group. The significant subsidiaries of the Group are listed below: 23 SUBSIDIARIES CONTINUED The Group’s ownership interest of the following entities is 50 per cent or less. However, they have been consolidated on the basis that the Group controls them through its exposure or rights to variable returns and the power to affect those returns. OVERSEAS SUBSIDIARIES 50% OR LESS OWNERSHIP Fonterra (Japan) Limited Fonterra Brands (Middle East) L.L.C. COUNTRY OF INCORPORATION AND PRINCIPAL PLACE OF BUSINESS AS AT 31 JULY 2020 AS AT 31 JULY 2019 OWNERSHIP INTERESTS (%) Japan UAE 50 49 50 49 In addition to the entities above, the Group controls the Fonterra Shareholders’ Fund and Fonterra Farmer Custodian Limited and consolidates these two entities. The trustees of the Fonterra Farmer Custodian Trust own the legal title to all of the shares of the Custodian. The Fund is a managed investment scheme with an independent trustee. In concluding that the Group controls the Fund and the Custodian, the Directors took into consideration that they form an integral part of the structure and operation of Trading Among Farmers. SUBSIDIARY NAME New Zealand Milk (Australasia) Pty Limited Fonterra Australia Pty Limited1 Fonterra Brands (Australia) Pty Limited1 Dairy Partners Americas Brasil Limitada2 Soprole Inversiones S.A.2 Comercial Santa Elena S.A.3 Soprole S.A.3 Sociedad Procesadora de Leche del Sur S.A. (Prolesur S.A.)3 Fonterra Commercial Trading (Shanghai) Company Limited2 Fonterra (Yutian) Dairy Farm Co. Limited2 Fonterra (Ying) Dairy Company Limited2 Tangshan Fonterra Dairy Farm Limited2 Fonterra Brands (Hong Kong) Limited Fonterra Brands Indonesia, PT Fonterra Brands (Malaysia) Sdn Bhd Fonterra (Europe) Coöperatie U.A. Fonterra Europe Manufacturing B.V. Fonterra (New Zealand) Limited Fonterra Brands (New Zealand) Limited Fonterra Dairy Solutions Limited Fonterra Ingredients Limited Fonterra Limited New Zealand Milk Brands Limited RD1 Limited Kotahi Logistics LP Fonterra Brands (Singapore) Pte Limited Fonterra Brands Lanka (Private) Limited Fonterra (USA) Inc. COUNTRY OF INCORPORATION AND PRINCIPAL PLACE OF BUSINESS OWNERSHIP INTERESTS (%) AS AT 31 JULY 2020 AS AT 31 JULY 2019 Australia Australia Australia Brazil Chile Chile Chile Chile China China China China Hong Kong Indonesia Malaysia Netherlands Netherlands New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand New Zealand Singapore Sri Lanka United States 100 100 100 51 99.9 99.9 99.9 100 100 100 51 99.9 99.9 99.9 99.94 86.26 100 100 100 85 100 100 100 100 100 100 100 100 100 100 100 100 90 100 100 100 100 100 100 85 100 100 100 100 100 100 100 100 100 100 100 100 91 100 100 100 1 These entities are subsidiaries of New Zealand Milk (Australasia) Pty Limited. 2 Balance date 31 December. 3 Balance date 31 December and these entities are subsidiaries of Soprole Inversiones S.A. 136 137 Fonterra Annual Report 2020 Notes to the Financial Statements 24 FAIR VALUE MEASUREMENT CONTINUED The following table shows the fair value hierarchy for each class of financial asset and liability where the carrying value in the Statement of Financial Position differs from the fair value: GROUP $ MILLION FAIR VALUE CARRYING VALUE LEVEL 1 LEVEL 2 AS AT 31 JULY 2020 AS AT 31 JULY 2019 RESTATED AS AT 31 JULY 2020 AS AT 31 JULY 2019 AS AT 31 JULY 2020 AS AT 31 JULY 2019 RESTATED 220 142 – – 235 150 (600) (35) (20) (4,782) – (600) (35) (619) (4,971) (71) (633) (32) – – – (627) (35) – – – – – (20) (4,996) – – – (620) (5,208) (75) Financial assets Long-term advances Financial liabilities Borrowings – NZX-listed bonds – Capital notes – Bank loans – Medium-term notes – Finance leases1 1 From 1 August 2019 finance leases are included in the lease liabilities balance. This presentation change is a result of the adoption of NZ IFRS 16 Leases. For details on the impact of the change in lease accounting refer to Note 27 Impact of transition to NZ IFRS 16 Leases. Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 24 FAIR VALUE MEASUREMENT Valuation techniques for determining fair values The fair value is the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. The fair values of financial assets and liabilities are calculated by reference to quoted market prices where that is possible. A market is regarded as active if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency, and those prices represent actual and regularly occurring market transactions on an arm’s length basis. If quoted market prices are not available, the methodology used to calculate the fair values of financial assets and liabilities is to identify the expected cash flows under the terms of each specific contract and then discount these values back to the present value. These models use as their basis independently sourced market data where it is available and rely as little as possible on entity-specific estimates. The calculation of the fair value of financial instruments reflects the impact of credit risk where applicable. Specific valuation techniques used to value financial instruments include: – The fair value of foreign exchange contracts is determined using observable currency exchange rates, option volatilities and interest rate yield curves; – The fair value of interest rate contracts is calculated as the present value of the estimated future cash flows based on observable interest rate yield curves; – The fair value of commodity contracts that are not exchange traded is determined by calculating the present value of estimated future cash flows based on observable quoted prices for similar instruments; and – The fair value on the hedged risks of borrowings and long-term advances that are not exchange traded is calculated as the present value of the estimated future cash flows based on observable currency exchange rates and interest rate yield curves. Fair value hierarchy The fair value hierarchy described below is used to provide an indication of the level of estimation or judgement required in determining fair value: – Level 1: Quoted prices (unadjusted) in active markets for identical assets or liabilities. – Level 2: Inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly (i.e. as prices) or indirectly (i.e. derived from prices). – Level 3: Inputs for the assets or liabilities that are not based on observable market data (unobservable inputs). The Group recognises transfers between levels of the fair value hierarchy at the end of the reporting period during which the change occurred. The following table shows the fair value hierarchy for assets and liabilities measured at fair value: GROUP $ MILLION LEVEL 1 LEVEL 2 LEVEL 3 AS AT 31 JULY 2020 AS AT 31 JULY 2019 AS AT 31 JULY 2020 AS AT 31 JULY 2019 AS AT 31 JULY 2020 AS AT 31 JULY 2019 19 – – (23) – – 157 17 – – 170 14 – – (9) – – 234 8 – – 247 2 493 602 (2) (72) (499) – 23 – – 547 1 40 433 (4) (200) (539) – 15 – – (254) – – – – – – – 11 6 402 419 – – – – – – – 16 295 229 540 Measured at fair value on a recurring basis: Derivative assets – Commodity derivatives – Foreign exchange derivatives – Interest rate derivatives1 Derivative liabilities – Commodity derivatives – Foreign exchange derivatives – Interest rate derivatives1 Investment in Beingmate Investments in shares Livestock Measured at fair value on a non-recurring basis: Disposal groups held for sale Fair value 1 Includes cross-currency interest rate swaps. 138 139 Fonterra Annual Report 2020 Notes to the Financial Statements Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 25 OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES Financial assets and liabilities are offset and the net amount reported in the Statement of Financial Position where there currently is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis or realise the asset and settle the liability simultaneously. The Group enters into various master netting arrangements or similar agreements that do not meet the criteria for offsetting in the Statement of Financial Position but still allow for the related amounts to be offset in certain circumstances. These principally relate to derivative transactions under ISDA (International Swap and Derivative Association) agreements where each party has the option to settle amounts on a net basis in the event of default of the other party. 27 IMPACT OF TRANSITION TO NZ IFRS 16 LEASES The impact of adopting NZ IFRS 16 Leases is summarised below: Closing lease commitment for the year ended 31 July 2019 Operating lease payments not brought on to Statement of Financial Position: – Exempt leases (short term leases and leases of low-value assets) – Arrangements that are not leases The table below sets out the financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and other agreements. Additional lease payments brought on to Statement of Financial Position AMOUNTS OFFSET IN THE STATEMENT OF FINANCIAL POSITION GROUP $ MILLION GROSS FINANCIAL ASSETS/(LIABILITIES) GROSS FINANCIAL ASSETS/(LIABILITIES) SET OFF NET FINANCIAL ASSETS/(LIABILITIES) PRESENTED AMOUNTS NOT OFFSET Effect of discounting lease payments Finance lease liabilities transferred Opening lease liability 1 August 2019 GROUP $ MILLION 513 (40) (50) 244 (86) 71 652 – (87) (86) (173) 87 86 173 – – (38) (90) (128) 38 90 128 – 788 1,116 1,775 3,679 (596) (1,588) (2,184) 1,495 550 488 1,824 2,862 (752) (1,534) (2,286) 576 – (447) (20) (467) 467 – 467 – (8) (283) – (291) 291 – 291 – NET 788 669 1,755 3,212 (129) (1,588) (1,717) 1,495 542 205 1,824 2,571 (461) (1,534) (1,995) 576 On transition, the Group has elected to utilise the modified retrospective approach for existing leases. This method resulted in an adjustment to the opening balance of retained earnings as at 1 August 2019 of $20 million. Prior year comparative information is not required to be restated. The weighted-average incremental borrowing rate used to measure lease liabilities at transition was 3.56 per cent. For leases previously classified as operating leases, lease liabilities were measured at the present value of the remaining lease payments, discounted at the incremental borrowing rate as at 1 August 2019. Right-of-use assets are measured at either: – Their carrying amount as if NZ IFRS 16 had been applied since the commencement date, discounted using the incremental borrowing rate at 1 August 2019; or – An amount equal to the lease liability, adjusted by the amount of any prepaid or accrued lease payments. The Group used the following practical expedients when applying NZ IFRS 16 to leases previously classified as operating leases: – Applied the exemption not to recognise Right-of-use assets and liabilities for low value leases and leases with less than 12 months of lease term remaining at 1 August 2019; – Elected to apply a single discount rate to a portfolio of leases where they had similar characteristics; – Excluded initial direct costs from the measurement of the Right-of-use asset at 1 August 2019; and – Assessed the lease term using facts and circumstances known at transition date, rather than looking back and making retrospective assumptions of the facts and circumstances at the start of the lease. The related lease expense for exempt leases is recognised in Profit before net finance costs and tax. A number of leases were previously classified as finance leases. The carrying value of lease assets and lease liabilities for these leases as at 31 July 2019 was transferred to Right-of-use assets and lease liability under NZ IFRS 16. Cash and cash equivalents Derivative financial assets Trade and other receivables (excluding prepayments) Derivative financial liabilities Owing to suppliers 31 July 2020 Cash and cash equivalents Derivative financial assets Trade and other receivables (excluding prepayments) Derivative financial liabilities Owing to suppliers 31 July 2019 (restated) 788 1,203 1,861 3,852 (683) (1,674) (2,357) 1,495 550 526 1,914 2,990 (790) (1,624) (2,414) 576 26 NET TANGIBLE ASSETS PER QUOTED EQUITY SECURITY Net tangible assets per security1 $ per equity instrument on issue Equity instruments on issue (million) 1 Net tangible assets represent Total assets less Total liabilities less Intangible assets. GROUP AS AT 31 JULY 2020 2.77 1,612 AS AT 31 JULY 2019 RESTATED 2.01 1,612 140 141 Notes to the Financial Statements CONTINUED FOR THE YEAR ENDED 31 JULY 2020 28 RE-PRESENTATIONS AND PRIOR PERIOD RESTATEMENTS 28 RE-PRESENTATIONS AND PRIOR PERIOD RESTATEMENTS CONTINUED Fonterra Annual Report 2020 Notes to the Financial Statements Re-presentations Discontinued operations As at 31 July 2020 the China Farms and Brazil consumer and foodservice businesses are classified as disposal groups held for sale and considered to be discontinued operations (refer to Note 2 Strategy review update for further details). This has the following impact on the presentation of these financial statements: – Discontinued operations are presented in a single line item in the Income Statement in both the current and comparative reporting periods. Comparative period information in the Income Statement has been re-presented to reflect the classification of China Farms and the Brazil consumer and foodservice businesses as discontinued operations. – Assets of disposal groups held for sale are presented in a single line item within Current assets, and Liabilities of disposal groups held for sale are presented in a single line item within Current liabilities. Comparative period information in the Statement of Financial Position has not been re-presented. – The Statement of Changes in Equity and Cash Flow Statement have not been adjusted to separately present discontinued operations. Current period presentation Long-term advances and the Investment in Beingmate have been presented as separate line items in the Statement of Financial Position. In the 2019 Financial Statements these items were included within Other non-current assets. Comparative period information in the Statement of Financial Position has been re-presented to reflect the current year presentation. Restatements Agent adjustment The Group adopted NZ IFRS 15 Revenue from Contracts with Customers from 1 August 2018. On adoption of NZ IFRS 15, the Group had determined that it was the principal in relation to certain performance obligations for freight and insurance services provided on specific international sales. During the current reporting period, this conclusion was reconsidered, and it was determined that the Group was an agent rather than the principal. This resulted in an adjustment to Revenue from sale of goods to record the net agency fees for arranging certain freight and insurance services, rather than the gross revenue. This change does not impact gross margin or earnings. Control transfer adjustment The Group has also reviewed its major revenue contracts. This review identified that for a specific contract in China, it had previously been determined that the Group ceased to control the goods when the goods were transferred to the distributor. During the current reporting period this conclusion was reconsidered, and it was determined that the distributor acts as an agent for the Group and control of the goods does not pass until the inventory reaches an end customer. This results in the deferral of revenue until the point in time that the control is transferred to the end customer, rather than on transfer to the distributor. GBP bond adjustment During the year ended 31 July 2009, the Group designated a GBP denominated medium term note and associated cross currency interest rate swaps used to manage foreign exchange and interest rate risk into hedge accounting relationships. During the current reporting period the Group reassessed the historic effectiveness of these relationships. This has resulted in a restatement of the Group’s Retained earnings and Borrowings. Presentation of cash flows from financing activities During the year ended 31 July 2020 the Group has reassessed the presentation of gross cash flows relating to bank loans in the Cash Flow Statement and Note 9 Borrowings. This has resulted in a $540 million increase in Proceeds from borrowings and Repayments of Borrowings in the Cash Flow Statement for the comparative year. This restatement was made to better reflect the Group’s financing activities and has had no impact on net cash flows, the Income Statement or Statement of Financial Position. The following tables reconcile the impact on key line items in the Group’s Income Statement and Statement of Financial Position from re-presentations and restatements1. STATEMENT OF FINANCIAL POSITION (EXTRACT) Trade and other receivables Inventories Deferred tax asset Trade and other payables Non-current borrowings Net assets Retained earnings Total equity GROUP $ MILLION AS AT 31 JULY 2018 AUDITED CONTROL TRANSFER ADJUSTMENT GBP BOND ADJUSTMENT AS AT 31 JULY 2018 RESTATED 2,355 2,917 667 (2,116) (5,907) 6,349 934 6,349 (75) 360 11 (324) – (28) (28) (28) GROUP $ MILLION – – 5 – (19) (14) (14) (14) 2,280 3,277 683 (2,440) (5,926) 6,307 892 6,307 INCOME STATEMENT (EXTRACT) Revenue Cost of sales Gross profit Expenses and other items including finance costs Profit/(loss) before income tax Income tax Loss after tax from continuing operations Loss from discontinued operations Loss after tax YEAR ENDED 31 JULY 2019 AUDITED DISCONTINUED OPERATIONS YEAR ENDED 31 JULY 2019 CONTINUING OPERATIONS PROFIT INCREASE/ (DECREASE) AGENT ADJUSTMENT INCREASE/ (DECREASE) CONTROL TRANSFER ADJUSTMENT YEAR ENDED 31 JULY 2019 RESTATED 20,114 (17,334) 2,780 (3,208) (428) (177) (605) (665) 766 101 292 393 95 488 19,449 (16,568) 2,881 (2,916) (35) (82) (117) (488) (605) (498) 498 – – – – – – – 304 (311) (7) – (7) 2 (5) – (5) 19,255 (16,381) 2,874 (2,916) (42) (80) (122) (488) (610) STATEMENT OF FINANCIAL POSITION (EXTRACT) Trade and other receivables Inventories Deferred tax asset Trade and other payables Non-current borrowings Net assets Retained earnings Total equity GROUP $ MILLION AS AT 31 JULY 2019 AUDITED CONTROL TRANSFER ADJUSTMENT GBP BOND ADJUSTMENT AS AT 31 JULY 2019 RESTATED 1,900 2,944 592 (1,869) (5,361) 5,881 360 5,881 (29) 221 13 (238) – (33) (33) (33) – – 5 – (19) (14) (14) (14) 1,871 3,165 610 (2,107) (5,380) 5,834 313 5,834 143 1 Where applicable, the Cash Flow Statement has been restated to reflect the above changes. These restatements have not impacted net cash flows. 142 Independent Auditor’s Report Fonterra Annual Report 2020 Independent Auditor’s Report To the shareholders of Fonterra Co-operative Group Limited REPORT ON THE AUDIT OF THE CONSOLIDATED FINANCIAL STATEMENTS Opinion In our opinion, the accompanying consolidated financial statements of Fonterra Co-operative Group Limited (the ‘Company’) and its subsidiaries (the ‘Group’) on pages 76 to 143: i. present fairly in all material respects the Group’s financial position as at 31 July 2020 and its financial performance and cash flows for the year ended on that date; and ii. comply with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards. We have audited the accompanying consolidated financial statements which comprise: — the consolidated statement of financial position as at 31 July 2020; — the consolidated income statement, statements of other comprehensive income, changes in equity and cash flows for the year then ended; and — notes, including a summary of significant accounting policies and other explanatory information. Basis for opinion We conducted our audit in accordance with International Standards on Auditing (New Zealand) (‘ISAs (NZ)’). We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. We are independent of the Group in accordance with Professional and Ethical Standard 1 (Revised) Code of Ethics for Assurance Practitioners 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 and the IESBA Code. Our responsibilities under ISAs (NZ) are further described in the auditor’s responsibilities for the audit of the consolidated financial statements section of our report. Our firm has also provided other services to the Group that are related to our role as the Group’s auditor, such as assurance and agreed upon procedures services. Subject to certain restrictions, partners and employees of our firm may also deal with the Group on normal terms within the ordinary course of trading activities of the business of the Group. These matters have not impaired our independence as auditor of the Group. The firm has no other relationship with, or interest in, the Group. Materiality The scope of our audit was influenced by our application of materiality. Materiality helped us to determine the nature, timing and extent of our audit procedures and to evaluate the effect of misstatements, both individually and on the consolidated financial statements as a whole. The materiality for the Group financial statements as a whole was set at $50 million, determined with reference to a benchmark of the cost of New Zealand sourced milk. We chose the benchmark because, in our view, this is a key measure of the Group’s performance for the co-operative’s farmer shareholders. We also benchmarked materiality against revenue, assets and earnings. Scoping The scope of our audit is designed to ensure that we perform adequate work to be able to give an opinion on the consolidated financial statements as a whole, taking into account the structure of the Group, the financial reporting systems, processes and controls, and the industry in which it operates. In establishing the overall approach to our audit, we considered the centralised nature of the Group’s operations, the risk profile of countries where the Group operates, and changes taking place within the business. We also considered the financial significance of each business unit together with any local statutory audit requirements. The Group financial statements are a consolidation of over 100 individual subsidiaries and equity accounted investees. Due to their financial significance and risk profile we scoped in 13 components in New Zealand, Australia, Chile, Japan and the USA to undertake audits performed under our instruction. Audits of these components were performed using materiality levels assigned by the Group audit team, which were lower than the materiality level for the Group as a whole, ranging from $5 million to $35 million, and determined with reference to their size and risk profile. Specified risk-focused audit procedures were performed by Group and component auditors on certain balances and transactions in respect of a further 16 in scope components in Australia, Brazil, Chile, China, Hong Kong, Malaysia, the Netherlands, New Zealand, Singapore and Sri Lanka. The Group consolidation, financial statement disclosures and a number of complex items were audited by the Group audit team centrally in New Zealand. These included general IT controls, revenue recognition, impairment, adoption of IFRS 16 Leases, financial instruments, taxation and accounting for divestments and assets held for sale. The Group audit team led the participation of component audit teams in the Group audit. We visited all component locations subject to audit during our risk assessment phase. Detailed audit instructions were sent to all auditors of in-scope components. These instructions set out the significant audit areas that we required component audit teams to consider, and the information required to be reported back to the Group audit team. We held meetings with component teams subject to both audit and specified risk-focused audit procedures as part of the audit planning phase to explain our audit instructions and discuss the component auditors’ audit plans. In addition to these visits and meetings, we held meetings with component auditors to discuss the findings reported to the Group audit team in more detail, and any further work required by the Group audit team was then performed by the component auditor. Taken together, the components in scope for the Group audit accounted for 91% of the Group’s revenue and 90% of the Group’s total assets. For the remaining components, we performed analysis at an aggregated Group level to re-examine our assessment that there were no significant risks of material misstatement within these components. Key audit matters Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the consolidated financial statements in the current period. We summarise below those matters and our key audit procedures to address those matters in order that the shareholders as a body may better understand the process by which we arrived at our audit opinion. Our procedures were undertaken in the context of and solely for the purpose of our statutory audit opinion on the consolidated financial statements as a whole and we do not express discrete opinions on separate elements of the consolidated financial statements. THE KEY AUDIT MATTER Revenue recognition Refer to Notes 3 & 28 to the Financial Statements. We considered the recognition of revenue from contracts with key customers and distributors to be a key audit matter due to: — the significance of the Group’s $20 billion of revenue to the Financial Statements as a whole; — the changes in accounting rules as a result of IFRS 15 Revenue from contracts with customers (which was adopted by the Group in the year ended 31 July 2019); — the level of judgement involved in establishing when a sale has occurred and the ultimate sales price under IFRS 15; — the prior period adjustment recorded by the Group in their interim financial statements; and — the extent of audit effort required to examine the Group’s contracts with customers in the context of the size and complexity of this area (as noted above), and the requirement under auditing standards for us to consider fraud risk associated with revenue recognition. HOW THE MATTER WAS ADDRESSED IN OUR AUDIT The procedures we performed to evaluate whether revenue had been recognised appropriately included: — identifying and testing relevant controls over revenue recognition, and using data analytics routines to evaluate 100% of sales transactions undertaken through the Group’s two core ERP systems (representing 89% of Group revenue); — assessing the Group’s revenue recognition accounting policies, and evaluating the application of these policies to actual contracts with customers as noted below; — evaluating contractual arrangements with key customers and distributors through discussion with management and inspection of the underlying documentation, as well as sample testing other sales arrangements; and — performing other audit procedures specifically designed to address the risk of management override of controls including journal entry testing, applying particular focus to the timing of revenue transactions. We found that for the majority of sales, revenue was recognised appropriately. Further consideration was required in respect of the timing and amount of revenue recognised for certain customers and distributors. This specifically related to agent versus principal considerations. The Group made certain changes to its revenue recognition accounting policy, and restated revenue amounts recorded in previously issued financial statements (see note 28). We assessed the disclosure of the restatements against the requirements of IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. 144 145 Independent Auditor’s Report CONTINUED Fonterra Annual Report 2020 Independent Auditor’s Report THE KEY AUDIT MATTER HOW THE MATTER WAS ADDRESSED IN OUR AUDIT THE KEY AUDIT MATTER HOW THE MATTER WAS ADDRESSED IN OUR AUDIT Impairment of goodwill and brands Refer to Note 17 to the Financial Statements. The Group’s balance sheet includes $1,784 million of goodwill and brands. $917 million of goodwill and brands is included within three cash generating units (‘CGU’) for impairment testing purposes. As disclosed in the basis of preparation of the Financial Statements, management undertakes an annual impairment assessment of these CGUs using a discounted cash flow model based on forecast future performance. Significant judgement is required in forecasting the future cash flows of each CGU, together with the rate at which they are discounted. This risk is elevated due to the impacts of Covid-19 on consumer behaviour, which has resulted in greater than normal levels of forecasting uncertainty. We consider impairment testing of these CGUs to be a key audit matter due to the level of judgement described above, and for the following reasons: — Fonterra Brands New Zealand (‘FBNZ’) ($512 million of goodwill and brands) – due to the significance of the CGU carrying value to the overall financial position of the Group, and the absence of any headroom between the recoverable amount and the carrying value following an impairment in the previous year; — Fonterra Australia (‘FAU’) ($282 million of goodwill and brands) – due to the significance of the CGU to the overall financial position of the Group; and — Soprole ($123 million of goodwill and brands) – due to the significance of the CGU to the overall financial position of the Group and due to the potential long-term impacts of the civil unrest which commenced in October 2019. We also considered the impairment assessment of the Group’s portfolio of consumer and foodservice brands to be a key audit matter due to the significance of the $674 million of brand assets to the overall financial position of the Group. These brands have been valued using the relief from royalty method. Judgement is required in ascertaining the key inputs into the relief from royalty calculation, namely the range of market royalty rates for each brand, appropriate sales growth (including terminal growth) rates for each brand, and appropriate discount rates to apply to the resulting future royalties. The procedures we performed to evaluate the impairment assessments included: — assessing whether the methodology adopted was consistent with accepted valuation approaches of IAS 36 Impairment of Assets; — evaluating the significant assumptions by comparing to historical trends, approved budgets, business plans and external market data; — comparing the discount rates applied to the estimated future cash flows and the terminal growth rates to relevant benchmarks using KPMG valuation specialists; — challenging the above assumptions and judgements by performing sensitivity analysis, considering a range of likely outcomes based on various scenarios; — in connection with the impairment charge of $21 million recognised by FBNZ, using KPMG valuation specialists to calculate a market participant fair value less cost of disposal valuation based on comparable company analysis and analysis of trading multiples; — comparing the Group’s total net assets as at 31 July 2020 of $6,703 million to its market capitalisation of $6,158 million at 31 July 2020, understanding the possible reasons for the market capitalisation to be below net assets, and assessing whether the carrying value of the net assets of the Group as a whole are impaired; and — considering the appropriateness of the disclosures in the financial statements. For each CGU we found the methodology to be consistent with IAS 36. We found the discount and terminal growth rates were in an acceptable range, and that future cash flow assumptions were largely supported by comparison to the sources we considered. For FBNZ where an impairment of $21 million was recognised, our scenario analysis indicated that the resulting carrying value was materially consistent with the high end of our valuation range. For the Chesdale brand where an impairment of $36 million was recognised, our scenario analysis indicated that the resulting carrying value was consistent with our valuation range. For FAU, Soprole, and other consumer and foodservice brands in the Group’s portfolio, where no impairment was recognised, our scenario analysis indicated that the recoverable amount of each of these assets exceeds its carrying value and that no impairment is necessary. The overall comparison of the Group’s net assets to market capitalisation was a shortfall of $545 million (or 8%). Based on the impairment testing undertaken across a large proportion of the Group’s non-current assets, and general market conditions, we are satisfied that this does not in itself represent an indicator of impairment for the Group as a whole. We consider the impairment disclosures to be a fair reflection of the underlying impairment tests. First-time adoption of IFRS 16 Leases Refer to Note 27 to the Financial Statements. We considered the first-time adoption of IFRS 16 to be a key audit matter due to the complexity of the new standard (in particular in connection with accounting policy choices and judgements on implementation, and the need to consider a wide range of arrangements such as supply agreements and service contracts), the size of the incremental lease liability and sensitivity of the Group’s funding arrangements to debt-based metrics. The new leasing standard was implemented across the Group as of 1 August 2019 through the modified retrospective approach with cumulative effects recognised as an adjustment to retained earnings at adoption date (and with no restatement of the comparative information). Following the implementation, the Group recorded right-of-use assets of $621 million, and a $652 million lease liability. The implementation of the standard requires judgement in establishing among other assumptions the incremental borrowing rate, the lease term, and the amount of lease payments in the future where escalation clauses exist in the lease agreements. In addition, significant audit effort was required to ensure that all arrangements subject to the new standard had been considered by the Group, not just those previously accounted for as operating leases. The cost of New Zealand sourced milk Refer to Notes 4, 12 and 14 to the Financial Statements. The cost of New Zealand sourced milk supplied by farmer shareholders amounted to $11 billion and comprises the volume of milk solids supplied at the Farmgate Milk Price as determined by the Board of Directors for the relevant season. In making that determination, the Board takes into account the Farmgate Milk Price calculated in accordance with the Farmgate Milk Price Manual. We consider the cost of New Zealand sourced milk to be a key audit matter due to its significance to the financial statements as a whole. The cost of New Zealand sourced milk is a key component of the Group’s cost of goods sold of $17 billion, the carrying value of the Group’s inventory of $3,268 million, and amounts owing to suppliers of $1,588 million. Significant audit effort was required to audit the cost of New Zealand sourced milk. KPMG has been engaged to provide a reasonable assurance report in connection with the Farmgate Milk Price. This is contained in the Fonterra Farmgate Milk Price Statement. The Fonterra Farmgate Milk Price Statement sets out information about the Farmgate Milk Price, and how it is calculated by Fonterra. It can be found in the ‘Investors/Farmgate Milk Prices’ section of the Company’s website. The procedures we performed to evaluate the first-time adoption of IFRS 16 included: — assessing the appropriateness of the Group’s accounting policies, judgements and related disclosures, involving KPMG IFRS specialists; — obtaining a sample of lease agreements (including those with the largest lease rentals or longest lease periods, as well as a random sample of the Group’s other leases), reading the agreements to understand key terms, and challenging management’s assumptions regarding renewals and rental escalation clauses in the context of IFRS 16 requirements, the lease agreements and our knowledge and understanding of the underlying right-of-use assets; — involving KPMG valuation specialists and audit teams from overseas KPMG member firms to test the appropriateness of the incremental borrowing rate assumptions used by the Group in calculating the lease liability; — performing a completeness check that all arrangements we identified during our transition activities that could be subject to IFRS 16 had been considered and accounted for appropriately by the Group; — using data analytics routines to identify whether any recurring payments made by the Group indicated the existence of additional arrangements that could be subject to IFRS 16; and — recalculating the lease liability and right-of-use asset for those arrangements identified as needing to be accounted for under IFRS 16. We found that the Group’s IFRS 16 adoption project had addressed the Group’s existing operating lease portfolio, and that the Group had implemented appropriate systems and processes to account for leases under IFRS 16 on an ongoing basis. The Group recognised an additional amount of right-of-use assets and lease liabilities compared to that anticipated in the 31 July 2019 financial statements, reflecting arrangements that were not previously accounted for as operating leases as well as updated assumptions regarding lease renewals for strategic assets. The procedures we performed to evaluate the impact of the Farmgate Milk Price calculation on the cost of New Zealand sourced milk included: — examining minutes of Milk Price Panel meetings and confirming with the Company Secretary that the Board considered the recommended Farmgate Milk Price from the Milk Price Panel and approved the payment of $7.14 per kgMS for New Zealand sourced milk for the season ended 31 May 2020; and — examining the application of the Board approved milk price to cost of goods sold, inventory and amounts owing to suppliers. This involved understanding and evaluating relevant controls to ensure that the latest milk price forecast series has been applied to cost of goods sold and inventory. At season end we checked that the cost of New Zealand sourced milk reflected the Board approved milk price for the season. We completed these procedures and have no matters to report. The Farmgate Milk Price calculation prepared by the Milk Price Group amounted to $11 billion (which equates to $7.14 per kgMS), and we confirmed with the Company Secretary that the Board of Directors approved a payment of $7.14 per kgMS for New Zealand sourced milk for the season ended 31 May 2020 at their meeting on 17 September 2020. 146 147 Independent Auditor’s Report CONTINUED Non-GAAP Measures Fonterra Annual Report 2020 Non-GAAP Measures Other information The Directors, on behalf of the Company, are responsible for the other information included in the entity’s Annual Report. Other information includes: — the Letter from the Chair and the CEO’s Q&A; — sections relating to Goals, Responding to Covid-19, the Year in Review and the Co-operative Difference; — sections relating to Healthy Environment, Healthy People and Healthy Business; — sections relating to Non-GAAP Measures and the associated Glossary; — the Statutory information section; — sections relating to Corporate Governance, the Board and the Management Team; and — the Directory. Our opinion on the consolidated financial statements does not cover any other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the consolidated financial statements our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the consolidated financial statements or our knowledge obtained in the audit or otherwise appears materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Other matter The consolidated financial statements of the Group, for the year ended 31 July 2019, was audited by another auditor who expressed an unmodified opinion on those statements on 25 September 2019. Use of this independent auditor’s report This independent auditor’s report is made solely to the shareholders as a body. Our audit work has been undertaken so that we might state to the shareholders those matters we are required to state to them in the independent 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 shareholders as a body for our audit work, this independent auditor’s report, or any of the opinions we have formed. Responsibilities of the Directors for the consolidated financial statements The Directors, on behalf of the Company, are responsible for: — the preparation and fair presentation of the consolidated financial statements in accordance with generally accepted accounting practice in New Zealand (being New Zealand Equivalents to International Financial Reporting Standards) and International Financial Reporting Standards; — implementing necessary internal control to enable the preparation of a consolidated set of financial statements that is fairly presented and free from material misstatement, whether due to fraud or error; and — assessing the ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate or to cease operations, or have no realistic alternative but to do so. Auditor’s responsibilities for the audit of the consolidated financial statements Our objective is: — to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement, whether due to fraud or error; and — to issue an independent auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs NZ will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. A further description of our responsibilities for the audit of these consolidated financial statements is located at the External Reporting Board (XRB) website at: http://www.xrb.govt.nz/standards-for-assurance-practitioners/auditors-responsibilities/audit-report-1/ This description forms part of our independent auditor’s report. The engagement partner on the audit resulting in this independent auditor’s report is Matthew Diprose. For and on behalf of KPMG Auckland 17 September 2020 148 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. These are non-GAAP measures and are not prepared in accordance with NZ IFRS. Management believes that these measures provide useful information as they provide valuable insight on the underlying performance of the business. They may be used internally to evaluate the underlying performance of business units and to analyse trends. These measures are not uniformly defined or utilised by all companies. Accordingly, these measures may not be comparable with similarly titled measures used by other companies. Non-GAAP financial measures should not be viewed in isolation nor considered as a substitute for measures reported in accordance with NZ IFRS. Reconciliations for the NZ IFRS measures to certain non-GAAP measures referred to by Fonterra are detailed below: Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised EBITDA Profit/(loss) for the period Add: Depreciation Add: Amortisation Add: Net finance costs Add: Taxation expense Total EBITDA Less: Disposal of investment in DFE Pharma Less: Disposal of investment in Goodminton Add: Falcon China Farms JV impairment Add: New Zealand consumer and foodservice business impairment Add: Disposal of Tip Top Add: China Farms impairment Add: Brazil consumer and foodservice business impairment Add: Disposal of Venezuelan operations Add: Australian strategic reset (Less)/add: Income Statement impact of Beingmate investment Add: Other Total normalisation adjustments Normalised EBITDA Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised EBIT GROUP $ MILLION 31 JULY 2020 31 JULY 20191 RESTATED 659 528 99 332 156 1,774 (427) (66) 65 – – 63 104 – – (50) 43 (268) 1,506 (610) 458 103 418 175 544 – – – 204 40 203 149 134 68 12 19 829 1,373 GROUP $ MILLION 31 JULY 2020 31 JULY 20191 Profit/(loss) for the period Add: Net finance costs Add: Taxation expense Total EBIT (Less)/add: Normalisation adjustments (as detailed above) Total normalised EBIT 659 332 156 1,147 (268) 879 1 The Income Statement for the year ended 31 July 2019 includes re-presentations and restatements. Please see Note 28 Re-presentations and prior period restatements for further details. (610) 418 175 (17) 829 812 149 Non-GAAP Measures CONTINUED FOR THE YEAR ENDED 31 JULY 2020 Fonterra Annual Report 2020 Glossary Glossary Reconciliation from the NZ IFRS measure of profit for the period to Fonterra’s normalised earnings per share NON-GAAP MEASURES Profit/(loss) for the period Add: Normalisation adjustments Add: Tax on normalisation adjustments Total normalised earnings Add: Share attributable to non-controlling interests Less: Normalisation adjustments to non-controlling interests Net normalised earnings attributable to equity holders of the Co-operative Weighted average number of shares (thousands of shares) Normalised earnings per share ($) Reconciliation from reported gross profit for the period to Fonterra’s normalised gross profit Gross profit for the period from continuing operations Add/(less): Gross profit for the period from discontinued operations Add: China Farms impairment normalisation adjustment (Less)/add: Other normalisation adjustments Total normalised gross profit GROUP $ MILLION 31 JULY 2020 31 JULY 20191 659 (268) 7 398 27 (43) 382 (610) 829 56 275 48 (59) 264 1,612,076 0.24 1,611,980 0.16 GROUP $ MILLION 31 JULY 2020 31 JULY 20191 3,062 99 63 (16) 3,208 2,874 (101) 203 32 3,008 Fonterra refers to non-GAAP financial measures throughout the Annual Report, 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 Report. Debt payback ratio EBIT EBITDA is calculated as total borrowings, plus bank overdraft, plus the effect of debt hedging, less a cash allowance of 75% of Cash and cash equivalents, divided by normalised earnings before interest, tax, depreciation and amortisation (normalised EBITDA) excluding Share of loss/profit of equity accounted investees and net foreign exchange losses/gains. Both Debt and EBITDA are adjusted to include amounts relating to businesses classified as held for sale. 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 lease liabilities and 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. Net Tangible Assets per Security is calculated as net tangible assets divided by the number of equity instruments on issue. Net tangible assets are total assets less total liabilities less intangible assets. Normalisation adjustments means transactions that are unusual by nature and size. Excluding these transactions can assist users with forming a view of the underlying performance of the business. Unusual transactions by nature are the result of 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 (kg/MS) and the dividend per share. Both of these components have established policies and procedures in place on how they are determined. means net profit after tax attributable to farmer shareholders divided by the number of shares at 31 May, less dividend per share. is calculated as normalised EBIT, less a notional tax charge divided by capital employed including brands, goodwill and equity accounted investments. Capital employed is calculated as the average for the period of: net assets excluding net interest-bearing debt and deferred tax balances. Segment earnings means segmental profit for the period before net finance costs and tax. Working capital is calculated as total trade and other receivables plus inventories, less current trade payables and accruals. It excludes amounts owing to suppliers and employee entitlements. Working capital days is calculated as working capital divided by external revenue, multiplied by the number of days in the period. 1 The Income Statement for the year ended 31 July 2019 includes re-presentations and restatements. Please see Note 28 Re-presentations and prior period restatements for further details. 150 151 Statutory Information FOR THE YEAR ENDED 31 JULY 2020 CO-OPERATIVE STATUS EMPLOYEE REMUNERATION Fonterra Annual Report 2020 Statutory Information In accordance with section 10 of the Co-operative Companies Act 1996, the Directors of Fonterra unanimously resolved on 27 August 2020 that the Company was, for the year ended 31 July 2020 a co-operative company. The opinion was based upon the fact that: • Throughout that period the principal activities of the Company have been the activities stated in clause 1.3 of the Company’s constitution: – the manufacture and sale of butter, cheese, dried milk, casein, or any other product derived from milk or milk solids supplied to the Company by its shareholders; – the sale to any person of milk or milk solids supplied to the Company by its shareholders; – the collection, treatment, and distribution for human consumption of milk or cream supplied to the Company by its shareholders. • Each of the Company’s principal activities are co-operative activities (as defined in section 3 of the Co-operative Companies Act 1996). • Throughout that period not less than 60 per cent of the voting rights attaching to shares in the Company have been held by transacting shareholders (as defined in section 4 of the Co-operative Companies Act 1996). EMPLOYEE REMUNERATION FRAMEWORK A well-designed remuneration framework helps the Group attract and retain talent, and both motivates and recognises the role our people play in the success of the Group. 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 amounts we pay to our employees are benchmarked against comparable companies in relevant markets, using information obtained from independent remuneration consultants. Adjustments to packages may occur on a cyclical basis, such as an annual salary review, or on an as-needed basis to recognise additional responsibilities. The framework is designed to take into account budget targets and restraints, market conditions, internal equity, and governance factors such as local legislation, as well as taking into account individual performance. Fonterra’s incentive programmes are designed to drive the Group’s performance by: • Focusing on the Group’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 Appointments and Remuneration Committee retains absolute discretion in respect to payments for all incentive schemes. Further detail on Fonterra’s remuneration framework can be found in the Corporate Governance section of the Annual Report. 152 The Group operates in a number of countries where remuneration market levels differ widely. During the year ended 31 July 2020, the number of employees, not being Directors of Fonterra, who received remuneration, incentives, and other benefits (including superannuation and allowances etc) exceeding $100,000 was as follows: REMUNERATION RANGE ($) NEW ZEALAND HEAD OFFICE1 REGIONAL NEW ZEALAND1 OFFSHORE2 CESSATIONS3 100,000 110,001 120,001 130,001 140,001 150,001 160,001 170,001 180,001 190,001 200,001 210,001 220,001 230,001 240,001 250,001 260,001 270,001 280,001 290,001 300,001 310,001 320,001 330,001 340,001 350,001 360,001 370,001 380,001 390,001 400,001 410,001 420,001 430,001 440,001 450,001 460,001 470,001 480,001 490,001 500,001 510,001 520,001 530,001 540,001 110,000 120,000 130,000 140,000 150,000 160,000 170,000 180,000 190,000 200,000 210,000 220,000 230,000 240,000 250,000 260,000 270,000 280,000 290,000 300,000 310,000 320,000 330,000 340,000 350,000 360,000 370,000 380,000 390,000 400,000 410,000 420,000 430,000 440,000 450,000 460,000 470,000 480,000 490,000 500,000 510,000 520,000 530,000 540,000 550,000 94 46 60 57 48 30 43 27 32 29 27 22 20 16 17 7 9 11 2 6 5 6 4 5 3 5 1 1 1 1 – 1 3 1 1 – 2 – – 1 – – – – – 1,353 737 682 318 141 110 75 55 33 32 21 12 9 5 9 5 5 8 4 2 3 4 – – 2 3 – 1 – – 1 1 2 1 – – – – – – 2 1 – – – 190 242 274 211 149 111 70 63 53 41 38 32 32 22 18 15 12 20 16 13 10 17 2 9 5 6 6 10 3 3 2 4 3 4 3 5 3 1 3 1 1 4 2 1 3 43 38 23 18 17 17 13 13 13 7 8 5 8 5 5 5 5 3 3 5 1 1 1 2 1 2 – – 2 – 2 2 1 – 1 – – 2 – 1 – – – – 2 TOTAL 1,680 1,063 1,039 604 355 268 201 158 131 109 94 71 69 48 49 32 31 42 25 26 19 28 7 16 11 16 7 12 6 4 5 8 9 6 5 5 5 3 3 3 3 5 2 1 5 153 Statutory Information CONTINUED FOR THE YEAR ENDED 31 JULY 2020 Fonterra Annual Report 2020 Statutory Information REMUNERATION RANGE ($) NEW ZEALAND HEAD OFFICE1 REGIONAL NEW ZEALAND1 OFFSHORE2 CESSATIONS3 TOTAL Within New Zealand, employees, who received remuneration, incentives, and other benefits (including superannuation and allowances etc) exceeding $100,000 were based throughout the country as follows: 550,001 560,001 570,001 580,001 590,001 600,001 620,001 630,001 640,001 650,001 660,001 690,001 700,001 740,001 750,001 760,001 780,001 790,001 820,001 830,001 860,001 870,001 910,001 990,001 560,000 570,000 580,000 590,000 600,000 610,000 630,000 640,000 650,000 660,000 670,000 700,000 710,000 750,000 760,000 770,000 790,000 800,000 830,000 840,000 870,000 880,000 920,000 1,000,000 1,000,001 1,010,000 1,080,001 1,090,000 1,090,001 1,100,000 1,130,001 1,140,000 1,190,001 1,200,000 1,220,001 1,230,000 1,300,001 1,310,000 1,480,001 1,490,000 1,690,001 1,700,000 1,870,001 1,880,000 2,000,001 2,010,000 2,010,001 2,020,000 2,430,001 2,440,000 Totals – 1 – 3 2 – 1 – – – 1 – – 2 – – – – 1 – – – – 1 – – – – – 1 – – – – 1 – – – 1 – – – – – 1 – – – – – – – – – – – – – – – – – – – – – – – – – – – – – 3 – 1 – 2 2 1 1 1 1 2 1 1 2 1 1 3 2 – – – 3 2 – – 1 – 1 1 – 1 1 – 1 – – – 1 – – – – – – – – 1 – – 1 – – 1 1 – 1 1 1 – – – 1 – 1 – – – – – 1 – – 1 1 4 2 1 3 4 2 2 2 1 2 3 1 2 4 1 2 4 2 2 1 1 3 2 1 1 1 1 1 1 1 1 1 1 1 1 1 1 Auckland Bay of Plenty Canterbury Manawatu – Wanganui Northland Southland Taranaki Waikato Rest of New Zealand New Zealand total TOTAL 984 129 493 280 155 189 534 1,451 82 4,297 In addition to being a significant employer in New Zealand, we also have employees in markets around the world. Those who received remuneration, incentives, and other benefits (including superannuation and allowances etc) exceeding $100,000 were based in markets around the world as follows: Australia China Europe Latin America New Zealand Rest of Asia Rest of World United States Cessations Global total TOTAL 962 196 102 94 4,297 263 72 81 287 6,354 REMUNERATION OF DIRECTORS The Directors’ Remuneration Committee, comprising six shareholders elected in accordance with the Constitution, makes recommendations for shareholder approval as to the level of Elected Directors’ fees. Elected Directors are those Directors elected by shareholders in accordance with clauses 12.2 and 33.4 of the Constitution. At the Annual Meeting of shareholders held on 7 November 2019, shareholders approved, on the recommendation of the Directors’ Remuneration Committee, the following amounts of remuneration to apply to Elected Directors from the date of that Annual Meeting of shareholders. Chairman Directors Discretionary additional payments to the Chair of permanent Board Committees (except when the Chair is the Chairman of the Board of Directors) $430,000 per annum $175,000 per annum $35,000 per annum 658 3,639 1,769 288 6,354 The Board has approved payment of the discretionary additional payment, at the prevailing approved rate, to the Chair of permanent Board Committees. 1 2 Includes employees employed in New Zealand during the reporting period. Includes employees employed in an offshore operation during the reporting period. Amounts paid in foreign currency have been converted at the average conversion rate for the period. As Fonterra has a significant offshore population, the number of offshore employees exceeding the fixed figure of $100,000 increases if the New Zealand dollar currency weakens significantly. Should the New Zealand dollar strengthen against those markets’ currencies, these same individuals may not be reported in future lists. 3 Cessations include employees that have been terminated or retired during the period. The amounts paid to former employees include salary and bonuses for the current period, prior period bonuses that have been paid in the current period and termination entitlements including those arising from employment arrangements entered into by legacy companies prior to the formation of Fonterra. The Board has discretion to set the fees for Directors appointed under clause 12.4 of the Constitution (Appointed Directors). In the period to 31 July 2020 the Board applied the same remuneration levels as above to the Appointed Directors. The Board has approved the payment to Mr Israel of a travel allowance of $10,000 per meeting for travel to and from New Zealand to attend Board meetings, until his retirement on 7 November 2019. The Appointments and Remuneration Committee and the Chairman of the Board of Directors has the discretion to allocate a discretionary pool of up to $75,000 per annum for fees for Directors remuneration for additional duties, workload and responsibilities (in each case not to exceed $25,000 per annum per Director). Fees paid by subsidiary or associate companies in respect of Fonterra Directors or employees appointed by Fonterra as Directors of those companies are payable directly to Fonterra. 154 155 Fonterra Annual Report 2020 Statutory Information Statutory Information CONTINUED FOR THE YEAR ENDED 31 JULY 2020 Directors Remuneration The total remuneration and value of other benefits (not including superannuation contributions, if applicable) received by each Director in the 12-month period from 1 August 2019 to 31 July 2020 are scheduled below: Clinton Dines Brent Goldsack (Chair of the Co-operative Relations Committee) Leonie Guiney (Chair of the Safety and Risk Committee) Bruce Hassall (Chair of the Audit and Finance Committee) Simon Israel1 Holly Kramer1 Andrew Macfarlane Peter McBride John Monaghan (Chairman of the Board of Directors) John Nicholls Donna Smit Scott St John (Chair of the Milk Price Panel) BOARD FEES COMMITTEE CHAIR FEES TRAVEL ALLOWANCE DISCRETIONARY POOL TOTAL REMUNERATION ($) 175,000 175,000 175,000 175,000 47,1 1 5 43,750 175,000 175,000 430,000 175,000 175,000 175,000 – 35,000 35,000 35,000 – – – – – – – 35,000 – – – – 40,000³ – – – – – – – – – – 25,000² – – – – – – – – 175,000 210,000 210,000 235,000 87,115 43,750 175,000 175,000 430,000 175,000 175,000 210,000 Indicates a part year. 1 2 The Appointments and Remuneration Committee and the Chairman of the Board of Directors has approved a payment of $25,000 to Mr Hassall from the discretionary pool for additional work undertaken in FY20. 3 The Board has approved the payment to Mr Israel of a travel allowance of $10,000 per meeting to travel to and from New Zealand to attend Board meetings. EQUITY SECURITIES HELD AT BALANCE DATE ENTRIES IN THE INTERESTS REGISTER Directors’ interests in transactions General disclosures of interest The following general disclosures of interest were made in the period from 1 August 2019 to 31 July 2020: Clinton Dines Griffith Asia Institute Brent Goldsack Rabobank New Zealand Limited Adjunct Professor Director Canterbury Grasslands Limited (ceased May 2020) Director and Shareholder CoLab Dairy Partners General Partnership (ceased 2020) Indirect Shareholder Holly Kramer Lendi Pty Limited Chair Australian Post (ceased June 2020) Woolworths Group Limited Goodes O’Loughlin Foundation Abacus Property Group Western Sydney University Chief Executive Woman Andrew Macfarlane GW and MA Macfarlane Family Trust Macfarlane Rural Business Limited (ceased August 2019) Peter McBride Kennedy Farm Limited Pokai Farm Limited Ian Elliot Family Trust MA Elliot Family Trust Zespri Global Supply Advisory Board Independent Non-executive Director and Deputy Chair Independent Non-executive Director Independent Non-executive Director Independent Non-executive Director Pro-Chancellor Member Trustee Shareholder Shareholder Shareholder Trustee Trustee Member Chair In accordance with Rules of the Fonterra Shareholders’ Market (FSM) Rule 2.7.1(d), the following table identifies the Equity Securities in which each Director has a Relevant Interest as at 31 July 2020: John Nicholls Quigley Contracting Advisory Board (ceased August 2019) During the financial year there were no notices from Directors requesting to disclose or use information received in their capacity as Directors which would not otherwise have been available to them. Brent Goldsack Leonie Guiney Andrew Macfarlane Peter McBride John Monaghan John Nicholls Donna Smit UNITS ISSUED BY THE FONTERRA SHAREHOLDERS’ FUND1 CO-OPERATIVE SHARES – – 136,1501 – – – 10,4411 400,407 1,198,824 813,301 6,923,748 140,179 2,190,864 1,243,933 1 Units issued by the Fonterra Shareholders’ Fund may be converted to Co-operative shares. A ‘Relevant Interest’ in Fonterra securities which is required to be disclosed is explicitly defined in the Financial Markets Conduct Act 2013. To qualify as an Elected Director under the Fonterra Constitution a person must be a shareholder, a shareholder of a company that is a shareholder, a member of a partnership that is a shareholder, or have a legal or beneficial interest in, or a right or entitlement to participate directly in the distributions of, a body corporate that is a shareholder of Fonterra. Given the variety of ways that farmer shareholders can organise their interests, it is possible for Fonterra Elected Directors to have an interest in Fonterra shares without this being a ‘Relevant Interest’ as defined in the Financial Markets Conduct Act 2013. All current Elected Directors have Relevant Interests in Fonterra shares. Some Elected Directors also have interests in Fonterra shares which are not within the definition of ‘Relevant Interest’ in the Financial Markets Conduct Act 2013, and those interests are not disclosed above. 156 157 Fonterra Annual Report 2020 Statutory Information Statutory Information CONTINUED FOR THE YEAR ENDED 31 JULY 2020 Securities dealings of Directors The following entries were made in the Interests Register during the year. During the year, Directors disclosed in respect of section 148(2) of the Companies Act 1993 and/or section 297 of the Financial Markets Conduct Act 2013 that they (or their associated persons) acquired or disposed of a relevant interest in financial products as follows: Co-operative share transactions Retail Bond transactions There were no transactions by Directors (or their associated persons) in Retail Bonds reported during the period from 1 August 2019 to 31 July 2020. No current holdings of Retail Bonds have been advised by Directors (or their associated persons). Capital Note transactions There were no transactions by Directors (or their associated persons) in Capital Notes reported during the period from 1 August 2019 to 31 July 2020. No current holdings of Capital Notes have been advised by Directors (or their associated persons). NUMBER OF SECURITIES ACQUIRED NUMBER OF SECURITIES DISPOSED CONSIDERATION $ DATE SUBSIDIARY COMPANY DIRECTORS DIRECTOR Peter McBride John Nicholls Peter McBride Donna Smit Donna Smit Peter McBride Donna Smit Donna Smit Donna Smit Brent Goldsack Brent Goldsack Brent Goldsack Donna Smit John Nicholls John Nicholls Leonie Guiney Leonie Guiney Leonie Guiney Leonie Guiney Leonie Guiney Peter McBride 480,187 134,8641 20,463 19,8942 5613 93,530 50,000 8264 2,1824 13,000 225,3731 14,600 2,5023 2,8463 39,154 115,000 115,000 15,340 34,660 40,000 825,2805 – – – 19,8942 – – – – – – – – – – – – – – – – – 1,522,193 31 August 2019 – 9 September 2019 71,416 30 September 2019 – – 332,092 206,000 3,003 7,932 7 October 2019 7 October 2019 9 October 2019 10 October 2019 15 October 2019 15 October 2019 52,260 17 October 2019 – October 2019 59,860 25 October 2019 – – 4 December 2019 27 February 2020 147,330 436,828 437,000 55,991 126,509 145,976 25 March 2020 26 March 2020 1 April 2020 4 May 2020 6 May 2020 7 May 2020 – 25 May 2020 1 Share transactions occurred through the acquisition of a new relevant interest. 2 Transferred between related entities. 3 Conversion of Units to Shares. 4 Acquired as part of Farm Source Dollars for Shares programme. 5 Acquisition of relevant interest by virtue of appointment as independent trustee. NUMBER OF SECURITIES ACQUIRED NUMBER OF SECURITIES DISPOSED CONSIDERATION $ DATE 4,0001 – – 1,1243 2,8463 – – 5612 2,5022 – – 2,8462 23,600 27 February 2018 – – – – – 7 October 2019 4 December 2019 27 February 2020 27 February 2020 27 February 2020 Unit transactions DIRECTOR Andrew Macfarlane Donna Smit Donna Smit Donna Smit John Nicholls John Nicholls 1 Acquired as Trustee of a Trust – Advice to Trustees was delayed. 2 Conversion of Units to Shares. 3 Acquired as part of the Contract Fees for Units programme. 158 The following companies were subsidiaries of Fonterra as at 31 July 2020. Directors as of this date are listed below. Those who resigned during the year are denoted with an R. Alternate Directors are denoted with an A. Canpac International Limited: G A Duncan (R), B D Mealings (R), B M Ryan, P D Wynen Kotahi GP Limited: D G Boulton, R G Carlyle, B Mealings (R), B M Ryan, R J Spurway (R), F S Whineray Dairy Industry Superannuation Scheme Trustee Limited: M A Apiata-Wade, B J Kerr, B M McCarthy, T P McGuinness, D W C Scott, A K Williams, P D Wynen, M F van Zon (R) Fonterra (Delegated Compliance Trading Services) Limited: G A Duncan, S D T Till Fonterra (International) Limited: G A Duncan, C E Rowe Fonterra (Kotahi) Limited: R G Carlyle, R J Spurway (R), F S Whineray Fonterra (Middle East) Limited: G A Duncan, P D Washer Fonterra (New Zealand) Limited: G A Duncan, C E Rowe Fonterra (North Asia) Limited: G A Duncan, S D T Till Fonterra Brands (New Zealand) Limited: M R Cronin, B Henshaw Fonterra Commodities Limited: G A Duncan, B M Turner Fonterra Dairy Solutions Limited: G A Duncan, R McNickle Fonterra Equities Limited: G A Duncan, S D T Till Fonterra Farming Ventures Limited: G A Duncan, C E Rowe Fonterra Finance Corporation Limited: G A Duncan, S D T Till Fonterra Ingredients Limited: G A Duncan, B M Ryan Fonterra LATAM Brands Limited: A J Cordner, G A Duncan, F Spinelli (R), A D Turnbull (R) Fonterra Limited: R J Spurway (R), A R van der Nagel, F S Whineray, K A Wickham (R) Fonterra PGGRC Limited: G A Duncan, J P Hill, M Piper (R) Fonterra TM Limited: G A Duncan, S D T Till Glencoal Energy Limited: G A Duncan, P D Wynen GlobalDairyTrade Holdings Limited: G A Duncan, C E Rowe Lactanol Limited: G A Duncan, B D Mealings (R), C E Rowe (R), B M Ryan MIH Limited: R J Allen, G A Duncan Milktest GP Limited: R J Allen, R J van Boheemen, P G Brown, G B McCullough, R G Townshend, T A Winter, P D S Grave (R) MyMilk Limited: C W Fergusson, K F Shaw New Zealand Dairy Board: G A Duncan, C E Rowe New Zealand Milk (International) Limited: G A Duncan, R M Kennerley New Zealand Milk Brands Limited: G A Duncan, S D T Till NZAgbiz Limited: R J Allen, G A Duncan RD1 Limited: R J Allen, G A Duncan SAITL Limited: G B McCullough, T A Winter Tangshan Dairy Farm (NZ) Limited: M R Cronin, G A Duncan Whareroa Co-Generation Limited: G A Duncan, P D Wynen Anchor Insurance Pte. Limited [Singapore]: G A Duncan, S S Herbert, B Mealings (R), C E Rowe, H N Toh (A) Anmum (Malaysia) Sdn. Bhd. [Malaysia]: R M Kennerley, J Oh, V Sivaraja Australasian Food Holdings Pty Limited [Australia]: R Dedoncker, G A Duncan Bonland Cheese Trading Pty Ltd [Australia]: R Dedoncker, G A Duncan Comercial Dos Alamos S.A. [Chile]: E Becker, M Kunstmann (R), A L Raddatz Vargas, R Waldspurger Comercial Santa Elena S.A. [Chile]: E Aldunate (R), J Barria, V E Flen Silva (R), C F Osorio Bascur, S T Perez Dairy Enterprises (Chile) Limitada [Chile]: A J Cordner, G A Duncan, J P Egaña Bertoglia, R Lavados, R Sepúlveda Seminario, F Spinelli (R), P L Linhares (A)(R) Dairy Partners Americas Brasil Limitada [Brazil]: R de Oliviera Carrelas, F Goncalves, R Gurrero Leal, F Spinelli, M G Guerreiro Pinheiro Dairy Partners Americas Nordeste-Productos Alimenticios Ltda [Brazil]: R de Oliviera Carrelas, F Goncalves, M G Guerreiro Pinheiro, R Guerrero Leal, F Spinelli Dairymas (Malaysia) Sdn Bhd [Malaysia]: R M Kennerley, J Oh, V Sivaraja Darnum Park Pty Ltd [Australia]: R Dedoncker, G A Duncan Falcon Dairy Holdings Limited [Hong Kong]: M P Campbell, G A Duncan, R O Frey, J F Ginascol (R), J Murphy Fazenda MIH Ltda [Brazil]: E B da Costa Junior (R), P C C Freitas Guedes, A R V Januario Oliveira (R) Fonterra (Beijing) Farm Management Consulting Company Limited [China]: S I Ahmed (R), H Berghorst (R), G A Duncan, P D Washer, X Xu Fonterra (Brasil) Ltda [Brazil]: R F Aracil Filho, A R V Januario Oliveira (R), P C C Freitas Guedes (R), B de Luca Zanatta, G Nascimento (R) Fonterra (Canada), Inc. [Canada]: J P Coote, G A Duncan, B Kipping, B M Ryan Fonterra (China) Limited [Hong Kong]: M R Cronin, G A Duncan, C Zhu (R) Fonterra (CIS) Limited Liability Company [Russian Federation]: E Grishina Fonterra (Europe) Coöperatie U.A. [Netherlands]: G A Duncan, H Huistra Fonterra (Europe) GmbH [Germany] (in liquidation): G R Sharma Fonterra (France) SAS [France]: H Huistra Fonterra (Ing.) Limited [Mauritius]: G Lee, B M Ryan Fonterra (Japan) Limited [Japan]: K Kumagai, K Kumagai, A Okuyama, H Ono (R), B M Ryan, Y Saito, K A Wickham Fonterra (Korea) Limited [Korea]: G A Duncan, J Murney, Y Saito 159 Fonterra Annual Report 2020 Statutory Information Statutory Information CONTINUED FOR THE YEAR ENDED 31 JULY 2020 Fonterra (Logistics) Ltd [United Kingdom]: M Boyd, G A Duncan, H Huistra (R), G R Sharma Fonterra (Mexico) S.A. de C.V. [Mexico]: L Barona Mariscal (A), F R Camacho (A), J P Coote, G A Duncan, E P G R Gil (A), J A Del Rio Fonterra (SEA) Pte. Ltd [Singapore]: A Aggarwal, H Gowans Fonterra (Thailand) Limited [Thailand]: A Aggarwal, K Vunthanadit Fonterra (USA) Inc. [United States]: N R Christiansen, J P Coote, G A Duncan, B M Ryan Fonterra (Ying) Dairy Farm Company Limited [China]: S I Ahmed (R), H Berghorst (R), G A Duncan, P D Washer, X Xu Fonterra (Yutian) Dairy Farm Company Limited [China]: S I Ahmed (R), H Berghorst (R), G A Duncan, P D Washer, X Xu Fonterra Australia Pty Ltd [Australia]: R Dedoncker, G A Duncan Fonterra Brands (Asia Holdings) Pte. Ltd [Singapore]: S I Ahmed (R), M R Cronin (R), A Dasqupta (R), S Goh, J Swales Fonterra Brands (Australia) Pty Ltd [Australia]: R Dedoncker, G A Duncan Fonterra Brands (Far East) Limited [Hong Kong]: G A Duncan, P D Washer Fonterra Brands (Guangzhou) Ltd [China] (in liquidation): T T Lye, P A Turner, K A Wickham Fonterra Brands (Hong Kong) Limited [Hong Kong]: W Y Chan, G A Duncan, J Ho (R), P D Washer Fonterra Brands (Malaysia) Sdn Bhd [Malaysia]: R M Kennerley, J Oh, V Sivaraja Fonterra Brands (New Young) Pte. Ltd [Singapore]: S Goh, Y Li, C Lin, Y Lin, J Ling, P D Washer Fonterra Brands (Singapore) Pte. Ltd [Singapore]: M R Cronin (R), S Goh, C C Pheng, J Swales Fonterra Brands (Thailand) Ltd [Thailand]: R M Kennerley, S Pronanunt, P A Richards, F Spinelli (R), S Totana Fonterra Brands (Viet Nam) Company Limited [Vietnam]: R M Kennerley, P Richards Fonterra Brands Indonesia, PT [Indonesia]: D M Irfani, S S Rapaka, C A Salinas Robeson, G Thiagarajan Fonterra Brands Lanka (Private) Limited [Sri Lanka]: J H P Gallage (R), R M Kennerley, T Salpitikotala, S Sethi (R), V Sivaraja 160 Fonterra Brands Manufacturing Indonesia, PT [Indonesia]: M Namjoshi, M A Nasution, S S Rapaka, C A Salinas Robeson, T A Siswanto Fonterra Brands Myanmar Co Ltd [Myanmar]: G A Duncan, P Richards, C D Wickramanayake Fonterra Brands Phils. Inc [Philippines]: L Barin (R), M T Boness, R Cook, C Ferrer, R M Kennerley, R A Mendoza, L De Velez Fonterra Chile SpA [Chile]: A J Cordner, G A Duncan, J P Egaña Bertoglia (A), R Lavados (A), P L Linhares (A) (R), R Sepúlveda Seminario, F Spinelli (R) Fonterra Commercial Trading (Shanghai) Company Limited [China]: R J Allen (R), G A Duncan, J Ruan, P D Washer, C Zhu (R) Fonterra Commercial Trading (Tangshan) Company Limited [China]: G A Duncan, J Ruan, P D Washer Fonterra Egypt Limited [Egypt]: A Anwar, G A Duncan Fonterra Europe Manufacturing B.V. [Netherlands]: D Krabbe, B Mealings (R), B M Ryan Fonterra Europe Manufacturing Holding B.V. [Netherlands]: G A Duncan, H Huistra Fonterra Foodservices (USA), Inc. [United States]: N R Christiansen, J P Coote, G A Duncan Fonterra Global Business Services Asia Sdn Bhd [Malaysia]: J Oh, V Sivaraja Fonterra India Private Limited [India]: A Aggarwal, H D Gowans, K M Turner (R), S G Mathews Fonterra Ingredients Australia Pty Ltd [Australia]: R Dedoncker, G A Duncan Fonterra Middle East FZE [United Arab Emirates]: G A Duncan, S Penfold Fonterra MIH Holdings Brasil Ltda [Brazil]: R F Aracil Filho, P C C Frieta Guedes (R), A R V Januario Oliveira (R), B de Luca Zanatta Fonterra Milk Australia Pty Ltd [Australia]: R Dedoncker, G A Duncan Fonterra Tangshan Dairy Farm (HK) Limited [Hong Kong]: H Berghorst (R), G A Duncan, X Xu Fonterra Venezuela, S.A. [Venezuela]: G A Duncan, F C Ortega Becea Inversiones Dairy Enterprises S.A. [Chile]: A J Cordner, G A Duncan, J P Egaña Bertoglia (A), R Lavados (A), P L Linhares (A)(R), R Sepúlveda Seminario Key Ingredients, Inc. [United States]: N R Christiansen, J P Coote, G A Duncan, B M Ryan Milk Products Holdings (North America) Inc. [United States]: N R Christiansen, J P Coote, B M Ryan New Tai Milk Products Co Ltd [Taiwan]: T Chow, C Lee, G Lee, K Lee, M R Robins, B M Ryan (R), P D Washer, K A Wickham (R) New Zealand Milk (Australasia) Pty Ltd [Australia]: R Dedoncker, G A Duncan New Zealand Milk (Barbados) Ltd [Barbados]: G A Duncan, F Spinelli New Zealand Milk (LATAM) Ltd [Bermuda]: G A Duncan, F Spinelli New Zealand Milk Products (Ethiopia) SC [Ethiopia]: A B Abubeker, M B Abubeker, G Amade, F Spinelli, M Woodward Newdale Dairies (Private) Limited [Sri Lanka]: J H P Gallage (R), R M Kennerley, T Salpitikorala, S Sethi (R), V Sivaraja NZMP (AEM) Ltd [United Kingdom] (in liquidation): M Boyd, G A Duncan, H Huistra (R), G R Sharma NZMP Fonterra Nigeria Limited [Nigeria]: G A Duncan, H Huistra Pure Source Dairy Farm Company Limited [China]: H Berghorst (R), M P Campbell, L Deng, G A Duncan, J F Ginascol (R), R M Kennerley (R), J Murphy Sociedad Agrícola y Lechera Praderas Australes S.A. (“Pradesur”) [Chile]: E Becker, M Kunstmann (R), A L Raddatz Vargas, R Waldspurger Sociedad Procesadora de Leche del Sur S.A. (“Prolesur S.A.”) [Chile]: C U Alcade (R), J Barria Pina (R), M P Campbell, L M Patron Costas (A)(R), H Covarrubias Lalanne, S Diez Arriagada (A), S Jimenez, R Lavados McKenzie (R), P L Linhares (A)(R), J P Matus Pickering (A), S Oddo Gómez (R), C Perez- Cotapos Subercaseaux (A), G V Varela Alfonso, A S Vega (A), T Walker Prieto (R), K A Wickham Soprole Inversiones SA [Chile]: M P Campbell, H Covarrubias Lalanne, S Diez Arrigada (A), S Jimenez, P L Linhares (A) (R), J P Matus Pickering (A), C Perez-Cotapos Subercaseaux (A), R Sepúlveda Seminario (R), F Spinelli (R), A D Turnbull (R), G V Varela Alfonso, A S Vega (A), K A Wickham, J Swales (R) Soprole S.A. [Chile]: M P Campbell, H Covarrubias Lalanne, S Diez Arrigada (A), S Jimenez, P C Lluch (A), J P Matus Pickering (A), C Perez-Cotapos Subercaseaux (A), R Sepúlveda Seminario (R), A D Turnbull (R), G V Varela Alfonso, A S Vega (A), K A Wickham, J Swales (R) Tangshan Fonterra Dairy Farm Ltd. [China]: H Berghorst (R), G A Duncan, Q Jiang, P D Washer, X Xu Unifood Holding B.V. [Netherlands]: M P Campbell, H Huistra, M Ivanov, A Sirotinin Unifood LLC [Russian Federation]: M P Campbell, H Huistra, M Ivanov, A Sirotinin United Milk Tasmania Pty. Limited [Australia]: R Dedoncker, G A Duncan DIRECTORS’ INDEMNITY AND INSURANCE Fonterra has given indemnities to, and has effected insurance for, Directors and executives of the Company and its related companies, in accordance with section 162 of the Companies Act 1993, and clause 35 of Fonterra’s Constitution, which, except for specific matters that are expressly excluded, indemnify and insure Directors and executives against monetary losses as a result of actions undertaken by them in the course of their duties. Among the matters specifically excluded are penalties and fines that may be imposed for breaches of law. ANALYSIS OF SHAREHOLDING Analysis of Fonterra’s shareholding as at 31 July 2020: FCG Largest Recorded Share Holdings1 NAME Fonterra Farmer Custodian Limited Singletree Dairies 2013 Limited Ellis-Lea Farms (2000) Limited – Lamorna Silverdale Farm Limited Southern Pastures (Manako Farm) Limited Partnership Coringa Park Dairies Limited Stewart Partnership Limited Arlanda Limited Moffitt Dairy Limited Baytown Investments Limited R.E.M. Farming Limited McBain Farms Limited Cookstin Dairies Limited Bel Group Limited – Ashton Rangitata Dairies Limited Partnership Auchenbrae Farm Limited Ellis-Lea Farms (2000) Limited – Grandview Nukiwai Pastoral Limited E F Deadman Limited Cashmore Investments Limited NUMBER OF SHARES % OF SHARES 104,581,516 1,012,776 977,890 973,679 944,515 944,415 922,500 920,075 910,713 890,348 883,811 867,790 839,600 836,353 836,011 829,147 811,143 810,487 804,707 794,315 6.48 0.06 0.06 0.06 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.05 0.04 0.04 1 The FSM Rules, which reflect the rules of the NZX Main Board, require that Fonterra’s annual report contain the names and holdings of persons having the 20 largest holdings of Fonterra shares on the register of Fonterra as at a date not earlier than two months before the date of the publication of the annual report. The list above complies with the FSM Rules and sets out the list of the 20 largest shareholders on the register as at the appropriate date. There is a separate requirement in the FSM Rules to disclose in the annual report those persons who have a ‘Relevant Interest’ (as defined in the Financial Markets Conduct Act 2013) in Fonterra shares in excess of five per cent, where this information has been provided to Fonterra. Accordingly, the list of the 20 largest holdings of Fonterra shares is not required to show, and does not purport to show, the top 20 holdings of ‘Relevant Interests’ in Fonterra shares which may be owned or controlled by a person or entity and their associated entities. Other people or entities may have ‘Relevant Interests’ in a greater number of Fonterra shares than those listed above. However, it is not possible for Fonterra to accurately determine those interests, nor is it a requirement of the FSM Rules for those interests to be reported in the annual report, except where Fonterra has been advised that a person has a ‘Relevant Interest’ in excess of the five per cent threshold. Substantial Product Holders According to notices given to the Company under the Financial Markets Conduct Act 2013, as at 31 July 2020, the substantial product holders in the Company and their relevant interests are noted below. The total number of Co-operative shares on issue as at 31 July 2020 was 1,612,097,067. SUBSTANTIAL PRODUCT HOLDERS Fonterra Farmer Custodian Limited FSF Management Company Limited NUMBER OF VOTING SECURITIES DATE OF MOST RECENT NOTICE 111,816,183 111,735,183 30 July 2018 30 July 2018 More than one ‘Relevant Interest’ can exist in the same voting financial products. Fonterra Farmer Custodian Limited holds Fonterra shares for the Fonterra Shareholders’ Fund, of which FSF Management Company Limited is the Manager. These two notices therefore refer to substantially the same Fonterra shares. The Custodian also holds some Fonterra shares for the Registered Volume Provider in respect of the Fonterra Shareholders’ Fund. 161 Fonterra Annual Report 2020 Statutory Information Statutory Information CONTINUED FOR THE YEAR ENDED 31 JULY 2020 FCG Fonterra Co-operative Shares Analysis of Fonterra Co-operative Shares as at 31 July 2020: FROM-TO 1–50,000 50,001–100,000 100,001–200,000 200,001–400,000 400,001 and over HOLDER COUNT % HOLDING QUANTITY 1,071 2,467 3,342 2,064 485 11.36 26.17 35.44 21.89 5.14 30,512,153 189,727,318 473,218,680 564,636,334 354,002,582 ANALYSIS OF CAPITAL NOTE AND RETAIL BOND HOLDING Analysis of Fonterra’s Capital Note Holding as at 5 August 2020: FCGHA Capital Notes FROM–TO 1–1,000 1,001–5,000 5,001–10,000 10,001–100,000 100,001 and over HOLDER COUNT % HOLDING QUANTITY 9 25 220 373 26 1.38 3.83 33.69 57.12 3.98 3,974 69,634 1,570,015 10,893,882 89,981,749 100,001 and over includes Fonterra Co-operative Group Limited’s holding of 67,435,575. Analysis of Fonterra’s Retail Bond Holding as at 5 August 2020: FCG030 $350 million Retail Bond issue FROM–TO 5,000–9,999 10,000–49,999 50,000–99,999 100,000–999,999 1,000,000 and over FCG040 $150 million Retail Bond issue FROM–TO 5,000–9,999 10,000–49,999 50,000–99,999 100,000–999,999 1,000,000 and over FCG050 $100 million Retail Bond issue FROM–TO 5,000–9,999 10,000–49,999 50,000–99,999 100,000–999,999 1,000,000 and over 162 HOLDER COUNT % HOLDING QUANTITY 33 264 70 138 35 6.11 48.89 12.96 25.56 6.48 200,000 5,932,000 4,342,000 46,113,000 293,413,000 HOLDER COUNT % HOLDING QUANTITY 58 373 73 70 23 9.71 62.48 12.23 11.73 3.85 337,000 7,794,000 4,458,000 14,776,000 122,635,000 HOLDER COUNT % HOLDING QUANTITY 13 154 26 23 18 5.56 65.81 11.11 9.83 7.69 97,000 3,542,000 1,584,000 7,264,000 87,513,000 % 1.89 11.77 29.35 35.03 21.96 % 0.00 0.07 1.53 10.63 87.77 % 0.06 1.69 1.24 13.18 83.83 % 0.22 5.20 2.97 9.85 81.76 % 0.10 3.54 1.58 7.27 87.51 CURRENT CREDIT RATING STATUS Standard & Poor’s long-term rating for Fonterra is A- with a rating outlook of stable. Fitch’s long-term 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 (FCGHA) are debt securities as defined in 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 is not required to comply with certain Listing Rules which apply to an issuer of quoted equity securities. NZX TRADING HALTS No trading halts were placed on Fonterra securities by NZX in the financial year ended 31 July 2020. STOCK EXCHANGE LISTINGS Fonterra’s Co-operative shares are listed and quoted on the Fonterra Shareholders’ Market (operated by NZX Limited for Fonterra) under the code ‘FCG’. Fonterra has three issues of retail bonds listed and quoted on the NZDX under the codes ‘FCG030’, ‘FCG040’, and ‘FCG050’. Fonterra also has an issue of capital notes listed and quoted on NZDX under the code ‘FCGHA’ and a Euro Medium Term Note Programme listed on the Singapore Stock Exchange. As at 31 July 2020 there were 1,612,097,067 Fonterra Co-operative shares on issue. 163 Fonterra Annual Report 2020 Corporate Governance Corporate Governance Fonterra’s Board, Shareholders’ Council and Management recognise that strong governance plays a critical role in the success of our Co- operative and are committed to achieving the highest standard of corporate governance, representation and leadership. To support this the Board has developed governance systems that reflect Fonterra’s unique characteristics and requirements as a globally competitive New Zealand based dairy co-operative. These are continuously reviewed to ensure best practice is followed. This Corporate Governance Statement is current as at 17 September 2020 and has been approved by the Fonterra Co-operative Group Limited Board. 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 2020 (NZX Code). Fonterra focuses on governance in a way that promotes: • the interests of our farmer shareholders, unit holders and other key stakeholders • our Co-operative’s purpose, values and strategy • 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 us in meeting our 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 our farmer shareholders, employees, customers, unit holders, debt investors, governments and the communities we operate in. Fonterra’s Global Ethical Behaviour Policy and The Way We Work are available, in multiple languages, to all employees on the Fonterra intranet. Training on our Code of Ethics and other core global policies is an important part of our global induction programme. Our annual check-in and certification process supports our people’s awareness and understanding of Fonterra’s global policies and was completed by 100% of its global audience, being our people leaders, managers and other key roles. Annual refresher learning programmes on our ethical behaviour commitments, expectations, systems and processes are also required to be completed throughout our 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. The hotline allows individuals across our Co-operative to anonymously make complaints or raise issues. In the year ended 31 July 2020, 29 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) before appropriate action is taken. Timely updates are made available to the whistleblower through the hotline. All Fonterra employees are expected to record actual or potential conflicts using our Conflict of Interest register. 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. Securities Trading Policy Fonterra has adopted a Securities Trading Policy that details the rules for trading in shares, capital notes, retail bonds, units, derivatives, 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 and is in addition to legislative requirements for trading securities in New Zealand and Australia. The Securities Trading Policy and Standard and other key Global 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 1: CODE OF ETHICAL BEHAVIOUR Code of Ethics A culture of honesty, integrity and transparency is integral to our purpose and securing our reputation. We expect our Directors, officers and employees to maintain high ethical standards and to operate ethically and legally in the countries where we do business, and reflect our guiding philosophy, Good Together, through all their behaviours, choices and decisions. Fonterra’s Code of Ethics comprises the following core documents: FONTERRA – CODE OF ETHICS The Way We Work (Code of Business Conduct) Board Charter Global Ethical Behaviour Policy BOARD CODE OF CONDUCT These documents are available on fonterra.com and are supported by our other policy documents and our employment agreements. They 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; • how to deal with conflicts of interest; • the use of corporate information, assets and property; • procedures for giving and receiving gifts; • procedures for whistle blowing; and • how to manage breaches of the Code of Ethics. We have a Code of Business Conduct, The Way We Work, which guides us in how we apply our values, every day. This year we updated The Way We Work to ensure that it reflects Good Together and aligns with our core goals of Healthy People, Healthy Environment and Healthy Business. The Board has also developed a Board Code of Conduct for Directors. PRINCIPLE 2: BOARD COMPOSITION AND PERFORMANCE Changes to the Fonterra Board Board Charter The Board Charter includes details about the Board’s role, responsibilities and obligations, Board composition and procedures including the Chair’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 Board Charter is reviewed each year and is available on fonterra.com. Board Appointments Fonterra’s Constitution provides for a maximum of 11 Directors and sets out how they are appointed. Up to seven Directors are elected by farmer shareholders (Farmer Directors) and up to four Directors are appointed by the Board (Appointed Directors). There were a number of changes to the Fonterra Board during the financial year ended 31 July 2020: • In November 2019, Farmer Directors Ms Donna Smit and Mr Andy Macfarlane were re-elected to the Board and Appointed Director Mr Simon Israel retired from the Board. • In March 2020, Chairman Mr John Monaghan announced he will retire from the Board following the Annual Meeting in November 2020. • In April 2020, Ms Holly Kramer was appointed to the Board as an Appointed Director. • In June 2020, Farmer Director Mr Peter McBride was named as Chairman-elect. Disclosure The Board is committed to building capabilities and maintaining the highest standards of governance in accordance with best practice. The Board considers it important that there is a good balance of experience on the Board. Information about the experience, length of service, independence and attendance at Board meetings of each Director is disclosed at pages 167, 168, 176 and 177. The ownership interests of each Director are disclosed in the Statutory Information section. 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, globally competitive New Zealand dairy co-operative with diverse stakeholders. The skills list is reviewed annually and updated as required. The Board then develops a skills matrix by assessing the required weighting of each skill against the aggregate skills of the current Board. The skills matrix is used to identify the skills to be targeted each year as part of the Farmer Director election process and when selecting Appointed Directors. The attributes, skills list, skills matrix and the year’s targeted skills are published annually 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. The Farmer Director selection process involves a three-member Independent Selection Panel (ISP) that recommends appropriate candidates to be put to farmer shareholders for election. The members of the ISP 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 ISP. In addition to candidates assessed and recommended by the ISP, 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 Farmer Director elections are overseen by the Shareholders’ Council. 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 are independent and bring to the Board perspectives, experience and skills to complement and enhance the attributes and skills provided by the Farmer Directors. 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 Board is consulted. The Appointed Directors are ratified by farmer shareholders at the next Annual Meeting held following their appointment. All Directors enter into written agreements establishing the terms of their appointment. Diversity and Inclusion Policy Diversity means respect for and appreciation of differences in people, including differences in ethnicity, cultural background, gender, age, national origin, disability, sexual orientation, education, religion, personality or thinking style. Inclusion is a sense of belonging, where people feel valued, respected and are encouraged to fully contribute in a safe and supportive environment. Our diversity and inclusion principles of whanaungatanga (belonging), manaakitanga (care), kaitiakitanga (guardianship) and whakaohooho (inspiration) guide and enable us to attract, keep and grow our people to deliver on our purpose, values and our strategy. You, me, us, together – (cid:55)(cid:195)(cid:87)(cid:82)(cid:88)(cid:15)(cid:3)(cid:87)(cid:195)(cid:87)(cid:82)(cid:88)(cid:17) Fonterra publishes its Diversity and Inclusion Policy on fonterra.com. 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’. Diversity and Inclusion Targets and Objectives Fonterra has made a formal commitment to increase the representation of women and ethnic minorities within senior leadership levels. The Board’s aspirational targets and objectives are to increase women in leadership to 50%1 by 2022 and further target 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. 164 165 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 2020 Corporate Governance Executive Leadership Gender Composition Director Independence PRINCIPLE 3: BOARD COMMITTEES FONTERRA MANAGEMENT TEAM AS AT 31 JULY 2019 7 FTE3 % FONTERRA MANAGEMENT TEAM AS AT 31 JULY 2020 8 FTE4,5 % Board Gender Composition MALE 5 71% MALE 6 75% GENDER FEMALE GENDER DIVERSE UNDECLARED – 0% – 0% 2 29% GENDER FEMALE GENDER DIVERSE UNDECLARED 2 25% – 0% – 0% As the majority of Directors are elected by farmer shareholders through an independent process, the Board has not adopted gender targets for the Board in 2020. The Board remains committed to addressing the gender composition of the Board, through the appointment of Appointed Directors, building a pipeline of Directors through the Fonterra Governance Development programme and through the Farmer Director election process. BOARD AS AT 31 JULY 2019 11 % GENDER MALE 9 82% FEMALE GENDER DIVERSE UNDECLARED 2 18% – 0% – 0% The rules of the Fonterra Shareholders’ Market (FSM Rules) require Fonterra to have at least two Independent Directors. In order to be an Independent Director under the FSM Rules, a Director must not be an ‘employee’ of Fonterra or have a ‘disqualifying relationship’. A Director has a disqualifying relationship where they have a direct or indirect interest, position, association or relationship that could reasonably influence, or could be reasonably perceived to influence, in a material way, the Director’s capacity to bring an independent view to decisions relating to Fonterra, to act in Fonterra’s best interests and to represent the interests of Fonterra’s financial product owners generally. 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. Fonterra currently has four Appointed Directors. As at 31 July 2020, Clinton Dines, Bruce Hassall, Holly Kramer 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 Officer roles at Fonterra are not exercised by the same individual. Fonterra has a number of permanent Board Committees, as detailed below. Additional Board Committees are formed when it is efficient or necessary to facilitate decision-making by providing for a sub-group of Directors to focus on particular areas or issues and to develop recommendations to the Board. Board Committees have standard ‘Terms of Reference’ and each permanent Committee has a charter, which defines the scope and responsibilities of that Committee and is approved by the Board each year. The charters of the permanent Board Committees are available on fonterra.com. The minutes for each of the Board Committees’ meetings are provided to the Board for review. There are two non-permanent Committees, the Divestment Review Committee and the Capital Structure Committee, which were established in 2019: • The Divestment Review Committee’s purpose is to oversee material divestments and similar transactions. Mr Scott St John is the Chair of the Committee and Mr Brent Goldsack, Ms Leonie Guiney, Mr Bruce Hassall, Ms Holly Kramer and Ms Donna Smit are members of the Committee. • The Capital Structure Committee’s purpose is to provide guidance over Management’s review of Fonterra’s capital structure. Mr Bruce Hassall is the Chair of the Committee and Mr Brent Goldsack, Ms Leonie Guiney, Mr Peter McBride and Mr John Nicholls are members of the Committee. The non-permanent Board Committees operate under separate Terms of Reference which define their respective purposes and responsibilities. The gender composition of Fonterra Board changed between 2019 and 2020. COMMITTEE OR GROUP MEMBERSHIP AS AT 31 JULY 2020 PURPOSE GENDER MALE 8 73% FEMALE GENDER DIVERSE UNDECLARED 3 27% – 0% – 0% Assess Performance Directors formally assess the performance of the Board each year, and the Board reviews each Committee’s performance against its Charter. 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 responsible for reviewing the Chief Executive Officer’s performance. BOARD AS AT 31 JULY 2020 11 % 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, where possible • 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 regular strategic readings and Directors are also expected to keep up to date with governance issues. Board visits to Fonterra’s global businesses occur regularly, where possible. 3 Full time equivalent. 4 Full time equivalent. 5 As of 31 July 2020, the position of Managing Director People & Culture is vacant and therefore not included in this calculation. 166 Appointments and Remuneration Committee John Monaghan (Chair) Audit and Finance Committee Clinton Dines6 Holly Kramer Andrew Macfarlane Peter McBride Bruce Hassall6 (observer) Bruce Hassall6 (Chair) Leonie Guiney Andrew Macfarlane Peter McBride Scott St John6 Co-operative Relations Committee Brent Goldsack (Chair) Milk Price Panel Andrew Macfarlane Peter McBride John Nicholls Donna Smit Scott St John6,7 (Chair) Bruce Hassall6,7 Brent Goldsack Andrew Wallace7,8 Bill Donaldson8 Safety and Risk Committee Leonie Guiney (Chair) Clinton Dines6 Brent Goldsack John Nicholls Scott St John6 Independent Director Independent member 6 7 8 Appointed by the Shareholders’ Council 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. The Milk Price Panel does not determine the Farmgate Milk Price, as this is a decision for the Board. 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. 167 Fonterra Annual Report 2020 Corporate Governance 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 Eligible to Eligible to Eligible to Eligible to Eligible to Attend Attendance Attend Attendance Attend Attendance Attend Attendance Attend Attendance Attend Attendance Clinton Dines Brent Goldsack Leonie Guiney Bruce Hassall Simon Israel Holly Kramer Andrew Macfarlane Peter McBride John Monaghan John Nicholls Donna Smit Scott St John 15 14 15 15 5 4 15 15 15 15 15 15 14 13 14 14 3 3 15 15 15 14 15 15 – – 7 7 – – 4 7 3 – 3 7 – – 7 7 – – 3 6 3 – 3 7 8 – – 8 2 3 8 6 8 – – – 7 – – 8 1 3 8 6 8 – – – – 6 – – – – 6 6 – 6 6 – – 6 – – – – 6 5 – 6 6 – – 7 – 7 – – – – – – – 7 – 7 – 7 – – – – – – – 7 2 4 4 2 – – – – – 2 – 4 2 4 4 1 – – – – – 2 – 4 Audit and Finance Committee Nominations Committee The Audit and Finance Committee comprises two Appointed Directors and three Farmer Directors. The Committee is chaired by Bruce Hassall, who is an independent Appointed Director and a Fellow of the New Zealand Institute of Chartered Accountants. The Appointments and Remuneration Committee fulfils the role of a nominations committee in respect of the appointment of Appointed Directors. The election and selection process for Farmer Directors and Appointed Directors is explained above under Board Appointments at page 165. Majority Independent Directors – Audit and Finance Committee and Appointments and Remuneration Committee Takeover Offer The Audit and Finance Committee and Appointments and Remuneration Committee do not comprise a majority of independent Appointed Directors. The Board does not believe that it is necessary to establish protocols for a takeover offer, given Fonterra’s co-operative structure and the thresholds on share ownership in its Constitution. PRINCIPLE 4: REPORTING AND 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 Global Disclosure Policy to ensure compliance with the NZX and FSM Listing Rules regarding continuous disclosure. The Global Disclosure Policy governs Fonterra’s communications with investors and market participants, and the disclosure of information relevant to Fonterra. The Global Disclosure Policy and the underlying Global Disclosure Standard are available on fonterra.com. 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. There is currently no headroom for Fonterra, based on having 11 Directors, to have more than four independent Appointed Directors, as the Farmer Directors fill each of the seven positions open to them (and as noted above, the Farmer Directors are not considered independent). Given this, it is difficult for Fonterra to appoint a majority of Appointed Directors to these Committees without excluding Farmer Directors or significantly increasing the workload of the Appointed Directors. Fonterra does not consider that this is a significant issue, as the Audit and Finance Committee is chaired by an independent Appointed 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 Appointed Directors. Employees attend Audit and Finance Committee and Appointments and Remuneration Committee meetings only at the invitation of the respective Committee. Milk Price Panel The Dairy Industry Restructuring Act 2001 (New Zealand) requires that the Chair and a majority of the members of the Milk Price 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 independent members. As at 31 July 2020, Scott St John, Bruce Hassall and Andrew Wallace were (and continue to be) independent members of the Milk Price Panel. Pursuant to the Dairy Industry Restructuring Amendment Act 2020, with effect from 1 June 2021, Fonterra must appoint one member of the Milk Price Panel who is nominated by the Minister. 168 Website Disclosure Fonterra has the following documents available on fonterra.com: • Board Charter • Board Code of Conduct • Appointments and Remuneration Committee Charter • Audit and Finance Committee Charter • Co-operative Relations Committee Charter • Safety and Risk Committee Charter • The Way We Work (Code of Business Conduct) • Global Disclosure Policy and Standard • Global Diversity and Inclusion Policy • Global Health, Safety and Wellbeing Policy • Global Environmental Policy • Global Ethical Behaviour Policy • Global Privacy Policy • Global Securities Trading Policy and Standard • Sustainability Code of Practice Fonterra does not have a Director Remuneration Policy for the reasons noted below under ‘Director Remuneration’. Non-Financial Reporting Fonterra is guided by international best practice and, reflecting the core role of sustainability within our strategy, we are on a journey towards more integrated reporting. In this Annual Report we provide coverage of both financial and non- financial matters. Non-financial reporting includes coverage of our social and environmental performance in the Healthy People and Healthy Environment sections, and our approach to governance in this Corporate Governance section. Our financial performance is reported on in our Healthy Business section. In November 2019 Fonterra issued its third Sustainability Report, which is prepared in accordance with the Global Reporting Initiative (GRI) Standards and is independently assured. This further expands the coverage of our non-financial reporting, including consideration of material environmental, social and governance (ESG) factors and performances against targets. We have adopted this internationally recognised reporting framework to help users of our Sustainability Report more easily compare our disclosed information and performance with others. We plan to release the Sustainability Report annually, with the next report due to be issued later this year. PRINCIPLE 5: REMUNERATION Fonterra’s remuneration framework is designed to attract, retain and motivate high-quality Directors and senior management. Director Remuneration Fonterra’s Constitution modifies the Board’s discretion to set remuneration of Farmer Directors. Farmer shareholders elect an independent committee of six farmer shareholders (the Directors’ Remuneration Committee) to consider and make recommendations at the Annual Meeting on the remuneration for Farmer Directors, which is required to be approved by farmer shareholders. The members of the Directors’ Remuneration Committee as at 31 July 2020 were David Gasquoine (Chair), Ellen Bartlett, John Gregan, Glenn Holmes, Scott Montgomerie and Stephen Silcock. Directors and employees only attend Directors’ Remuneration Committee meetings at the invitation of the Committee. 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. Further details of the Directors’ remuneration are contained on pages 155 and 156. Remuneration of our People The remuneration of our Chief Executive Officer (CEO) and Management is governed by the Appointments and Remuneration Committee (ARC), who assists the Board in fulfilling its corporate governance responsibilities relating to remuneration, recruitment and retention. Fonterra has a Remuneration and Rewards Global Standard which outlines our overall remuneration framework. The ARC oversees and provides counsel on Fonterra’s People Strategy, including key priorities and milestones, as well as noting progress on culture, talent and leadership activities and diversity and inclusion. During the year ended 31 July 2020 (FY20), the ARC engaged the services of an independent external consultant to provide guidance on the design and development of the new CEO and Fonterra Management Team (FMT) Executive Incentive, to replace the existing FY19-21 Long-Term Incentive. The engagement of an independent consultant ensured that the ARC did not receive advice solely from Management or advisors commissioned by Management. Remuneration Strategy Fonterra’s remuneration strategy has been designed to align with and support our philosophy of Good Together through: • Our purpose • Our values • Our business strategies and goals These are the foundation of our Co-operative and the lens through which all our behaviours, decisions and choices are made. Executive Remuneration Framework Fonterra’s executive remuneration framework follows three simple principles: ATTRACT AND RETAIN KEY TALENT ENSURE A STRONG LINK BETWEEN BUSINESS PERFORMANCE AND REWARD REWARD OUR PEOPLE EQUITABLY The remuneration framework for our CEO and FMT is based on a total remuneration approach which is delivered through fixed remuneration and variable (at risk) components as outlined below. In FY20, the ARC and Board approved a new variable Executive Incentive Plan (EIP) for the CEO and FMT, which replaced the Short-Term Incentive (STI) and Long-Term Incentive (LTI) programmes for FY20. The purpose of the new design is to have a fit for purpose long-term incentive that focuses the CEO and FMT on the execution of our new strategy, asset rationalisation, and business repositioning of the strategy transformation. The new design is a modified STI which focuses the FMT on annual strategy execution and defers a portion of the incentive over three years. The final vesting of the deferred value is modified using a long-term performance hurdle of Return on Capital (ROC) over the Milk Price Weighted Average Cost of Capital (WACC). 169 Fonterra Annual Report 2020 Corporate Governance Both the fixed and variable remuneration components of the CEO and FMT are outlined below: Total Remuneration Earned for FY20 FIXED ELEMENT VARIABLE ELEMENT FIXED REMUNERATION EXECUTIVE INCENTIVE PLAN (EIP) How it’s delivered How it works Cash Cash (with a deferred cash component) - consists of base salary, KiwiSaver or - CEO Target is 120% of Base Remuneration Superannuation, and insurance - benchmarked against the external market using comparable companies in the country or region where the individual is located - benchmarked to the median of the relative peer group - reviewed annually based on performance and behaviours - eligible FMT members Target is 110% of Base Remuneration - the incentive is capped at 150% payment of on-target earnings - calculated based on achievement against a Fonterra Group scorecard which aligns to our triple bottom line (Healthy People, Healthy Environment and Healthy Business) - our measures within the scorecard include Health and Safety, Food Safety Quality, Lowering our Environmental Footprint, Group Return on Capital and Total Farmer Payout - achievement is determined over a one-year performance period (1 August – 31 July, aligned to Fonterra’s financial year) - paid as cash, with 70% cash paid in the year earned and 30% deferred cash which vests three years after grant, subject to continued employment and a performance hurdle of Group ROC over the Milk Price WACC What it does Attracts and retains key talent in the markets in which we operate Aligns the CEO and eligible FMT members on delivering exceptional results over both the short and long term for our farmer owners The FY20 EIP for the CEO and eligible FMT members replaces all previous LTI programmes for those individuals, including the FY18-20 and FY19-21 LTI schemes. The CEO and eligible FMT members participate in the EIP. FMT members who do not participate in the EIP are entitled to fixed remuneration and participate in the Group STI scheme. The pay-mix of on-target total remuneration for the CEO is shown below. Base Remuneration 45% EIP paid as STI 38% EIP deferral 17% Executive Remuneration Benchmarking Pay benchmarking for the CEO, eligible FMT members and certain senior roles is conducted using independent third-party remuneration advisors 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. CEO Remuneration Total Remuneration Paid for FY20 Total Remuneration Paid reflects remuneration in the period it is received, rather than the performance period to which the payment relates. Miles Hurrell has held the role of Chief Executive Officer for the year ended 31 July 2020 (FY20). His annual fixed remuneration as at 31 July 2020 is $1,950,000. The variable pay component paid in FY20 was for FY19 and is $0. The total remuneration received by Mr Hurrell in FY20 was $2,008,500, as shown in the table below. FIXED REMUNERATION PAY FOR PERFORMANCE TOTAL REMUNERATION PAID SALARY $1,950,000 BENEFITS1 $58,500 STI2 $0 LTI3 $0 $2,008,500 1 Employer superannuation contribution. 2 3 No LTI was payable to the CEO in FY20 for the FY19 performance year. In FY19 the Board exercised its discretion to not award any STI payment for the FY19 performance year. Total Remuneration Earned illustrates the remuneration outcomes for the FY20 performance period, providing what we believe is a more transparent indication of pay for performance. Variable pay outcomes are listed against the relevant performance period, regardless of when the payment is made. We believe this reporting approach provides the right balance of transparency and disclosure while accurately reflecting the outcomes for a given fiscal year. FIXED REMUNERATION PAY FOR PERFORMANCE2 TOTAL REMUNERATION EARNED5 SALARY $1,950,000 BENEFITS1 $153,410 FY20 EIP EARNED3 (70%) $2,214,576 FY20 EIP DEFERRED TO FY234 (30%) $949,104 $5,267,090 1 Employer superannuation contribution includes portion paid on base remuneration and incentive earned. 2 Based on FY20 Group Scorecard results. 3 Subject to meeting the required short-term performance hurdles, this is due to be paid in October 2020. 4 Subject to meeting the required long-term performance hurdles, this is due to be paid in October 2023. 5 Not inclusive of the amount relating to the provision recognised by Fonterra in relation to the pending judicial interpretation of the Holidays Act 2003 in New Zealand. PRINCIPLE 6: RISK MANAGEMENT Risk Management Framework The Board, supported by the Safety and Risk Committee, has overall responsibility for ensuring: • the effective implementation of risk management systems in line with our Global Risk Management Policy • that Fonterra operates within its risk appetite settings Fonterra’s Risk Management Policy is aligned to the ISO31000 Risk Management – Principles & Guidelines 2018. The policy outlines our risk principles and accountabilities, setting out the requirements for managing and reporting risk across our global business. It is designed to embed a co-operative-wide risk management capability, establishing a consistent approach to identifying, assessing, controlling, monitoring and reporting on our key risks. These include risks that may affect our Co-operative’s ability to achieve its objectives and protect our people, shareholders, customers and reputation. Our risk management framework is based on the three lines of defence model. Fonterra’s first line of defence is our people. Managers and individual business units hold clear risk management responsibilities for business risk management, including requirements to ensure compliance with external requirements as well as Fonterra’s Global Policy standards. Our risk management and assurance processes support this via our group functions, ensuring a consistent best-practice approach to risk management across the business, aligned with our risk appetite settings. These processes are overseen by the Fonterra Management Team alongside a dedicated internal audit function, taking a risk-based approach to oversight of key business activities and reporting to the Board via the Safety and Risk Committee and the Audit and Finance Committee. E C N E F E D F O E N I L D R 3 E C N E F E D F O E N I L D N 2 E C N E F E D F O E N I L T S 1 FONTERRA BOARD INTERNAL ASSURANCE Audit & Finance Committee Safety & Risk Committee Fonterra Management Team IT GROUP RISK Finance Supply Chain Environment People & Culture Food Safety Legal Health & Safety Milk Supply APAC COO Greater China AMENA Co-operative Affairs oCFO 170 171 Fonterra Annual Report 2020 Corporate Governance As part of its risk management responsibility, the Safety and Risk Committee receives regular reports of the emerging and existing key risks and the measures in place to mitigate the impact of key risks on our Co-operative. The Safety and Risk Committee also receives regular reports on the health and safety of our people as part of Fonterra’s risk management framework. For further information about Fonterra’s Health & Safety performance in FY20, please refer to the Health & Safety section on page 174. Risk Management Focus in FY20 Throughout FY20, we have evaluated our risk appetite settings, revised our risk management policy and framework, and strengthened the processes for the identification and reporting of risks. As part of our strategy refresh, our Group Risk Appetite settings were assessed to provide clarity of the acceptable level of risk to be taken in pursuit of our strategic objectives. This involved the Fonterra Management Team and Board participating in risk identification, definition and appetite workshops, further strengthening our ability to identify, define and establish tolerance levels for the risks associated with implementing our refreshed business strategy. Strengthening the connectivity between our Co-operative’s first line (bottom-up) and third line (top-down) of defence is crucial to ensure risk management information, including the effectiveness of risk controls, is captured and provided to both Management and the Board. This has been reinforced in FY20 through the refresh of our Risk Management Policy, Framework, and Standard, ensuring a consistent approach to risk management is ingrained in our day-to-day operations at a business unit level. This is monitored and measured via our integrated business planning process, with oversight of the effectiveness of controls provided by our annual audit plan. Covid-19 Fonterra’s response to the global Covid-19 outbreak was first initiated in January 2020. As with many businesses, the pandemic has had varying levels of impact across our supply chain and within the global markets in which we operate. Fonterra has utilised its Group Crisis Response plan and Incident Management Team to enable an expedited and appropriate response at each stage of the situation globally. Key impact areas include: • Supply chain disruptions • Health risks to our people • Market volatility • Social distancing and increased safety measures at our manufacturing and distribution sites • Fluctuations in customer demand and changes to global consumption habits Fonterra’s response to the pandemic is ongoing. To ensure the continuity of Fonterra’s operations during FY21, a number of control measures have been put in place to mitigate risks to our operations. While Fonterra’s Incident Management framework has allowed our operations and core business activities to continue, ongoing challenges will be presented to the organisation by Covid-19. These challenges, which include the economic impacts of the virus on the global markets in which we operate, will require continued monitoring, analysis and management for a sustained period. Key Risks Fonterra’s Risk Management Framework focuses on the key risks Fonterra faces globally in implementing our business strategy. Regular monitoring of the risk environment occurs via our integrated business planning process, specific technical risk councils and audit outcomes. KEY RISK Strategic Deployment RISK DESCRIPTION RISK MITIGATION MEASURES Sub-optimal execution of healthy environment, healthy people and healthy business strategic initiatives. Market Price and Currency The risk that price movement within the global dairy markets in which Fonterra operates is not appropriately managed or responded to, adversely impacting operations and profitability. Environmental Sustainability Failure to enact measures to mitigate the impact or perceived impact of Fonterra’s activities on the environment. • Integrated business planning enables regular proactive monitoring of strategic deployment milestones including forecast and interim returns. • Best practice programme management. • Strong focus on capital expenditure and balance sheet management. • Established financial assurance framework including oversight from the Finance Risk Committee. • Regular review of policy settings, credit terms and payment standards. • Regular portfolio analysis and ongoing market exposure assessments. • Resourcing plans to make progress against environmental targets. Please refer to pages 18 to 23 of this report for Fonterra’s sustainability goals and performance. • Proactive engagement with industry, government and regulators. Milk Supply Market Access and Geopolitical Supply Chain Fonterra’s inability to retain milk supply due to reduction of milk production driven by disruption (weather/biosecurity event), reduced returns and/or adverse regulatory settings. • Strong financial performance. • Our Purpose – Good Together. • On farm support services and frameworks. The risk that changes within global markets, including economic volatility, geopolitical instability, market access and market concentration adversely impact business operations and sales. Disruption to production through the inability to maintain and/or effectively operate Fonterra’s milk collection, manufacturing and supply chain assets. Health, Safety & Wellbeing Failure to manage the health, safety and wellbeing of our people in the workplace. People & Culture The risk that leadership, organisational culture, and people management practices adversely impact engagement and performance. • Supplier policy settings. • Trade strategy and advocacy. • Active central portfolio management including consideration of concentration risk. • Efficient collection, treatment and distribution of milk. • Strong focus on global supply chain management, and proactive identification of emerging risks. • Established, robust business continuity plans to address identified supply chain continuity risks. • Zero tolerance for unsafe work practices. • Mature reporting of events, near misses and hazards in the enterprise wide First Priority event management tool. • Ensuring our Co-operative’s culture invites communication of accepted behaviours, values, leadership development and succession planning. • Global diversity and inclusion objectives in our Healthy People strategy. Please refer to pages 24 to 31 of this report for Fonterra’s diversity and inclusion goals and performance. • The People & Culture function partners across the business, providing advice, tools, processes and policies to engage individuals, teams and support performance. • Our Purpose – Good Together. • A dedicated Community engagement programme. Social Licence to Operate Food Safety & Quality (FSQ) Legal & Regulatory Information Technology The risk that Fonterra’s engagement with and treatment of the communities, stakeholders and environments where Fonterra operates globally, fails to consider potential societal impacts, and stakeholder interests. The risk that Fonterra manufactures and supplies unsafe food or food that is perceived to be unsafe, and/or product that does not meet local and international standards and regulations. • The FSQ framework is designed to ensure the purchase, supply and production of food is aligned with global regulatory standards as a minimum. • Third party providers undergo specific food safety and quality audits by specialists from Fonterra. • External specialists provide independent audits on manufacturing and product quality control processes within Fonterra. • Proactive engagement on regulatory and contractual changes globally. • Global Policy Framework. • Reliable and trustworthy IT environment with effective management of risk including cyber security, data protection and data availability. • Established IT disaster recovery plans. Failure to manage or respond to changes in our legal, regulatory and compliance obligations within the markets, and geographies in which Fonterra operates globally. Failure to establish, maintain and safeguard an appropriate information technology and data management framework, including systems, that ensure the confidentiality, integrity and availability of our data, systems and supply chain. 172 173 Fonterra Annual Report 2020 Corporate Governance Farmer Meetings A schedule of regular meetings with farmer shareholders, sharemilkers and farm workers are usually held across the country at least twice each year. Often these are run in conjunction with the Shareholders’ Council and Farm Source™ regional teams. However, due to Covid-19 restrictions, this year Fonterra has been unable to hold a number of these regular face-to- face meetings and offered stakeholders the opportunity to attend a range of online meetings instead. 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. 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 in line with Fonterra’s Constitution and are published on fonterra.com. Annual Report The Group’s Annual Report, together with the half-year report 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. Fonterra.com and Farm Source™ Digital Tools Other Disclosures An overview of our Co-operative’s operations, financial presentations and public announcements are all available on the fonterra.com website. Fonterra also uses emails, including regular updates from the Chairman, Chief Executive Officer 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. The My Co-op application provides updated news and information from across our Co-operative and the industry including milk price announcements, updates from the Chairman and Chief Executive Officer. The On Farm application 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 Chief Executive Officer attends the Annual Meeting. 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 FSM Rules. In particular, FSM Rule 4.1.1 restricts Fonterra from entering into any transaction (or series of linked or related transactions) which would significantly change, indirectly or directly, the nature of Fonterra’s business or involves a gross value above 50% of the average market capitalisation of Fonterra, unless the transaction(s) is approved by (or is conditional on the 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. Health and Safety It is fundamental to Fonterra that our people are healthy, live with balance and go home safe from work every day, everywhere. This is a commitment not just to employees, but also to the large number of contractors that support our business every day. Fonterra’s health and safety performance is measured using a number of reactive and preventive, leading and lagging 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. Our TRIFR for FY20 is 5.8. On a like for like basis this is slightly higher than last year, and higher than our industry best practice goal of 5.0. We have had 10 serious harm injuries, compared to 18 in FY19 and 14 in FY18. We are pleased to report that there have been no fatalities during FY20 across our global footprint. Keeping a continual focus on health, safety and wellbeing is essential, and we have a number of targeted programmes of work underway to support us to achieve this ambition – particularly around establishment of lead indicators, mental health, critical risk, process safety and ensuring our safety management system is robust and user friendly. Underpinning this is a focus on maintaining a strong safety culture and employee engagement in the process of managing risk. 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. KPMG was appointed as Fonterra’s external auditor for the financial year ended 31 July 2020. Fonterra has a Group Audit Independence Policy. This policy ensures that the ability of the auditor to carry out its statutory audit role is not impaired, or could be perceived to be impaired. The policy sets out the types of services that the auditor may undertake, those the auditor may only undertake with the approval of the Audit and Finance Committee, and those that are not permitted. The policy stipulates the rotation of the lead external audit partner at least every five years. As per the policy, all non-audit services to be undertaken by the auditor require approval by the Chief Financial Officer or Director Group Finance. Regardless of the nature of the services proposed, any engagements exceeding a total of NZD200,000 must be approved by the Audit and Finance Committee. The Audit and Finance Committee reviews the independence of the auditor, external audit fees, terms of engagement and the annual audit plan. The Chairman of the Audit and Finance Committee 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 fees paid to Fonterra’s auditor, KPMG, are detailed in Note 6 (page 98) to the Financial Statements for the year ended 31 July 2020. 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 has an internal audit function that provides independent and objective assurance to both the Audit and Finance Committee and Management on the adequacy of risk management, control and governance processes. Fonterra’s internal audit approach 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 The appointment and removal of the Chief Internal Auditor (CIA) is subject to the approval of the Audit and Finance Committee. The CIA develops the annual internal audit plan, which is endorsed by the Audit and Finance Committee, and is accountable for its implementation. The Audit and Finance Committee monitors progress of the internal audit plan implementation. PRINCIPLE 8: SHAREHOLDER RIGHTS AND RELATIONS Website Fonterra‘s website (fonterra.com) provides investors and interested stakeholders access to 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 Constitution, is independent of the Board and as at 31 July 2020 comprised 25 farmer shareholders elected as Councillors, representing 25 wards across New Zealand. The 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 and Farm Source™ websites and the My Co-op mobile application. In addition, Fonterra provides farmers with the ability to receive communications (such as the Annual Report) from Fonterra electronically. Webcasts are used where appropriate. Fonterra’s communications with farmers include regular face-to-face meetings, a regular Global Dairy Update, Farm Source™ magazine, My Co- op application posts and regular emails from the Chairman, Chief Executive Officer and Regional Heads. As described above, Fonterra releases all material information to the NZX and ASX (where applicable), and complies with the FSM Rules with respect to shareholder communications. 174 175 Fonterra Annual Report 2020 Corporate Governance Board of Directors JOHN MONAGHAN CLINTON DINES BRENT GOLDSACK LEONIE GUINEY BRUCE HASSALL HOLLY KRAMER BOARD RESPONSIBILITIES Farmer-elected Director, Chairman, Chair of the Appointments and Remuneration Committee and Member of the Governance Development 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. In March 2020, John announced he will retire from the Board following the Annual Meeting in November 2020. 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. BOARD RESPONSIBILITIES Appointed Director, Member of the Appointments and Remuneration Committee and the Safety and Risk Committee TERM OF OFFICE Appointed 2015 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 Clinton was appointed to the Fonterra Board in 2015. Clinton lived and worked in China for 36 years, 21 of which as President of BHP Billiton’s China business. He has extensive experience as an executive in China and Asia businesses and has had an active career as a Non-Executive Director, currently serving on the Boards of the Port of Newcastle, Sky Renewables Pty Limited and Zanaga Iron Ore Company Limited. 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 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 and is a Director of Rabobank NZ Limited. Brent previously served on the Board of Canterbury Grasslands Limited. Brent is actively involved as a shareholder of three dairy operations in the Waikato. 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 BOARD RESPONSIBILITIES Farmer-elected Director, Chair of the Safety and Risk Committee and 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 seven South Canterbury farms and Bobby Square Limited. BAgrSci BOARD RESPONSIBILITIES Appointed Director, Chair of the Audit and Finance Committee, Member of 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) BOARD RESPONSIBILITIES Appointed Director, Member of the Appointments and Remuneration Committee TERM OF OFFICE Appointed 2020 Holly Kramer was appointed to the Fonterra Board in 2020. Holly has more than 25 years of extensive governance, management and product/marketing experience. She was Chief Executive Officer of major Australian retailer Best & Less. She has also held senior executive roles at Telstra Corporation, Ford Motor Company (in the US and Australia) and Pacific Brands. Holly is currently a Director on the Boards of Woolworths, Abacus Property Group and the GO (Goodes-O’Loughlin) Foundation. She is Chair of the unlisted mortgage broking fintech, Lendi. She is also the Pro-Chancellor of Western Sydney University. Holly’s previous governance roles include the Boards of Australia Post, Nine Entertainment Corporation, AMP Limited, and Telstra Clear (NZ). BA, MBA ANDY MACFARLANE PETER MCBRIDE JOHN NICHOLLS DONNA SMIT SCOTT ST JOHN BOARD RESPONSIBILITIES Farmer-elected Director, Member of the Appointments and Remuneration Committee, the Audit and Finance Committee and the Co-operative Relations Committee TERM OF OFFICE Elected 2017, last re-elected 2019 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. (cid:37)(cid:17)(cid:36)(cid:74)(cid:85)(cid:17)(cid:54)(cid:70) BOARD RESPONSIBILITIES Farmer-elected Director, Chairman-elect, Member of the Appointments and Remuneration Committee, the Audit and Finance Committee, the Co-operative Relations Committee and the Governance Development Committee TERM OF OFFICE Elected 2018 Peter McBride was elected to the Fonterra Board in 2018 and was announced as Chairman-elect in June 2020. 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 Chief Executive Officer of Trinity Lands Limited and 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. (cid:37)(cid:17)(cid:3)(cid:43)(cid:82)(cid:85)(cid:87)(cid:76)(cid:70)(cid:88)(cid:79)(cid:87)(cid:88)(cid:85)(cid:72)(cid:15)(cid:3)(cid:51)(cid:42)(cid:3)(cid:39)(cid:76)(cid:83)(cid:3)(cid:38)(cid:82)(cid:80)(cid:3)(cid:36)(cid:74)(cid:85)(cid:76)(cid:69)(cid:88)(cid:86)(cid:76)(cid:81)(cid:72)(cid:86)(cid:86) BOARD RESPONSIBILITIES Farmer-elected Director, Member of the Co-operative Relations Committee and the Safety and Risk 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 Post Graduate Diploma in Agricultural Science. He has shareholding interests in the South Island, owning dairy farms in mid Canterbury. (cid:37)(cid:17)(cid:36)(cid:74)(cid:85)(cid:15)(cid:3)(cid:51)(cid:42)(cid:3)(cid:36)(cid:74)(cid:85)(cid:54)(cid:70)(cid:76) BOARD RESPONSIBILITIES Farmer-elected Director, Member of the Co-operative Relations Committee TERM OF OFFICE Elected 2016, last re-elected 2019 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 Fellow 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 and manufacturing experience and financial background, and complements her deep dairy farming experience. FCA 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 the Chair of Fisher and Paykel Healthcare. Scott also serves on the Board of Mercury NZ Limited and NEXT Foundation. Previous roles have included Chairman of the Securities Industries Association, and membership of both the Capital Markets Development Taskforce and the Financial Markets Authority Establishment Board. BCom, Diploma of Business 176 177 Fonterra Annual Report 2020 Corporate Governance Management Team MILES HURRELL MARC RIVERS JUDITH SWALES MIKE CRONIN FRASER WHINERAY KELVIN WICKHAM TEH-HAN CHOW CARLY ROBINSON CHIEF EXECUTIVE OFFICER CHIEF FINANCIAL OFFICER Marc Rivers joined Fonterra in February 2018 as the Chief Financial Officer, responsible for our Co-operative’s finances and central portfolio management. Marc is an experienced global finance executive with strong strategic leadership capability. Prior to joining Fonterra, Marc was the CFO of the 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. After a 19-year career with our Co- operative, Miles Hurrell was appointed as Chief Executive Officer in August 2018. Miles’ focus is on resetting the business, refreshing our Co-operative’s strategy and introducing a customer-led operating model. He is also focused on leading the implementation of the value-based strategy and differentiating New Zealand milk through innovation, sustainability and efficiency. Prior to his appointment as Chief Executive Officer, 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). CHIEF EXECUTIVE OFFICER, ASIA PACIFIC (APAC) Judith Swales leads Fonterra’s business in Asia Pacific where she is responsible for all sales and marketing of Fonterra’s Consumer, Foodservice and Ingredients products in the region. Judith and her team also set the global strategy for the Consumer and Foodservice businesses. Prior to this she was Fonterra’s COO Global Consumer and Foodservice having earlier led the Innovation and Transformation 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 served as a Non-Executive Director on the DuluxGroup Board from April 2011 to August 2019 and a Non-Executive Director on the Virgin Australia Board from May 2019 to August 2020. Judith has a degree in Microbiology and Virology. MANAGING DIRECTOR, CO-OPERATIVE AFFAIRS MANAGING DIRECTOR, PEOPLE & CULTURE (ACTING) Mike Cronin oversees our Governance, Risk and Audit, Farm Source, Global Stakeholder Affairs, Maori Strategy, Communications, Legal, and Purpose teams. Mike joined Fonterra in 2002 and has been a member of teams that have contributed to some of Fonterra’s key initiatives, including Trading Among Farmers, the Governance and Representation Review, the Fonterra Purpose and The Co-operative Difference. 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 is also acting Managing Director, People & Culture where he has oversight of the team responsible for facilitating Fonterra’s people strategy and employee experience. Mike has a Bachelor of Laws and Bachelor of Arts from the University of Auckland. CHIEF OPERATING OFFICER Fraser Whineray joined Fonterra in March 2020 as the Chief Operating Officer. He is responsible for our New Zealand manufacturing site and global supply chain operations, sustainability, innovation and R&D, IT and safety, quality and regulatory teams. Fraser joined our Co-op from Mercury, a 100% renewable electricity retailer and generator, where he was the Chief Executive from 2014 and held executive roles since joining the company in 2008. Fraser is no stranger to the dairy industry. He started his career as a graduate of the New Zealand Dairy Board’s technical training programme and spent time at manufacturing sites that are now part of our Co-op, and also in Fonterra’s export markets. He has also worked in the investment banking and forestry industries, both in New Zealand and internationally. Fraser is a keen advocate for astute long- term decisions that leverage New Zealand’s competitive advantages, including its people, for sustainable growth. He served as a Non-Executive Director of Opus International Consultants from 2008 – 2016 and of Tilt Renewables and Chaired the Prime Minister’s Business Advisory Council. In 2019 he was named the Deloitte Top 200 Chief Executive of the year. Fraser holds an MBA from the University of Cambridge, a Bachelor of Chemical Engineering from Canterbury University and a Diploma in Dairy Science and Technology from Massey University. CHIEF EXECUTIVE OFFICER, AFRICA, MIDDLE EAST, EUROPE, NORTH ASIA AND THE AMERICAS (AMENA) Kelvin Wickham is responsible for the business activities of Fonterra across Consumer, Foodservice and Ingredients products in Africa, Middle East, Europe, North Asia and the Americas. In addition, Kelvin oversees the Sports & Active Lifestyles and Medical and Healthy Ageing Nutrition units, and with his team is responsible for development of Fonterra’s NZMP™ brand and sales capability. In his previous role as COO NZMP Kelvin led the delivery of 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. In his earlier role as President Greater China and India he 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. Kelvin holds a Chemical and Materials Engineering Degree, a Master of Management and a Diploma of Dairy Science and Technology. CHIEF EXECUTIVE OFFICER, GREATER CHINA DIRECTOR, OFFICE OF THE CHIEF EXECUTIVE OFFICER Teh-han Chow was appointed as the Chief Executive Officer, Fonterra Greater China in August 2020, after acting in the interim role from December 2019. In this role he is responsible for overseeing our Co-op’s overall business in Greater China region, including Ingredients, Foodservice, Consumer Brands and China Farms business. Teh-han has extensive experience leading large organisations in the food sector, as well as proven ability in business growth through innovation and putting customers front and centre. Previously, he headed up Fonterra’s NZMP Ingredients business for Greater China, South & East Asia, where he embedded sustained improvements in business performance, strong customer relationships and empowering leadership. Before joining Fonterra in 2015, Teh-han was the CEO of Louis Dreyfus in China, a leading merchant and processor of agricultural goods. He was also Managing Director Greater China for Simplot, a food and agribusiness company. Teh-han has a Bachelor’s degree in Marketing from California State University Northridge and a Master’s degree, with honours, in International Management from Thunderbird Graduate School of International Management. Carly Robinson was appointed as the Director, Office of the Chief Executive Officer in March 2020, focusing on our executive management systems and oversight of key strategic projects to support the delivery of Fonterra’s top priorities and targets. Carly plays a key role in guiding the wider leadership community, helping create the best environment for enterprise-wide success. Carly has spent over 20 years within the dairy industry, after joining the New Zealand Dairy Board’s Marketing Graduate Programme in 1998. Her career has spanned a wide range of business functions, models and markets over this time, including leadership roles in sales and marketing, farmer services, strategy, sustainability, social responsibility and transformation. Carly has spent considerable time living and working within South East Asia and Europe, and brings a real passion for customers, communities and people in her ways of working. Carly has a Bachelor of Arts (Spanish) and Bachelor of Commerce (Economics) from the University of Auckland. 178 179 Fonterra Annual Report 2020 Directory Directory FONTERRA BOARD OF DIRECTORS AUDITOR John Monaghan Clinton Dines Brent Goldsack Leonie Guiney Bruce Hassall Holly Kramer Andrew Macfarlane Peter McBride John Nicholls Donna Smit Scott St John FONTERRA MANAGEMENT TEAM Miles Hurrell Marc Rivers Judith Swales Mike Cronin Fraser Whineray Kelvin Wickham Teh-han Chow Carly Robinson REGISTERED OFFICE Fonterra Co-operative Group Limited Private Bag 92032 Auckland 1142 New Zealand 109 Fanshawe Street Auckland Central 1010 New Zealand Phone +64 9 374 9000 Fax +64 9 374 9001 6 6 0 A R R E T N O F z n . o c . e v i t a e r c t h g i s n i KPMG 18 Viaduct Harbour Avenue Auckland 1010 New Zealand FARMER SHAREHOLDER AND SUPPLIER SERVICES Freephone 0800 65 65 68 FONTERRA SHARES AND FSF UNITS REGISTRY Computershare Investor Services Limited Private Bag 92119 Auckland 1142 New Zealand Level 2, 159 Hurstmere Road Takapuna Auckland 0622 New Zealand CAPITAL NOTES REGISTRY Link Market Services Limited PO Box 91976 Auckland 1142 New Zealand Level 11, Deloitte Centre 80 Queen Street Auckland Central 1010 New Zealand INVESTOR RELATIONS ENQUIRIES Phone +64 9 374 9000 investor.relations@fonterra.com www.fonterra.com Dad & Lisa, Bay of Plenty 180 fonterra.com 

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