1. New Zealand Cold Storage Association
FONTERRA UPDATE
Welcome
Background
Strategy update
What it means for Cold Storage
New Zealand Cold Storage Association
August 2014
Confidential to Fonterra Co-operative Group

2. Background – Industry Growth
NZ’s pastoral based dairy sector has grown strongly as a result of increasing hectares under dairy, average cows per hectare, and average production per cow.
Production has more than doubled
To understand future direction it is always useful to reflect on how we arrived at where we are now.
Distil 20 years of NZ Dairy Industry into 3 graphs...
Hectares up by 50%
Cows per hectare up to near 2.8 from 2.3
Milk solids processed has more than doubled
Milk solids per cow up from 240 to 360 kgms
NZ growth only surpassed by that of China – note that data is to 2012, China CAGR significantly impacted in and that NZ has had 2 significant growth years 13 &14.
So where is all this milk going to...
Source: NZ Dairy Statistics

3. Background - Global supply and demand overview
China imports 1.5 MT of dairy products, or 13.4% of global imports
Russia imports 1.4 MT of dairy products, or 12.5% of global imports
Global dairy importers
Chinese dairy consumption – by product origin
China and Russia are the two top importers of dairy by a significant margin
Focusing in on China, significant dairy imports are required to meet gap between domestic supply and demand
Top 10 – significant demand volatility
So we’ve looked at the Dairy industry and Demand / Supply dynamics, Lets refresh with an overview of Fonterra...
Source: Fonterra; China Dairy Association, China Customs, Rabobank estimates and forecasts 2014.

4. Background - Fonterra overview
World’s largest processor of dairy products
Consumer and Foodservice operations in China, Asia, Middle East, Latin America, Oceania
International Farming Ventures – China
Access to global milk pools
Collects ~88% of New Zealand’s milk
Processes approximately 22 billion litres of milk per year
FY13 revenue (NZ$)
18.6 billion
FY13 normalised EBIT (NZ$)
1.0 billion
Shareholders
~10,500
Market cap (NZ$)
9.4 billion
Credit rating: Standard & Poor’s
Fitch
A+ stable AA- stable
Integrated and diversified business operations drive sustainable earnings
Fonterra has a significant presence in emerging markets
Fonterra is well placed to meet the growing demand in key regions, with 68% of NZ MP volumes sold into emerging market regions
Developing Farming Hubs in China
Where does 22 billion litres of milk put us on the world stage?

5. Background - Fonterra global ingredients
The world’s largest milk processor
Fonterra’s share of global dairy exports²
Fonterra is the world’s largest processor of dairy products
22 billion litres of milk – 17 bn in NZ (I hear you ask ‘what does that look like?’ Paraparaumu/40min drive)
21% of global dairy exports
Much of the data I’ve just shown you is from 2012 – so to bring us up to date on the year that was...
Note: These figures are sourced from the TAF prospectus, issued in October 2012
Milk intake figures above are measured in millions of tons (not billions of litres) and represent milk volume collected and commodity purchases for the company and its subsidiaries. 50% of Dairy Partners America milk intake has been allocated to each of Fonterra and Nestle. Source: IFCN Dairy Network. Analysis is based on the IFCN Dairy Report Data represents in most cases the year 2011 (Nestlé data represents the year 2010).
Figures are for the 2011 / 2012 Season. Global Dairy Exports means the market for the cross-border trade of dairy products but excludes trade among countries within the European Union. Source: Fonterra, Global Trade Information Services.

6. Background – The year that was
A challenging year…
…Our strategic response
Margin squeeze in consumer
STAY ON STRATEGY Turning the Wheel
STRATEGIC REVIEW
Optionality
Portfolio optimisation
Multi hubs
Negative stream returns
Record volumes and Record Farm Gate Milk Price = margin squeeze. “turning the wheel’ covered in the next few slides
Negative Stream returns from being unable to make the highest returning products during peak of the dairy season.
Optionality from new builds (Paihiatua, Litchfield) and processing upgrades
Portfolio Optimisation is Focusing on 5 global brands, with clear links to our strategy (Fonterra, NZMP, Anchor, Anlene and Anmum)
Multi Hubs strategy will match demand growth to our best source of supply
Precautionary recall – much of what you have seen from Fonterra in the past season has been focused on Food Safety and Quality. That focus will continue...
So that completes the background and leads nicely on to an overview of Fonterra’s Strategy...
Precautionary recall
RENEWED FOCUS ON FOOD SAFETY AND QUALITY

7. Strategic overview
6 consistent trends influencing our business

8. Consistent consumer trends influencing our business
Rise of emerging markets
Nutrition for the old
Nutrition for the young
Food safety and quality
Commodity price volatility
Route to Market
Rise of emerging markets
2050: 3 billion more middle class
13 new global megacities by 2025
Nutrition for the old
Seniors to exceed children in Latin America by 2050
33% of Japanese are 60+ and median age currently 46
Nutrition for the young
Infant formula sales to increase by 50% in Asia in three years
China’s demand expected to double in four years to $25bn
Food safety and quality
Heightened awareness around food origin and transparency (AP E-Cert Dairy go live today!)
Increased Chinese safety regulations for imported infant formula products
Commodity price volatility
WMP $2,600 to $5,250 and back down to $2,700 in two years
Significant impact on consumer prices and FMCG margins
Route to market
Half of all smartphones used for retail research
43% of young adults and wealthy individuals use social networks for customer service
~10% of retail is online
How does this translate to the markets we export to...

9. The outlook for global trade in dairy products: a view to 2020
Outlook to 2020¹
MENA 2% 4%
10%
India² 7%
China
LATAM
ANZ 1%
Nth America
Europe
<1%
ASEAN
2-3%
Explain graph, then
China – growth in middle class / mega cities
Japan and LATAM – nutrition for the old
Asia and China – nutrition for the young
Global trends – Food Safety, Commodity Price volatility and route to market
Fonterra is evolving its strategy in response to these trends...
Demand growth
Supply growth
Demand volume
Supply volume
Source: Fonterra estimate
Current volumes are represented by the area of the circles displayed. Growth rates represent forecast compound annual growth rates.
Although strong growth in demand is expected in India, the ability to supply is likely to remain limited. In the 12 months to May 2012, Fonterra exported 22,300 MT of product to India and total imports represented approximately 0.2% of consumption.

10. Our journey to becoming a globally relevant Co-op
Packed a lot into three years
Capital structure – massive milestone, secure base for strategy growth
V3 – strategy refresh – volume, value, velocity
Clear strategic choices - focus
Turning the wheel
Now 2014 – This is Fonterra – real sense of purpose

11. Value creation by ‘Turning the Wheel’
Growth in Consumer and Foodservice volumes
Drive price achievement
in Ingredients
talk about turning the wheel to deliver on our strategy.
The Ambition
And if we are successful we will see around 40% of our milk being sold through our consumer and foodservice business by 2023.
And in ingredients we will see both growth in non-commodity sales volume over time and generating more value from commodity sales.
By FY17 this translates into a target of :-
26% of total LME into Consumer and Foodservice by FY17
2bn LME incremental growth
360m USD Price achievement. [Whether or not this shows up in EBIT depends on the evolution of the Milk Price]
Why?
Why do we measure our volume and value in LMEs?
It has been asked, why do we measure this in LMEs or liquid milk equivalents when we sell tonnes (weight). It is difficult to make comparisons on performance on a weight basis as different products have different weights.
LME’s is a simple way that we can talk about our milk sales growth on a like for like basis. A LME is an allocation of an amount of milk to each dairy ingredient or consumer dairy food. It expresses a bucket of milk on a volume basis (litres) [It does not represent the actual amount of milk required to make the product]
Why do we want to turn the wheel?
As we move from the right hand side of the wheel to the left, we deliver more value. The profit margins are higher in consumer and foodservice and higher value ingredients.
Return on Capital (ROC) > WACC

12. V3
Responsible Dairying – waterways
Dairy excellence – collaboration with CSIRO
Getting better every day – Simplicity & connected NZMP/BRANDS/FNZ
Bring it down to what we see on the ground...

13. Investing in optionality to achieve less volatile returns
ASSET OPTIONALITY
F15
F16
F17
F18
F19+ A
Plant productivity
Expand capacity
Advance investment
Maintain flexibility
MIX OPTIMISATION B
Review constraints
Centralised management
Physical trading
DEEPER FINANCIAL (FUTURES) MARKETS
Plant productivity - $50m investment in processing technology improvements. investing heavily in its capacity to better handle bumper production seasons and changes in the value of revenue streams between making a tonne of milk powder and a tonne of value- added products. The idea is to have some buffer, so we can flex around our product mix
Expand capacity – Waitoa, Pahiatua, Litchfield
Stuff you can’t see... C
Develop WMP futures market
Grow WMP futures volumes
Asset-backed trading

14. What does this mean for Cold Storage?
Quote from Thomas Fuller – “He that knows little often repeats it”...

15. V3 & Strategic Priorities1
Optimise NZ milk
Redefine milk supply model
Invest in optionality to achieve higher less volatile returns 2
Build and grow beyond our current consumer positions 3
Deliver on Foodservice potential
Focus on strategic and leadership markets
Focus on 5 global brands 4
Grow our Anlene business 5
Develop leading positions in paed & maternal nutrition
Investment in global multi-hubs
Global Megatrends Informing Strategy remain the same...
Seven Strategic Priorities remain the same...
Therefore, the direction we have taken over the past year and a half since I last gave this strategy update to many of you, will largely remain the same... 6
Selectively invest in milk pools
Organisational changes to support strategy
Food safety and quality 7
Align our business and organisation

16. Fonterra Logistics Network
Fonterra’s logistics network is responsible for storing, moving and shipping: .
Packaging and Ingredients from suppliers through to our NZ-based manufacturing plants
Finished goods from NZ-based manufacturing plants through to end customers
Value Chain
Fonterra Logistics Network
Many of you have seen this slide – Our 3PDC Cold Storage providers are a fundamental element of the future Logistics Network Strategy.
The goals for our network are the same. However, there has been significant achievements and change over the past year... 4

17. Guiding principles of our future logistics network
The pathway to our future logistics network, is guided by the following key principles: 1
Consolidating flows into major ports, to attract bigger ships
Optimising our
domestic freight
network 2 3
Enhancing our
logistics network’s
storage infrastructure
Establishing global connectivity, through international hubs 4
Developing our
future operating capabilities 5 6
Leveraging our strategic vendors capabilities 7
Ensuring
sustainable network infrastructure & flows
Supply Chain Strategic Alliances between Kotahi, Maersk and Port of Tauranga
Seeing better integration of our inbound and outbound domestic freight networks, along with incorporating of 3rd Party customer volume flows on key domestic laneways, for commercial benefit. IFH at Savill drive is expected to be operational during this season.
We are enhancing our logistics network’s storage infrastructure, examples include the expansion of Whareroa Dry and Polarcold Wiri build.
Established a forward deployment hub in Dubai which has been a success and are progressing with hubs in Asia and China.
Our future operating capabilities (People Process Systems and Technology) are an area where we will have significant focus over the coming season and beyond.
We are focusing on delivering in line with our customers expectations. Accordingly, vendor management is critical to maintaining the stability of our network, and ensure our vendors are integrated both back into our business and with each other. BML initiatives in this space eg changing how we measure our performance
Sustainability improvements have been achieved through ‘closed loop’ arrangements and reducing empty running. Eg Dunedin – Edendale inbound rail utilisation.

18. Optimising our asset footprint to support premium growth platforms
High
Neutral Invest if returns significantly exceed cost of capital over time
Accelerate Investment
UHT
Mozzarella
Nutritionals
Cream Cheese
Supports V3 Strategy
Reduce
Grow with Market
Natural Cheese
Butter / AMF
WMP / SMP
Slice on Slice production capacity build at Eltham
Casein
Low
Low
Supports Earnings Stability / Growth
High

19. Foodservice and consumer roll-out
Launched Anchor™ UHT
Launched Anmum™ infant formula
Expansion of Anlene™ in mainland China
Continued success in Foodservices expansion
Waitoa

20. In summary
Significant volumes to volatile regions... While milk-price volatility will continue, the long- term outlook is good, due to the rise of the middle class in emerging markets
Quote from Stuff: 17 years ago British punk band Chumbawamba released the Fonterra milk price theme song "I get knocked down But I get up again You're never gonna keep me down I get knocked down But I get up again...“
Bigger Ships
Heavy Rated Vehicles (2 additional pallets per truck)

21. Thank you.

22. Supplementary Slides

23. China
China is a key driver of global dairy markets, and will be a key influencer of long term supply / demand balance and commodity prices
Demand
China is a key driver of global dairy markets
Growing “westernisation” of diet - were China’s dairy consumption per capita to equal that prescribed by FAO, consumption would need to grow an additional 230m tonnes (from ~35m tonnes currently)
Domestic production growth unable to meet demand. Strong focus on quality and brand following Melamine scandal in 2008
Imports up 39% for year to February Mostly WMP (China now accounts for 32% of global WMP imports)
Recent Rabobank analysis estimates supply gap at 10bn litres and growing
Supply
NZ largest exporter by some margin
China nearly 40% of NZ’s total dairy exports (mostly WMP)
Fonterra establishing “milk hubs” in China. China’s large dairy companies also developing large scale dairy farms in China
Other large milk producers largely for domestic consumption, with marginal production flowing to export markets (where possible)
Generally more intensive, grain fed, dairy markets dependent on grain prices to be competitive internationally
Given size of in-market production in these countries, small shifts can have magnified effect on export market
EU coming off quotas in 2015 – ramp up in production in Germany, Netherlands, and Ireland expected to hit export markets
Source: United States Department of Agriculture – Economics, Statistics, and Market Information System

24. Investing in China milk pool
Investing in farms that will integrate with downstream positions
Strong platform to launch from – pipeline of livestock, sites, capability
Adopting a hub approach, starting with Yutian, supplying Beijing
Hub: 4-5 farms in one region
Allows flexibility in developing downstream partnerships
Further expansion, pursued through partnership
Strategy To develop a 1 billion litre milk pool in China by 2020
Purpose – To support the development of an integrated consumer business comprising domestically produced and NZ exported products
– To protect access for 400,000mT of NZ commodity exports by demonstrating commitment to developing the local dairy industry
Approach Complete the Yutian hub of farms (four farms, 160m L) by the end of FY14
Develop one new hub of farms per year from FY14 to FY18 for a total of six hubs
Secure investment partner(s) to provide funding for the second and further hubs
Ensure that the highest quality standards are maintained on farm throughout, and that Fonterra retains access to the milk through the process
Growing to one billion litres by Our focus is to roll out a new farming hub every months

25. Supply Chain Collaboration
4 July 2014

26. NEW ZEALAND MARKET “Big Ship” benefits are dependant on: Full ships
Commercialised benefit sharing models
Port Infrastructure capability
Consolidated Demand
Deployment of assets and feasible modes available for consolidation purposes
Rail versus Road
Coastal Shipping
Without freight owner/ stakeholder collaboration, there is a risk of an increase in waste and costs across the entire supply chain.
Ship Size
LANDSIDE COSTS
without
collaboration
with collaboration
OCEAN COSTS
Tipping Zone
Costs per TEU
Big Ship Benefits
Securing long term direct vessel calls for NZ
31% Lower carbon emissions per TEU
25% reduction in operating cost per TEU
Sustainable returns for carriers
Sustainable services for freight owners
Reduced ocean freight pricing over time

27. Alliances Summary – 3 Co-Dependent Engagements to drive Big ship efficiencies Delivering Value, Control, Traceability and Simplicity to the Finished Goods Supply Chain
Big Ship Benefits
Commercial model to share Big Ship Value
Maersk Line Ocean Alliance
Import/Export Vessel Calls Direct Volume Commitment
Commitment to Port Investment
Vessel Calls Direct Volume
Timaru Port
Port of Tauranga
Enables Hinterland Expansion
Facilitates Kotahi Commitment