Fonterra Co-operative Group Limited

Company Profile
Publication Date: 10 Nov 2009

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Fonterra Co-operative Group Limited

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TABLE OF CONTENTS

TABLE OF CONTENTS
Company Overview..............................................................................................4 Key Facts...............................................................................................................4 Business Description...........................................................................................5 History...................................................................................................................6 Key Employees.....................................................................................................8 Key Employee Biographies..................................................................................9 Major Products and Services............................................................................16 Revenue Analysis...............................................................................................19 SWOT Analysis...................................................................................................20 Top Competitors.................................................................................................25 Company View.....................................................................................................26 Locations and Subsidiaries...............................................................................32

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Company Overview

COMPANY OVERVIEW
Fonterra Co-operative Group (Fonterra) markets and distributes milk and milk based products for both industrial and consumer use. The company primarily operates in New Zealand, where it is headquartered in Auckland and employed 15,900 people as on July* 31, 2008. The company recorded revenues of NZ$19,512 million (approximately $14,962.2 million) during the financial year ended July 2008 (FY2008), an increase of 42.6% over FY2007. The operating profit of the company was NZ$598 million (approximately $458.6 million) during FY2008, a decrease of 50.9% over FY2007. The net profit was NZ$244 million (approximately $187.1 million) in FY2008, a decrease of 60.8% over FY2007. *the comapny changed its financial year end from May 2007 to July 2008. There fore the financial for FY2008 include the financials for the 14 month period

KEY FACTS
Head Office Fonterra Co-operative Group Limited Fonterra Co-operative Group Limited Private Bag 32032 Auckland 1142 NZL 64 9 374 9000 64 9 374 9001 [Link]

Phone Fax Web Address

Revenue / turnover 19,512.0 (NZD Mn) Financial Year End Employees July 15,900

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Fonterra Co-operative Group Limited

Business Description

BUSINESS DESCRIPTION
Fonterra Co-operative Group is engaged in the collection, manufacture and sale of milk and milk derived [Link] company primarily operates in New [Link] company exports its products from farms all over New Zealand to customers and consumers in more than 140 countries. The company operates through four business divisions: commodities and ingredients; Asia/AME; and latam. Commodities and Ingredients business division generates its revenue primarily from ingredient milk products. All other reportable segments generate their revenue primarily from consumer products and exclude any part of the groups operations that is included within Commodities and Ingredients. Fonterra operates all its business through the following subsidiaries: Fonterra Brands, Fonterra Ingredients, Fonterra Foodservices, Fonterra Milk Supply, Fonterra Shared Services. Fonterra Brands, a subsidiary of the company operates its consumer products [Link] company produces, distributes, and markets a wide range of products including ready-to-drink milk, nutritional milk powders, butter, yoghurt, cheeses, and indulgent ice creams. The company sells its consumer products under Anchor, Tip Top, Anlene, Peters and Brownes, Anmum, Mainland, Fresh 'N Fruity, Soprole and Fernleaf brand names. The company also offers enriched calcium milk under Anlene brand name for adults. Fonterra also exports dairy ingredients under the NZMP brand. The key products of this division include milk powders, cream products, cheese and cheese ingredients, milk and whey proteins, ingredients used in clinical products, organics, and anchor ethanol. The company exports its products to more than 140 countries and territories around the world. The Fonterra Foodservices team is a sales channel and meets the specialized needs of customers in quick service restaurants, fast food outlets, cafes, restaurants, hotels, bakeries and the catering industry. Fonterra provides foodservice operators with a range of branded dairy products, as well as core dairy ingredients, including ready-to-serve creams, ready-to-serve beverages, butter, yoghurt, milk, cheese, ice cream, desserts and pre-proofed frozen pastry. The Fonterra Milk Supply unit is responsible for driving sustainable milk growth in New Zealand and Australia and other global sources. It strengthens relationships with shareholders and maintains a highly-efficient milk collection service. The company's Shared Services division provides support for business units across Fonterra. These services include finance, communications, human resources, and strategy and information services.

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Fonterra Co-operative Group Limited

History

HISTORY
Fonterra Co-operative Group (Fonterra) was established in 2001 as a result of the merger between New Zealand dairy co-operatives and the New Zealand Dairy Board. In 2005, Fonterra's consumer business 'New Zealand Milk' was renamed to 'Fonterra Brands'. In the same year, Fonterra acquired the Bonlac Supply Company, a manufacturer of dairy products; and Kapiti Fine Foods, a producer of gourmet cheeses, ice cream and other dairy products. The company acquired Auckland bakery 'The Pastryhouse' in 2006. In the same year, the company entered into a research agreement with Dairy Management. Also in the same year, Fonterra established a joint venture with Campina to serve their pharmaceutical customers, and provide more market opportunities for Fonterra's lactose business. Also in 2006, the Chinese government approved the company's take over of 43% stake in Chinese dairy company San Lu. In the same year, the company entered into a global advertising agreement with BBDO and OMD. Towards the end of the year, Fonterra established a dairy farm in China. In 2007, Fonterra disposed Naturalac Nutrition (a marketer of branded sports nutrition and weight management products) to Etika. In the same year, the company appointed Kelvin Wickham as the Managing Director of Fonterra GlobalTrade. Also during the year, the company launched a bone health center in partnership with GE Healthcare. The company Fonterra launched a new internet-based sales channel for its internationally traded commodities in April 2008. Two months later, Nestle Australia sold its yoghurt and dairy dessert business including the Echuca factory, to Fonterra. In the same month, the company opened its new corporate headquarters for North America and a new Application and Sensory Technical and Development Centre (CDC) in Chicago, Illinois. In September 2008, Fonterra China recalled one batch of prenatal milk (manufactured using contaminated local raw milk) sold in China under the ANMUM Materna brand name. In the following month, Fonterra opened a research and development centre - the Chicago Technical Centre (CTC) - in Chicago, Illinois, with an initial investment of $2.4 million. A month later in November 2008, Fonterra unveiled its plans to establish a new 45,000 tons dry store and a 17,000 tons cool store at Mosgiel to facilitate its supply chain operations in South Island. In January 2009, Fonterra acquired a license from National Foods to manufacture market and sell Nestls SKI yoghurt brand in Australia. In April 2009, Fonterra signed an agreement with Arab Dairy Products, one of the leading dairy companies in Egypt, to manage the franchising, processing and distribution of its Anchor brand of products throughout Egypt. In the same month, Fonterras the Pastry house business began supplying pastries to McDonalds McCafs across Australia and New Zealand. Also in April 2009, Fonterra exited its investment in Britannia New Zealand Foods a joint venture based in India, and passed its stake to partner Britannia

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History

to focus on its strategic priorities. In the same month, Fonterra signed an agreement with both Nestle Australia and Regal Cream Products to sell its Australian ice cream business. In June 2009, Global industry research group, International Farm Comparison Network benchmarked 600 milk processors in over 70 countries and named Fonterra world's No.1 milk processor. In September 2009, Fonterra started reviewing its capital structure by consulting with farmer shareholders on a three-step process. This is to cover the companys capital needs for about the next five years and would retain 100% farmer control and ownership of their Co-operative. The three step formula includes the strengthening the share structure; restricting share value; and trading among the farmer shareholders.

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Key Employees

KEY EMPLOYEES
Name
Henry van der Heyden Colin Armer Malcolm Bailey John Ballard Ian Farrelly Roger France Greg Gent David Jackson Stuart Nattrass Earl Rattray Jim van der Poel Ralph Waters John Wilson Andrew Ferrier Guy Cowan John Doumani Barry Harris Graeme McMillan Jennifer Kerr Andrei Mikhalevsky Kelvin Wickham Gary Romano Mark Wilson

Job Title
Chairman Director Director Director Director Director Director Director Director Director Director Director Director Chief Executive Officer Chief Financial Officer and Director, Group Services Managing Director, Fonterra Australia / New Zealand Director, Fonterra Milk Supply Group Director, Corporate Communications Group Director, Human Resources Managing Director, Fonterra Ingredients Managing Director, Fonterra GlobalTrade

Board
Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Non Executive Board Senior Management Senior Management Senior Management Senior Management Senior Management Senior Management Senior Management Senior Management

Director, Group Manufacturing and Supply Chain Senior Management Managing Director, Asia/Africa, Middle East Senior Management

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Key Employee Biographies

KEY EMPLOYEE BIOGRAPHIES

Henry van der Heyden
Board: Non Executive Board Job Title: Chairman Since: 2002 Mr. Heyden has been the Chairman at Fonterra Co-operative Group since 2002. He is a founding director at the co-operative. He is a founding director of the Co-operative and has contributed to industry governance for 16 years, as both a director and chairman. Mr. Heyden is also a Director at King St Advertising, Independent Egg Producers, Northern Feedmills, Elevation Capital and Manuka. He also serves on Waikato University's School of Management Advisory Board.

Colin Armer
Board: Non Executive Board Job Title: Director Mr. Armer is currently a Director at Fonterra Co-operative Group. Over the last three decades he has built up his farming interests, particularly in the Bay of Plenty and Central Plateau region. Mr. Armer is also a Director and Shareholder at Dairy Holdings.

Malcolm Bailey
Board: Non Executive Board Job Title: Director Since: 2004 Mr. Bailey has been a Director at Fonterra Co-operative Group since 2004. He is Fonterra's representative on the International Food and Agriculture Trade Policy Council. Mr. Bailey is a former National President of Federated Farmers, a former Fonterra shareholders' councilor. He has been a Special Agricultural Trade Envoy for the New Zealand Government and an External Monetary Policy Adviser to the Reserve Bank. Mr. Bailey has nine years experience as a member of the Technology NZ Reference Group analysing research and development projects, and has served on the Animal Remedies and Pesticides Boards. Mr. Bailey is a Director at Embryo Technologies and Hawkes Bay Dairies.

John Ballard
Board: Non Executive Board Job Title: Director

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Key Employee Biographies

Since: 2006 Mr. Ballard has been a Director at Fonterra Co-operative Group since 2006. He has served on the boards of several listed companies including Woolworths, CSR, Rinker, and Email. Mr. Ballard is a former Chairman of Wattyl and is a trustee of the Sydney Opera House. He held various leadership roles in international companies including Coca-Cola Amatil (Australia), United Biscuits Asia, and Southcorp, where he was Chief Executive Officer.

Ian Farrelly
Board: Non Executive Board Job Title: Director Since: 2007 Mr. Farrelly has been a Director at Fonterra Co-operative Group since 2007. He spent 21 years in the banking industry, including 14 years as head of ASB Bank's Rural Division.

Roger France
Board: Non Executive Board Job Title: Director Since: 2003 Mr. France has been a Director at Fonterra Co-operative Group since 2003. He spent 11 years of his professional career with a predecessor firm of PricewaterhouseCoopers. Mr. France spent 10 years as the Chief Financial Officer with two New Zealand publicly listed companies, Allied Farmers Co-operative and Freightways Holdings, before returning to Coopers & Lybrand as a partner in the Corporate Finance division, and subsequently served as the Managing Partner for its Auckland operations. Mr. France sat on the Management Board of PricewaterhouseCoopers and led its Corporate Value Consulting practice in the Asia Pacific region for three years before retiring from the firm in 2001. He joined Air New Zealand's Board in 2001, and served as the Executive Director until 2002. Mr. France is the airline's Deputy Chairman and Chairman of its Audit Committee. Mr. France has been the Chairman of the private investment company Tappenden Holdings since 1997, and is a member of The University of Auckland Council.

Greg Gent
Board: Non Executive Board Job Title: Director Mr. Gent is currently a Director at Fonterra Co-operative Group. He also serves as a Director of the dairy industry since 1993. Mr. Gent is also a Director at FMG Insurance and began his career working

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Key Employee Biographies

for the Bank of New Zealand in 1972. In 2002, he completed the Advanced Management Program at INSEAD, France.

David Jackson
Board: Non Executive Board Job Title: Director Since: 2007 Mr. Jackson has been a Director at Fonterra Co-operative Group since 2007. He serves on the boards of several companies including Pumpkin Patch, Nuplex Industries and The New Zealand Refining Company. Mr. Jackson is also a member of the Securities Commission. He spent more than 30 years with accounting firm Ernst & Young in a variety of roles including Director of the Corporate Audit and Tax Division, Human Resources Partner (local and national) and Audit Partner-Corporate Services. Mr. Jackson served as the Chairman of the Board of Management for Ernst & Young New Zealand from 1999 to 2002.

Stuart Nattrass
Board: Non Executive Board Job Title: Director Since: 2003 Mr. Nattrass has been a Director at Fonterra Co-operative Group since 2003. He was involved in international financial markets, principally foreign exchange risk management, for 16 years. Mr. Nattrass was initially employed at the National Bank in Wellington and he left the industry having held the position of Global Head of Foreign Exchange Risk for Westpac, based in Sydney.

Earl Rattray
Board: Non Executive Board Job Title: Director Mr. Rattray is currently a Director at Fonterra Co-operative Group. He is the Chairman at the Dairy Companies Association of New Zealand. Prior to dairy farming, Mr. Rattray worked as an economist for the New Zealand Meat and Wool Board's Economic Service in Wellington.

Jim van der Poel

Board: Non Executive Board Job Title: Director Since: 2002

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Key Employee Biographies

Mr. Poel has been a Director at Fonterra Co-operative Group since 2002. He is the Chairman at Dexcel and a Director and Chairman of a number of private companies in which he is a shareholder.

Ralph Waters
Board: Non Executive Board Job Title: Director Since: 2006 Mr. Waters has been a Director at Fonterra Co-operative Group since 2006. He retired as the Chief Executive of Fletcher Building in 2006. Before joining Fletcher Building, Mr. Waters was the Managing Director at the Australian publicly-listed company Email. He has also held a number of engineering and managerial positions. Mr. Waters currently serves as a Director at Fletcher Building and Fisher & Paykel Appliances and Westpac New Zealand.

John Wilson
Board: Non Executive Board Job Title: Director Since: 2003 Mr. Wilson has been a Director at Fonterra Co-operative Group since 2003. He was the first Chairman of the Fonterra Shareholders' Council and is the Chairman of SAITL. Mr. Wilson is also a member of the Institute of Directors and holds a certificate in Company Direction. Farming all his life, Mr. Wilson lives near Te Awamutu with his wife Belinda and has built a dairy farming business that includes their farm in Te Awamutu and joint ownership of farms in Geraldine, South Canterbury.

Andrew Ferrier
Board: Senior Management Job Title: Chief Executive Officer Since: 2003 Mr. Ferrier has been the Chief Executive Officer at Fonterra Co-operative Group since 2003. He has 20 years experience in international agribusiness both in commodities and consumer products. Mr. Ferrier is founding Chairman of Global Dairy Platform, an international organization established to deliver guidance in the promotion of the healthy consumption of dairy.

Guy Cowan
Board: Senior Management Job Title: Chief Financial Officer and Director, Group Services

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Key Employee Biographies

Mr. Cowan is currently the Chief Financial Officer and Director of Group Services at Fonterra Co-operative Group. He is a Chartered Accountant (UK) and Certified Public Accountant (US). Mr. Cowan has 23 years of experience in commercial and finance roles in the Oil and Gas business. Prior to joining Fonterra in 2005, he was Chief Financial Officer of Shell Oil in the US.

John Doumani
Board: Senior Management Job Title: Managing Director, Fonterra Australia / New Zealand Since: 2007 Mr. Doumani has been the Managing Director, Fonterra Australia / New Zealand since 2007. He has more than 25-year career in international business and consumer brands. Most recently, he served as President International operations of Campbells Soup Company. Prior to joining Campbells he was Managing Director at Meadow Lea Foods. Mr. Doumani has 13 years experience with Johnson & Johnson, during which time he held many senior roles in Australia, the UK, Italy and the US.

Barry Harris
Board: Senior Management Job Title: Director, Fonterra Milk Supply Mr. Harris is currently the Director at Fonterra Milk Supply at Fonterra Co-operative Group. He was formerly the Chief Executive of the Greater Wellington Regional Council and Environment Waikato.

Graeme McMillan
Board: Senior Management Job Title: Group Director, Corporate Communications Mr. McMillan is currently the Group Director of Corporate Communications at Fonterra Co-operative Group. He has more than 20 years of communications experience including senior international postings in South-East Asia and 10 years experience in dairy industry communications.

Jennifer Kerr
Board: Senior Management Job Title: Group Director, Human Resources Ms. Kerr is currently the Group Director of Human Resources at Fonterra Co-operative Group. She has worked in senior human resources roles in the oil industry in the US and Europe for Mobil and

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Key Employee Biographies

in the leisure industry in the UK for Whitbread. Ms. Kerr started up her own consultancy, Jennifer Kerr and Associates, before joining Fonterra in 2006.

Andrei Mikhalevsky
Board: Senior Management Job Title: Managing Director, Fonterra Ingredients Since: 2007 Mr. Mikhalevsky has been the Managing Director of Fonterra Ingredients at Fonterra Co-operative Group since 2007. Previously, he was the Global President of the Flavors Division in the German listed company Symrise, a leading manufacturer of flavors, fragrances and sensory ingredients.

Kelvin Wickham
Board: Senior Management Job Title: Managing Director, Fonterra GlobalTrade Since: 2007 Mr. Wickham has been the Managing Director of Fonterra GlobalTrade at Fonterra Co-operative Group since 2007. He has 18 years experience in the New Zealand dairy industry. Prior to becoming Director of Group Sales and Operations Planning in 2005, Mr. Wickham held a number of technical, sales, marketing and general management roles around the world. He has spent 10 of the last 15 years with Fonterra and its legacy companies.

Gary Romano
Board: Senior Management Job Title: Director, Group Manufacturing and Supply Chain Mr. Romano is currently a Director of Group Manufacturing and Supply Chain operations at Fonterra Co-operative Group. Before he joined the dairy industry in 1997, he worked for Alcoa of Australia, The Boston Consulting Group and Dairy Partners of America.

Mark Wilson
Board: Senior Management Job Title: Managing Director, Asia/Africa, Middle East Since: 2008 Mr. Wilson has been Managing Director, Asia/Africa, Middle East operations of Fonterra since 2008. He has more than 30 years experience in the consumer goods sector, specifically in the general management and marketing of food, beverage, medicines, and personal care products in Asia, the

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Key Employee Biographies

Pacific, South America, and Europe. Prior to joining Fonterra, Mr. Wilson managed Numicos operations across Asia and the Pacific. Before that, he served as the Chief Executive Officer of Dumex from 1995 to 1998; and as the President and Chief Executive Officer of the East Asiatic (a marketer of Dumex infant and child nutrition products) from 1998 to 2005.

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Fonterra Co-operative Group Limited

Major Products and Services

MAJOR PRODUCTS AND SERVICES

Fonterra markets and distributes milk and milk based products for both industrial and consumer use. The company's key products and services include the following: Consumer products: Ready-to-drink milk Nutritional milk powders Butter Yoghurt Cheeses Indulgent ice creams Calcium milk Ingredients: Milk powders: Skimmed milk powder Buttermilk powder Whole milk powder Nutritional powder Cream powder High fat milk powder Dry blended powder Cultured and confectionery powders Custom blends Cream products: Butter Anhydrous milkfat Frozen cream Whipping cream Milkfat blends Cheese and cheese ingredients: Hard and semi-hard cheeses Cheese powder Cheese paste Natural cheese flavours Milk based consumer products: Fresh milk UHT milk

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Major Products and Services

Standard creamery butter Unsalted pure creamery butter Semi soft pure creamery butter Spreadable butter Cultured butter Clarified butter or ghee Garlic and other flavored butters Cheese and cheese ingredients: Cheddar Egmont Colby Edam Gouda Blue cheese Soft blue cheese Feta Camembert Brie Parmesan Mozzarella Sliced cheese Blocks Portions Spreads Snack food Milk and whey proteins: Caseins Caseinates Total milk proteins Milk protein concentrates Milk protein isolates Whey powders Whey protein concentrates Whey protein isolates Hydrolysates Tailored protein solutions Clinical products: Paediatric Hydrolysates Complex Lipids Colostrum (milk protein concentrates)

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Major Products and Services

Probiotics Organics: Organic cheeses Organic milk powders Organic butters Organic proteins Organic fluid milk Anchor ethanol:

Brands: Anchor Soprole NZMP Anlene Mainland Tip Top Peters and Brownes Anmum

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Fonterra Co-operative Group Limited

Revenue Analysis

REVENUE ANALYSIS
Fonterra Co-operative Group The company recorded revenues of NZ$19,512 million (approximately $14,962.2 million) during the financial year ended July 2008 (FY2008), an increase of 42.6% over FY2007. For the FY2008, New Zealand, the company's largest geographic market, accounted for 50.8% of the total revenues. Fonterra generates revenues through four business divisions: commodities and ingredients (69.3% of the total revenues during FY2008), ANZ (16.9%), Asia/AME (9.8%) and latam (4%). Revenues by Division During the FY2008, the commodities and ingredients division recorded revenues of NZ$13,517 million (approximately $10,365.1 million), an increase of 46.4% over FY2007. The ANZ division recorded revenues of NZ$3,302 million (approximately $2,532 million) in FY2008, an increase of 39.6% over FY2007. The Asia / AME division recorded revenues of NZ$1,904 million (approximately $1,460 million) in FY2008, an increase of 24.1% over FY2007. The latam division recorded revenues of NZ$789 million (approximately $605 million) in FY2008, an increase of 43.2% over FY2007. Revenues by Geography New Zealand, Fonterra's largest geographical market, accounted for 50.8% of the total revenues in the FY2008. Revenues from New Zealand reached NZ$9,918 million (approximately $7,605.3 million) in FY2008, an increase of 59.8% over FY2007. Australia accounted for 11.3% of the total revenues in the FY2008. Revenues from Australia reached NZ$2,213 million (approximately $1,697 million) in FY2008, an increase of 37.5% over FY2007. The US accounted for 9.8% of the total revenues in the FY2008. Revenues from the US reached NZ$1,911 million (approximately $1,465.4 million) in FY2008, an increase of 27.5% over FY2007. Rest of world accounted for 28% of the total revenues in the FY2008. Revenues from Rest of world reached NZ$5,470 million (approximately $4,194.5 million) in FY2008, an increase of 25.1% over FY2007.

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SWOT Analysis

SWOT ANALYSIS
Fonterra is a marketer and distributor of milk and milk based products for industrial and consumer use. The diversified business as well as geographic presence would limit the company's exposure to the risks associated with a particular region. However, the intense competition from the US dairy players and other multinational companies in the dairy food industry could adversely affect the companys business operations and its market share. Strengths Diversified business operations Leading milk processor Strong partnership with McDonalds Opportunities Growing demand for dairy products Increasing demand for organic products Growth opportunities in emerging markets Weaknesses Weak profitability High debt burden Legal suit against Sanlu Threats Intense competition Outbreak of animal diseases Economic downturn and reduced access to credit markets

Strengths

Diversified business operations Fonterra is well diversified both geographically as well as in terms of the product categories it offers. The company divides its products into two categories: consumer products; and commodities and ingredients. But, according to the companys reporting, it operates four business divisions. Commodities and ingredients accounted for 69.3% of the total revenues during FY2008; Australia/New Zealand (ANZ) (16.9%), Asia/AME (9.8%) and latam (4%). Commodities and Ingredients business division generates its revenue primarily from ingredient milk products. All other reportable segments generate their revenue primarily from consumer products. The company is also well diversified in terms of its geographic presence. In FY2008 the company generated 50.8% of its total revenues from the New Zealand; 11.3% from Australia; 9.8% from the US; and 28% from other international regions. The wide geographical reach and diversified product portfolio would limit the company's exposure to the risks associated with a particular region. Leading milk processor

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SWOT Analysis

Fonterra is the world's leading exporter of dairy products and responsible for more than a third of international dairy trade. The company processes more than 2 million tons of export products every year from farms all over New Zealand to customers and consumers in more than 140 countries. This is also justified when International Farm Comparison Network (IFCN), a global industry research group named Fonterra world's No.1 milk processor in June 2009. The research firm benchmarked 600 milk processors in over 70 countries and placed Fonterras total annual volume of milk processed ahead of Dairy Farmers of America, Nestle, Dean Foods and FrieslandCampina. The large scale of operations and leading market position puts the company at competitive advantage, and provide it with better bargaining power. Strong partnership with McDonalds The company has long standing partnership with [Link] company partnered with McDonalds 25 years back and created dairy-based products for McDonalds in 30 markets worldwide. The company currently supply McDonalds with slice-on-slice cheese in 25 markets in the Asia Pacific Middle East and Africa region, as well as milk, yoghurt, parmesan, cheddar, butter and shake and sundae mix to its Australian business. The company supplies 470 McCafes in Australia and 50 McCafes in New Zealand with sweet and savory pastries. Further in late 2008, Fonterra became a McDonalds global target capable supplier for slice-on-slice cheese used in McDonalds burgers in the Asia-Pacific/Middle East-Africa (APMEA) region. Again in June 2009, Fonterras The Pastry house business started supplying premium pastries to McDonalds McCafes across Australia and New Zealand. The strong partnership with McDonalds, a leading quick service restaurant would expand the companys market reaching capabilities. This also helps the company to develop new products according to the customer needs.

Weaknesses

Weak profitability The company recorded weak operational performance in the recent period. In FY 2008, the revenues of the company grew at a rate of 42.6% to reach NZ$19,512 million (approximately $14,962.2 million). Though the company registered strong revenue growth, its profitability declined significantly. The operating profit of the company declined at a rate of 50.9% to reach NZ$598 million (approximately $458.6 million) in FY2008. Similarly, the net profit of the company also declined at a rate of 60.8% from NZ$622 million (approximately $476.9 million) in FY2007 to NZ$244 million (approximately $187.1 million) in FY2008. The operating cash flows of the company also declined at a rate of 29.5% from NZ$2,164 million (approximately $1,659.4 million) in FY2007 to NZ$1,310 million (approximately $1,004.5 million) in FY2008. The operating margin of the company reached to 3.1% in FY2008 from 8.9% in FY2007. The net profit margin also declined from 4.5% in FY2007 to 1.3% in FY2008. The weak operational

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SWOT Analysis

performance would adversely affect the growth initiatives of the company and also erode investor confidence in the company. High debt burden The company holds a substantial amount of debt. As of July 31, 2008, the total debt outstanding for the company stood NZ$6,620 million (approximately $5,076.4 million), of which NZ$2,083 million (approximately $1,597.3 million) is the short term debt and NZ$4,537 million (approximately $3,479.1 million) is the long term borrowings. At the same time, the companys share holders equity stood at NZ$4,226 million (approximately $3,240.6 million), representing a debt-equity ratio of around 156.6%. Further, the interest expenses of the company also increased at a rate of 23.7% from NZ$358 million (approximately $274.5 million) in FY2007 to NZ$339.7 million (approximately $260.5 million) in FY2008. The companys substantial debt limits its ability to obtain additional financing to fund future working capital, capital expenditures and other general corporate requirements which is a disadvantage to the company. Legal suit against Sanlu The milk contamination issue affected the companys operations in China. Sanlu Group, the Chinese dairy company (in which Fonterra has 43% stake) was involved in contamination scandal. In September 2008, Sanlu Group admitted that some of its baby milk powder products were contaminated by melamine and tripolycyanamide and instituted a public recall of all infant products in China. In December 2008, a court in Shijiazhuang China issued a bankruptcy order against Sanlu, in response to the legal suit. Further, the court has asked Sanlu to pay $130 million to the affected families. The dairy also owes more than $88 million to distributors for goods returned when it recalled its products nationwide. As a result, Fonterra which valued its investment in Sanlu at $201 million, left empty handed when SanLu's was sold to Chinese dairy company Sanyuan for NZ$184 million ($118 million) in March 2009. This incident affected the Fonterras brand image and resulted in the loss of its business opportunity in China. Further, it would require an additional effort from the company to consolidate its business operations in a developing country like China.

Opportunities

Growing demand for dairy products The global demand for dairy food products is expected to register significant growth in the coming period. The total volume of dairy products has risen by 15% from 40.9 million tons in 2003 to an estimated 47.0 million tons in 2008. Spoonable yoghurt registered a strong growth rate of 23% over the past five year period. Ice cream volume also grew by 18%, with the majority of additional sales coming from Asia/Australasia and the Middle East. Cheese volume also increased to 18.2 million tons in 2008, equivalent to 39% of the total. Further, it is estimated that the total volume of dairy

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SWOT Analysis

products to increase at a rate of 10% to 51.8 million tons by 2012, with spoonable yoghurt is expected to gain as much as 16%. The strong and growing dairy products market would help the company to expand its business operations. Increasing demand for organic products Natural and organic food products segment is one of the fastest growing categories in food retailing. There is an explosive growth in the demand for organic foods because of the increasing preferences among consumers for healthy food. The US, Germany, and the UK would be the key geographical areas of growth for the organic food market. As per the industry trends, the global organic food market generated total revenues of $52,000 million in 2008, representing a compounded annual growth rate, CAGR of 15.8% for the period spanning 2004-08. This is expected to reach $85,100 million by the end of 2013. Fonterra supplies organic cheeses; organic milk powders, organic butters, organic proteins and organic fluid milk products a number of consumer and industrial customers. With significant operations in the organic food market, the company is well positioned to exploit this growing trend for natural and organic food products. Growth opportunities in emerging markets Growing economies like India and China could prove to be high potential markets for dairy products market in the future. The Chinese economy is expected to grow at an annual rate of 8% during the period 200911. The other potential market India is estimated to grow at 6% in the next two years. Higher income levels are leading to higher demand for milk and dairy products in these markets. Other factors boosting demand for these products include single-person households, longer working hours, and the increasing number of dual-income households. Further, the signing of the ASEAN FTA agreement in Thailand is a significant step for New Zealand dairy exporters. This agreement eliminated the tariffs on all of the dairy trade into the region which has more than 566 million people. The company has a strong consumer and ingredients business in Asia and accounted for around 25% of its revenues in FY2008. Thus a growth plan for Asian economies could help the company in capitalizing on the economic growth of these markets.

Threats

Intense competition Fonterra's competitors include multinational companies such as Groupe Danone and Nestle, as well as companies like Fromageries Bel, Royal Friesland Foods with focused markets or product lines. These businesses compete with it in one or more product categories. In addition, some traditional and specialty supermarkets, and food retailing chains offering generic or private label products are

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SWOT Analysis

also expanding more aggressively in marketing a range of dairy products, thereby, competing directly with the company for products, customers and locations. Some of these existing and potential competitors have greater financial or marketing resources than Fonterra, and may be able to devote greater resources to sourcing, promoting and selling their products. Further, the US government helps its dairy exporters through Dairy Export Incentive Program (DEIP) in order to develop export markets for dairy products made in the US. Under the program, the US Department of Agriculture pays cash to exporters as bonuses, allowing them to sell certain US dairy products at prices lower than the exporter's costs of acquiring them. The intense competition from the US dairy players and other multinational companies in the dairy food industry could adversely affect the companys business operations and its market share. Outbreak of animal diseases Fonterra is dependent on constant supply and quality of the raw materials like milk. The company collected approximately 1,192 million kilograms of milk annually. Any outbreak of animal diseases (especially foot and mouth disease caused by a virus which is one of the most contagious and feared diseases), can cause heavy loss in susceptible cloven-hoofed animals world over. The operations of the company including the milk supplies and the production and sale of dairy products could be affected in case of diseases outbreak. A large-scale outbreak of animal disease could have an adverse effect on the production and sale of dairy products, and also could negative effect the financial performance of Fonterra. Economic downturn and reduced access to credit markets The dairy industry is sensitive to changes in general economic conditions, both nationally and locally. Recent disruptions in global financial markets and banking systems have made it more difficult for companies to access credit and capital markets. Continuing volatility in the credit and capital markets could potentially impair the company and its customers' ability to access these markets and increase associated costs. According to market forces, the real GDP of New Zealand will contract by 2.6% in 2009, owing to extremely weak domestic and external demand. The Real GDP growth of the country will then average around 2.2% a year in 201013. Similarly, the GDP of the US is expected to decline by 2.6% in 2009. A recessionary economic cycle, higher levels of unemployment, higher consumer debt levels could adversely affect consumer demand for products the company sell or distribute, which could adversely affect Fonterra's results of operations.

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Top Competitors

TOP COMPETITORS

The following companies are the major competitors of Fonterra Co-operative Group Limited

Bonlac Foods Campina Dairy Crest Group Groupe Lactalis Hochland Glanbia plc National Foods Limited Nestle SA Dairygold Co-operative Society Limited China Cattle Ltd. China Dairy Group Ltd China Milk Products Group Ltd FirstFarms A/S Fromageries Bel Groupe Danone SA Modern Dairies Ltd Pieno Zvaigzdes AB Royal Friesland Food Trigon Agri A/S

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Company View

COMPANY VIEW
A statement by Henry van der Heyden, Chairman of the board of Fonterra Co-operative Group is given below. The statement has been taken from the companys 2008 annual report. Amid unprecedented volatility in commodity, currency and financial markets, Fonterra achieved its best result ever, distributing $9.1 billion to shareholders in payout. However it was a period when many farmers were hit by drought and Fonterras share price fell by 18 per cent. Then the tragic events in China left an indelible mark, overshadowing what should have been a result to remember. The milk contamination issue in China which affected our interest in San Lu, rapidly widened to engulf the Chinese dairy industry with devastating consequences for affected families. We continue to work with Chinese authorities on this issue, with our prime concern being the safety of consumers and any role we can play in getting safe products in their hands. The scale of this tragedy is truly shocking and our deepest regrets and sympathies are extended to the thousands of victims. Our hearts also go out to the many farmers and workers in China whose livelihoods have been affected. The 2007/08 financial period was one in which payout to farmers hit a 43 year high in inflation adjusted terms. Commodity prices hit record highs on the back of strong demand from oil-rich nations, supply shortages and the overall surge in global food prices. These factors led to Fonterras share of total exports from New Zealand rising from 22 per cent to 25 per cent and we made a $9.7 billion contribution to the countrys total dairy exports of $10.7 billion from May 2007 to June 2008. The surge in commodity prices was mirrored in currency, with the average NZD/USD spot rate of 77 cents versus 68 cents in the prior season. Fonterras average conversion rate was seven cents higher for the period at 74 cents and we saw the New Zealand dollar appreciate to 82 cents against the US in February 2008, its highest level since the 1985 float of the currency. The world entered a global liquidity crisis considered to be the worst since 1929, tightening capital markets and eroding confidence. Inflation adjusted fuel prices were the highest seen in over 20 years and farmers saw their input costs rise by 32 per cent over the season. In February 2008, the Waikato was declared a drought region for the first time in 100 years, while dry conditions in the rest of the country also saw an early end to the season for many farmers. The unpredictability in the market, rising costs, a high currency and financial turmoil do not make for an easy business environment. However Fonterra worked within this highly volatile environment to bring shareholders the best returns since our formation. It is clear that 2007/08 has fundamentally changed market dynamics and volatility is more likely to be the norm, rather than the exception, in the medium term. With global financial confidence tenuous at best and the inevitable lag between price signals guiding farmer decisions around production,

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Company View

there is every possibility of an imbalance between demand and supply influencing prices. This makes it increasingly difficult to forecast and theres every chance that forecasts could go down, as well as up over the course of the coming season. Payout Our final payout was $7.90 per kilogram of milk solids (kgMS), comprising a Milk Price of $7.59 per kgMS and a total Value Return of 31 cents per kgMS. To achieve a final payout of $7.90 with our average exchange rate against the US dollar of 74 cents is something few shareholders would have expected to see. Its a reminder of just how much market fundamentals have moved. At the start of the season, nobody would have bet on the EU removing its dairy subsidies, Japan opening its very protected market to emergency butter imports, food crops being used to the extent they now are for bio-fuels or governments taxing dairy exports in a bid to keep local prices down. Yet all of these and a tightening supply situation converged to drive up prices. Average prices achieved by Fonterra were US$4,350 a ton for the 14 months to July 31, 2008. This was US$1,677 a ton more than the year before. While this significant shift in pricing contributed to our very good payout, the contribution would have been greater had we not had long-term contracts in place with some customers? As prices rose, these contracts lagged behind the market. As a result, these contracts reduced the total amount available for payout and hence the final distribution to shareholders. We have been able to renegotiate some of the contracts. Retention and final cash distribution The actual final cash distribution to shareholders (excluding supplier premiums) for the season is $7.66 per kgMS following the Boards decision to retain 24 cents per kgMS from the Value Return. Retentions were signaled by the Board in May 2008 as a result of the turmoil in financial markets. There is no sign of that turmoil settling in the short term, making it even more prudent for retentions to be made to protect Fonterras balance sheet. While the balance sheet is not under pressure, we need to ensure it remains that way given the potential impact of market conditions on our cost of capital. As a result of the retention, Fonterra will distribute $9.1 billion from the $9.3 billion available for payout. Of the total available for payout, the milk cost represents $9.0 billion compared to $4.8 billion in 2006/07, while the value component was $364 million compared to $728 million in the prior year. Fair Value Share

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Company View

The Fair Value Share price for 2008/09 has been set at $5.57, a drop of $1.22 on the 2007/08 season share price of $6.79. This is the first fall in our share price and again says a lot about the unprecedented conditions in world markets. We have a strong payout but the increased cost of capital linked to the credit crunch in global financial markets, ongoing high commodity prices cutting into our ingredients margins, and a higher milk price hit our share price. On the positive side, the independent value, Duff & Phelps, took into account stronger profitability in our consumer businesses and gains in the performance of overseas investments and joint ventures. Largely because of the drought, a high percentage of farmers throughout the country were holding excess shares. The drop in share price did present an opportunity for some shareholders to surrender those excess shares at $6.79 and buy back shares at the $5.57 price to cover a return to expected production levels. As a result a net amount of approximately $300 million was returned to shareholders. With the financial year now ending two months after the season end, share surrenders and issues are reflected in the closing share capital for the period. Fonterras share capital stood at $4.3 billion at July 31, 2008 compared to $4.9 billion at May 31, 2007. Total Shareholder Return Total Shareholder Return (TSR) in Fonterra is defined as the Value Return (being payout less the Milk Price) plus any appreciation or depreciation in the Fair Value Share over the relevant financial period. Value Return is calculated before retentions. Our TSR for 2007/08 was (91) cents per kgMS, comprising a Value Return of 31 cents and the decrease in the fair value of a Fonterra share of $1.22. Dividing the total return earned by a shareholders investment at the start of the period results in a TSR for the season of (13.4) per cent. Driven by 2008s reduction in the share price, Fonterras annual compound average TSR for the last three years was 2.4 per cent and for the last five years was 6.6 per cent. Milk Price Gap Historically Fonterra has shown the Milk Price Gap as a measure of performance in the annual report. It was resolved at the July 2008 Board meeting, and subsequently supported by the Shareholders Council, that the Milk Price Gap be removed from the Annual Report. Due consideration was given to the fact that the analysis does not necessarily provide a meaningful measure when comparing one theoretical model with another, and that the analysis is possibly confusing for shareholders alongside other headline measures, such as Total Payout, the Milk Price, the Value Return component of Payout and Total Shareholder Return. The new Milk Price that will be presented to shareholders at the 2008 AGM will be linked more transparently to Fonterra reference plants rather than the theoretical efficient competitor model.

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Company View

This will offer more assurance to shareholders of a competitive milk price, and will be more meaningful as a measure of performance. Production Fonterra collected 1,192 million kgMS in the 2007/08 season, including contract milk of nine million kgMS. Milk solids collected from the season were down 4.3 per cent on the prior year as a direct result of the drought. But while production was down on the prior seasons record 1,246 million kgMS, the higher Milk Price of $7.59 per kgMS means shareholders milk was worth $3.72 per kgMS more at the farm gate, a 96.1 per cent increase in the price of milk. While its disappointing many of our shareholders didnt get the full benefit of a record result because of lower production, the final payout will go some way to offset the higher on-farm costs hitting our shareholders. Despite some climatic impacts on production, the supply picture looks more positive overall. New conversions in the South Island contributed 5.1 per cent more in milk solids this season and our peak milk was 1.6 per cent up on the previous season at 71.6 million liters. The peak didnt hit our 73.8 million liter forecast because of a cold, wet spring and low sunshine hours. However winter volumes, as we came to the end of the financial year, were reaching record levels in the lower North Island with higher numbers of cows in milk. San Lu Impairment As a direct consequence of the milk contamination issue in China, Fonterra has written down the value of our investment in San Lu by $139 million. Although Fonterra was not made aware of the contamination issue until August, accounting standards require us to reflect in our financial statements the best estimate of the impact of this contamination as at July 31, 2008. The write down is a best estimate of the fair value of the investment given an environment which has changed virtually every day as the contamination issues in Chinas dairy industry escalate. Our best estimate of the current value of this investment is approximately $62 million. Longer term, the Board has reaffirmed its commitment to the China market and we believe Fonterra is well placed to supply safe and healthy dairy products to Chinese consumers and contribute towards helping improve the Chinese dairy supply chain. Competition

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Company View

Fonterra has everything going for us. Our scale, our market presence and our supply partnerships with some of the worlds biggest dairy customers are real strengths. Shareholders have every right to expect us to use these strengths to lift our performance. In an increasingly competitive local market for milk, its performance which will keep our shareholders loyal. We have to demonstrate that we can outperform the competition. Competition is healthy when everyone competes on an even playing field. Thats currently not the case. Under the Dairy Industry Restructuring Act 2001 (DIRA), Fonterra is obliged to supply 600 million liters of subsidized raw milk to other milk processing companies. These other processors, including those with Russian, Singaporean and Japanese investors, received a discount on our Milk Price. Many of them then use that discount to compete with us for milk and to compete with us in export markets. The intent of DIRA was to ensure competition in New Zealands dairy markets, not to give subsidies to competitors. Having seen competition well established, we have pushed hard for a review of DIRA. Changes announced by the Government, which will see an auction system for DIRA milk established in 2010-11, are a step in the right direction and are welcome. But we still have two years of subsidizing other processors until that change occurs. Thats something we have to live with and we cant and wont use it as an excuse for underperformance. Shareholder loyalty will be retained so long as we deliver the most competitive milk price and the best returns over and above that price. Milk Price Since Fonterras formation, Fonterras cost of milk (Milk Price) and the basis for its calculation have been under review to ensure we continue to improve our signals to farmers about the value of their milk at the farm gate. Because Fonterra processes a large proportion of New Zealands milk, we have never had a true market-based price for milk. Since 2001 theoretical calculations have been used to determine a commodity milk price (CMP). These were based on the hypothetical competitor model, with the CMP calculated by the Independent Valuer using guidance provided under Fonterras Constitution. Our Milk Price Working Group has put a tremendous effort and a lot of careful thought into how we can establish a Milk Price which is less theoretical and more responsive to the actual factors which influence what we pay for milk. The new Milk Price which has been introduced to the business this year for management purposes, is the result of this work, which has also involved the Shareholders Council. It will refine the way Fonterras cost of milk (Milk Price) is distinguished from the profits we make (Value Return). It will drive future performance across the business and show farmers what is performing well and what is not.

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Company View

The underlying principle is providing supplier shareholders with the means to assess whether Fonterra is doing all it can to achieve the best prices possible in global markets and doing all it can to maximize value returns over and above these prices. As suppliers, farmers want to know that they are receiving the right value for their milk at the farm gate, a value which reflects the benefits of co-operative membership and the economies of scale it brings. As shareholders, farmers also want to know that they are getting the best returns on the money invested in the Co-operative, both now and in the future. Those returns are reflected in the Value Return derived from the value the Cooperative adds to milk once it leaves the farm gate. Capital Structure Included in our results this year are good returns from investments made over the years to grow our returns. Its important that we continue with this growth strategy, but progress will be constrained without sufficient capital. At the same time, none of us, as shareholders, can afford to have redemption risk hanging over our Co-operative. The need for capital and the risks posed by redemptions will not go away and it is important that we continue to work towards a solution. There is no timeline on the capital structure discussions, but that does not mean capital structure is off the agenda. Capital structure is an issue which must be resolved within the three year timeframe which we originally [Link] Board, the Shareholders Council and management will use this time to work with shareholders to find an answer which can be confidently supported by our shareholders. Thanks Our record result was a real team effort. Its good to be able to acknowledge the effort put in by the Fonterra Leadership Team and all of our people around the world in a period where unpredictability was the main constant. Thanks to our shareholders for another year of support. Its been great to talk to so many of our shareholders during the year and hear them express their confidence in the industry and their part in it. We know the competition is trying to win you over. Thanks for standing firm. I especially want to thank Roger France who is retiring as an appointed director. Our shareholders, the Board and I have enjoyed six years of unconditional commitment from Roger as a director, as Chairman of the Fair Value Share Review Committee and as a member of the Audit, Finance and Risk Committee. Roger has given to Fonterra more than we ever could have asked for and he has done it in a quiet, unassuming but authoritative way. His ability to cut to the essence of an issue and his intellectual precision has been both admired and appreciated by the Board and by myself as Chairman. Finally, my thanks to all of our directors who have been forthright in their views and always thoughtful in their counsel.

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Locations and Subsidiaries

LOCATIONS AND SUBSIDIARIES

Head Office
Fonterra Co-operative Group Limited Fonterra Co-operative Group Limited Private Bag 32032 Auckland 1142 NZL P:64 9 374 9000 F:64 9 374 9001 [Link]

Other Locations and Subsidiaries

Fonterra Milk Supply Private Bag 32032 Auckland 1142 NZL Fonterra Australia Corporate Centre 327 Ferntree Gully Road Mt Waverley Melbourne Victoria AUS Fonterra Ingredients Private Bag 32032 Auckland 1142 NZL Fonterra Group Manufacturing and Supply Chain Hamilton 3240 NZL Fonterra GlobalTrade Private Bag 32032 Auckland 1142 NZL

Fonterra Brands Private Bag 75806 Manurewa NZL

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