Australian Securities Exchange · Page 1 Reporting Period Year ended 31 July 2015 Previous Reporting Period Year ended 31 July 2014 31 July 2015 (NZD million) 31 July 2014 (NZD million)

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Reporting Period Year ended 31 July 2015

Previous Reporting Period Year ended 31 July 2014

31 July 2015 (NZD million)

31 July 2014 (NZD million)

Percentage Change

Revenue from sale of goods 18,845 22,275 (15.4%)

Net profit attributable to Shareholders of the company1

466 157 196.8%

Non-controlling interests 40 22 81.8%

Net profit for the period 506 179 182.7%

1 Net profit attributable to shareholders of the company is equivalent to profit from ordinary activities after tax attributable to

shareholders of the company (as required to be disclosed pursuant to Clause 1.2 of Appendix 1 of the Fonterra Shareholders’

Market Listing Rules, and Clause 1.2 of Appendix 1 of the NZX Debt Market Listing Rules).

Interim/Final Dividend Amount per Security

(NZ cents) Imputed Amount per Security

(NZ cents)

Interim 10.0 Nil

Final 15.0 Nil

Record Date Interim: 10 April 2015

Final: 8 October 2015

Dividend Payment Date Interim: 20 April 2015

Final: 20 October 2015

Comments On 23 September 2015, the Board of Directors declared a final dividend of 15.0 cents per share payable on 20 October 2015 to Shareholders on the share register at 8 October 2015.

To be followed by the balance of the information required in the report pursuant to Appendix 1.

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24 September 2015

Fonterra Strengthens Second Half Performance in 2014/15

Highlights

Total sales volumes up 9% at 4.3 million metric tonnes

Revenue $18.8 billion, down 15%

Normalised EBIT $974 million, up 94%

Net profit after tax $506 million, up 183%

Cash Payout $4.65, down 45% - Farmgate Milk Price $4.40 per kgMS - Dividend of 25 cents per share

2015/16 forecast total available for payout up 75 cents to $5.00 − $5.10 per kgMS Annual results

Fonterra Co-operative Group has announced a net profit after tax of $506 million for the financial year ended 31 July 2015 - up 183 per cent - after a stronger second half performance in difficult market conditions.

The Co-operative will pay a final Cash Payout of $4.65 for the 2015 season for a 100 per cent share-backed farmer, comprising a Farmgate Milk Price of $4.40 per kgMS and a dividend of 25 cents per share.

Chairman John Wilson said extremely challenging trading conditions globally had affected all parts of the Co-operative’s business. “Falling global dairy prices due to a supply and demand imbalance impacted the Milk Price, while the dividend reflected higher funding costs following significant investment in capacity to support milk growth in New Zealand, essential investments in the key strategic market of China, and the costs of maintaining a higher Advance Rate through the season. “The strengthening of performance in the second half resulted in normalised earnings before interest and tax almost doubling, with good growth in our consumer and foodservice businesses and the results of a major push in our ingredients business to offset low milk prices with improved margins.” Cash interest costs on funding were up $95 million to $427 million, which had an impact of around 6 cents per share.

Mr Wilson said that despite drought in some regions and floods late in the season, milk collection across New Zealand for the 2014/15 season to 31 May 2015 was 1,614 million kgMS, up two per cent on the previous season.

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Fonterra Co-operative Group

Confidential to Fonterra Co-operative Group Page 2

Strong Volume and Value Growth

Chief Executive Theo Spierings said improved second half results in the 2015 financial year were driven by a strong focus on cash and costs. “We focused on improving our sales mix, achieving more efficiencies, maximising our gross margins and achieving our strategic goals faster. Our efforts contributed to a second half rebound in our performance and profitability.”

Normalised EBIT for the group was $974 million, up 94 per cent. The ingredients business’ efforts to offset low milk prices with improved margins increased ingredients normalised EBIT by 43 per cent to $973 million. Consumer and foodservice normalised EBIT increased 216 per cent to $408 million.

“Significant progress was achieved in our consumer and foodservice strategy where we are aiming to win hearts, minds and especially market share in our eight strategic markets of New Zealand, Australia, Sri Lanka, Malaysia, Chile, China, Brazil and Indonesia. With the reorganisation of Dairy Partners Americas completed, consumer and foodservice volumes were up a significant 27 per cent to 1.7 million MT,” said Mr Spierings.

“Our Asia and Greater China consumer and foodservices businesses, which source most of their milk from New Zealand, were also important contributors to this result.”

In the 2015 financial year, investments in capacity and maintenance in New Zealand included: the $167 million to complete the Pahiatua dryer and distribution centre; $132 million in the anhydrous milk fat, milk protein concentrate and reverse osmosis plants at Edendale; and the $122 million investment in the dryer at Lichfield due for commissioning in 2016. Combined they represent 8.2 million litres additional capacity.

“Our new plants stand out in terms of efficiency gains and a more flexible product mix. In the second half we optimised our product mix, favouring products where we could secure higher prices, such as cheese and casein, to capture shifts in customer demand,” Mr Spierings said.

“Our $230 million investment in the past two years on capacity to support our consumer and foodservice performance is generating the volume and value growth we want, especially in Asian markets.

“Our return on capital for the Group was 8.9 per cent. Our ingredients business’ return on capital was 9.3 per cent and our consumer and foodservice business achieved a return on capital of 25.5 per cent,” said Mr Spierings.

With capacity now more in line with current expectations of milk growth, the Co-operative would have a reduced capex spend in 2016 of $900 million.

Mr Spierings said this year’s difficult market conditions were shaped by a rare combination of factors.

"Prices are often cyclical, but this year’s market is one of the most difficult I’ve known. The global dairy industry has been hit simultaneously by geopolitical turmoil in the Middle East and Russia, Ebola in Africa, an economic slowdown in China and the sharp drop in oil and mineral prices. These events suppressed demand at a time when farmers all around the world had ramped up production in response to previous high prices. This resulted in an inevitable impact on pricing.

“Looking ahead, this uncertainty means that world markets are likely to be difficult in the medium-term. However, we will be more than ready when the market turns.

“That’s because we have thoroughly reviewed our execution of strategy, our processes and working practices to embed long-term change. We are focusing all our resources to make us faster, more efficient, and achieve sustainable results,” said Mr Spierings.

Fonterra’s business review is an on-going process across the whole organisation to identify areas where the Co-operative can find more efficiencies and improve future performance.

This on-going review is targeting one-off cash savings and recurring cash savings from across the business including procurement, operations, supply chain and sales mix. These cash savings are expected to build over the next 24 months and, as they are realised, will impact Milk Price, earnings, cash flow and the balance sheet.

“Our business review is about always pursuing the full potential of our Co-op so we are in the best position to drive performance now in these challenging times and when global conditions improve,” said Mr Spierings.

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Global Outlook

The Co-operative is lifting its forecast Farmgate Milk Price for the 2015/16 season to $4.60 per kgMS, an increase of 75 cents. It has also reduced its New Zealand forecast production volumes by at least five per cent compared with the previous season. The forecast total payout available to farmers in the 2015/16 season is now $5.00 − $5.10 per kgMS, comprising:

Forecast Farmgate Milk Price $4.60 per kgMS

Forecast earnings per share range of 40 - 50 cents per share.

Mr Wilson said the lift in profitability in the second half of the 2015 financial year was expected to carry through into the current financial year.

“Our track record this year in growing consumer and foodservice, along with our ingredients margins, make us confident in our forecast earnings per share range of 40-50 cents,” said Mr Wilson.

An update on the outlook will be provided at Fonterra’s Annual Meeting in November.

2014/15 Dividend Payment

The dividend of $0.25 per share comprises an interim dividend of $0.10 and a final dividend of $0.15. Record date for the final dividend is 8 October 2015, with a final dividend payment date of 20 October 2015.

The dividend reinvestment plan (DRP), under which eligible shareholders and unit holders can elect to reinvest all or part of their cash dividends in additional shares or units, will be made available in respect of the 2015 final dividend. The Board has determined that shares and units will be issued at a 2.5% discount on the average of the daily volume weighted average price for the period 6-12 October 2015. Participation election notices for the final dividend DRP must be received by 9 October 2015.

The Annual Results presentation, the Annual Review and the Financial Statements & Statutory Information are available on our website www.fonterra.com

NB: All dollars quoted are New Zealand dollars

- ENDS - For further information contact: Simon Till Director Capital Markets Phone: +64 21 777 807 24-hour media line Phone: +64 21 507 072

Business units Ingredients Our New Zealand ingredients business delivered a solid performance. This was mainly due to improved margins which were up $264 million. We adjusted our product mix away from reference products like Whole Milk Powder (WMP) towards non-reference products such as cheese and casein, and took advantage of better pricing opportunities in Japan and the United States. This, together with our differentiated product and service offerings, resulted in an improved second half and full year

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http://www.fonterra.com/documents/2012%20Fonterra%20Financial%20Statement%20&%20Statutory%20Information.pdf

http://www.fonterra.com/documents/2012%20Fonterra%20Financial%20Statement%20&%20Statutory%20Information.pdf

http://www.fonterra.com/



normalised EBIT for the ingredients segment of $973 million, up 43 per cent compared to last year. This was partially offset by an adverse product mix in ingredients manufactured in Australia as a result of lower sales of nutritionals and the fire at our Stanhope cheese factory in December 2014. The lower revenue reflected the relatively high domestic milk price in Australia, which is an intensely competitive market for milk supply. We are taking steps to address product mix issues, including investigating the rebuilding of the Stanhope cheese facility. Our Beingmate partnership will help ensure Darnum returns to producing higher-value nutritionals. The ingredients segment sales volume was two per cent lower at three million MT, as a result of lower sales of dairy ingredients to China, largely offset by higher sales in other regions. Revenue was 27 per cent down, reflecting the 36 per cent lower dairy prices compared to last year. Consumer and Foodservice Our consumer and foodservice segment delivered a strong result with normalised EBIT of $408 million, up 216 per cent compared to last year. The growth was mainly due to a record performance from our key markets, Asia and China, with strong volume growth. In addition, lower input costs for Asia, China and New Zealand (the regions that source their product from New Zealand) improved margins significantly. In Australia our domestic foodservice business increased volumes by 10 per cent after five years of flat volume. We have implemented a number of initiatives to improve margins in our Australia consumer business. We have taken a $108 million write-down of the yoghurt and dairy desserts assets reflecting the continuing challenges in that business’ market environment. Total consumer and foodservice volume rose 27 per cent to 1.7 million MT. This increase was largely due to the Dairy Partners Americas (DPA) Brazil and Venezuela businesses being fully consolidated in our accounts for the first time, contributing 324,650 MT. We achieved like-for-like volume growth of three per cent. In Asia and Greater China volumes were up four per cent and 33 per cent respectively, contributing to a volume-driven increase in normalised EBIT of $41 million. The restructure of DPA generated $100 million in cash. International Farming We have two farming hubs with a total of seven farms producing safe, high-quality raw milk.

Sales volume of raw milk for the year increased to 164,000 MT largely due to additional capacity coming online. This equates to 12 million kgMS of milk produced for the year.

A normalised EBIT loss of $44 million reflected a decrease in the realisable raw milk price, farm development costs and a decrease in fair valuation in livestock, partially offset by significant operational efficiencies.

In the prior period the livestock values saw a significant uplift reflecting milk price and the herd profile assumptions at the time. The revaluation gain in the prior period was not repeated this year. For the full year, there was a revaluation loss of $3 million.

Future investments in China farms may include funding from strategic partners as well as Fonterra, enabling future and continued integration.

In total, capital expenditure for the year was $364 million. These funds were used for the completion of Fonterra’s Ying and Yutian Hubs in addition to the ongoing construction of the farm effluent treatment systems. The total spend is inclusive of the purchase of livestock.

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Non-GAAP measures Fonterra uses several non-GAAP measures when discussing financial performance. For further details and definitions of non-GAAP measures used by Fonterra, refer to the Glossary in Fonterra’s 2015 Annual Review. 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.

Fonterra calculates normalised earnings by adding back depreciation, amortisation, net finance costs, taxation expense and normalisation adjustments to net profit for the period.

Normalisation adjustments are transactions that are unusual by nature or size so that they materially reduce the ability of users of the financial results to understand the on-going performance of the Group or operating segment to which they relate.

Unusual transactions by nature are the result of a specific event or set of circumstances that are outside the control of the business, or relate to the major acquisitions or disposals of an asset/group of assets or business.

Unusual transactions by size are those that are unusually large in a particular accounting period that is not expected to repeat regularly to the same extent in future periods.

Normalisation adjustments are determined on a consistent basis each year.

Reconciliation of normalised earnings to reported profit

GROUP $ MILLION

31 JULY 2015

31 JULY 2014

Profit for the period 506 179

Add: Net finance costs 518 366

Less: Taxation credit (82) (42)

Total EBIT 942 503

Add: Impairment of assets in Australia 108 –

Add: Restructuring and redundancy provisions 33 –

Add: Time value of options 20 –

Less: Gain on Latin America realignment (129) –

Total normalised EBIT 974 503

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ANNUAL REVIEW 2015FONTERRA CO-OPERATIVE GROUP LIMITED

FONTERRA DAIRY FOR LIFE

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FONTERRA ANNUAL REVIEW 2015

OUR CO-OPERATIVE

A STRONG CO-OPERATIVE 42

SUSTAINABLE DAIRYING 45

OUR CUSTOMERS AND CONSUMERS 49

SUPPORTING COMMUNITIES 50

OUR PEOPLE 54

LETTER FROM THE CHAIRMAN 2

LETTER FROM THE CHIEF EXECUTIVE 10

OUR GLOBAL BRAND FAMILY 14

ANCHOR MAKING US PROUD 20

FINANCIAL HIGHLIGHTS 22

GROUP OVERVIEW 24

INGREDIENTS 28

CONSUMER AND FOODSERVICE 34

INTERNATIONAL FARMING 40

CORPORATE GOVERNANCE 56

BOARD OF DIRECTORS 64

FONTERRA MANAGEMENT TEAM 66

SUMMARY FINANCIAL STATEMENTS 68

INDEPENDENT AUDITORS’ REPORT 88

STATUTORY INFORMATION 89

FIVE YEAR SUMMARY 90

NON-GAAP MEASURES 92

GLOSSARY 93

DIRECTORY 94

THE CONTENTS

OUR PRIORITIES

OUR PERFORMANCE

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INTRODUCTION | 1


PAGE 24

PAGE 44

PAGE 2

Normalised EBIT up 94 per cent to $974m with a strong contribution from New Zealand ingredients and Asia/China consumer businesses.

Our farmers have continued to make progress with stock excluded from 98 per cent of defined waterways on mapped farms.

A tough season for farmer shareholders with a $4.65 Cash Payout.

98%

$974M

PAGE 19

Our strength comes from having capable, confident and resilient people on both sides of the farm gate.

PAGE 22

We delivered a strong rebound in profitability and this is expected to continue.

PAGE 50

Supporting communities where we live, work and farm is part of who we are.

$4.65

THE YEAR IN REVIEW

per kgMS

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2 | OUR PRIORITIES


We have put in place a strong platform for growth, including a strategic cornerstone in our key market of China, and this has set us up well for a turn in the market. We have seen early returns from this work, with the Co-operative turning in a credible result, despite the challenging environment.

But while we are building a much stronger Co-operative for the future, I am acutely aware this has not translated into financial gains for our farmers this year.

The $4.40 kgMS Farmgate Milk Price reflects market prices which declined 36 per cent this year, largely as a result of the significant imbalance in global supply and demand amid geo-political concerns around the world.

Our good performance this year did not flow into the dividend. The 25 cent dividend reflects higher funding costs we have had because of around $900 million invested primarily in capacity and maintenance to support milk growth here in New Zealand. Added to that are the $364 million invested in completing our farm development in our key market of China, $750 million in our partnership investment with Beingmate to expand into the infant nutrition market in China and finally, the costs of our higher Advance Rate early in the season.

THE YEAR HAS BEEN DIFFICULT BECAUSE GLOBAL PRICES KEPT FALLING IN RESPONSE TO DIMINISHING DEMAND. DEFINING BECAUSE WE ARE ROUNDING OFF ONE OF THE BIGGEST PHASES OF CAPACITY DEVELOPMENT WE HAVE SEEN IN THE CO-OPERATIVE.

LETTER FROM THE CHAIRMANThe 2015 financial year has been difficult for global dairy and defining for our Co-op.

SUPPLY, DEMAND IMBALANCEThe GlobalDairy Trade™ index hit a five-year low.

NET PROFITAFTER TAXOur net profit after tax is 183 per cent higher at $506 million.183% 0

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Maintaining our earlier Advance Rate, set at 64 per cent of our original forecast Farmgate Milk Price of $7.00 per kgMS, meant that at the half year we had effectively paid out 82 per cent of the revised forecast Farmgate Milk Price of $4.70 per kgMS made on 10 December 2014. This added to funding costs due to higher working capital requirements. In total, interest costs on funding were up $95 million to $427 million, with an impact of around six cents per share.

The dividend this year is 65 per cent of our adjusted net profit after tax (NPAT) which is at the lower end of our dividend policy range of 65 to 75 per cent of adjusted NPAT over time. While conditions are challenging, it is important to ensure that we maintain a strong balance sheet and the financial discipline needed to underpin a strong Co-operative.

This is a year where a higher dividend would have been welcomed to help smooth the impact of a lower Farmgate Milk Price and overall reduced farm incomes. However this is a watershed year with significant investments made, including further capacity projects. Strengthening our Co-operative comes with short-term costs which are being felt this year, but there are long-term benefits, some of which will flow in the new season.

There are already positive signs that the investments in our strategy are paying off in our return on capital of 8.9 per cent. Our ingredients return on capital was 9.3 per cent and our consumer and foodservice business achieved a return on capital of 25.5 per cent. These returns were delivered despite the continued challenges we have faced in the Australian market, including the fire at our Stanhope cheese factory which was a defining factor in an adverse product mix, coupled with lower sales of nutritionals. This impacted our performance and improving our business results in Australia is a high priority for management with a clear plan in place.

We are seeing good growth in our consumer and foodservice businesses and the results of a major push in our ingredients business to offset low milk prices with improved margins.

Despite drought in some regions and floods late in the season, our farmer shareholders lifted production season-on-season. Milk collection across New Zealand for the 2014/15 season to 31 May 2015 was 1,614 million kgMS, up two per cent.

We expect the lift in profitability to carry through into the new season. This is factored into our 2016 financial year forecast earnings per share range of 40-50 cents, which will help offset the continued low level of global dairy prices. Our track record this year in growing consumer and foodservice, along with our ingredients margins, make us very confident in our forecast.

OUR PRIORITIES | 3 OU

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FINAL CASH PAYOUTFor the 2014/15 season we have a final Cash Payout of $4.65 per kgMS for a fully shared-up farmer. This includes the Farmgate Milk Price of $4.40 per kgMS and a 25 cent dividend. As detailed previously, the Farmgate Milk Price reflects market prices and the dividend reflects our higher funding costs, especially in New Zealand where we have a total investment of around $900 million primarily in capacity, as well as maintenance to enable us to process growth in supply. This investment formed part of the $2.1 billion spent since 2013 which expanded our processing capacity and will support a higher return on investment for our farmers’ capital.

Our investments in New Zealand have been critical to accommodating milk growth of 10 per cent from the 2012/13 season. Building the new plants has also been important for efficiency. We now have far more flexibility to switch production between products in favour of those delivering the best returns in any one season. This overcomes the product mix disadvantages, which have affected earnings in the past and will improve peak costs, which last season were $59 million, or four cents per kgMS.

We have had an intensive period of capacity growth in Canterbury, Southland, Waikato and the lower North Island including both powders and premium products for consumer and foodservice.

Investments in New Zealand this year includes $167 million to complete the Pahiatua dryer and distribution centre, and $132 million for the Anhydrous Milk Fat, Milk Protein Concentrate and reverse osmosis plants at Edendale, all commissioned in 2015. It also includes the $122 million of investment in the dryer at Lichfield due for commissioning in 2016. Combined they represent 8.2 million litres more capacity. With capacity now more in line with current expectations of milk growth, we have reduced the amount of capital expenditure considerably in 2016 to $900 million.

Globally we invested $364 million in farm development and livestock purchases in China as part of our commitment to the Chinese dairy industry and the creation of our own milk supply to support our consumer growth in this market. These are now well-performing farms achieving good levels of on-farm efficiency, but just like here in New Zealand, decisions have been made to lower costs and production at a time of low milk prices.

Now that we are completing the development phase we will move to establish partnerships in them. We also invested $750 million in our global partnership with Beingmate that provides a cornerstone from which to grow in the infant formula market. This partnership brings together specialty ingredients from our European business, nutritionals from our Australian plants and milk from New Zealand, sold through our own Anmum™ brand. Greater China

INFORMATION FASTERWe have made it our mission to get farmers information faster, in formats which are more convenient.

LETTER FROM THE CHAIRMAN

4 | OUR PRIORITIES

FONTERRA ANNUAL REVIEW 2015 FONTERRA ANNUAL REVIEW 2015F

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is a very important dairy market and we now have investments which link milk from our New Zealand farms to consumers and customers.

In any season, some parts of our Co-operative may perform better than others, depending on global pricing and in-market dynamics. By providing clear reporting on each of our business segments and each of our markets we are ensuring our farmer shareholders can see where we are doing well and clearly see the steps we are taking when performance needs improving.

GENERATING HIGHER VALUEFonterra’s strategy emphasises shifting greater volumes of milk to higher returning products.

In our ingredients business opportunities to achieve higher returns can be influenced by market conditions and prices. The product mix gross margin in our New Zealand ingredients business was up 24 per cent to $1.3 billion, as we successfully adjusted our product mix to take advantage of improved prices for cheese and casein relative to Whole Milk Powder. We also achieved premiums on the sale of specialised ingredients used in dairy applications, sports nutrition and medical applications.

Our consumer and foodservice businesses in Asia and China achieved record performance helped by low milk costs and they maintained their strong

contribution to the Co-operative’s normalised EBIT of $974 million. Consumer and foodservice volumes increased by 27 per cent to 1.7 million metric tonnes (MT) and this contributed to normalised EBIT of $408 million.

This result was helped by finalising the reorganisation of our Dairy Partners Americas (DPA) joint venture with Nestlé which gave us management control of DPA Brazil and the consumer business in Venezuela. Their consolidation into the consumer and foodservice segment contributed an additional 324,650 MT of sales.

DAIRY INDUSTRY RESTRUCTURING ACT REVIEWThe Government is reviewing competition in the New Zealand dairy market and possible changes to the Dairy Industry Restructuring Act (DIRA).

One of the triggers for a review is when the proportion of milk collected by independent processors exceeds 20 per cent. These processors are collecting 22 per cent of farm gate milk supply in the South Island and just over 14 per cent nationally. While they are collecting more volumes it’s important to note that total volumes produced in New Zealand have also grown from 1.2 billion kgMS in the 2001/02 season to 1.9 billion kgMS in the 2014/15 season. Fonterra’s share of this higher total is 85.4 per cent.

FOODSERVICE SUCCESSConsumer and foodservice volumes increased by 27 per cent to 1.7 million MT.

DIRAThe government review of the DIRA is underway and we have made several submissions.


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Our submission to the Commerce Commission says parts of DIRA contribute to a competitive, efficient dairy sector. These include the Milk Price regime and the obligation to supply Goodman Fielder and small niche processors with raw milk.

However, we believe other parts of DIRA are no longer necessary given the competitive market, such as the rule that we have to accept all new milk supply. We believe it is also time to end the requirement to provide milk to large processors establishing a foothold in New Zealand. They no longer need a regulatory leg-up, paid for by our farmers.

STRONGER TOGETHERIn recent years our farmers have made major investments in fencing waterways, nutrient management and compliance and capital works like effluent system upgrades. Farmers support the principle of sustainability and have increasingly embraced it to the point where we are world leading in areas such as managing nutrient impacts. Our farmers need to be applauded for their commitment and their investment which is not only improving the sustainability of their farms but also natural resources in their regions.

This year our Co-operative has stepped up our presence in these regions, providing more local contacts between farmers and their co-operative. We have focused on practical solutions like Fonterra Farm Source™, our comprehensive package of regional

advice, digital tools, competitive discounts on farm necessities and financial options for managing farmers’ businesses. We now have more than 9,000 farmers benefiting from Fonterra Farm Source™ Rewards Dollars, $4 million of which have been accumulated to be redeemed for a range of products or Fonterra Farm Source™ vouchers.

Fonterra Farm Source™ stores market share has increased since launch, which confirms the value farmers place on the competitive discounts provided. Farmers have also commented positively on the stronger regional networks and support being provided to them.

We have moved key people away from head office and into the regions, so farmers can now call on one of seven regional heads who know their area, the conditions, local government requirements and how our Co-op can support them. Having senior eyes and ears on the ground enables our Co-op to get practical things done more quickly, such as rolling out our emergency response team during the lower North Island floods. Regional heads also have the depth of knowledge across our business to answer farmers’ questions and work with them to resolve any problems.

We have also made it our mission to get farmers information faster in formats which are more convenient, such as mobile apps delivering milk data, tanker arrival times and now Fonterra news direct to their smartphone.

FONTERRA FARM SOURCE™ REWARDSThere are more than 9,000 farmers benefiting from Fonterra Farm Source™ Rewards Dollars, $4 million of which have been accumulated to be redeemed for a range of products or vouchers.


MARKET SHARE UPFonterra Farm Source™ market share has increased since launch.

6 | OUR PRIORITIES


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FONTERRA CO-OPERATIVE SUPPORT Fonterra Co-operative Support, developed for the 2015/16 season, is another example of how we can step up for our farmers, using the strength of the Co-op.

We’re offering payment support equalling 50 cents per kgMS on share-backed production through an interest-free loan until 31 May 2017. Repayments are triggered when the Farmgate Milk Price exceeds $6.00 per kgMS.

Fonterra Co-operative Support will help smooth the impact of the low Farmgate Milk Price on farming business cash flows, and has been made possible through the financial strength of the Co-op including working capital savings the business is currently making.

With the support tied to share-backed production, it is not directly available to sharemilkers, but we expect many farmer shareholders will do what they can to help them using this initiative. This is dependent on the farmer – sharemilker relationship and arrangements which are unique to them.

OUTLOOKForecasting is difficult given the many influences on the market today. The political unrest in the Middle East, the refugee crisis, Europe’s farmer support packages announced in September of this year, plus slowing economies in China, Southeast Asia and Brazil all make for continued uncertainty in the short term.

However these short-term uncertainties do not mean today’s Farmgate Milk Price represents a permanent change in global dairy markets. Long-term demographics have not changed. The United Nations tells us that the global population will reach 9.7 billion by 2050. That includes middle class growth of three billion in emerging markets. By 2050 dairy consumption will be 50 per cent higher than current levels.

Farmers reacted to extraordinarily high prices in 2014 with significant growth in supply, but that supply is now declining.

On the demand side the OECD-FAO outlook is for per capita consumption growth in dairy of between 1.4 and two per cent per annum through to 2024, with increasing import demand supporting dairy prices over the next decade.

What complicates forecasting are the market complexities, such as the geopolitical and economic shifts we have seen in these volatile times, especially those which destabilise populations.

FONTERRA CO-OPERATIVE SUPPORTFonterra Co-operative Support is available for share-backed Fonterra farmers by way of a loan, interest-free until 31 May 2017.


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There is no doubt that volatility is now the rule, not the exception. Our best approach as New Zealand farmers is to focus on a low cost base so we have the flexibility to adjust to this volatility. This is undeniably tough on our farm businesses and families, but it is important not to lose our critical point of difference. The more cost-effective we are, the more competitive we are compared to some of the high-input farming systems globally. This high quality pasture-fed milk, flowing through an efficient vertically integrated Co-operative, will put our milk in the forefront in meeting growing demand, with higher volumes going into higher value areas.

ACKNOWLEDGEMENTSI want to thank our farmer shareholders for their support this year and especially their engagement with the Co-operative. With more difficult times, farmers want good, relevant information. We have stepped up to provide as much as we can by emails, technology and more regional contacts, but there are few good substitutes for local meetings. As I have gone around my own district and to meetings around the country I have been tremendously encouraged by the turnout and the questions.

I want to thank the management team for the pace, thoroughness and determination with which they have put in place changes to make our Co-op leaner, more focused and very single-minded on reducing costs and raising performance. Early benefits were promised and have come through. But the biggest change will be the longer term improvement in the business.

This is not a knee-jerk reaction to low global prices. It is part of our evolution as a Co-operative so we stay competitive and capable of making the most of a rapidly changing market. This work recognises we need to be more agile, faster in our thinking and our actions. It is laying the groundwork for our next phase of growth.

It is important to thank Sir Ralph Norris who has served as an Appointed Director since 2012 and retires at the Annual Meeting. Midway through his term, Sir Ralph skilfully led the Board’s review of the WPC80 precautionary recall and its recommendations. The Board welcomes Leonie Guiney who succeeded Jim van der Poel as an Elected Director on his retirement.

We thank Ian Brown for his thoughtful chairmanship of the Shareholders’ Council, particularly during the period when Trading Among Farmers (TAF) was under development. He very ably represented and guarded the interests of shareholders through the TAF discussions and its implementation, and was not afraid to lay down challenges during this process. We congratulate Duncan Coull on succeeding Ian and look forward to working with him.


ACCOMMODATING MILK GROWTHOur investments have been critical for milk growth and flexibility to switch production between products.

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On a personal noteAll of us face a new season which will present us with some real challenges on our farms, in our finances and even in our families as we try to work through a hard year. It is important we all look beyond the farm gate to recognise the strength of the Co-operative we belong to and also recognise that the fundamentals of our industry have not changed. Dairy remains a great industry and business to be in and I have full confidence that this will not change.

We have a unique strength coming from having a vertically integrated supply chain with scale, that connects high quality milk from pasture raised cows to consumers around the world.

More than ever before, it is critical that we stay on course and maintain our global position. We have a highly capable management team which has the Board’s support and a focused strategy.

Fonterra was formed to set ourselves and our farmers up for the future. We have a vertically integrated Co-operative, operating ably across ingredients, consumer and foodservice and doing this from farm to market. We have built scale and market focus across the world. Now we’re focused on being faster on our feet in a market which can change more rapidly than we have seen before. Our farmers have concentrated on efficiency, quality and competitive costs. As we make even more of our pasture-based model, we can expect to see more gains in productivity. All of these qualities stand us in good stead.

John WilsonChairman

DAIRY REMAINS A GREAT INDUSTRYDairy remains a great business to be in and I have full confidence that this will not change.


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Our response paid off in the second half with a rebound in performance and profitability, although our Farmgate Milk Price remains the outcome of extreme volatility. Even with less demand we lifted total group volumes by nine per cent to 4.3 million MT, with consumer and foodservice volumes up a significant 27 per cent to 1.7 million MT. These volumes contributed to normalised EBIT of $974 million for the group, up 94 per cent.

This year’s market conditions were some of the most difficult I have known. Prices are often cyclical, but it is rare to see a combination of geopolitical turmoil in the Middle East and Russia, serious disease outbreaks such as Ebola in Africa, an economic slowdown in China and the sharp drop in oil and mineral prices all at the same time. These suppressed demand at a time when farmers all around the world had ramped up production in response to previous high prices. This resulted in an inevitable impact on pricing and all of these factors are making it difficult to forecast near-term conditions.

We will be more than ready when the market turns.That’s because we have thoroughly reviewed our execution of strategy, our processes and working practices to embed long-term change.

WITH FARMERS FACING A REDUCED PAYOUT WE HAD TO IMPROVE OUR SALES MIX, ACHIEVE MORE EFFICIENCIES, MAXIMISE OUR GROSS MARGINS AND ACHIEVE OUR STRATEGIC GOALS FASTER.

LETTER FROM THE CHIEF EXECUTIVEWhen the fall-off in global demand and pricing forced us to reduce our Farmgate Milk Price forecast to $4.70 kgMS in December, I sent a clear, strong message to our Co-operative’s senior leaders.

GROUP EBITNormalised EBIT was $974 million for the group, up 94 per cent.

OUR PURPOSE FRAMEWORKThe framework to achieve our purpose has three elements: Our Strategy, Our Identity and Our People.

Volume Responsible Dairying

Value Nutrition for Life

VelocityDairy

Excellence

Inspiring Leaders

GettingBetter

Every Day

All of UsTogether

Our People

OurStrategy

OurIdentity

The V3 strategy is all about driving volume, value and velocity through our seven strategic paths:

• Optimise New Zealand milk.• Build and grow beyond our current consumer positions.• Deliver on Foodservice potential.• Grow our Anlene™ business.• Develop leading positions in paediatrics and maternal nutrition.• Selectively invest in milk pools.• Align our business and organisation to enable the strategy.

OUR STRATEGY

Responsible Dairying• Committed to helping our dairying communities thrive.• Champion of the health of our farms and waterways.

Nutrition for Life• Delivering superior products to improve health at key life stages.• Making dairy nutrition accessible.

Dairy Excellence• Global leader in dairy safety and quality.• Innovation, expertise and openness.

Inspiring Leaders• Trusted leaders inspiring exceptional performance.

Getting Better Every Day• Simplicity, clarity and focus in everything we do.• Capable, passionate people, growing every day.• High performing teams who own our collective success.

All of Us Together• A collaborative and connected culture.• Caring for our people and our consumers.• Accountable to our customers, communities and shareholders.

OUR IDENTITY

OUR PEOPLE

With our purpose, story and values at the heart, our ‘This is Fonterra framework’ brings together our people, identity and strategy commitments to guide us ‘to be the world’s most trusted source of dairy nutrition’.

THIS IS FONTERRAFRAMEWORK

To beThe World’s

Most TrustedSource of Dairy

Nutrition

$974M

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I was challenged on this change by several of our people, who asked if our payout was higher, would we have done this review. The answer is yes. Progress demands that we are proactive, not reactive. We have a single-minded purpose to be the most trusted source of dairy nutrition.

Our ‘This is Fonterra’ framework has three elements: Our Strategy, Our Identity and Our People. We have made considerable progress with Our Strategy and Our Identity over the past three years, but less with Our People as we have worked our way through a series of challenges. We have a talented workforce but we haven’t always had the right environment to get the best from them.

To perform at their best, people need simplicity, focus and clarity and a collaborative and accountable working culture. Instead we had growing complexity that was beginning to get in the way of quick and clear decisions and actions. This meant opportunities were lost.

By working together with a clear sense of purpose we will be able to move even faster on our volume and value priorities. We have unfortunately lost some good people as we have reduced roles, but this is not about jobs and cost cutting. It is about mindset. It is about focusing all our resources to make us faster, more efficient and more accountable for getting sustainable results.

Everyone with a stake in Fonterra wants to be confident we have actionable plans that will produce results. We do. Post balance date my leadership team signed off on a number of transformation initiatives. We are already well underway and are confident where we are heading, the opportunities available, and our ability to achieve real results and realise our Co-operative’s full potential.

STRONG REBOUND SUPPORTS FUTURE PROGRESSOur results demonstrate the benefits of this continued focus despite the much tougher global market, supported by the valuable contribution made from important capital investments in three crucial areas.

We continued to strengthen our home base, with the added capacity to grow margins for ingredients and market share, volume and value across our consumer and foodservice channels. We invested for the long term in our key market of China, pushing ahead with farm developments and building our Beingmate global partnership. We helped our farmers manage their on-farm costs with Fonterra Farm Source™ discounts and deferred payment terms.


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Our New Zealand ingredients business delivered a solid performance and our consumer and foodservice businesses in Asia and China produced record results, contributing to a net profit after tax of $506 million, up 183 per cent.

Our $2.1 billion investment in growing and updating our capacity and asset base in New Zealand over the past three years is now delivering tangible benefits. Our new plants stand out in terms of efficiency gains and a more flexible product mix. In the second half we made the most of this flexibility, favouring production of products where we could secure higher prices and changing production from powders to cheese and casein to capture shifts in customer demand.

Our $230 million investment in the past two years on capacity to support our consumer and foodservice performance is generating the volume and value growth we want, especially in Asian markets. This progress is further supported by an investment of approximately $30 million in our consumer packing plant in Indonesia. We also invested some $750 million in Beingmate in China to accelerate access to the infant formula market, from our milk pools in New Zealand, Australia and Europe.

STRONG VOLUME AND VALUE GROWTHWe achieved significant progress in our consumer and foodservice strategy, where we are aiming to win hearts, minds and especially market share in our eight strategic markets of New Zealand, Australia, Sri Lanka, Malaysia, Chile, China, Brazil and Indonesia. We already have leadership positions in key dairy categories in New Zealand, Malaysia, Sri Lanka and Chile. In China, Brazil, Australia and Indonesia we are building our market positions and operations to meet our strategic targets.

The results are clear, with consumer and foodservice normalised EBIT up 216 per cent to $408 million, achieving a return on capital of 25.5 per cent.

While ingredients imports to China decreased, consumer and foodservice volumes were important contributors with volume growth of 27 per cent, or three per cent on a like-for-like basis, mainly from foodservice and higher Anchor™ sales. Our investment in UHT production capacity in New Zealand is paying off, as we are now one of the leading exporters of UHT to China, thanks to determined building of our Anchor™ UHT presence in the market, including Anchor™ Kids Milk.

216 EBIT INCREASEConsumer and foodservice normalised EBIT was up by 216 per cent to $408 million.

%

LETTER FROM THE CHIEF EXECUTIVE

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In Asia, strong volume growth was due to a turnaround in Sri Lanka and combined volume growth of 11 per cent in foodservice across the region, which also locked in double digit growth in Indonesia, Malaysia and the Philippines. Consumer volume growth in Indonesia is supported by our capacity investment in West Java.

Our first milk powder manufacturing plant had its first commercial run in June with the capacity to pack and blend 12,000 tonnes of milk powder products annually for the Anlene™, Anmum™ and Anchor™ Boneeto brands.

Innovation and speed to market has helped achieve volume growth in New Zealand with the launch of new products, Anchor Uno™ yoghurt for children and Anchor™ Greek yoghurt into the market.

FOODSERVICE FLOURISHINGWe have always believed in the potential of the foodservice sector and the competitive position we have built in it. This is based on our understanding of dairy and the profit drivers behind commercial kitchens of all scales.

This repeatable model offers a compelling combination of high-performing products and professional menu development support that improves demand and profitability. While markets remain tough, foodservice has made a valuable contribution to volume and value, giving us confidence in our aim to grow it into a $3.4 billion and 3.2 billion LME business by 2020.

Asia is important for foodservice growth and we are winning there with combined volume growth of 11 per cent across the region. But our opportunities are not limited to Asia or Greater China, as Latin America, the United States and closer to home in Australia and New Zealand also offer growth opportunities. In Australia, our domestic foodservice business achieved 10 per cent volume growth compared to the same time last year after five years of flat volume.

In China, the foodservice business was rolled out into 13 new cities, taking the total to 40, and we launched our new foodservice application centre in Shanghai in November.

UHT MARKET GROWTH

Our investment in expanding our UHT

production capacity in New Zealand is paying off,

with Fonterra now one of the leading exporters

of UHT to China.

USEFUL FACTWe have leadership positions in our consumer and foodservice business in key dairy categories in New Zealand, Malaysia, Sri Lanka and Chile.


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OUR GLOBAL BRAND FAMILYWe have a portfolio of world-leading brands with breakthrough products that bring dairy nutrition to life, in new ways, at all life stages.

We are passionate about dairy and what it can do for life. So we work hard to bring superior dairy-based nutrition with a taste advantage that’s more accessible and more engaging for more people – every day.

TOTAL ANCHOR™ PERFORMANCE ACROSS ALL MEASURED CATEGORIES IN WHICH ANCHOR™ PARTICIPATES.

NEW ZEALAND

SRI LANKA

MARKET POSITION IN CATEGORY:

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#

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TOTAL ANMUM™ PERFORMANCE FOR MATERNAL, PREMIUM, AND PREMIUM GUMP.

MALAYSIA

INDONESIA

#

#

2

5

Putting mum at the centre of everything we do, with great products, innovative service/tools,

and the community connections mum needs to raise amazing young minds.

Freedom of movement starts with strong bones and strong bones start with Anlene™.

TOTAL ANLENE™ PERFORMANCE FOR ADULT POWDERS (INCLUDING SUPER BEVERAGES).

MALAYSIA

SRI LANKA

INDONESIA


#

#

#

1

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STRATEGIC MARKET UPDATE: GREATER CHINAOur growing consumer and foodservice volumes in Greater China continue to highlight the opportunities in our largest market, despite the current softer demand for ingredients and the economic slowdown.

The market access provided through New Zealand’s Free Trade Agreement opened opportunities to build on the years invested in relationships. Even though this is a market with some difficulties today it is important we continue to build here for the future. We remain confident in our long-term potential and ability to grow demand. The volume growth achieved with Anchor™ UHT this year is a good example, especially Anchor™ Kids Milk that reached a 13 per cent market share in June.

Consumer and foodservice growth underlines the importance of our work to create an integrated business in China. Our seven farms in two hubs underpin this work and we now have 25,000 milking cows producing around 12 million kgMS for the year. The farms’ ability to produce safe, high-quality milk will support future growth, but currently International Farming is running at a loss because of low domestic liquid milk prices in the market and farm development costs.

The farms are strategically important but owning them outright is not, so we are pursuing a partnership model. This will enable us to progress our milk pool strategy while recouping establishment and running costs.

We continue to make progress with our global partnership with Beingmate, which puts our Anmum™ brand and our high-quality dairy ingredients in a strong position to meet the needs of China’s growing infant formula market. Our investment in Beingmate has been secured and we are now selling Anmum™ through Beingmate channels in China. The joint venture proposal with Beingmate in relation to Fonterra’s Darnum plant in Australia is also progressing and we anticipate further developments in the 2016 financial year.

FOODSERVICE GROWTHIn Asia, foodservice delivered volume growth of 11 per cent, mainly due to butter, UHT cream and cheese.


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STRATEGIC MARKET UPDATE: AUSTRALIAAustralia is a tough market. It is highly competitive, margins are squeezed and we have had some setbacks – Darnum is one and our fire at the Stanhope cheese factory is another. But our team is fully committed to progress an integrated model as part of our global multi-hub strategy and they are achieving some wins.

Our Australian team is also concentrating on increasing volumes and revenue in priority areas such as foodservice, while reviewing our options in crowded market areas such as yoghurt and dairy desserts.

We are retaining milk volumes in a competitive market and our 10-year partnership with Woolworths, which gives us certainty in the fresh milk market, is now underway with the successful commissioning of a state-of-the-art beverages plant.

We have a detailed plan to get back to acceptable performance, based on Australia’s important role in our multi-hub strategy. Ultimately the aim is to have Darnum and Dennington as the core of a growing nutritionals business while we improve our capacity in cheese through a potential rebuild of our Stanhope factory. The fire at Stanhope has constrained our cheese performance so we can expect some more short-term pain, but we are determined to move faster on achieving a superior and more profitable product portfolio.

PROFITABLE PARTNERSHIPSChina and Australia are important to our global multi-hub strategy. This is designed to complement New Zealand supply with milk pools offshore, protecting our scale so we remain globally relevant.

Partnerships and joint ventures are important to this strategy. Our A-Ware partnership in the Netherlands is a prime example. Fonterra’s Heerenveen ingredients plant was commissioned in early 2015, producing high-quality whey and lactose ingredients for use in a range of consumer products including paediatrics and sports nutrition. It is adjacent to A-Ware’s new cheese plant on the same site and is part of our fully integrated global supply chain. The plant supports our ability to deliver high-quality, advanced dairy nutrition to meet the needs of our priority markets and global customers. Our plant will produce 5,000 metric tonnes of whey protein plus 25,000 metric tonnes of lactose annually. We are also working towards infant-grade product as well as commissioning Fonterra’s uniquely functional WPC 515, used in sports protein bars.

Also in Europe our exclusive partnership with United Kingdom-based Dairy Crest markets and sells galacto-oligosaccharides and demineralised whey powder for infant formula. We are the exclusive sales channel for Dairy Crest’s product, aligning to our strategy to develop a leading position in infant formula and growing-up milk in China and other international markets.

RECORD PERFORMANCEAsia and China delivered volume growth and improved margins, supporting a 216 per cent increase in normalised EBIT from our consumer and foodservice platform.


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NZMP™ JOINT VENTUREThe joint venture with Faffa Foods will bring Anchor™ Fortified Milk Drink to the market in Ethiopia.

In Africa, our partnership with leading South African company Clover passed a 10-year milestone for marketing ingredients and foodservice products throughout the sub-Saharan region in Africa. Meanwhile our NZMP™ Ethiopia joint venture with local partner Faffa Foods will bring Anchor’s Fortified Milk Drink to the market, from the first ever milk powder dry blending plant in Ethiopia. We have worked with the Food and Nutrition Society of Ethiopia to specifically develop this affordable milk drink fortified with the right level of nutrients for local children.

Reshaping our DPA joint venture with Nestlé in Latin America gives us control of DPA Brazil and our consumer business in Venezuela and opportunities for growth, especially in foodservice. With the businesses consolidated in our accounts for the first time, our consumer and foodservice business benefited from their contribution to volumes of 324,650 MT.

OUR PEOPLEI began with our people and I want to end with our people. The rebound in our performance and the foundations laid for future growth are the results of their work. A great deal of this work was achieved at the same time as we reviewed our business, so they deserve real credit for managing uncertainty while achieving these results.

We have come through a difficult time and our priority now is to ensure these changes to both our structure and our way of working achieve the results we all want. We have great people. The direction is clear, the motivation is there, and the commitment to keep improving returns for our farmer shareholders and investors is certainly there.

INTERNATIONAL FARMINGOur seven farms in China are well underway and we now have 25,000 milking cows and production volumes of 164,000 MT.


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On a personal noteOur Co-operative is our farmers and our people together, along with investors in the Fonterra Shareholders’ Fund, who believe in dairy. Our strength comes from having capable, confident and resilient people on both sides of the farm gate. By staying true to our shared values, putting our energy into our priorities and strategy and working collaboratively, we will achieve Fonterra’s full potential.

This includes ensuring our Co-operative is valued by our communities for doing what is right socially and environmentally. In New Zealand we continue to invest in the health of our young people, the environment and the sustainability of dairying and we continue to play our part in global communities where our knowledge of nutrition and dairy supports better health and better farming.

I remain confident about the future. Our farms and farmers are more adaptable to changing markets than those in Europe or the United States. Our pasture-based farming gives us a competitive edge so our farmers are not at the mercy of fluctuating feed prices. We have scale in ingredients, growing scale with our global brands in the markets that matter, and a repeatable and successful model in foodservice. We are not reliant on subsidies or farmer-friendly policies and are well beyond the trials of consolidation.

Our strategy is clear – higher volumes and generating more value from those volumes. It’s working and it will keep on working. I have one of the strongest teams ever in my 30 years in the dairy industry. They are all very aware of what farmers and investors expect from us. We will not let you down.

I believe in the Co-operative model. It works for the small farmer and the large, and treats them both equally. It recognises that scale comes from collective effort and the more effort we put in, the more we get back.

It works for our people. The responsibility we have for our farming families’ livelihoods is huge, but it is also motivating and when we do our best, it is very rewarding. Only a Co-operative offers this, along with the opportunity to be part of the wider collective that is us and our farmer shareholders.

Theo SpieringsChief Executive


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ANCHOR™ MAKING US PROUDAnchor™ is teaming up with the All Blacks to show all New Zealanders that game time is milk time.

WE’RE PUTTING OUR ENERGY BEHIND OUR BIGGEST DAIRY CONSUMER BRAND. Anchor™ is New Zealand for dairy and as dairy champions we’re getting behind our brand, with new product lines and our total commitment to our All Blacks, with a great new campaign celebrating our heritage with the limited edition All Blacks bottle.

> Pour a little pride on your cereal.

> Possession is everything.

ANCHOR™ MILK REIGNITES 1935 ALL BLACKS PARTNERSHIP > 80 years ago, the All Blacks and Anchor milk products were loaded onto the export ship Rangitiki and set sail for England. This marked the beginning of Anchor’s partnership with the All Black’s successful 1935 tour of Britain, Ireland and Canada.

> The current campaign is developed to promote the limited edition black bottle in market through September and October.

ANCHOR™ SUCCESS

TOTAL DAIRY VALUE IN THE NEW ZEALAND GROCERY CHANNEL1, 3

ANCHOR™ MARKET POSITION IN CATEGORY1, 2

#1

$1.5b

11%

5%

LIMITED EDITION ALL BLACKS BOTTLE

1 Dairy refers to chilled dairy in the New Zealand grocery channel and excludes ice cream.2 Total Anchor performance across all measured categories in which Anchor participates.3 For the year ended 2 August 2015.

ANCHOR™ VALUE MARKET SHARE1, 3

ANCHOR™ BRAND GROWTH PER YEAR1, 3

Image acknowledges Gilbert Meadows.

20 | OUR PRIORITIES


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#GOSTRONGANCHOR.CO.NZ/GOSTRONG

POSSESSION IS EVERYTHING.

GO STRONG. GO ALL BLACKS.

The goodness in every bottle of Anchor™ milk is the same goodness that nourishes the All Blacks.

OUR PRIORITIES | 21

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NORMALISED EBIT (NZD)

974$M

WE DELIVERED A STRONG REBOUND IN PROFITABILITY AND THIS IS EXPECTED TO CONTINUE. HOWEVER, A LOW FARMGATE MILK PRICE THIS YEAR HAS BEEN DIFFICULT FOR OUR FARMERS.

22 | OUR PERFORMANCE


FINANCIAL HIGHLIGHTS

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FINAL CASH PAYOUT

$4.65VOLUME (’000 MT)

4,303MT

REVENUE (NZD)

$18.8B

NET PROFIT AFTER TAX (NZD)

$506M

MILK COLLECTION

1,614M KGMS

DIVIDEND PER SHARE

25CPS

OUR PERFORMANCE | 23

Fonterra refers to normalised segment earnings, normalised EBIT, EBIT, EBITDA, constant currency variances, normalisation adjustments and payout when discussing financial performance. These are non-GAAP financial measures and are not prepared in accordance with 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 IFRS. Please refer to page 92 for the reconciliation of the NZ IFRS measures to the non-GAAP measures and for definitions of the non-GAAP measures used by Fonterra.

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% $974MNORMALISED EBITNormalised EBIT for the group was $974 million, almost double that of last year.9 RETURN

ON CAPITALThe group return on capital of nine per cent reflects a strong rebound in performance.

OUR STRATEGY OF DELIVERING VOLUME AND VALUE ACROSS OUR LEADERSHIP AND STRATEGIC MARKETS RESULTED IN A STRONG IMPROVEMENT IN PROFITABILITY THIS YEAR.

VOLUMESales volume increased nine per cent compared to last year, mainly as a result of strong volume growth in our consumer and foodservice segment, volume was up four per cent across Asia, up 33 per cent in Greater China and more than double in Latin America. This was offset to some extent by lower volumes in Australian yoghurts and dairy desserts.

The strong volume growth in Greater China was mainly from foodservice and Anchor™ in mainland China with the rollout of foodservice across a number of new cities. In Asia, the strong volume growth was due to a turnaround of business performance in Sri Lanka and combined foodservice growth of 11 per cent across the region. In Latin America the growth was due to the consolidation of DPA Brazil and Venezuela. The growth in consumer and foodservice reflects our strategy of moving more milk into higher value products.

USEFUL FACTLiquid milk equivalent (LME) is an additional measure of performance that allocates an amount of milk to dairy products based on the amount of fat and protein (milk solids) in the product relative to the amount of fat and protein in raw milk. Sales volume increased three per cent on an LME basis from 22.2 billion to 22.8 billion, with our consumer and foodservice segment increasing 15 per cent to 4.5 billion LME.

GROUP OVERVIEWWe delivered a strong rebound in profitability and this is expected to continue.



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NZD MILLION YEAR ENDED 31 JULY 2015 YEAR ENDED 31 JULY 2014 CHANGE

Volume (LME, billion) 22.8 22.2 3%

Volume (‘000 MT)1 4,303 3,965 9%

Sales revenue 18,845 22,275 (15%)

Gross margin 3,278 2,462 33%

Gross margin percentage 17.4% 11.1% –

Operating expenses (2,760) (2,210) 25%

Reported EBIT 942 503 87%

Normalised EBIT 974 503 94%

Net finance costs (518) (366) 42%

Tax credit 82 42 95%

Net profit after tax 506 179 183%

Earnings per share (cents) 29 10 190%

Adjusted earnings per share2 39 11 255%

Dividend per share (cents) 25 10 150%

Gearing ratio3 49.7% 42.3% –

Return on capital4, 5 8.9% 4.7% –

1 Excluding consolidation of DPA Brazil and Venezuela of 324,650 MT, like-for-like volume growth was 0.3 per cent. 2 Adjusted EPS excludes certain non-cash items3 Gearing ratio is economic interest bearing debt divided by economic net interest bearing debt, plus equity, excluding cashflow hedge reserve.4 Return on capital is calculated as normalised EBIT, less equity-accounted investees’ earnings, less a notional tax charge divided by capital employed.

Capital employed excludes brands, goodwill and equity-accounted investments.5 Return on capital, including brands, goodwill and equity-accounted investments was 6.9 per cent (2014: 4.1 per cent).

SRI LANKA RECOVERYPart of our recovery plan in Sri Lanka involved playing a larger role in the local dairy industry.

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GROUP OVERVIEW

VALUENew Zealand ingredients delivered a solid performance with significantly improved margins as a result of effective optimisation of our mix of products. This resulted in normalised EBIT for the ingredients segment increasing 43 per cent compared to last year1.

A record performance in Asia and China, with volume growth and improved margins, supported a 216 per cent increase in normalised EBIT from our consumer and foodservice segment. We also made good progress on building an integrated dairy business in China with a strong on-farm performance, in a challenging domestic milk price environment.

Performance strengthened in the second half where normalised EBIT was $498 million higher than the second half last year. This resulted in normalised EBIT for the group of $974 million, almost double that of the prior year, and in line with more normal levels.

The group result was impacted by an adverse product mix in our Australian ingredients business and lower returns from our Australian consumer business. However, we made good progress delivering strong volume growth in domestic foodservice and we have implemented a number of initiatives across the Australian business to help improve margins.

Operating expenses were up four per cent on a like-for-like basis, excluding the consolidation of DPA and one-off costs of around $100 million relating to the impairment of assets in Australia and restructuring across the group. The remaining increase was due to the expansion of our China business and investment in brands, growth in China Farms, increased storage and distribution costs in the ingredients business, and higher unallocated group costs required to support the global business.

This was offset to some extent by savings in Australia and most markets across Asia where an increased focus on costs delivered significant reductions in operating expenses. Including the consolidation of the newly acquired businesses in Latin America, group operating expenses were 25 per cent higher.

INCREASE IN VOLUMEIn Greater China, sales volume increased by 33 per cent compared to last year.33

1 Normalised EBIT for Ingredients excludes unallocated costs.

ANCHOR™ UNO LAUNCHNew Zealand volume benefited from the launch of new yoghurt products such as Anchor™ Uno and Anchor™ Greek.

USEFUL FACT The new milk powder dryer at Lichfield will process 700MT of Whole Milk Powder per day.



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The tax credit was higher than last year mainly due to the tax effect of a higher dividend this year, and also as a result of additional tax credits recognised in Australia.

The group return on capital of 8.9 per cent reflects a strong rebound in performance. Despite the significant volatility in dairy prices, the ingredients business delivered a return on capital of 9.3 per cent. In addition, the consumer and foodservice segment delivered a return on capital of 25.5 per cent. This is well above the ingredients return, reflecting the improved margins this year as well as the strength of our global brands.

Our dividend policy is to pay out 65–75 per cent of adjusted NPAT over time. In the calculation of the dividend, NPAT has been adjusted for certain non-cash items that were included in line with accounting standards. The total dividend payment for the year of 25 cents per share is 65 per cent of adjusted NPAT of $621 million or 39 cents per share.

STRATEGIC INVESTMENTSWe made a number of strategic investments during the year, building capacity in our home base of New Zealand and building a dairy business in China, our key market. These are positioning us well for the future.

Our investments include developing capacity and optionality in our home base with a spend of around $900 million, building an integrated dairy business in China, investing around $750 million in a global partnership with Beingmate and capital expenditure of $364 million for the development of new farms and livestock purchases.

We have also used the underlying strength of the Co-operative to support our farmers during tough times by accelerating the Advance Rate Payments, resulting in a higher proportion of the forecast Farmgate Milk Price being paid out at the balance date.

As a result of the Advance Rate, our debt at balance date was $900 million higher than it would have been and was the main reason for cash interest increasing by $95 million to $427 million. In addition, included in finance costs is a non-cash item relating to hedging interest in future periods.

These initiatives have led to additional funding requirements, resulting in a gearing ratio of 49.7 per cent. This was in line with our expectations. Adjusting for the accelerated Advance Rate, which has only had a temporary impact on the balance sheet, gearing would have been 46.4 per cent.

NZD $ MILLION CENTS

Normalised earnings before interest and tax 974 61

DPA 100 6

Interest (427) (27)

Other (26) (1)

Adjusted net profit after tax (NPAT) 621 39

Financial instruments (non-cash finance costs) (138) (9)

Australian yoghurt and dairy desserts (non-cash impairment) (77) (5)

DPA and hyperinflation 60 4

Profit after tax attributable to equity shareholders 466 29

Minorities (share of earnings) 40 3

Profit after tax attributable to equity shareholders 506 32

Dividend 65% of adjusted NPAT – 25

PROFIT AVAILABLE FOR DISTRIBUTION

Our dividend policy is to pay out 65-75 per cent

of adjusted net profit after tax over time. This is based on

an adjusted earnings per share of 39 cents per share.

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ADDITIONAL CAPACITYWe have invested our capital prudently, including at our Pahiatua and Edendale plants, both due for completion this year.

OUR NEW ZEALAND INGREDIENTS BUSINESS DELIVERED A SOLID PERFORMANCE. THIS WAS MAINLY DUE TO IMPROVED MARGINS WHICH WERE UP $264 MILLION.

We adjusted our product mix away from reference products such as Whole Milk Powder towards non-reference products such as cheese and casein and took advantage of better pricing opportunities in Japan and the United States.

This, together with our differentiated product and service offerings, resulted in an improved second half and full-year normalised EBIT for the ingredients segment of $973 million, up 43 per cent compared to last year. This was partially offset by an adverse product mix in ingredients manufactured in Australia as a result of lower sales of nutritionals and the fire at our Stanhope cheese factory.

Despite significant volatility in dairy prices, the ingredients segment delivered a return on capital of 9.3 per cent.

MILK COLLECTION Milk collection across New Zealand for the 2014/15 season to 31 May 2015 was 1,614 million kgMS, up two per cent compared to the previous season. New Zealand farmers experienced varied conditions across the country with the mild winter and spring ensuring that the season started well, but the hot summer resulted in a drought being declared in the South Island by mid-February. However, this was followed by rain in March supporting pasture growth ending the season with good growth in milk supply.

Milk collection in Australia, our second largest milk pool, was up five per cent at 127 million kgMS. Tasmanian production grew by four per cent due to strong rainfall through the year and continued structural expansion in new farms and irrigation investment. Market share declined slightly in Northern Victoria as new entrants provided aggressive fixed price offers to suppliers.

INGREDIENTS

The ingredients segment represents the ingredients businesses in New Zealand, Australia and Latin America. This segment also includes Fonterra Farm Source™ (formerly RD1), a rural supplies retailer in New Zealand.

NORMALISED EBITIngredients segment normalised EBIT was up 43 per cent compared to last year.

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Volume (LME, billion) 21.5 21.7 (1%)

Volume (‘000 MT) 2,982 3,052 (2%)

Revenue 14,341 19,553 (27%)

Total gross margin 1,562 1,325 18%

– New Zealand product mix 1,343 1,079 24%

New Zealand reference products 729 1,067 (32%)

New Zealand non-reference products 614 12 –

– Australia ingredients (27) 118 –

– Other gross margin 246 128 92%

Normalised EBIT¹ 973 679 43%

Gross margin per MT

Reference products ($ per MT) 376 542 (31%)

Non-reference products ($ per MT) 980 23 –

Return on capital2 9.3% 5.6% –

1 Normalised EBIT for Ingredients excludes unallocated costs.2 Return on capital is calculated as normalised EBIT, less equity-accounted investees’ earnings, less a notional royalty charge for use of the group’s brands, less a notional tax charge,

divided by capital employed. Capital employed excludes brands, goodwill and equity-accounted investments.

PRODUCT MIXWe adjusted our product mix to take advantage of better pricing opportunities in the global marketplace.

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PERFORMANCEOur New Zealand ingredients business manufactures five commodity products that inform the Farmgate Milk Price. These are referred to as reference products and all other products are referred to as non-reference products. The relative difference between reference product prices and non-reference product prices can impact our gross margin.

Product mix in our New Zealand ingredients business includes the returns from both reference and non-reference products.

The ingredients segment sales volume was two per cent lower at three million MT as a result of lower sales of dairy ingredients to China, largely offset by higher sales in other regions. Revenue was 27 per cent down, reflecting the 36 per cent lower dairy prices compared to last year.

The product mix gross margin in our New Zealand ingredients business was up 24 per cent to $1,343 million, $264 million higher than last year. We successfully optimised our product mix by taking advantage of the change in relative commodity prices and adjusting our product mix away from WMP towards non-reference products such as cheese and casein.

With the change in global demand dynamics, we increased sales to customers outside Greater China. We also successfully grew our volume of offshore government tenders. Gross margin increased, reflecting the value proposition of our ingredients products and services for global customers in various dairy applications.

Reference products delivered a gross margin of $729 million, which compares to $1,067 million in the prior year. Last year, reference product margins benefited significantly from the adjustment to the Farmgate Milk Price and without that, gross margin for reference products would have been higher than last year. In addition, significant falls in dairy prices had a negative impact on early season margins.

Gross margin for non-reference products increased significantly to $614 million compared to $12 million last year. This was mainly due to favourable relative pricing and the change in mix towards non-reference products. Last year, margins for non-reference products were extremely low due to unprecedented relative price movements of reference products compared to non-reference products.

USEFUL FACT With the change in global demand dynamics, we increased sales to customers outside Greater China. We also successfully grew our volume of offshore government tenders.

INGREDIENTS

NEW ZEALAND INGREDIENTS REVENUE AND VOLUME

YEAR ENDED

31 JULY 2015

YEAR ENDED

31 JULY 2014 CHANGE

Sales volume (‘000 MT)

Reference products 1,939 1,970 (2%)

Non-reference products¹ 626 522 20%

Production volume (‘000 MT)


Non-reference products 682 593 15%

Revenue per MT NZD


Non-reference products¹ 5,831 7,064 (17%)

1 Sales volume and revenue excludes bulk liquid milk. The annual bulk milk volume for the 2015 financial year was 67,000 MT.

PRODUCT PERFORMANCEOur New Zealand ingredients business delivered a solid performance.



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9.3Ingredients manufactured in Australia returned a gross margin loss of $27 million as a result of an adverse product mix due to lower sales of nutritionals and the fire at our Stanhope cheese factory in December 2014. In addition, the loss of production impacted our ability to match the market price for milk in Australia. The lower revenue was set against a relatively high domestic milk price in Australia, reflecting an intensely competitive market for milk supply.

We are taking steps to address product mix issues, including investigating the rebuilding of the Stanhope cheese facility. Post balance date we also signed a paediatrics supply agreement with a customer for our Darnum plant. Together with our Beingmate partnership, this will ensure Darnum returns to producing higher-value nutritionals.

Other factors influencing gross margin includes liquid milk, global sourcing, Fonterra Farm Source™ stores, Prolesur, global supply chain and peak milk costs. Returns from liquid milk were higher than last year due to quarterly fixed pricing in a falling milk price environment. Strong milk production through the peak collection period, combined with capacity constraints, resulted in some additional transport costs and inefficient processing. However, these peak costs of $59 million were 21 per cent lower than last year as a result of additional investment in plant and operational efficiencies.

Operating expenses in New Zealand ingredients were $46 million higher primarily due to additional storage requirements in New Zealand and offshore. Our factory profit improvement plan in Australia has delivered $31 million in cost savings over the past two years.

CAPITAL EXPENDITUREWe have invested our capital prudently, spending around $900 million in our home base in New Zealand primarily on maintenance, additional capacity and optionality. This includes the Pahiatua powder dryer and the Edendale expansion, which includes a new Milk Protein Concentrate (MPC) plant, a reverse osmosis plant and an Anhydrous Milk Fat plant. Both expansions are due for completion this year. This additional capacity also benefits our consumer and foodservice business with investments in mozzarella at Clandeboye, slice-on-slice cheese at Eltham and ultra-heat treated (UHT) at Waitoa.

USEFUL FACT Our factory profit improvement plan in Australia has delivered $31 million in cost savings over the past two years.

RETURN ON CAPITALThe ingredients segment delivered a return on capital of 9.3 per cent.

%

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NZMP™ INGREDIENTSLEADERSHIPWe are the world’s largest exporter of dairy ingredients.

NZMP™ IS THE DAIRY INGREDIENTS BRAND OF FONTERRA.

Fonterra is renowned for pure natural goodness, stringent quality assurance systems and world-leading expertise in agri-science.

Using the best of Fonterra know-how and processes, NZMP™ ingredients give our customers a natural advantage.

Trusted globally, NZMP™ ingredients can be found at the heart of some of the world’s most famous food and nutrition brands.

THOUSANDS OF INGREDIENTSNZMP™ has the broadest range in the dairy industry – we provide thousands of solutions to meet the needs of our customers every day.

That range spans from highest-quality core ingredients, such as milk powders and butter through to functional ingredients, like specialised proteins for sports and nutritional products.



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PIONEERING PARTNERSNZMP™ captures a pioneering spirit that goes back more than 40 years.

Today, our work with new and long-standing customers sees us export to more than 100 countries.

Our global availability gives customers access to supply security that only comes from partnering with the world’s largest dairy exporter.

Every day, our people, products and innovation combine to take the best of dairy to the world.

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OUR CONSUMER AND FOODSERVICE SEGMENT DELIVERED A STRONG RESULT WITH NORMALISED EBIT OF $408 MILLION, UP 216 PER CENT COMPARED TO LAST YEAR.

This performance resulted in a return on capital of 25.5 per cent, which was well above the return from our ingredients business, reflecting the contribution from the higher-value branded products.

The growth in normalised EBIT was mainly due to a record performance from our key markets of Asia and Greater China, with a strong volume increase. In addition, lower input costs for Asia, Greater China and New Zealand (the regions that source their product from New Zealand) improved margins significantly.

In Asia, foodservice delivered combined volume growth across the region of 11 per cent, mainly in butter, UHT cream and cheese. In Australia our domestic foodservice business increased volumes by 10 per cent after five years of flat volume.

We have implemented a number of initiatives to improve margins in our Australia consumer business. We have taken a $108 million write-down of the yoghurt and dairy desserts assets reflecting the continuing challenges in that business’s market environment.

VOLUMEIn line with our strategy to increase volumes across our consumer and foodservice segment, we achieved like-for-like volume growth of three per cent. In Asia and Greater China volumes were up four per cent and 33 per cent respectively, contributing to a volume driven increase in normalised EBIT of $41 million. The strong volume growth in Greater China was mainly from foodservice and Anchor™ in China. The foodservice business was rolled out into 11 new cities in the second half in addition to the two new cities in the first half, taking the total to 40. The growth in foodservice was supported by the launch of our new foodservice application centre in Shanghai in November, and the development of three others across China.

CONSUMER AND FOODSERVICEThe consumer and foodservice segment represents the consumer brands businesses and foodservice businesses in Oceania, Asia, Greater China and Latin America.

NORMALISED EBITOur consumer and foodservice business delivered a strong result with normalised EBIT, up 216 per cent compared to last year.

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FOODSERVICE VOLUME GROWTHIn Asia, foodservice delivered combined volume growth of 11 per cent across the region, mainly in butter, UHT cream and cheese.%11



Volume (‘000 MT) 1,685 1,325 27%

Sales revenue 6,701 5,321 26%

Normalised EBIT 408 129 216%

Return on capital1 25.5% 5.9% –

1 Return on capital is calculated as normalised EBIT, less equity-accounted investees’ earnings, less a notional royalty charge for use of the group’s brands, less a notional tax charge, divided by capital employed. Capital employed excludes brands, goodwill and equity-accounted investments.

NORMALISED EBIT: KEY PERFORMANCE DRIVERS1

NZD MILLION NORMALISED EBIT

Normalised EBIT year ended 31 July 2014 129

Volume 41

Price (67)

Cost of goods sold 284

Operating expenses 43

Other (22)

Normalised EBIT year ended 31 July 2015 408

1 The impact on volume and revenue due to the consolidation of DPA Brazil and Venezuela is not included in the price, volume and COGS rows of the table, but is included in ‘other’ to ensure those reflect the underlying performance of the business.

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CONSUMER AND FOODSERVICE

Volumes for the combined DPA Brazil and Venezuela businesses were 324,650 MT. DPA Brazil and our consumer business in Venezuela have been fully consolidated in our accounts for the first time. This inclusion is a key reason for the increase in volume and revenue compared to the prior period. In total volume was up 27 per cent compared to last year at 1.7 million MT.

Our brands business in China is well-positioned both in-store and in the top e-retailers such as T-mall. The rollout of Anchor™ in China continues with market share growth in the Yangtze River Delta region and in the North. The distribution of Anmum™ infant formula through Beingmate is now underway and the first shipments landed in China in June 2015. Beingmate has an extensive distribution and sales network with significant growth potential and the company continues to pursue a leading position in the China infant formula market.

In Asia, the strong volume growth was due to a turnaround of business performance in Sri Lanka and foodservice growth across all our markets. In key markets such as Indonesia, Middle-East and the Philippines, we achieved double digit growth. This reflects our successful foodservice strategy that is focused on three main channels across our leadership and strategic markets, with particularly strong growth in the Italian kitchen and Asian bakery channels.

This volume growth was offset somewhat by Oceania, with Australia having lower volumes in yoghurt and dairy desserts. Australia delivered some good volume growth in Western Star™ butter, up nine per cent, and Tamar Valley™ yoghurt, up 62 per cent. New Zealand

had domestic volume growth from foodservice and the launch of new yoghurt products such as Anchor Uno™ and Anchor™ Greek.

Our Australian domestic foodservice business achieved 10 per cent volume growth compared to the same time last year, after five years of flat sales. This is a strong result given the market’s maturity and aggressive competitive environment.

Our new beverages plant at Cobden has been commissioned and was officially opened in September.

PERFORMANCENormalised EBIT for the consumer and foodservice segment was up 216 per cent to $408 million.

Our pricing strategy delivered higher margins while maintaining market share. In Latin America we managed price increases in Chile and the Caribbean while increasing volume in Chile and maintaining market share in the Caribbean. In China, trade spend is required to support the consumer business and grow volume and market share as competition increases and this impacted margins to some extent.

The fall in dairy ingredients pricing benefited our consumer and foodservice businesses in Asia and China, where products are sourced from New Zealand. Input costs were significantly lower in these markets and in New Zealand consumer and foodservice, increasing gross margin by $284 million.

This was offset to some extent by milk prices in Chile that were around two per cent higher on average than last year, as movements in raw milk prices in Chile tend to lag global

PERFORMANCE HIGHLIGHTSReturn on capital increased to 25.5 per cent reflecting a record performance from Asia and Greater China.

CONSUMER AND FOODSERVICE PERFORMANCE

VOLUME (‘000MT) NORMALISED EBIT ($M) 2015 RETURN

ON CAPITAL

31 JULY 2015

31 JULY 2014 CHANGE

31 JULY 2015

31 JULY 2014 CHANGE

Consumer and foodservice 1,685 1,325 27% 408 129 216% 25.5%

Oceania 619 631 (2%) 51 (24) – 5.0%

Asia 284 274 4% 202 51 296% 96.2%

Greater China 122 92 33% 45 8 463% 71.5%

Latin America 660 328 101% 110 94 17% 18.6%



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commodity prices. The local price was also impacted by the drought in the south of the country. Input costs in Latin America increased as a result of the cost of locally sourced products for Soprole, partially offset by the lower cost of New Zealand-sourced products into the Caribbean.

Although milk prices remained high in Australia, on average they were slightly lower than last year. The change in product mix in Australia consumer and foodservice meant that more product was sourced from New Zealand where input costs were more aligned to global dairy prices.

Operating expenses were lower in Asia and Australia, where continued focus on spend led to further reductions in operating costs. This was offset to some extent by increased investment in our China consumer business, due to increased distribution, advertising and promotional spend to support business growth.

In Asia, we made good progress on delivering our strategy. Part of our recovery plan in Sri Lanka involved our commitment to play a larger role in the local dairy industry and in May we launched a new flavoured Anchor™ UHT

milk for children. The launch has been a great success helping us to generate additional volume and value in this growth segment.

In Indonesia the powder blending and packaging plant in West Java was completed with the first commercial run in June 2015. The plant has the capacity to produce more than 100,000 packs per day of Anlene™, Anmum™ and Anchor™ Boneeto, and has the potential to expand to meet the fast-growing demand in Indonesia.

In Latin America a number of initiatives were implemented in Soprole to offset the negative impact of the economic environment in Chile. We also delivered ongoing cost reductions and expense control. In Brazil, we launched a number of new products including Chandelle Chantilly – Brazilian market innovation, Greek yoghurt unitary pots, and products within the children’s category. The launch was supported by a successful trade marketing roadshow.

In Australia, we continued to improve on delivery to customers. A significant achievement was Fonterra being named the number one preferred supplier to Coles, climbing from a ranking of 33 last year. Australia foodservice was also rated as the top dairy supplier for one of our major customers. These were achieved as a result of improved cross-function collaboration resulting in improvements across key metrics such as delivered in full, on time, forecasting accuracy, reduction in days cover and sales growth.

ITALIAN KITCHENOur successful foodservice strategy is focused on three main channels across our leadership and strategic markets, with particularly strong growth in the Italian kitchen channel.

USEFUL FACT In Australia, Fonterra was named #1 preferred supplier to Coles, climbing from 33.

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WE HAVE A WINNING FOODSERVICE MODELWe have a winning foodservice model that has the potential to rapidly grow into a $3.4 billion business by 2020.

ASIA PACIFIC AND LATIN AMERICA ARE THE FASTEST-GROWING GEOGRAPHIES IN THE GLOBAL FOODSERVICE MARKET AND WE ARE THE LEADING DAIRY FOODSERVICE PROVIDER IN THE ASIA PACIFIC REGION WITH ABOUT 15 PER CENT SHARE OF SALES.

We have a growth strategy that focuses on solutions for three specific types of foodservice businesses.

Most of our Anchor™ foodservice products are derived from our New Zealand farmers’ milk. Anchor™ brings the goodness of natural New Zealand dairy to consumers throughout the Asia Pacific region.

Our sales to Global Quick Service Restaurant (QSR) brands are forecast to grow to $750 million by 2020.

Italian kitchen sales are forecast to grow by nearly 30 per cent per annum to 2020.

Our sales to Asian bakeries are forecast to grow to $1 billion by 2020.



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ASIAN BAKERY

> Our products such as Anchor™ Bakery Butters, Anchor™ Cream Cheese and Anchor™ Extra Whip Cream are used in croissants, pastries, cheesecakes and cream cakes, which are core offerings in nearly every bakery in Asia.

> Asian bakeries are the largest dairy foodservice channel in Asia.

> Fonterra dairy solutions deliver benefits including superior texture and improved taste in cheesecakes, cream cakes and pastries and higher whipping yields in cream cakes.

ITALIAN KITCHEN

> Our products including Anchor™ Extra Yield Culinary Cream and Anchor™ Extra Stretch Mozzarella Cheese are used in pasta and pizzas, which are the core offerings in most Italian-style restaurants.

> Pizza/pasta is the fastest growing western-style dining concept in Asia.

> Our dairy solutions for Italian kitchen save operators’ time, and reduce wastage and variability during the cooking process.

GLOBAL QUICK SERVICE RESTAURANTS

> Our dairy solutions are used in burgers, pizzas, soft-serve ice creams, frappes/smoothies and coffee beverages for some of the leading global QSR brands.

> These brands are benefiting from the growth in western-style dining across the emerging markets in Asia. We are the largest supplier of shredded mozzarella cheese and slice-on-slice processed cheese to global QSR brands in the Asia Pacific region.

TAKING OUR BEST TO THE WORLD

More than $150 billion of dairy products are purchased by foodservice businesses every year and with annual growth of six per cent it is growing faster than the overall food industry.

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MILK VOLUMESales volume for the year increased by 64 per cent.

FARMING HUBS ARE A KEY COMPONENT TO OUR STRATEGY TO BECOME A MORE INTEGRATED BUSINESS IN CHINA.

China is a key strategic market for Fonterra and we are committed to participating in the development of the local dairy industry.

We have two farming hubs with a total of seven farms producing safe, high-quality raw milk. A typical hub accommodates approximately 16,000 milking cows, consisting of three to five farms in one region. A single farm can accommodate up to 3,500 milking cows while a double farm has capacity of up to 7,000 milking cows. In total we have 25,000 milking cows, as well as 29,000 heifers and calves across all our farms in China, supporting our growth.

USEFUL FACT At full capacity the Ying hub and Yutian hub can each produce 200 million litres per annum.

Sales volume of raw milk for the year increased to 164,000 MT largely due to additional capacity coming online. This equates to 12 million kgMS of milk produced for the year.

INTERNATIONAL FARMINGInternational Farming represents the international farming operations in China.

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FARMING HUBSWe have made good progress in building an integrated dairy business in China.

The current result reflects both the development phase and adverse market conditions in the latter half of the financial year, with a normalised EBIT loss of $44 million. The main contributing factors were farm development costs, the fall in the milk price in China and a decrease in fair valuation in livestock, partially offset by significant operational efficiencies. As we develop farming hubs we benefit from economies of scale through purchasing of feed and staffing, both administration and farm management.

We are in a position where we can optimise our on-farm production. We are managing our farms to maximise profitability in the low milk price environment.

In the prior period the livestock values saw a significant uplift reflecting milk price and the herd profile assumptions at the time. The revaluation gain in the prior period was not repeated this year. For the full year, there was a revaluation loss of $3 million.

Future investments in China farms may include funding from strategic partners as well as Fonterra, enabling future and continued integration.

In total, capital expenditure for the year was $364 million. These funds were used for the expansion of Fonterra’s Ying and Yutian Hubs in addition to the ongoing construction of the farm effluent treatment systems. The total spend includes the purchase of livestock.

NZD MILLION

YEAR ENDED

31 JULY 2015

YEAR ENDED

31 JULY 2014 CHANGE


Volume (‘000 MT) 164 100 64%

Sales revenue 141 103 37%

Normalised EBIT (44) 21 –O

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42 | OUR CO-OPERATIVE


A STRONG CO-OPERATIVEThroughout the year, our farmers have made the most of the unity and strength of our Co-op.

Our aim was to help farmers take their farming business from strength to strength, to give them the benefit of local ears and eyes in their region and access to practical benefits, such as discounts on farming basics and access to group buying benefits. This is all about solutions, not problems, using the strength of the Co-operative to do more for our farmers.

At another level, we worked hard to simplify our farmers’ dealings with us. These include sharing-up options which give more time to back milk with shares, and a dividend reinvestment plan.

CONNECTING FARMERSWe have seven regional heads providing farmers with easy connections to their Co-operative.

We developed our Fonterra Co-operative Support package, which enables farmer shareholders to apply for an interest-free loan of 50 cents for every share-backed kgMS produced from 1 June to 31 December 2015. The loan will be interest-free until 31 May 2017, after which Fonterra may charge interest. The loan will be repayable directly from milk payments, and automatic repayments will occur when Total Advance Rate Payments exceed $6.00.

WE DEVELOPED AND ROLLED OUT FONTERRA FARM SOURCE™ THIS YEAR TO PROVIDE NEW LEVELS OF REWARDS, SERVICE, INFORMATION, FINANCIAL OPTIONS AND LOCAL SUPPORT FOR OUR FARMERS.

FONTERRA FARM SOURCE™ REWARDS DOLLARSCurrently, over 9,000 farmers have generated $4 million Fonterra Farm Source™ Rewards Dollars.

CO-OPERATIVE SUPPORT Fonterra Co-operative Support provides 50 cents for every share-backed kgMS produced.

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SENIOR SUPPORT IN THE REGIONS > We have seven regional heads in place, working with farmers to provide accurate information on the Co-op and speeding up the decision-making process for our farmers.

> These are senior people with extensive experience in the Co-operative and the skills to provide our farmers with the advice they need at a local level.

> They lead the many people we have working with farmers from Area Managers, Service Centres, and the Vat Assets team, to staff in our stores and our Sustainable Dairying Advisors.

> Feedback from farmers is that they value the new levels of support and advice the regional heads are providing.

INFORMATION AT FARMERS’ FINGERTIPS > Insights from the regions are helping us advance our digital strategy, so farmers can expect more facts, figures and useful information from us, direct to their smartphones.

> Our Fonterra Farm Source™ app gives farmers easy access to farm production data, tanker arrival estimates, farm supply deals and Co-op updates.

> We already have approximately 7,500 users.

> We also rolled out our My Co-op app, which gives farmers instant access to Fonterra news via their mobile.

$4 MILLION IN REWARDS DOLLARS > Our Fonterra Farm Source™ store network has grown market share by offering very competitive terms on farming necessities and reward purchases.

> Currently, over 9,000 farmers have generated $4 million Fonterra Farm Source™ Rewards Dollars, which can be redeemed for a range of products or Fonterra Farm Source™ vouchers.

> Fonterra Farm Source’s ability to respond to farmer needs was stepped up as the payout declined, with support including interest-free extended credit on farm basics and concessions on feed contracts.

MYMILK™ – MORE MILK > The MyMilk™ initiative offers farmers the opportunity to supply Fonterra for up to five seasons before having the option to share up.

> MyMilk™ is delivering on target.

> Suppliers can shift to share ownership and full membership of the Co-op.

THE FONTERRA FARM SOURCE™ APPOur app gives 7,500 farmers information at their fingertips.

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SUSTAINABILITY AND SOCIALRESPONSIBILITYFor Fonterra and our farmers, operating responsibly means taking ownership for the impacts of our decisions on society and the environment.

Global demand for food is set to grow as the population is estimated to reach 9.7 billion by 20501. This demand growth must be met against a backdrop of limited resources, climate-related changes to global ecosystems, and consumers who are increasingly interested in the way their food is produced.

EMBEDDING A RESPONSIBLE AND SUSTAINABLE APPROACHDuring the past year we have further embedded our approach to monitoring our sustainability performance globally.

This has reinforced a range of topics that matter both to our stakeholders and our Co-operative success, including water, nutrition, food safety, climate change, efficient use of natural resources, and biosecurity.

We found many areas where we’re already performing well, or where improvement plans are in place. In other areas we now have an enhanced register of target improvements. Times are tough, but operating responsibly and sustainably is a necessity. We may need to adjust the pace of investment and change, but our commitment is clear – our responsibilities must be embedded in the way we do things.

IT’S ABOUT BEHAVING TRANSPARENTLY, ETHICALLY, AND THINKING FOR THE LONG TERM. IT’S ALSO ABOUT RESPECTING THE DIFFERENT PERSPECTIVES OF EVERYONE WHO HAS A LINK TO OUR CO-OPERATIVE, AND THE COMMUNITIES WHERE WE LIVE, WORK AND FARM.

STOCK EXCLUSION98 per cent of defined waterways on mapped farms were stock-excluded, up from 95 per cent reported last year.

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1 United Nations World Population Prospects, 2015.2 This includes approximately 535km of waterways and 35 stock crossing points

with dispensations, primarily due to management plans achieving stock exclusion through a temporary or natural barrier. Taranaki farms are excluded from these statistics as they are covered by the Regional Council programme. 99 per cent of all other farms have been mapped.

3 OVERSEER® is owned by the Ministry for Primary Industries, the Fertiliser Association and AgResearch.



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The Accord has targets for effluent management, nutrient management, water use efficiency and waterway management, including stock exclusion and riparian management.

Our farmers have continued to make progress towards the commitment to have stock excluded from 100 per cent of all defined waterways by 31 May 2017. At the end of July 2015, 98 per cent (24,352 kilometres) of defined waterways on mapped farms were stock-excluded2, up from 95 per cent reported last year. In addition, 99.4 per cent of regular water crossings have now been bridged or culverted.

Nitrogen ManagementNitrogen Management aims to reduce the impact of dairying on ground and surface water. In the past year our farmers have taken the time to record detailed information that allows us to produce farm reports for them using the OVERSEER® nutrient management tool3. These reports detail nitrogen leaching risk, nitrogen conversion efficiency and let farmers compare their performance to other farms in the region.

We have seen strong participation from our farmers, with 76 per cent completing an assessment in the past year, up from 59 per cent in the 2013/14 season. Our farmers continue to demonstrate leadership and their commitment in this area. While behind the target timeline, our Sustainable Dairying Advisors have provided an enhanced service this year to help with the process. This includes identifying potential efficiency gains and scenario analysis to predict the positive impact of farmer-driven changes on nitrogen loss, helping the environment and saving on-farm costs.

SUSTAINABLE DAIRYINGNew ZealandOur farmers are committed to building an industry that’s sustainable and resilient, particularly when faced with challenges. Together, we continue to use New Zealand’s dairy expertise and natural resources to produce dairy products that are trusted around the world. This will benefit our farmers and the Co-operative, and deliver an industry that is an asset to New Zealand and the countries in which we farm.

Supply FonterraWe are supporting our farmers’ sustainable farming practices with our Supply Fonterra programme. It supports farmers in future-proofing their farming operations by helping them to meet regulatory requirements and achieve environmental, food safety and animal welfare expectations.

Annual Farm Dairy and Environmental Assessments measure each farm’s sustainability performance. These demonstrate the real progress and investment made by our farmers. In some cases, where further improvements are needed, plans are developed with our farmers to help them get there.

Over the 2014/15 season, our farmers continued to make clear progress and total identified risks reduced by nine per cent.

Waterway ManagementWe are signatories to the Sustainable Dairying: Water Accord, an industry-wide commitment to a set of national benchmarks aimed at lifting environmental performance on dairy farms.

PARTICIPATION76 per cent of our farmers participated in nutrient management assessment.

SUSTAINABLE SUPPORTWe’re actively supporting our farmers’ sustainable farming practices with our Supply Fonterra programme.

76%


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Sustainable dairying in AustraliaIn Australia, we have around 1,200 farmer suppliers across New South Wales, Victoria and Tasmania. Through Fonterra SupportCrew™ we make a team of specialists available to farmers, with experience across sustainability, finance, nutrition and agronomy, human resource management and milk quality.

Since launching in 2013, SupportCrew™ has identified an average annual saving of AUD$2,400 per farm for 285 farmers through electricity tariff reviews; completed 238 on-farm environmental projects; and initiated a further 44.

Once these projects are completed, almost 25 per cent of our Australian suppliers will have participated in at least one on-farm environmental project. Benefits include energy and water savings from automation, soil health improvement, effluent recovery or milk cooling optimisation. To deliver these projects, farmers’ investments have been supported by the Australian Government’s Carbon Farming Futures programme, Barwon Water and Natural Resource Management (NRM) North in Tasmania.

Carbon footprint of New Zealand milkThe 2013/14 full lifecycle estimate of greenhouse gas emissions for New Zealand milk to the farm gate was 0.90 kilograms of carbon dioxide equivalent per kilogram of fat-and-protein-corrected milk (kg CO2-e/kg FPCM), or 11.68 kilograms of carbon dioxide equivalent per kilogram of milk solids (kg CO2-e/kg MS). This was a four per cent decrease from the 2012/13 season and at 0.62kg CO2-e/kgMS, was the lowest

animal emissions intensity in 10 years. The reduction was primarily associated with increased productivity on farm, including increased milk production per cow, but also due to a small decrease in the emissions associated with nitrogen fertiliser use, supplementary feeds and land use change4.

SUSTAINABLE MANUFACTURINGFonterra’s largest manufacturing footprint is in New Zealand, with Australia our second largest asset base. Together these represent more than 95 per cent of our raw milk supply.

Efficiently managing our raw materials and waste means we can minimise our environmental impacts, better protect our food safety and quality, and will also lead to production efficiencies and reduced costs.

New Zealand and AustraliaEmissionsOur manufacturing greenhouse gas emission intensity reduced 0.4 per cent from 0.6125 tonnes of carbon dioxide equivalent per tonne of production in 2013/14 to 0.609 tonnes CO2-e/tonne in 2014/15.

While our overall energy intensity performance is similar to last year, a shift in product mix towards lower energy intensive products has helped our emissions intensity performance.

SUSTAINABILITY AND SOCIAL RESPONSIBILITY

4 Figures reported for previous years have been revised down by approximately two per cent due to adopting a new and internationally accepted method for land use change associated with Palm Kernel Expeller (Blonk, 2014. Direct Land Use Change Assessment Tool). There was also a slight revision to the land use change results due to updated statistics from the Ministry of Primary Industries.

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GREENHOUSE GAS EMISSION TRENDS NZ MILK PRODUCTIONkg/CO2-e/kgFPCM

The 2013/14 full lifecycle estimate of greenhouse gas animal emissions intensity was the lowest result in 10 years.



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EnergyThe efficient use of energy remains a major contributor towards our goal of reducing emissions. Energy use per tonne of production in New Zealand and Australia (called ‘energy intensity’) increased 0.2 per cent from 8.336 GJ/tonne in 2013/14 to 8.35 GJ/tonne in 2014/15.

In New Zealand operations, improvements were observed due to a change in product mix towards lower energy intensity products such as UHT milk and the use of the reverse osmosis plant at Longburn to offset transport energy use. Our consumer business in New Zealand remains committed to reducing energy intensity but showed a slight increase due to product mix and under-use of some plant.

In Australia, a combination of product mix (including shifting to lower energy intensity powders due to a factory fire at Stanhope) and the implementation of energy efficiency projects gave an overall reduction in energy intensity.

We have one of the longest-running energy efficiency programmes in New Zealand. Since it began in 2003, we have achieved a 16.8 per cent reduction in manufacturing energy intensity for our New Zealand operations. This reduction in Fonterra’s energy intensity is equivalent today to a saving of more than double the annual electricity usage of all the households in Wellington City.

This year, we have been improving boiler efficiency and reliability, and working at individual sites to remove unnecessary energy use. We expect further improvement next season with the installation of a condensing economiser as part of our expansion at Pahiatua.

WaterOur New Zealand operations, including our consumer business, used 45.6 million cubic metres of water, an increase of 3.4 million cubic metres on the prior year, due to increased production and the change in product mix. We recycled or reused 5.6 per cent of the total water used compared to

6.1 per cent last year. Our water reuse in New Zealand has remained largely stable over the past few years at approximately 2.5 million cubic metres, primarily due to existing factory capabilities, so as production increases, the proportion we are able to recycle is reduced. As Fonterra builds new capacity we are committed to investing in resource-efficient plants.

5 This was reported as 0.62 tonne CO2-e/tonne in the 2014 Annual Report. Due to the timing of reporting some estimates for July are used and updated in the following year. Furthermore, the emissions factors for FY14 were subsequently updated.

6 This was reported as 8.37 GJ/tonne in the 2014 Annual Report. Due to the timing of reporting some estimates for July are used and updated in the following year.

RESOURCE EFFICIENCYAs we build new capacity, we are committed to investing in resource-efficient plants.

DID YOU KNOW Since 2003, the reduction in Fonterra’s energy intensity is equivalent to a saving of more than double the annual electricity usage of all the households in Wellington City.


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As the expansion at Pahiatua goes live this season we expect to see a significant improvement there, as the site allows all evaporator condensate from the new drier to be reused.

Our Australian operations used 2.9 million cubic metres of water in the period 1 July 2014 to 30 June 2015, compared to 3.2 million cubic metres of water in the prior period. This reduction in water use has seen the water intensity (the amount of water used per tonne of production) reduce by 4.8 per cent, primarily due to changes in product mix.

WasteIn our New Zealand operations, including our consumer businesses, we reused or recycled 94 per cent of the solid waste. For the fifth consecutive year we have surpassed our target to reuse or recycle at least 90 per cent of our solid waste.

In the past year, in association with ecostore, we launched two portable consumer recycling stations as part of a recycling trial. Throughout the trial, stations have been moved between Auckland, Whangarei and Tauranga, and positioned in schools, community centres and businesses. The stations provide a drop off location for selected Fonterra and ecostore products.

The aim of the recycling stations is to encourage recycling and collect a clean stream of packaging that can be recycled locally into new products. If the trial is successful, Fonterra will look to work with other companies, councils and community groups to broaden the approach and create more drop-off locations for other products.

TRUST IN SOURCEOur Fonterra Food Safety and Quality System ensures that we have a clear and consistent framework to deliver safe, quality products and services all over the world. It enables oversight of product quality from farm to customer, including rigorous testing, verification and auditing regimes that starts on farm and run through the supply chain. In addition to our own testing, independent and external tests provide further reassurance on the quality and safety of our products.

2015 performance achievementsWe have conducted comprehensive food safety and quality audits of every Fonterra manufacturing site globally to identify any food safety risks to our business. These audits were completed in December 2014 and we have action plans in progress to make further improvements.

Our Food Safety and Quality System is also subject to regular scrutiny from third-party audits by regulators, key account customers and certification bodies. This year we have started the process to certify all Fonterra manufacturing plants against the latest globally recognised standards: FSSC22000 or BRC7. These standards are considered global benchmarks in food safety and quality management. All New Zealand ingredient sites achieved FSSC22000 certification this year.

Over the past year we have deployed a new tamper-evident solution for Anmum™ infant milk formula to give families added confidence across South East Asia and China. It gives

7 FSSC is Food Safety System Certification; BRC is the British Retailer Consortium.

FOOD SAFETY AND QUALITYWe have conducted comprehensive food safety and quality audits of every Fonterra manufacturing site globally.




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consumers a clear visible indication of product tampering that could occur post-packing. The solution was introduced by our Canpac factory in New Zealand in June and is to be deployed within our Malaysian and Indonesian operations later in 2015, delivering a global rollout across all Anmum™ markets.

Hard-wiring food safety and qualityEmbedding food safety and quality as a shared value across our organisation is vital. Comprehensive food safety and quality standards must be supported by a strong food safety culture that starts at the top and permeates through every level of the organisation.

This year we reinforced our food safety culture through a comprehensive suite of activities including refreshing our food safety and quality expectations, communications, capability building and learning programmes.

In our annual series of roadshow events with Fonterra farmers and employees, senior executives presented our strategy, priorities and progress for food safety and quality and gave the opportunity for detailed questioning.

For our own staff, we have also added food safety and quality as a fundamental part of the induction process for all employees, not just those directly involved in manufacturing.

For our vendors, we have strengthened our Approved Vendor Programme by including new food safety and quality requirements for vendors of packaging, ingredients, warehousing and co-manufacturers.

OUR CUSTOMERS AND CONSUMERSWe operate in a global market that is rapidly evolving and highly competitive. Our customers and consumers increasingly want to make informed choices about the products and services they select, including considerations of environmental, social and nutritional impacts. So we can optimise their experience of our products and services, we need to listen to and understand their concerns and needs. Communicating openly, regularly checking their satisfaction with our performance, and responding positively to their feedback are essential to earning their trust.

Since 2009, Global Ingredients has been using Fonterra’s annual customer value management survey to assess performance and act as a guide for improvement. In 2015 our overall product performance continues to be very strong and we achieved a score of 8.3, up on 8.1 for 2014, and for the sixth consecutive year we achieved a value above 8.0, which is considered best in class.

In the same assessment survey by our customers we achieved an overall value performance score of 7.8, significantly up on 7.5 last year, the highest score since our tracking began and considered to be ahead of the competition.

CUSTOMER SATISFACTION

In our Global Ingredients annual customer survey,

our product performance achieved a score of 8.3,

which is considered best in class.

OUR CO-OPERATIVE | 49


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Case study – Forging long-term partnerships through innovative solutionsThe Operations Master Plan is a joint initiative between Nestlé and Fonterra that was kicked off two years ago to grow our relationship with a focus on product quality, operational performance and customer service. Nestlé demands compliance to exacting product quality standards and business ways of working from all its suppliers.

Working together over the past two years, we have introduced improvements such as warehouse hubs in key regions to improve our service delivery and overall we have seen a lift in our delivery performance. In line with our own Trust In Source programme, our New Zealand supplying farms and manufacturing facilities have successfully passed the stringent responsible sourcing requirements set by Nestlé. In addition, our customer service team has focused on providing prompt resolutions to any issues that have been raised. All of these improvements have resulted in a substantial lift in customer satisfaction.

USEFUL FACT More than 1,490 schools are participating in our Fonterra Milk for Schools programme, which means approximately 170,000 primary-aged school children are able to drink milk every school day.

SUPPORTING COMMUNITIESSupporting the communities where we live, work and farm is part of who we are. We aim to improve livelihoods and support thriving communities by understanding their needs and expectations.

At the heart of our commitment to our communities is our desire to share what we do best: our excellence in dairy.

Fonterra Milk for SchoolsOur Fonterra Milk for Schools programme contributes to the health of future generations of New Zealanders and this year marks its first full year of national operation.

Participation remains strong, with more than 1,490 schools involved, which means approximately 170,000 primary-aged school children are able to drink milk every school day.

Preliminary results from two research projects suggests that it’s already having a positive impact on the dairy consumption of children and supporting healthy growth and development.

The programme is also building a connection between school children and the dairy farms where the milk comes from through visits from schools to farms, and visits to schools by our farmers and tankers.


FONTERRA MILK FOR SCHOOLSPreliminary results from two research projects suggests that it’s already having a positive impact on the dairy consumption of children and supporting healthy growth and development.



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KickStart BreakfastThe KickStart Breakfast programme provides a healthy breakfast of Weet-Bix and Anchor™ milk to New Zealand school children. Started in 2009 as a partnership between Fonterra and Sanitarium, it was expanded in 2013 from two days to five when the New Zealand Ministry of Social Development joined as a partner.

In the past year, we welcomed new schools, with more than 800 KickStart Breakfast clubs, run by volunteers, now active across the country, serving more than 100,000 breakfasts per week.

Living Water Partnership with the Department of ConservationLiving Water is a 10-year, $20 million partnership with the Department of Conservation. Established in 2013, Living Water is focused on five sensitive water bodies: Kaipara Harbour, Tı-kapa Moana/Firth of Thames, and three Waikato peat lakes, Te Waihora/Lake Ellesmere and Awarua/Waituna Lagoon.

The vision for the partnership is for a sustainable dairy industry as part of healthy functioning ecosystems that together enrich the lives of all New Zealanders. Over the past year we have been working to bring this vision to life through a number of start-up projects, and through working collaboratively with our communities to put three-year strategic plans in place.

Key achievements of the programme this year included field days to demonstrate how to build low-cost wetlands on farm, trialling passive filter systems, re-vegetation at all sites, drain rehabilitation, and completing baseline assessments of freshwater quality and biodiversity.

Sustainable Business CouncilWe are an active member of the Sustainable Business Council in New Zealand, a Global Network Partner of the World Business Council for Sustainable Development. This year, we have led a working group to improve business engagement on water in New Zealand and completed a pilot ecosystem services review project.

Fonterra ChinaIncreasing understanding of the dairy sector and encouraging the development of young talent in agriculture is an important aspect of our community involvement in China. This year we have hosted a series of activities for students from Beijing Guang’ai School, a charitable school for disadvantaged children, including donating Anchor™ milk and school stationery. For World Milk Day and International Children’s Day this year, winners of a painting competition at the school, themed ‘Farm in my heart’, were invited to visit one of our farms in China and experience life on a real working farm.

This year, we have also started a project at the Shandan Bailie school. This school was founded by the New Zealander Rewi Alley and has trained many professionals in the field of animal husbandry and agricultural science, and played a key role in promoting the development of local economy. In partnership with the Chinese People’s Association for Friendship with Foreign Countries (CPAFFC), we have set up scholarships for students from poverty-stricken areas.

LIVING WATERKey achievements of the programme this year included field days to demonstrate how to build low-cost wetlands on farm, trialling passive filter systems, re-vegetation at all sites and drain rehabilitation.


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Together with our existing Fonterra Scholarship scheme where we partner with the China Song Ching Ling Foundation, and our Anchor™ Scholarship for outstanding western cuisine and pastry students, this means that more than 300 students have benefited this year.

Fonterra Latin AmericaAs Chile’s leading dairy company, Soprole is committed to the education of future dairy professionals who will help the long-term economic contribution of dairy to Chile and its regions. To enable this, in 2012, through our subsidiary Prolesur and the not-for-profit training organisation Codesser, we established a programme at the Vista Hermosa Agricultural School. This year the programme included funding transport for students from rural regions to and from the school each week and three scholarships for top-performing students to continue their studies at the Universidad Austral de Chile. Soprole has also continued its long-running support of school sports in Chile, including the granting of eight scholarships this year for the best participants to further their education in sport.

Soprole is always attentive and committed to the community and its consumers, especially when they need it the most. That’s why, when a disaster strikes, the company is one of the first to react and donate food to distressed households. For example, in March 2015 when unseasonal heavy rains caused devastating floods in the cities of Copiapó and Chañaral in Northern Chile, we were quick to donate 7,500 litres bottled water and 6,500 litres of milk to the community.

The Fonterra Grass Roots FundSince 2007, our Fonterra Grass Roots Fund has helped clever initiatives happen in our rural communities. Community groups apply for grants of up to $5,000, and this year approximately $600,000 was provided to more than 300 New Zealand community organisations.

In the past year we expanded the scheme to Sri Lanka. The Sri Lankan Fund is supporting community projects that have positive social, economic and environmental impacts. In its first nine months the fund has invested in important school and community facilities. These investments have a wide-spread and sustainable impact, with more than an estimated 5,000 people enjoying ongoing benefits.

A newly formed partnership between Fonterra Brands Sri Lanka and the Sarvodaya Shramadana Movement, Sri Lanka’s largest and oldest community organisation, has led to the opening of two newly renovated Early Childhood Development centres in the Hanwella area. The renovations included exterior improvements such as significant roof repairs, upgrades to the building interior, and equipping the centres with items such as first-aid kits and educational materials for the children. In the coming months the two parties will be working together on more projects to enhance local dairy communities.

Food BanksThrough our businesses across the world we are supporting families in need through the donation of short-dated product to charities. In the Auckland region we proudly support six food banks, including the Auckland City Mission, the Salvation


ISLAND RESTORATIONThe Fonterra Grass Roots Fund has supported the native bird sanctuary on Motuihe Island. Gorse clearing has helped with restoration of habitat for birds including the little spotted kiwi.

DISASTER RELIEFWhen unseasonal heavy rains caused devastating floods in Northern Chile, we were quick to donate 7,500 litres of bottled water and 6,500 litres of milk to the community.



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Army and Presbyterian Support and in the past year donated more than 80 tonnes of product. In Australia, we are a provider to Foodbank’s Milk programme, and in 2014–15, helped deliver 2.5 million litres of milk to Australians in need. In Chile, Soprole has been in partnership with ‘Red de Alimentos’ since 2011, supporting multiple charities to reduce hunger and improve Chilean’s nutrition.

Dairy DevelopmentThrough Dairy Development we aim to make a tangible difference to people’s livelihoods by improving milk productivity, quality and income. Building on our history of working with local communities and stakeholders around the world, we are committed not only to ensuring sustainable returns for our farmers, but also to contributing responsibly to key markets where we operate such as China, Sri Lanka, Indonesia and Malaysia.

We employ different models that reflect local operations and dairy development needs. For example, in Indonesia, we work in partnership with the Government and other partners on the Fonterra Dairy Scholarship programme for dairy farmers, dairy extension officers and dairy service providers to enable them to improve their dairy knowledge.

In China, our largest export market, we run farms with 25,000 milking cows employing about 1,000 locally recruited and trained staff.

We also support training programmes with the Ministry of Agriculture, the China-New Zealand Dairy Exchange

Centre and the China National Research Institute of Food & Fermentation Industries under the Ministry of Industry & Information Technology in Beijing to develop the skills of local dairy practitioners and promote Dairy Development. These programmes have trained nearly 3,000 farmers and processing workers in two years.

Case study – Dairy Development in Sri LankaFonterra has supported the development of the Sri Lankan dairy industry since 1997. We buy milk from several thousand local farmers, for sale under Fonterra brands, including Anchor™ Newdale.

In the past year, we have significantly expanded local milk sourcing and the level of our commitment to working with local farmers. The local Dairy Development team has been strengthened to include six Supplier Relationship Officers who share knowledge and expertise with the farmers. We began construction of our first Demonstration Farm and Training Centre at Pannalla, and added three further Fonterra-operated Milk Collection Centres to our network.

USEFUL FACT In the Auckland region alone this year, we have donated more than 80 tonnes of product to food banks.

MAKING A DIFFERENCEThrough Dairy Development we aim to make a tangible difference to people’s livelihoods by improving milk productivity, quality and income.

FONTERRA GRASS ROOTS FUNDThe Fonterra Grass Roots Fund has helped more than 300 New Zealand community organisations, including providing essential equipment for Land Search and Rescue (LSAR).


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Health and safety performanceHealth and safety is a top priority for our Co-operative, right across the globe. We want all of our people to be healthy, to live with balance, and to go home from work safely every day.

Sadly, this year two people lost their lives on our sites: an employee in Chile and a contractor in China. Having achieved our lowest recorded level of serious harm injuries10 last year of 22 globally, this year we saw an increase to 38. For all fatalities and serious harm injuries we conduct investigations to identify the root causes and implement corrective actions and share learnings across the business.

USEFUL FACT Through coaching, health monitoring and environment design, injuries to our 1,500 tanker drivers have been reduced by 31 per cent.

During the year, 370 of our employees required medical treatment, restricted work duties or time away from work as a result of an injury. This represents a 17 per cent reduction in the employee injury rate for the hours worked, from 9.8 total injuries per million hours worked last year to 8.1 this year. This is our lowest recorded level and a total reduction of 55 per cent since 2010.

OUR PEOPLEEverything about our Co-operative’s success, both now and in the future, starts with our people. The shared passion, diversity and experiences of our worldwide team give us a competitive edge, propel us forward and mean we can better deliver according to our purpose and strategy. We have a strong sense of responsibility to our people – to protect their safety and foster their development.

We see real value in creating an environment where people with diverse experiences and ways of thinking are encouraged and enabled.

To achieve a culture of encouragement and tolerance, we do not tolerate unlawful discrimination, bullying, harassment or victimisation. To help us identify and resolve any issues we provide a confidential hotline service operated by an independent organisation.

We are taking an increasingly global view of labour and human rights across our workforce, and we have increased awareness of key principles, such as those in the ILO8 conventions and in our agreement with the International Union of Food. This year, we have also continued to collaborate with unions, including on staff development programmes such as He Tangata (see below) and food safety and quality.

8 ILO is the International Labour Organisation, a United Nations agency.9 For the purposes of reporting we are counting graduates who originally started

in one of the companies that formed Fonterra in 2001.10 Serious harm injuries are injuries that cause temporary or permanent loss

of body function.

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We achieved our lowest recorded TRIFR, a 17 per cent reduction in the employee injury rate for the hours worked.



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This year we have continued to focus on the most significant risks to our staff. We have built on work completed last year identifying these risks on sites, taking steps this year to reduce the exposure of our staff. In addition, our health and safety team have performed comprehensive audits on 18 of our sites to ensure that our defined practices for health and safety are being followed. These audits have continued to show improved resilience.

An important initiative this year has been targeting the safety of our 1,500 tanker drivers in New Zealand. Our drivers have had a high rate of injury and faced increased risks. The project included using vehicle data to coach drivers, enhanced health monitoring and the design of critical aspects of their environment, such as the unloading bays on sites. Overall, injuries have decreased by 31 per cent last year and tanker driver safety has been further improved.

For the second year our staff participated in the 10,000 Steps programme, a challenge to improve wellbeing by walking an average of at least 10,000 steps per day for a six-week period. This year 3,094 employees across the globe participated in the challenge and on completion of the programme, 75 per cent of respondents reported that they had made permanent exercise changes and felt their productivity had increased. This is a great global initiative for sustainable wellbeing.

Training and developmentGetting the best people for the job is essential for the Co-operative to deliver on strategy. We are always looking to source the best talent to join us and help us achieve our goals.

Our Graduate Programme has been operating in New Zealand for more than 40 years and was introduced to China in 2013. Since inception 603 staff have passed through the programme with more than 200 still working for the Co-operative. Notable participants include two members of the current Fonterra Management Team, Kelvin Wickham and Alex Turnbull, and three graduates are still with us after 40 years of service: Clive Bleaken, Dave Packer and Ian Peacock9.

Targeted at building capability and engagement in our New Zealand operations team, our He Tangata: It is People programme has three distinct streams. ‘He Tangata: Leadership’ develops leadership skills and 503 managers completed the first three modules this year. ‘It’s all about you’ is focused on individual development and resilience.

Since February 2015, more than 3,500 staff have completed the two-day course in sessions facilitated by a team of 100 of our own specially trained staff. Finally, our Dairy Apprenticeship and Skills Recognition stream is the first step in establishing an apprenticeship programme for dairy factory operators in New Zealand with almost 200 apprentices joining this year. Having worked with industry training organisations and the New Zealand Qualifications Agency (NZQA) to develop this programme, it not only gives the apprentices the opportunity to gain a recognised NZQA qualification, but also allows experienced operators to have their experience recognised and assessed to gain the qualification too.

603GRADUATES

603 graduates have passed through our

graduate programmes and two graduates are

now on the Fonterra Management Team.

EXERCISE HELPS PRODUCTIVITYOur employees walked over one million kilometres in the 10,000 Steps challenge. That’s more than to the moon and back.


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CORPORATE GOVERNANCE

CONTENTS

CORPORATE GOVERNANCE 57

BOARD OF DIRECTORS 64

FONTERRA MANAGEMENT TEAM 66

56 | CORPORATE GOVERNANCE


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CORPORATE GOVERNANCEThe Board and Management of Fonterra are committed to achieving the highest standard of corporate governance and leadership.To support our role as a Board, we have developed governance systems that reflect Fonterra’s unique characteristics and requirements as a significant New Zealand-based co-operative competing in the global dairy market.

CHANGES TO THE FONTERRA BOARDThere were changes to the Fonterra Board during the financial year ending 31 July 2015. In November 2014, Jim van der Poel retired as a Farmer Director following 12 years of service and Leonie Guiney was elected as a Farmer Director. In May 2015 Sir Ralph Norris, an Independent Director, indicated he will not seek to continue his term on the Board following the Annual Meeting on 25 November 2015.

COMPLIANCE WITH BEST PRACTICE GOVERNANCE STANDARDSThe Fonterra Board’s governance framework takes into consideration contemporary standards in New Zealand and Australia, incorporating the Corporate Governance in New Zealand Principles and Guidelines issued by the Financial Markets Authority in December 2014, the Corporate Governance Best Practice Code issued by NZX Limited (NZX) for the Fonterra Shareholders’ Market (FSM) and the third edition of the ASX Limited (ASX) Corporate Governance Council Principles and Recommendations (ASX Principles). These are guidelines designed to maximise company performance and accountability in the interests of farmer shareholders, unitholders and the broader community.

Fonterra complies with the Fonterra Shareholders’ Market Corporate Governance Best Practice Code.

We focus on governance in a way that promotes: > the interests of our farmer shareholders and other key stakeholders

> Fonterra’s Co-operative philosophy, which is largely expressed through our Co-operative principles

> transparency, giving our farmer shareholders, Fonterra Shareholders’ Fund (FSF) unitholders and other stakeholders the information they need to assess our performance

> effective risk management to ensure that Fonterra meets its business objectives and all legal requirements

> an appropriate balance between the roles and functions of the Board and Management

> communication with important stakeholder groups, including farmer shareholders, employees, customers, unitholders, debt investors, governments and the communities Fonterra works in.

CORPORATE GOVERNANCE | 57


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Principle 1: Ethical Standards Ethics frameworkFonterra expects its Directors, officers and employees to maintain high ethical standards. The Board is committed to maintaining high ethical standards across the group, in all aspects of the business in all parts of the world. The Group Ethical Behaviour Policy and the Board Charter set out these standards. These documents are reviewed and approved annually.

Fonterra’s Code of Business Conduct – The Way We Work – provides practical guidelines on how to apply Fonterra’s values in everyday work situations and when working with customers, farmer shareholders, suppliers and the wider community.

The Way We Work is available in several languages, to facilitate its accessibility to Fonterra’s global employee base. The document has been written in simple, straightforward language. An independently run telephone, email and web-based Hotline provides individuals with a confidential channel to raise ethical issues. In the 2015 financial year, 31 calls were raised globally with the Hotline.

All were fully investigated and appropriate action taken, including managing issues through other HR processes.

Employee training is provided on both the Group Ethical Behaviour Policy and The Way We Work. Individuals are assessed to ensure understanding of group policies and an annual compliance certification process promotes compliance.

Principle 2: Board Composition and PerformanceOur BoardThe Constitution of Fonterra provides for not more than 13 directors and sets out how they are appointed.

In accordance with the Constitution, not more than nine directors are elected by farmer shareholders from the shareholder base, and not more than four directors are appointed by the Board. The People, Culture and Safety Committee oversees the process for identifying and recommending potential appointees, and makes appropriate recommendations to the Board. The Board of the Fonterra Shareholders’ Fund is also consulted in relation to the appointment of Appointed Directors.

The 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, sophistication and complexity. They bring to the Board perspectives, experience and skills to augment the direct industry knowledge and other expertise provided by the Farmer Directors.

Farmer Directors must be qualified as farmer shareholders under section 12.3 of the Constitution and are therefore not considered Independent Directors.

Director independenceThe rules of the Fonterra Shareholders’ Market require Fonterra to have a minimum of two Independent Directors.

In order to be an Independent Director, a Director must not be an executive officer of Fonterra, or have a disqualifying relationship.

A Director has a disqualifying relationship where he or she has a direct or indirect interest or relationship that could reasonably influence, in a material way, the Director’s decisions in relation to Fonterra. The FSM Rules contain specific examples of what may give rise to a disqualifying relationship. Appointed Directors cannot be shareholders and are expected to maintain independence for the length of their term.

At 31 July 2015, Simon Israel, David Jackson, Sir Ralph Norris and John Waller each did not have (and continue not to have) any disqualifying relationship in relation to Fonterra and are therefore Independent Directors.

The Board has determined that Simon Israel, David Jackson, Sir Ralph Norris and John Waller (being the Directors appointed by the Board in accordance with Fonterra’s Constitution) are Independent Directors under the FSM Rules as at 31 July 2015.

John Wilson, who is a Farmer Director, is the Board-elected Chairperson. Following good governance, the Chairperson and Chief Executive roles at Fonterra are not exercised by the same individual.

Board Charter The Board Charter, which sets out the responsibilities, roles and obligations of the Board and Directors is reviewed annually and was last approved by the Board in December 2014. The Board Charter and the Charters of the Board Committees are available on fonterra.com. The Board considers it important that there is a good balance of experience on the Board. To help achieve this, the Board Charter prescribes the qualifications and skills required of Directors, and contains principles in relation to the tenure of Directors. The Board Charter also contains details of the delegation of authority to management, the Board’s procedures, the training provided to Directors and the process for assessing the Board’s performance.

Board meetingsThe Board meets formally at least seven times a year and has regular and ad hoc teleconferences to ensure the Board is kept informed, and to deal with specific issues as they arise. Between full Board meetings, the Board uses committees to advance its work programme and to enhance the efficiency and effectiveness of its decision making.




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Information for the BoardIt is important that all members of the Board are appropriately informed of the group’s activities.

Directors are supplied with detailed monthly performance reports and analysis in advance of all Board meetings, together with papers on any significant commercial initiatives, and information on the group’s competitive position, industry updates and general economic indicators.

The Directors also make a point of meeting away from head office on a semi-regular basis so that they can broaden their understanding of the business through direct contact with managers and customers. Directors regularly visit key markets to gain a better understanding of the global dairy market.

Director trainingFollowing appointment to the Board, Directors undertake an induction programme to familiarise themselves with the group. 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

• the Fonterra Constitution and other governance systems.

Directors are expected to keep themselves abreast of changes and trends in the business and in Fonterra’s environment and markets, and trends in the economic, political, social and legal climate generally. As a group the Board holds several workshops on relevant subjects each year, and Directors are also expected to keep up to date with governance issues.

Nomination CommitteeThe People, Culture and Safety Committee oversees the process for appointments to the Board. To the extent the Board is responsible for appointing Directors, the People, Culture and Safety Committee satisfies the role of a nomination committee.

Performance assessmentDirectors formally assess the performance of the Board as a whole each year. A regular programme of peer review of individual Directors also occurs. The Shareholders’ Council reviews the Board’s Statement of Intentions against the performance and operation of the group and reports on this to farmer shareholders annually. The Board is responsible for reviewing the Chief Executive’s performance.

Independent professional adviceAny Director of the Board is entitled to seek independent professional advice relating to the affairs of Fonterra or to his or her other responsibilities as a Director. Fonterra will pay the reasonable cost of independent professional advice.

Diversity and Inclusion PolicyFonterra has a Board-approved People Policy that encompasses the Group’s policy on diversity and inclusion. Fonterra is committed to creating and maintaining an environment where people with diverse experiences and ways of thinking are encouraged and enabled. Fonterra recognises that diversity is not solely a matter of compliance; it means respecting differences and making those differences count. The People Policy requires that all policies, standards and guidelines support the intent of diversity and inclusion. Fonterra proactively identifies and maximises local talent pools to improve participation. This includes increasing gender ratios in leadership, and access for people with disabilities, and those representing different cultures and ethnicities. To give effect to our People Policy, Fonterra is looking to develop targets to enable diversity and inclusion to be appropriately monitored.

As at 31 July 2015, the gender composition of the Board comprised 11 male Directors and two female Directors (2014: 1 of 13). The nine Farmer Directors on the Fonterra Board are elected by postal ballot of the farmer shareholders conducted by the Shareholders’ Council, and the four Appointed Directors are appointed by the Board and ratified by farmer shareholders. Of 16 officers who reported directly to the Chief Executive at 31 July 2015, four were female (2014: 3 of 12).



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Principle 3: Board CommitteesFonterra has a number of permanent Board Committees, as detailed in the table below. Additional Board Committees will be formed when it is efficient or necessary to facilitate efficient decision-making by providing for a sub-group of Directors to focus on particular areas or issues and to develop recommendations to the full Board.

The Fonterra Board Committees have a standard Terms of Reference and each committee has a charter, which defines the scope and responsibilities of that committee and is approved by the Board annually. The minutes for each of the Board Committees’ meetings are supplied to the Board for review.


COMMITTEE OR GROUP MEMBERSHIP AS AT 31 JULY 2015 PURPOSE

Audit and Finance Committee

David Jackson (Chair)Ian FarrellyLeonie Guiney

Michael SpaansNicola ShadboltJohn Waller

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

People, Culture and Safety Committee

John Wilson (Chair)Ian FarrellyJohn Monaghan

Simon IsraelSir Ralph NorrisDavid Jackson (observer)

To assist the Board in fulfilling its governance responsibilities in relation to the recruitment, retention, remuneration and development of Directors, executives and other employees, and to promote a safe and healthy working environment.

Co-operative Relations Committee

John Monaghan (Chair)Malcolm BaileyDavid MacLeod

Ian (Blue) ReadMichael Spaans

To assist the Board in fulfilling its governance responsibilities in relation to the supply of milk from Fonterra suppliers, and to seek to resolve supplier complaints before reference to the Milk Commissioner.

Risk Committee Malcolm Bailey (Chair)David JacksonIan Farrelly

Leonie GuineyIan (Blue) ReadJohn Waller

To assist the Board in fulfilling its corporate governance responsibilities relating to Fonterra’s management of key enterprise-wide risks. This includes strategic and operational risks, through Fonterra’s enterprise-wide risk management framework, the behaviours required of its people and its guidelines, policies and processes for monitoring and mitigating enterprise-wide risks.

Board and Committee attendance

BOARD REGULAR

AFC PCS CRC RC

John Wilson 10/10 – 6/6 – –

Malcolm Bailey 10/10 – – 5/6 3/3

Ian Farrelly 10/10 7/7 6/6 – 1/3¹

Leonie Guiney (elected 12 November 2014 – 7 meetings) 7/7 4/7¹ – – 0/3¹

Simon Israel 10/10 – 6/6 – –

David Jackson 10/10 7/7 6/6 – 3/3

David MacLeod 10/10 3/7¹ – 6/6 –

John Monaghan 10/10 – 6/6 6/6 2/3

Sir Ralph Norris 9/10 3/7¹ 4/6 – 1/3¹

Blue Read 10/10 – – 5/6 1/3¹

Nicola Shadbolt 10/10 7/7 – – –

Michael Spaans 10/10 4/7¹ – 4/6 –

Jim van der Poel (retired 12 November 2014 – 3 meetings) 3/3 – – – 2/3

John Waller² 7/7 5/5 – – 2/2

TOTAL MEETINGS 10 7 6 6 3

1 Committee memberships were reviewed in February 2015 and memberships changed. Directors’ attendances may reflect serving on committees for only part of the year.2 Mr Waller was on a leave of absence for part of the financial year.



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Audit and Finance CommitteeThere is an established Audit and Finance Committee as described on the previous page.

The Audit and Finance Committee comprises two Appointed Directors and four Farmer Directors. The committee is chaired by David Jackson, who is an Independent Director and a Fellow of the New Zealand Institute of Chartered Accountants.

Principle 4: Reporting and DisclosureFonterra is committed to high standards of reporting and disclosure. The Board has overall responsibility for the financial statements and the Audit and Finance Committee, as described on the previous page, plays an important role in overseeing the financial reporting processes used by management.

Financial reporting The Audit and Finance Committee reviews the financial statements and recommends approval of the financial statements to the Board. The committee considers whether the financial statements are complete, whether they reflect appropriate accounting policies, any major judgement areas, any legal matters that may significantly impact the financial statements and any complex transactions.

The CEO and CFO provide the Board with management representations that the Fonterra financial statements give a true and fair view, in all material respects, of Fonterra’s financial position and financial performance for each financial reporting period.

The Audit and Finance Committee oversees the Internal Assurance function and reviews the annual Internal Audit work plan. Internal audits provide assurance to the Board and management that the internal control framework is operating effectively.

Milk Price PanelThe Board has created the Milk Price Panel for the purpose of providing assurances as to the governance of the Farmgate Milk Price and the proper application of the Farmgate Milk Price Manual and the Milk Price Principles.

The Panel does not determine the Farmgate Milk Price, as this is a decision for the Board.

The Dairy Industry Restructuring Act 2001 (New Zealand) requires that the Chair and a majority of the members of the Panel (including the Chair) are independent. The Panel consists of two Appointed Directors, one Farmer Director and two appropriately qualified persons nominated by the Shareholders’ Council, at least one of whom must be independent. The Chair must be one of the Appointed Director members. The Panel is currently chaired by John Waller. Other Board members are David Jackson and Michael Spaans. The Shareholders’ Council appointees are Patrick Boyle and Bill Donaldson. The Board confirms that at 31 July 2015, John Waller, David Jackson and Patrick Boyle are considered to be Independent Members of this panel.

Continuous Disclosure Regime Fonterra is committed to promoting a well-informed and efficient market in its shares, units issued by the Fonterra Shareholders’ Fund and debt securities. The Board has approved a Group Disclosure Policy to ensure compliance with the FSM, the NZX Main Board and ASX listing rules regarding disclosure. The Group Disclosure Policy governs Fonterra’s communications with investors and market participants, and the disclosure of information relevant to Fonterra.

Fonterra has established a Disclosure Committee that holds regular and ad hoc meetings to oversee Fonterra’s continuous disclosure obligations. The Disclosure Committee has overall responsibility for reviewing, monitoring and implementing the Group Disclosure Policy.

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 listing rules of the FSM, the NZX Main Board or the ASX (as the case may be) is disclosed simultaneously to the Fonterra Shareholders’ Market, the NZX Main Board and the ASX. It is intended that where NZX, as market operator of the Fonterra Shareholders’ Market, receives information provided by Fonterra for release under the Fonterra Shareholders’ Market, NZX will simultaneously release the information under the code relating to the Fund. This process is intended to be automatic. Fonterra simultaneously discloses relevant information on ASX.

Securities trading policyFonterra has adopted a Securities Trading Policy that details the rules for trading in units and/or shares. The policy applies to Directors, officers, employees and contractors of Fonterra and members of the Shareholders’ Council and Milk Price Panel, and is additional to legal prohibitions on insider trading in New Zealand and Australia. All Directors comply with the legislative requirements for disclosing interests and with the Securities Trading Policy, which regulates both Directors and management in their personal dealings with Fonterra securities and those of related companies.

Principle 5: RemunerationFonterra’s remuneration framework is designed to attract, retain and motivate high-quality Directors and senior management.

The Constitution modifies the discretion of the Board to set remuneration of Directors. In accordance with the Constitution, farmer shareholders elect an independent committee of six farmer shareholders to consider and make recommendations to the Annual Meeting on Farmer Director remuneration.



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The members of the Directors’ Remuneration Committee as at 31 July 2015 were Rodney Wilson (Chair), David Gasquoine, Murray Holdaway, Scott Montgomerie, Philip Wilson and Gerard Wolvers.

The Board has full discretion over the remuneration of Appointed Directors. The details of the Directors’ remuneration are contained on page 57 of the Annual Financial Results document.

The remuneration framework for management is outlined on page 50 of the Annual Financial Results document.

Principle 6: Risk ManagementRisk managementThere is an established Risk Committee as described previously. The Audit and Finance Committee oversees financial risk management and the Risk Committee covers all other aspects of risk including ensuring a strong risk management culture in Fonterra.

The Risk Committee comprises two Appointed Directors and three Farmer Directors. The Committee is chaired by Malcolm Bailey, who is a Farmer Director. It is a requirement that the Chairman of the Audit and Finance Committee is also a member of the Risk Committee.

Fonterra has a global Risk Management Policy, the purpose of which is to embed an enterprise-wide risk management capability within Fonterra to provide a consistent method for the identification, assessment, control, monitoring and reporting of risks faced by the organisation. The policy recognises that risk represents both opportunity and threat and that risk is an integral part of business.

Fonterra’s tolerance for risk is defined in the Risk Management Framework, which requires the reporting of material risks as appropriate to the Fonterra Management Team, the Risk Committee and the Board.

Fonterra’s Risk Management Policy was reviewed by the Board in June 2015 and is aligned with the ISO31000 Risk Management Standard. The Policy is supported by a detailed Group Risk Management Standard and Guidelines that define the mandatory requirements relating to risk management for businesses. The Risk Management Policy provides a consistent methodology and approach for the execution of these mandatory requirements by specifying processes for:

• identifying existing and potential risks that may impact upon business objectives

• assessing the consequence and likelihood of risks identified

• identifying key controls in place to address risks

• evaluating the design and operating effectiveness of controls in mitigating risks to an acceptable level

• generating action plans to improve controls where required

• regularly monitoring risks and tracking progress against action plans.

Risk reporting to the Board for review occurs on a regular basis. This includes Fonterra’s top 20 risks, and changes in risks and emerging risk areas. This process is supported by a formal annual evaluation of the top risks by all material business units along with a six-monthly review and update of this risk assessment material. The six-monthly review process also includes management’s self-assessment of the effectiveness of key controls relied upon to manage the top risks. A summary of the results of this assessment is reported to the Risk Committee.

Fonterra’s Internal Audit function is accountable for formally reviewing the effectiveness of the group’s risk management processes, including using the outputs of risk assessments to compile its audit plan and performing independent validation of the control environment.

Principle 7: Auditors The Audit and Finance Committee is responsible for making recommendations to the Board regarding the appointment of the external auditor. The auditor is appointed by the shareholders at the Annual Meeting.

The Audit and Finance Committee reviews the independence of the auditor and reviews the external audit fees, the terms of engagement and annual audit plan.

Fonterra encourages the rotation of the lead external audit partner in the relationship in accordance with best practice. Fonterra has a Group Audit Independence Policy, for certain activities the auditor may undertake for the group. This policy is prescriptive as to the types of activities that the auditor may undertake, those the auditor may only undertake with the approval of the Audit and Finance Committee, and the types of activities that are not permitted. The Audit and Finance Committee will not approve the auditor performing any tasks that have the potential to create a conflict except in exceptional circumstances and then only if appropriate safeguards are in place.

The Audit and Finance Committee Chairman communicates regularly with the external auditor and the Audit and Finance Committee meet with the external auditor without management at least annually.

Principle 8: Shareholder RelationsShareholders’ CouncilOne of the Board’s most important relationships is with the Shareholders’ Council. The Council, which is established under the Fonterra Constitution, is independent of the Board and comprises 35 farmer shareholders elected as councillors, representing 35 wards across New Zealand. 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 and the Board meet regularly, as do the Chairs of the Board and the Council and the Chairs of their respective committees.




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Farmer communicationsFonterra is committed to maintaining and improving dialogue with our farmer shareholder base to ensure that the objectives of both the group and farmer shareholders are understood. An extensive farmer shareholder and supplier relations programme is managed by the Group Director Co-operative Affairs. Channels for electronic communication are provided through the fonterra.com and Fonterra Farm Source™ websites and the My Co-op smartphone app introduced this year.

Fonterra’s communications with farmer shareholders include regular face-to-face meetings, Sky broadcasts, the Global Dairy Update, Farm Source publication and a regular Chairman’s email. As described above, Fonterra releases to the relevant stock exchanges all material information, and will comply with the Fonterra Shareholders’ Market, NZX Main Board and ASX Listing Rules with respect to shareholder communications.

Farmer meetingsA schedule of regular meetings with farmer shareholders, sharemilkers and farm workers is held across the country at least twice a year. Often these are run in conjunction with the Shareholders’ Council, Area Managers and the Fonterra Farmer Network.

Directors also regularly attend other farmer meetings during the year on specific topics.

In addition, the Board consults with farmer shareholders on specific issues as they arise.

Fonterra.com and Fonterra Farm Source™ websitePresentations on the development of the business are available on the fonterra.com website. The group also uses email alerts, including regular updates from the Chairman and regular farmer shareholder updates.

The Fonterra Farm Source™ website enables Fonterra 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.

Annual MeetingThe 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 ensures that adequate time is provided at these meetings for farmer shareholders to raise issues or ask questions from the floor.

Notices of meetings will be sent to farmer shareholders at least 10 working days before the meeting.

The Constitution describes the process whereby a farmer shareholder can raise a proposal for discussion or resolution at the next meeting of farmer shareholders at which the farmer shareholder is entitled to vote.

Annual ReportThe group’s Annual Report including financial statements and an annual review, together with the half-year reports and other material announcements, are designed to present a balanced and clear view of Fonterra’s activities and prospects and are available on fonterra.com.

Other disclosuresInformation 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 Disclosure Policy. Farmer shareholders and other stakeholders receive regular updates on these and other issues relevant to them.

Principle 9: Stakeholder InterestsThe Board has policies in place for the governance and management of Fonterra’s relationships with key stakeholders. The Co-operative Relations Committee (CRC) of the Board specifically provides governance oversight of the management of Fonterra’s relationships with key external stakeholders in New Zealand and all other key markets, including, but not limited to, its government, non-government (NGO) and community relationships. This includes oversight of Fonterra’s community initiatives in support of its social responsibility and identity objectives. Examples of this activity are detailed in the social responsibility reporting section of this report. Of particular significance are the approaches to relationships with the Shareholder’s Council, farmer shareholders and farmer suppliers. These approaches are detailed at Principle 8.

CORPORATE GOVERNANCE BEST PRACTICE CODEThe Board has also reviewed compliance with Appendix 5 to the FSM Rules Corporate Governance Best Practice Code. While the Board believes it complies with the Code, there is a point of divergence from specific principles.

Audit Committee membership (Principle 3.1). The majority of members are not independent, due to the proportion of Farmer Directors on the Board.

FSM waiversThere have been no FSM waivers granted.



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BOARD OF DIRECTORS

1. JOHN WILSON2. MALCOLM BAILEY3. IAN FARRELLY4. LEONIE GUINEY 5. SIMON ISRAEL6. DAVID JACKSON7. DAVID MACLEOD8. JOHN MONAGHAN9. SIR RALPH NORRIS KNZM

10. BLUE READ

11. NICOLA SHADBOLT12. MICHAEL SPAANS

13. JOHN WALLER

1 6

2

3

5

11

12

9

10

8

7

13

4

1. JOHN WILSONBOARD RESPONSIBILITIES Chairman, and Chair of the People, Culture and Safety CommitteeTERM OF OFFICE Elected 2003, last re-elected 2012

John Wilson was elected to the Fonterra Board in 2003 and became Chairman in 2012. Previously he served as the inaugural Chairman of the Fonterra Shareholders’ Council. John is a Director of Turners & Growers Limited and he serves on the Executive Board of the New Zealand China Council. He is a chartered member of the Institute of Directors in New Zealand. John lives on his dairy farm near Te Awamutu and jointly owns a dairy farming business based near Geraldine, South Canterbury.

B.Agr.Sc

2. MALCOLM BAILEYBOARD RESPONSIBILITIES Farmer-elected Director, Chair of the Risk Committee and Member of the Co-operative Relations CommitteeTERM OF OFFICE Elected 2004, last re-elected 2013

Malcolm Bailey was elected to the Fonterra Board in 2004. Malcolm represents Fonterra on the Dairy Companies Association of New Zealand. He is a Director of Westpac New Zealand Limited, Hopkins Farming Group Limited and Gleneig Holdings Limited. He is also the Independent Chair of the Red Meat Profit Partnership. Malcolm’s dairy farming interests are as a shareholder in Hopkins Farming Group Limited.

B.Agr.Econ

3. IAN FARRELLYBOARD RESPONSIBILITIES Farmer-elected Director, Member of the Audit and Finance Committee, the People, Culture and Safety Committee and the Risk CommitteeTERM OF OFFICE Elected 2007, last re-elected 2013

Ian Farrelly was elected to the Fonterra Board in 2007. Ian had a 20-year career in the banking industry including 15 years as head of ASB’s Rural Division. Ian is also a Director of First Mortgage Managers Limited, Spectrum Dairies Limited, Fortuna Group Limited and is an Advisor to Waikato Stud. He owns and runs a 400-hectare 10,000 animal calf rearing farm in Te Awamutu, and has ownership interests in dairy farms in Canterbury and the Waikato.

B.Agr.



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4. LEONIE GUINEY BOARD RESPONSIBILITIES Farmer-elected Director, Member of the Audit and Finance Committee and the Risk CommitteeTERM OF OFFICE Elected 2014

Leonie Guiney was elected to the Fonterra Board in 2014. Leonie has worked in the agriculture sector for 25 years in a number of positions including lecturer in 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 was the 2014 winner of the low input New Zealand Dairy Business of the year and the 2006 Canterbury Sharemilker of the year. Leonie and her husband began farming in Canterbury in 2002 and she is now a Director and shareholder of four Canterbury farms.

5. SIMON ISRAELBOARD RESPONSIBILITIES Appointed Director, Member of the People, Culture and Safety CommitteeTERM OF OFFICE Appointed 2013

Simon Israel was appointed to the Fonterra Board in 2013. Simon currently chairs Singapore Telecommunications Limited and is a Director of CapitaLand, one of Asia’s largest real estate companies. He was an Executive Director of Temasek Holdings for six years and President from 2010 to 2011. Simon was a Director of Fraser & Neave, Neptune Orient Lines, Asia Pacific Breweries, Griffin Foods and Frucor Beverage Group. He had 10 years’ experience in the dairy industry with Danone as a Senior Vice President and member of the Group Executive Committee. He was conferred Knight in the Legion of Honour by the French Government in 2007.

Diploma of Business Studies

6. DAVID JACKSONBOARD RESPONSIBILITIES Appointed Director, Chair of the Audit and Finance Committee, Member of the Risk Committee and Milk Price Panel, Observer of the People, Culture and Safety CommitteeTERM OF OFFICE Appointed 2007

David Jackson was appointed to the Fonterra Board in 2007. David also serves on the boards of Nuplex Industries Limited and Mitre 10 (New Zealand) Limited and was previously Chairman of The New Zealand Refining Company Limited. David spent more than 30 years with accounting firm Ernst & Young in a variety of roles, and served as Chairman of the board of management for the firm in New Zealand from 1999 to 2002.

M.Com(Hons), FCA, FInstD

7. DAVID MACLEODBOARD RESPONSIBILITIES Farmer-elected Director, Member of the Co-operative Relations CommitteeTERM OF OFFICE Elected 2011, last re-elected 2014

David MacLeod was elected to the Fonterra Board in 2011. David also serves on the boards

of Port Taranaki Limited and A.J. Greaves Electrical Limited. He is Chairman of the Taranaki Regional Council. David lives near Hawera in South Taranaki and is a director of P.K.W. Farms GP Limited, one of Fonterra’s largest shareholders, and is a shareholder of Far South Farms Limited, which owns a dairy farm in Southland.

8. JOHN MONAGHANBOARD RESPONSIBILITIES Farmer-elected Director, Chair of the Co-operative Relations Committee and Member of the People, Culture and Safety CommitteeTERM OF OFFICE Elected 2008, last re-elected 2014

John Monaghan was elected to the Fonterra Board in 2008. Prior to joining the Fonterra Board John was Chairman of the Fonterra Shareholders’ Council for a three-year period. He is also a Director of Centre Port Limited and Centre Port Properties Limited, and is a trustee of the Wairarapa Irrigation Trust and the Eketahuna Charitable Trust. John has dairy farming interests in the Wairarapa and Otago regions.

9. SIR RALPH NORRIS KNZM

BOARD RESPONSIBILITIES Appointed Director, Member of the People, Culture and Safety CommitteeTERM OF OFFICE Appointed 2012

Sir Ralph Norris was appointed to the Fonterra Board in 2012. Sir Ralph also serves on the boards of the Manager of the Fonterra Shareholders’ Fund, Origin Energy Limited and is Chairman of Fletcher Building Limited and Chairman of RANQX Holdings Limited. He is a member of the University of Auckland Council and the New Zealand Treasury Advisory Board. He was Chief Executive of the Commonwealth Bank of Australia for six years until 2011 and prior to that served as Chief Executive and Managing Director of Air New Zealand Limited from 2002 to 2005. Sir Ralph had a 40-year career in banking and served as the Managing Director and Chief Executive of ASB Bank Limited from 1991 to 2001. Sir Ralph was made a Knight Companion of the New Zealand Order of Merit in 2009 and a Distinguished Companion of the New Zealand Order of Merit for services to business in 2006. In 2012, he had conferred on him an Honorary Doctorate of Business by the University of New South Wales.

FNZIM, FNZCS

10. BLUE READBOARD RESPONSIBILITIES Farmer-elected Director, Member of the Co-operative Relations Committee and the Risk CommitteeTERM OF OFFICE Elected 2012

Blue Read was elected to the Board in 2012. Blue was the Chairman of the Fonterra Shareholders’ Council from 2007 to 2010, having been a Shareholders’ Councillor since 2001 and Deputy Chairman from 2003 to 2007. Blue is Chairman of the Governance and Representation Review Committee and led a

Water Policy Project Team reporting through to the Co-operative Relations Committee. Blue has previously been Chairman of Cooperative Business New Zealand, Taranaki Dairy Section of Federated Farmers and Chairman of the New Zealand Sharemilkers Association. Blue has interests in two dairy equity partnerships in the lower Waikato, and he lives and farms near Urenui in Northern Taranaki.

11. NICOLA SHADBOLTBOARD RESPONSIBILITIES Farmer-elected Director, Member of the Audit and Finance CommitteeTERM OF OFFICE Elected 2009, last re-elected 2012

Nicola Shadbolt was elected to the Fonterra Board in 2009. Nicola is a Professor of Farm and Agribusiness Management at Massey University, serves on the Boards of the Manager of the Fonterra Shareholders’ Fund, the International Food and Agribusiness Management Association, and Hopkins Farming Group Limited. She represents New Zealand in the International Farm Comparison Network in Dairying. Nicola and her husband live in the Pohangina Valley in the Manawatu, which is the base for the five farming and forestry equity partnerships they run, which include two dairy farms.

B.Sc(Hons), M.AgrSc(Hons), DipBusStud (Accountancy), FNZIPIM (Reg), FAICD

12. MICHAEL SPAANSBOARD RESPONSIBILITIES Farmer-elected Director, Member of the Audit and Finance Committee, the Co-operative Relations Committee and the Milk Price PanelTERM OF OFFICE Elected 2013

Michael Spaans was elected to the Fonterra Board in 2013. He was a member of the Fonterra Shareholders’ Council since its formation in 2001 until 2008. Michael serves on the board of ASB Bank Limited and is a Director of Shoof International Limited. Michael’s family farm is in the Waikato near Te Aroha where he milks a 500-cow herd.

Graduate Diploma Finance

13. JOHN WALLER BOARD RESPONSIBILITIES Appointed Director, Chair of the Milk Price Panel, Member of the Audit and Finance Committee and the Risk Committee TERM OF OFFICE Appointed 2009

John Waller was appointed to the Fonterra Board in 2009. He retired as Chairman of the Bank of New Zealand and as a Director of National Australia Bank Limited in July 2015. John serves on the boards of Haydn & Rollett Limited, Sky Network Television Limited, Property For Industry Limited and Donaghys Limited. John was a partner at PricewaterhouseCoopers for more than 20 years. He was also a member of their board and led their advisory practice for many years.

BCom, FCA



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1. THEO SPIERINGS

2. LUKAS PARAVICINI

3. JACQUELINE CHOW

4. MAURY LEYLAND

5. JOHAN PRIEM

6. ROBERT SPURWAY

7. ALEX TURNBULL

8. KELVIN WICKHAM

2

1 5

6

4

3 7

8

FONTERRA MANAGEMENT TEAM

1. THEO SPIERINGSChief Executive

Theo Spierings sets Fonterra’s overall direction and leads the Fonterra Management Team. He is focused on building on Fonterra’s strengths and securing future growth for the Co-operative. Theo joined Fonterra in 2011, bringing with him extensive experience from across the dairy industry, particularly in Asia, Latin America, Africa, the Middle East and Europe. Theo has 30 years’ experience in the global dairy industry in a variety of roles including general management, operations and supply chain, and sales and marketing positions. He was previously the acting CEO of Royal Friesland Foods, a Dutch dairy co-operative and, in 2008, led the Dutch dairy co-operative through a merger with Campina. Before taking up his leadership role at Fonterra, Theo ran his own company in the Netherlands focusing on corporate strategy, and mergers and acquisitions, in Fast-Moving Consumer Goods (FMCG). Theo has a Bachelor of Arts in Food Technology/Biotechnology and a Master of Business Administration.

2. LUKAS PARAVICINIChief Financial Officer

Lukas Paravicini joined Fonterra as CFO in 2013 after 22 years with Nestlé. Most recently Lukas was General Manager for Nestlé Professional Europe. Before this role he held a number of senior finance positions including CFO of Nestlé Brazil, Nestlé’s fourth largest market, Vice President of Global Business Services and CFO of Nestlé Professional, and Nestlé’s globally managed Out-of-Home business. He has an in-depth understanding of dairy and has lived and worked in some of Fonterra’s most strategically important markets. Lukas holds a Business and Administration degree from the University of Zurich, Switzerland, and speaks five languages.



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3. JACQUELINE CHOWChief Operating Officer Velocity

As Chief Operating Officer Velocity, effective 1 June 2015, Jacqueline leads the next stage in Fonterra’s evolution, working across the Co-operative to push forward the business transformation part of our strategy and deliver the best possible performance. Jacqueline was previously Managing Director Fonterra Global Brands and Nutrition, responsible for Fonterra Group’s customer and consumer brands portfolio. Prior to joining Fonterra in 2013, Jacqueline was Australia and New Zealand General Manager for Arnott’s, one of Asia Pacific’s largest food companies. She has also held executive marketing and innovation roles at Campbell’s and the Kellogg Company. She has extensive FMCG and marketing experience garnered from a 20 year career in global blue-chip multinationals. Jacqueline holds a Bachelor of Science (First Class Honors) and an MBA in International Business Strategy and Finance. She is also a graduate of the Australian Institute of Company Directors. The remit of Managing Director Fonterra Global Brands and Nutrition includes global strategic leadership for the Co-operative’s nutritional platforms ensuring group-wide alignment on strategies, brands, marketing and innovation for Fonterra products. It also includes leadership for the company’s Food Safety and Quality agenda, Fonterra brand stewardship, global planning and insights, research and development, and science and technology.

Since June 2015 René Dedoncker has been acting in the role of the Managing Director Global Brands and Nutrition.

4. MAURY LEYLANDManaging Director People, Culture and Strategy

As Fonterra’s Managing Director – People, Culture & Strategy, Maury Leyland leads an integrated global team. Maury has worked at Fonterra since 2005 in a variety of leadership roles across strategy, supply chain and Trading Among Farmers. Maury is responsible for driving Fonterra to deliver on its people, Health & Safety, property and risk strategies and has significant experience in crisis management and operational excellence. Prior to joining Fonterra, she spent nine years with The Boston Consulting Group. Originally an engineer, Maury was a member of Team New Zealand

during the successful 1995 America’s Cup campaign. Professional awards include: Joint Winner as a Member of Team New Zealand of Sports Team of the Year and Sailor of the Year (1996), Merit Award Winner, IPENZ Young Engineer of the Year (1996), and Merit Award Winner, NZIM Young Executive of the Year (2002). Maury holds a First Class Honours Degree in Engineering Science, is a Fellow of the Institution of Professional Engineers New Zealand, a member of the Institute of Directors in New Zealand and has also served on the Board of Spark New Zealand Limited.

5. JOHAN PRIEMPresident Greater China and Managing Director Asia, Middle East, Africa (AsiaAME)

As President Greater China and Managing Director Asia, Middle East, Africa (AsiaAME), Johan Priem directs the development of Fonterra’s businesses across a number of priority markets. Johan has a strong background in the global dairy industry and has held a number of leadership positions across Fonterra. He has been leading the Co-operative’s China operations for 12 months before which he was focused on enhancing Fonterra’s approach to food safety and quality, corporate social responsibility and sustainability. Before joining the Co-operative, Johan was on the Board of Management at Royal Friesland Foods (which later became Royal FrieslandCampina). At various times he was responsible for branded consumer businesses in Europe, Asia, the Middle East and West Africa, as well as the Corporate Marketing and Research and Development functions.

6. ROBERT SPURWAYManaging Director Global Operations

Robert Spurway joined Fonterra in 2011. As Managing Director Global Operations, Robert leads Fonterra’s global operations business, responsible for the Co-operative’s manufacturing and supply logistics operations in New Zealand and around the world. In his previous role he was responsible for overseeing milk collection, manufacturing and logistics for the Co-operative’s New Zealand milk supply. Prior to that, he was Fonterra’s South Island Regional Operations Manager. In this role, he oversaw the greenfield development of the Co-operative’s Darfield site. Robert has more than 20 years’ experience in the food and dairy

industries. After managing the Northland Dairy Company’s Dargaville site, he moved to Australia in 1999, where he held various roles in Goodman Fielder Australia. From 2008 to 2011 he led two Australian food companies before returning to New Zealand. Robert holds a Bachelor of Engineering (Chemical and Materials).

7. ALEX TURNBULLManaging Director Latin America

Alex Turnbull leads Fonterra’s business in the fast-growing markets of Argentina, Brazil, the Caribbean, Chile, Columbia, Ecuador, Mexico and Venezuela. Alex has more than 20 years’ experience in the dairy industry, having joined one of the Co-operative’s predecessors in 1990. Alex has extensive experience in key senior sales and general management roles within Latin America and New Zealand, and also in the leadership of Fonterra’s global paediatrics business. He is fluent in Portuguese, having spent almost a decade living in Brazil. Alex holds a Diploma of Dairy Science and Technology and a Chemical and Materials Engineering Degree.

8. KELVIN WICKHAMManaging Director Global Ingredients

Kelvin Wickham leads the sale of all Fonterra ingredients globally, delivering solutions to our global customers, ensuring tactical optimisation of demand and supply (S&OP), and managing the NZMP™ brand. Kelvin has more than 25 years’ experience in the dairy industry and has played a key role in building markets, customer relationships and partnerships. His previous role of President Greater China and India focused on directing the development of Fonterra’s business in these expanding markets, during which he oversaw a period of rapid growth. Prior to that, he led Fonterra’s Supplier and External Relations team, and was Managing Director of Fonterra’s Global Trade overseeing the launch of GlobalDairyTrade. From 2005 to 2007 he was the Director of Sales and Operations Planning. Kelvin holds a Chemical and Materials Engineering Degree, a Master of Management and a Diploma of Dairy Science and Technology.



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SUMMARY FINANCIAL STATEMENTSFor the year ended 31 July 2015

CONTENTS

DIRECTORS’ STATEMENT 69

INCOME STATEMENT 70

STATEMENT OF COMPREHENSIVE INCOME 71

STATEMENT OF FINANCIAL POSITION 72

STATEMENT OF CHANGES IN EQUITY 73

CASH FLOW STATEMENT 74

NOTES TO THE SUMMARY FINANCIAL STATEMENTS 75


68 | SUMMARY FINANCIAL STATEMENTS


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DIRECTORS’ STATEMENT FOR THE YEAR ENDED 31 JULY 2015

The Directors hereby approve and authorise for issue the summary financial statements for the year ended 31 July 2015 presented on pages 70 to 87. For and on behalf of the Board:

JOHN WILSON DAVID JACKSONCHAIRMAN DIRECTOR

23 September 2015 23 September 2015

Fonterra Co-operative Group Limited (Fonterra or the Co-operative) is a co-operative company incorporated and domiciled in New Zealand. Fonterra is registered under the Companies Act 1993 and the Co-operative Companies Act 1996, and is an FMC Reporting Entity under the Financial Markets Conduct Act 2013. Fonterra is also required to comply with the Dairy Industry Restructuring Act 2001.

These summary financial statements are those of Fonterra and its subsidiaries (together referred to as the Group) and include the Group’s interest in its equity accounted investees. They have been prepared in accordance with Financial Reporting Standard No. 43: Summary Financial Statements and have been extracted from the Group’s full financial statements. The Group’s full financial statements comply with International Financial Reporting Standards. They also comply with New Zealand Equivalents to International Financial Reporting Standards and have been prepared in accordance with New Zealand Generally Accepted Accounting Practice.

The Board has elected to present summary financial statements for the year ended 31 July 2015 as part of the Annual Review sent to Shareholders. These summary financial statements include notes setting out key information.

These summary financial statements are presented for the year ended 31 July 2015. The comparative information is for the year ended 31 July 2014. These summary financial statements of the Group have been prepared using the same accounting policies and measurement basis as the Group’s full financial statements for the year ended 31 July 2015.

The full financial statements for the year ended 31 July 2015, approved and authorised for issue by the Board on 23 September 2015, have been audited by PricewaterhouseCoopers and given an unqualified opinion.

The Group is primarily involved in the collection, manufacture and sale of milk and milk derived products and is a profit-oriented entity. These summary financial statements are presented in New Zealand Dollars ($ or NZD), which is Fonterra’s functional and presentation currency, and rounded to the nearest million, except where otherwise stated.

The summary financial statements cannot be expected to provide as complete an understanding of the financial affairs of the Group as the full financial statements, which are available from Fonterra’s registered office at 9 Princes Street, Auckland, New Zealand or on Fonterra’s website, www2.fonterra.com.

SUMMARY FINANCIAL STATEMENTS | 69


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The accompanying notes form part of these summary financial statements.

INCOME STATEMENTFOR THE YEAR ENDED 31 JULY 2015

GROUP $ MILLION

NOTES 31 JULY 2015 31 JULY 2014

Revenue from sale of goods 18,845 22,275

Cost of goods sold 2 (15,567) (19,813)

Gross profit 3,278 2,462

Other operating income 288 139

Selling and marketing expenses (693) (593)

Distribution expenses (700) (499)

Administrative expenses (874) (762)

Other operating expenses (493) (356)

Net foreign exchange gains 70 39

Share of profit of equity accounted investees 66 73

Profit before net finance costs and tax 942 503

Finance income 39 13

Finance costs (557) (379)

Net finance costs (518) (366)

Profit before tax 424 137

Tax credit 11 82 42

Profit after tax 506 179

Profit after tax is attributable to:

Equity holders of the Co-operative 466 157

Non-controlling interests 40 22


GROUP $

31 JULY 2015 31 JULY 2014

Earnings per share:

Basic and diluted earnings per share 0.29 0.10



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STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 JULY 2015


GROUP $ MILLION

31 JULY 2015 31 JULY 2014


Items that may be reclassified subsequently to profit or loss:

Cash flow hedges:

– Net fair value (losses)/gains (1,361) 732

– Transferred and reported in revenue from sale of goods 501 (505)

– Tax credit/(expense) on cash flow hedges 241 (63)

Net investment hedges:

– Net fair value (losses)/gains on hedging instruments (164) 25

– Tax credit/(expense) on net investment hedges 46 (7)

Available-for-sale investments:

– Net fair value (losses) on available-for-sale investments (2) (1)

Foreign currency translation gains/(losses) attributable to equity holders 385 (207)

Foreign currency translation reserve transferred to income statement 78 –

Hyperinflation movements attributable to equity holders 20 –

Share of equity accounted investees’ movements in reserves 4 (11)

Total items that may be reclassified subsequently to profit or loss (252) (37)

Items that will not be reclassified subsequently to profit or loss:

Foreign currency translation (losses) attributable to non-controlling interests (6) (4)

Hyperinflation movements attributable to non-controlling interests 13 –

Total items that will not be reclassified subsequently to profit or loss 7 (4)

Total other comprehensive (expense) recognised directly in equity (245) (41)

Total comprehensive income 261 138

Total comprehensive income is attributable to:






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STATEMENT OF FINANCIAL POSITIONAS AT 31 JULY 2015

GROUP $ MILLION


ASSETS

Current assets

Cash and cash equivalents 342 340

Trade and other receivables 2,322 1,950

Inventories 3,025 3,701

Tax receivable 22 20

Derivative financial instruments 44 303

Assets held for sale 90 58

Other current assets 232 112

Total current assets 6,077 6,484

Non-current assets

Property, plant and equipment 6,159 5,091

Equity accounted investments 1,185 388

Livestock 331 202

Intangible assets 3,273 2,791

Deferred tax assets 732 231

Available-for-sale investments 74 74


Other non-current assets 111 114

Total non-current assets 12,238 9,045

Total assets 18,315 15,529

LIABILITIES

Current liabilities

Bank overdraft 39 21

Borrowings 5 1,681 1,534

Trade and other payables 1,984 1,638

Owing to suppliers 6 159 1,771

Tax payable 39 18


Provisions 77 47

Other current liabilities 59 74

Total current liabilities 5,031 5,133

Non-current liabilities



Provisions 186 65

Deferred tax liabilities 109 5

Other non-current liabilities 36 13

Total non-current liabilities 6,625 3,862

Total liabilities 11,656 8,995

Net assets 6,659 6,534

EQUITY

Subscribed equity 5,814 5,807

Retained earnings 1,289 1,059

Foreign currency translation reserve (110) (455)

Cash flow hedge reserve (537) 82

Other reserves 17 (1)

Total equity attributable to equity holders of the Co-operative 6,473 6,492


Total equity 6,659 6,534




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STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 JULY 2015

ATTRIBUTABLE TO EQUITY HOLDERS OF THE CO-OPERATIVE

GROUP $ MILLIONSUBSCRIBED

EQUITYRETAINED

EARNINGS

FOREIGN CURRENCY

TRANSLATION RESERVE

CASH FLOW HEDGE

RESERVEOTHER

RESERVES TOTAL

NON-CONTROLLING

INTERESTSTOTAL

EQUITY

As at 1 August 2014 5,807 1,059 (455) 82 (1) 6,492 42 6,534

Profit after tax – 466 – – – 466 40 506

Other comprehensive income/(expense) – 4 345 (619) 18 (252) 7 (245)

Total comprehensive income/(expense) – 470 345 (619) 18 214 47 261

Transactions with equity holders in their capacity as equity holders:

Dividend paid to equity holders of the Co-operative – (240) – – – (240) – (240)

Acquisition of subsidiaries – – – – – – 120 120

Equity instruments issued 7 – – – – 7 – 7

Dividend paid to non-controlling interests – – – – – – (23) (23)

As at 31 July 2015 5,814 1,289 (110) (537) 17 6,473 186 6,659

As at 1 August 2013 5,807 1,249 (266) (82) – 6,708 40 6,748

Profit after tax – 157 – – – 157 22 179

Other comprehensive (expense)/income – (11) (189) 164 (1) (37) (4) (41)

Total comprehensive income/(expense) – 146 (189) 164 (1) 120 18 138




As at 31 July 2014 5,807 1,059 (455) 82 (1) 6,492 42 6,534




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CASH FLOW STATEMENTFOR THE YEAR ENDED 31 JULY 2015

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Cash flows from operating activities

Profit before net finance costs and tax 942 503

Adjustments for:

Foreign exchange (gains)/losses (70) 11

Depreciation and amortisation 561 538

Movement in provisions (157) 132

Other (63) (41)

271 640

Decrease/(increase) in working capital:

Inventories 809 (757)

Trade and other receivables 182 (111)

Amounts owing to suppliers (1,612) 1,060

Payables and accruals 104 111

Other movements 27 (28)

Total (490) 275

Cash generated from operations 723 1,418

Net taxes paid (55) (51)

Net cash flows from operating activities 668 1,367

Cash flows from investing activities

Cash was provided from:

– Proceeds from sale of business operations 62 46

– Proceeds from disposal of property, plant and equipment 20 12

– Proceeds from sale of livestock 30 13

– Other cash inflows 36 8

Cash was applied to:

– Acquisition of business operations (771) (18)

– Acquisition of available-for-sale investments – (78)

– Acquisition of property, plant and equipment (1,189) (791)

– Acquisition of livestock (121) (88)

– Acquisition of intangible assets (104) (102)

– Other cash outflows (3) (11)

Net cash flows from investing activities (2,040) (1,009)

Cash flows from financing activities


– Proceeds from borrowings 7,470 4,241

– Interest received 8 13

– Other cash inflows – 8


– Interest paid (427) (332)

– Repayment of borrowings (5,443) (3,894)

– Settlement of borrowing derivatives – (24)

– Dividends paid to non-controlling interests (23) (16)

– Dividends paid to equity holders of the Co-operative (233) (336)

Net cash flows from financing activities 1,352 (340)

Net (decrease)/increase in cash and cash equivalents (20) 18

Cash and cash equivalents at the beginning of the year 319 329

Effect of exchange rate changes on cash balances 4 (28)

Cash and cash equivalents at the end of the year 303 319

Reconciliation of closing cash balances to the statement of financial position:


Bank overdraft (39) (21)

Closing cash balances 303 319



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SUMMARY FINANCIAL STATEMENTS PRESENTATION

Fonterra is pleased to present a new structure for our summary financial statements. The new structure has been designed to improve the clarity and usefulness of this report. The report has been structured under the following categories:

• Performance

• Debt and equity

• Working capital

• Investments

• Financial risk management

• Other

PERFORMANCE

1 SEGMENT REPORTING

a) Operating segmentsThe Group has five reportable segments that reflect the Group’s management and reporting structure as viewed by the Fonterra Management Team.

During the year ended 31 July 2014, transactions between segments were based on estimated market prices adjusted for the difference between the Farmgate Milk Price calculated in accordance with the Farmgate Milk Price Manual and that determined by the Board. During the year ended 31 July 2015, transactions between segments were based on estimated market prices.

REPORTABLE SEGMENT DESCRIPTION

Global Ingredients and Operations (formerly New Zealand Milk Products (NZMP))

Represents the collection, processing and distribution of New Zealand milk, global sales and marketing of New Zealand and non-New Zealand milk products (including North Asia), Global Brands and Nutrition, Co-operative Affairs and Group Services.

Oceania Represents Fast Moving Consumer Goods (FMCG) businesses in New Zealand (including export to the Pacific Islands) and all FMCG and ingredients businesses in Australia (including Milk Supply and Manufacturing). It includes foodservice sales in Australia and New Zealand, and Fonterra Farm Source stores.

Asia Represents FMCG and foodservice businesses in Asia (excluding North Asia and Greater China), Africa and the Middle East.

Greater China Represents FMCG, foodservice and farming businesses in Greater China.

Latin America Represents FMCG and ingredients businesses in South America and the Caribbean.

From 1 August 2014, Greater China has been reported separately from Asia. In addition, Fonterra’s organisational structure was realigned and as a result the Taiwanese ingredients business has moved out of Greater China into Global Ingredients and Operations. Comparatives have been restated to reflect these changes.

NOTES TO THE SUMMARY FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015



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a) Operating segments continued

GROUP $ MILLION

GLOBAL INGREDIENTS AND

OPERATIONS OCEANIA ASIAGREATER

CHINALATIN

AMERICA ELIMINATIONSTOTAL

GROUP

Segment income statement

Year ended 31 July 2015

External revenue 11,497 2,802 1,551 807 2,188 – 18,845

Inter-segment revenue 1,575 483 181 – 2 (2,241) –

Revenue from sale of goods 13,072 3,285 1,732 807 2,190 (2,241) 18,845

Cost of goods sold (11,576) (2,873) (1,224) (599) (1,516) 2,221 (15,567)

Segment gross profit 1,496 412 508 208 674 (20) 3,278

Selling and marketing expenses (109) (141) (176) (135) (132) – (693)

Distribution expenses (217) (164) (33) (10) (276) – (700)

Administrative and other operating expenses (773) (296) (105) (81) (162) 50 (1,367)

Segment operating expenses (1,099) (601) (314) (226) (570) 50 (2,760)

Net other operating income 120 40 2 18 158 (50) 288

Net foreign exchange gains/(losses) 83 (1) (4) – (8) – 70

Share of profit of equity accounted investees 62 7 – (5) 2 – 66

Segment earnings before net finance costs and tax 662 (143) 192 (5) 256 (20) 942

Normalisation adjustments 37 119 3 1 (128) – 32

Normalised segment earnings before net finance costs and tax 699 (24) 195 (4) 128 (20) 974

Normalisation adjustments (32)

Finance income 39

Finance costs (557)

Profit before tax 424

Profit before tax includes the following amounts:

Depreciation (321) (66) (10) (19) (37) – (453)

Amortisation (77) (25) (3) (1) (2) – (108)

Normalisation adjustments consist of the following amounts:

Net gain on Latin America strategic realignment¹ – – – – (129) – (129)

Impairment of assets in Australia² – 108 – – – – 108

Restructuring and redundancy provisions³ 17 11 3 1 1 – 33

Time value of options⁴ 20 – – – – – 20

Total normalisation adjustments 37 119 3 1 (128) – 32

Segment asset information:

As at and for the year ended 31 July 2015

Equity accounted investments 276 42 – 858 9 – 1,185

Capital expenditure⁵ 930 93 36 382 90 – 1,531

1 Of the $129 million normalisation adjustment, $141 million relates to other operating income, $4 million to cost of goods sold and $8 million to other operating expenses. Refer Note 7.

2 Of the $108 million normalisation adjustment, $58 million relates to other operating expenses and $50 million to cost of goods sold. This relates to impairment losses recorded by Fonterra during the year ended 31 July 2015 in relation to the Australian yoghurt and dairy desserts business. This impairment reflected the continuing challenges in that business’s market environment.

3 The $33 million normalisation adjustment relates to administrative and other operating expenses.

4 The $20 million normalisation adjustment relates to net foreign exchange losses.

5 Capital expenditure comprises purchases of property, plant and equipment and intangible assets, and net purchases of livestock.

NOTES TO THE SUMMARY FINANCIAL STATEMENTS CONTINUEDFOR THE YEAR ENDED 31 JULY 2015



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GROUP $ MILLION



CHINALATIN


GROUP






Cost of goods sold (17,032) (3,017) (1,224) (436) (894) 2,790 (19,813)

Segment gross profit 1,043 583 386 182 267 1 2,462




Segment operating expenses (963) (574) (328) (174) (198) 27 (2,210)


Net foreign exchange gains/(losses) 50 (1) (12) – 2 – 39

Share of profit of equity accounted investees 54 5 – – 14 – 73

Segment earnings before net finance costs and tax 280 31 50 30 111 1 503

Finance income 13

Finance costs (379)



Depreciation (323) (72) (8) (8) (26) – (437)

Amortisation (75) (22) (3) – (1) – (101)



Equity accounted investments 218 36 – – 134 – 388

Capital expenditure¹ 602 93 32 198 44 – 969


There were no normalisation adjustments for the year ended 31 July 2014.



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b) Strategic platformsThe Group also presents financial information that reflects Fonterra’s strategic platforms. These strategic platforms are organised on a different basis than the Group’s operating segments presented in section a) of this note. The basis of presentation is explained in the table below.

Fonterra considers this information is useful as it provides more clarity on the financial performance of the ingredients, consumer and foodservice, and international farming businesses.

PLATFORM DESCRIPTION

Ingredients Represents the Global Ingredients and Operations reportable segment, the ingredients businesses in Australia and South America, and Fonterra Farm Source stores, and excludes the foodservice businesses in Asia and Greater China and unallocated costs.

Consumer and foodservice

– Oceania

Represents the Oceania reportable segment, excluding the ingredients business in Australia and Fonterra Farm Source stores.

– Asia Represents the Asia reportable segment and the Asia foodservice business reported in Global Ingredients and Operations.

– Greater China Represents the Greater China reportable segment, excluding International Farming and including the foodservice business in Greater China reported in Global Ingredients and Operations.

– Latin America Represents the Latin America reportable segment excluding the ingredients businesses in South America.

International Farming Represents China farming operations.

GROUP

31 JULY 2015

INGREDIENTS CONSUMER AND FOODSERVICEINTERNATIONAL

FARMING

UNALLOCATED COSTS AND

ELIMINATIONS TOTAL

OCEANIA ASIAGREATER

CHINALATIN

AMERICA TOTAL

Volume1 (liquid milk equivalents, billion) 21.5 1.7 1.6 0.6 0.6 4.5 0.2 (3.4) 22.8

Volume1 (metric tonnes, thousand) 2,982 619 284 122 660 1,685 164 (528) 4,303

Sales revenue1 ($ million) 14,341 2,021 1,918 729 2,033 6,701 141 (2,338) 18,845

Normalised EBIT ($ million) 973 51 202 45 110 408 (44) (363) 974

Capital employed2 ($ million) 8,592 465 145 45 403 1,058 594 (757) 9,487

Return on capital3 (%) 9.3% 5.0% 96.2% 71.5% 18.6% 25.5% (7.3)% 8.9%

For the year ended 31 July 2015 the Group’s return on capital including intangible assets, goodwill and equity accounted investments, was 6.9 per cent.

GROUP

31 JULY 2014


FARMING


ELIMINATIONS TOTAL

OCEANIA ASIAGREATER

CHINALATIN

AMERICA TOTAL



Sales revenue1 ($ million) 19,553 2,102 1,811 560 848 5,321 103 (2,702) 22,275

Normalised EBIT ($ million) 679 (24) 51 8 94 129 21 (326) 503

Capital employed2 ($ million) 9,403 294 154 (23) 220 645 288 (1,843) 8,493

Return on capital3 (%) 5.6% (15.0)% 17.0% N/A 24.6% 5.9% 7.1% 4.7%


1 Includes sales to other strategic platforms. Total column represents total external sales.

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

3 Return on capital is calculated as normalised EBIT, less equity accounted investees’ earnings, less a notional royalty charge for use of the Group’s brands, less a notional tax charge, divided by capital employed.




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c) Geographical revenue

GROUP $ MILLION

CHINAREST OF

ASIA AUSTRALIANEW

ZEALAND USA EUROPELATIN

AMERICAREST OF WORLD TOTAL

Geographical segment external revenue:

Year ended 31 July 2015 2,111 5,222 1,560 1,882 1,198 725 3,113 3,034 18,845

Year ended 31 July 2014 5,537 5,787 1,666 2,162 1,014 946 1,802 3,361 22,275

Revenue is allocated to geographical segments on the basis of the destination of the goods sold.

d) Non-current assets

GROUP $ MILLION

GLOBAL INGREDIENTS AND OPERATIONS OCEANIA ASIA

GREATER CHINA

LATIN AMERICA

TOTAL GROUP

NEW ZEALAND

REST OF WORLD

NEW ZEALAND AUSTRALIA

Geographical segment reportable non-current assets:

As at 31 July 2015 4,783 464 1,394 814 822 1,751 1,105 11,133

As at 31 July 2014 4,300 391 1,387 1,022 705 410 445 8,660

GROUP $ MILLION

AS AT31 JULY 2015

AS AT31 JULY 2014

Reconciliation of geographical segment non-current assets to total non-current assets:

Geographical segment non-current assets 11,133 8,660




2 COST OF GOODS SOLD

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Opening inventory 3,701 3,078

Cost of Milk:

– New Zealand sourced 7,121 13,226

– Non-New Zealand sourced 1,151 1,192

Other purchases 6,619 6,018

Closing inventory (3,025) (3,701)

Total cost of goods sold 15,567 19,813



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DEBT AND EQUITY

3 SUBSCRIBED EQUITY INSTRUMENTS

Co-operative shares, including shares held within the GroupCo-operative shares may only be held by a shareholder supplying milk to the Company (farmer shareholder), by former farmer shareholders for up to three seasons after cessation of milk supply, or by Fonterra Farmer Custodian Limited (the Custodian). Voting rights in the Company are dependent on milk supply supported by Co-operative shares¹.

CO-OPERATIVE SHARES (THOUSANDS)

Balance at 1 August 2014 1,597,834

Shares issued² 1,260

Shares surrendered –

Balance at 31 July 2015 1,599,094

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

2 1,260,116 shares with a total value of $7 million were issued under the Dividend Reinvestment Plan during the year ended 31 July 2015.

No shares were issued or surrendered during the year ended 31 July 2014.

The rights attaching to Co-operative shares are set out in Fonterra’s Constitution, available in the ‘About/Our Governance’ section of Fonterra’s website.

Units in the Fonterra Shareholders’ Fund The Custodian holds legal title of Co-operative shares of which the Economic Rights have been sold to the Fund on trust for the benefit of the Fund. At 31 July 2015, 105,480,366 Co-operative shares (31 July 2014: 109,777,717) were legally owned by the Custodian, on trust for the benefit of the Fund.

UNITS (THOUSANDS)

Balance at 1 August 2014 109,778

Units issued 21,906

Units surrendered (26,204)

Balance at 31 July 2015 105,480


Units issued 13,116



The rights attaching to units are set out in the Trust Deed constituting the Fonterra Shareholders’ Fund, available in the ‘Financial/Trading Among Farmers’ section of Fonterra’s website.

Capital management and structureThe Board’s objective is to maximise equity holder returns over time by maintaining an optimal capital structure. As part of the key financial risk management activities undertaken by the Group, Trading Among Farmers (TAF) was launched in November 2012 to support the establishment of the Fonterra Shareholders’ Market. The establishment of the Fonterra Shareholders’ Market eliminates redemption risk and provides a permanent capital base for the Co-operative.

The Group provides returns to farmer shareholders through a milk price, and to equity holders through dividends and changes in the Company’s share price.

The Fund is subject to the issue and redemption of units at the discretion of Fonterra and Fonterra’s farmer shareholders. Fonterra has an interest in ensuring the stability of the Fund and has established a Fund Size Risk Management Policy, which requires that the number of units on issue remain within specified limits and that within these limits, the number of units is managed appropriately. Fonterra may use a range of measures to ensure the Fund size remains within the specified limits, including introducing or cancelling a dividend reinvestment plan, operating a unit and/or share repurchase programme and issuing new shares.




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4 DIVIDENDS PAID

$ MILLION

DIVIDENDSYEAR ENDED

31 JULY 2015YEAR ENDED

31 JULY 2014

2015 Interim dividend – 10.0 cents per share¹ 160 –

2014 Final dividend – 5.0 cents per share² 80 –

2014 Interim dividend – 5.0 cents per share³ – 80

2013 Final dividend – 16.0 cents per share⁴ – 256

1 Declared on 24 March 2015 and paid on 20 April 2015 to all Co-operative shares on issue at 10 April 2015. The Dividend Reinvestment Plan applied to this interim dividend.

2 Declared on 23 September 2014 and paid on 20 October 2014 to all Co-operative shares on issue at 9 October 2014.

3 Declared on 25 March 2014 and paid on 17 April 2014 to all Co-operative shares on issue at 10 April 2014.


Dividends declared after balance dateOn 23 September 2015, the Board declared a final dividend of 15 cents per share, to be paid on 20 October 2015 to all Co-operative shares on issue at 8 October 2015.

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 does apply to this dividend. Full details of the Dividend Reinvestment Plan are available on the financial section of Fonterra’s website.

5 BORROWINGS

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Commercial paper 473 464

Bank loans 1,717 437

Finance leases 169 180

Capital notes 35 35

NZX listed bonds 500 948

Medium-term notes 4,666 2,834

Total borrowings 7,560 4,898

Included within the statement of financial position as follows:

Total current borrowings 1,681 1,534

Total non-current borrowings 5,879 3,364




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5 BORROWINGS CONTINUED

Leverage ratiosThe Board closely monitors the Group’s leverage ratios, which include the gearing ratio and debt coverage ratios (debt payback and interest coverage ratios). The primary debt payback ratios comprise funds from operations divided by economic net interest bearing debt, and economic net interest bearing debt divided by EBITDA. The gearing ratio is calculated as economic net interest bearing debt divided by total capital. Economic net interest bearing debt is calculated in the table below. Total capital is calculated as equity, as presented in the statement of financial position (excluding the cash flow hedge reserve), plus economic net interest bearing debt. The gearing ratio as at 31 July 2015 was 49.7 per cent (31 July 2014: 42.3 per cent). The Group is not subject to externally imposed capital requirements.

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

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Net interest bearing debt position


Cash and cash equivalents (342) (340)

Interest bearing advances included in other non-current assets (65) (81)


Net interest bearing debt 7,192 4,498

Value of derivatives used to manage changes in hedged risks and other foreign exchange movements on debt (72) 234

Economic net interest bearing debt 7,120 4,732

Liquidity riskThe Group manages its liquidity by retaining cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Fonterra’s funding facilities are reviewed at least annually, which is one of the key financial risk management activities undertaken by the Group to ensure an appropriate maturity profile given the nature of the Group’s business. At balance date the Group had undrawn lines of credit totalling $2,520 million (31 July 2014: $3,215 million).

WORKING CAPITAL

6 OWING TO SUPPLIERS

The Board uses its discretion in establishing the rate at which Fonterra will pay suppliers for the milk supplied over the season. This is referred to as the advance rate. The following table provides a breakdown of the advance payments made to suppliers:

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Final milk price for the season $4.40 $8.40

Of this amount:

– Total advance payments made during the year $4.33 $7.30

– Total owing as at 31 July $0.07 $1.10

Amount advanced during the year as a percentage of the milk price for the season ended 31 May 98% 87%

The total amount owing to suppliers at 31 July 2015 is $159 million (31 July 2014: $1,771 million).




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INVESTMENTS

7 BUSINESS COMBINATIONS

On 1 August 2014, the Group acquired additional voting shares in DPA Brazil (Dairy Partners Americas Brasil Limitada – from 50 per cent to 51 per cent, with Nestlé holding the balance) and DPA Venezuela (Lacven Corporation – 25 per cent to 60 per cent, with a local partner holding the balance). These equity accounted investments became consolidated subsidiaries from that date.

On 1 October 2014, the Group’s equity accounted investments in Ecuador (Ecuajugos S.A.) and DPA’s milk powder manufacturing business (DPA Manufacturing Holdings Limited) were sold to Nestlé.

The fair value of consideration transferred at the acquisition date is:

GROUP $ MILLION

BRAZIL VENEZUELA TOTAL

Carrying value of existing interest 106 23 129

Gain/(loss) on remeasuring to fair value¹ 165 (6) 159

Fair value of existing interest 271 17 288

Cash paid 2 – 2

Fair value of consideration transferred 273 17 290

Represented by:

Share of identifiable acquired net assets 97 41 138

Goodwill on acquisition 176 – 176

Gain on bargain purchase² – (24) (24)

Total 273 17 290

1 The gain/(loss) on remeasuring the previous equity accounted interests is determined with reference to the fair value determined by independent experts.

2 Gain on bargain purchase arises on the consolidation of Venezuela into the Group. The business was no longer a strategic fit for another owner, and therefore the Group was able to negotiate a favourable purchase price for the additional 35 per cent.

The cash inflow on acquisition is:

GROUP $ MILLION


Net cash acquired with subsidiary 9 17 26

Cash paid (2) – (2)

Net consolidated inflow on acquisition 7 17 24

The contribution of the acquired entities to the Group’s revenue and profit for the year ended 31 July 2015 is:

GROUP $ MILLION


Revenue 495 673 1,168

Profit after tax 4 45 49

The Group has recorded a one-off gain relating to the business combinations, sale of equity accounted investments and the settlement of other relationships with the parties.

GROUP $ MILLION

BRAZIL VENEZUELA OTHER TOTAL

Fair value gain/(loss) revaluing existing interest 165 (6) – 159

Foreign currency translation reserve transferred to income statement (39) (15) (24) (78)

Gain on bargain purchase – 24 – 24

Gain on sale of equity accounted investment – – 5 5

Other items – – 19 19

Total gain¹ 126 3 – 129

1 The gain is included in other operating income ($141 million), cost of goods sold ($4 million expense) and other operating expenses ($8 million expense).



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7 BUSINESS COMBINATIONS CONTINUED

The fair values of the major classes of identifiable assets acquired and liabilities assumed at the acquisition date are:

GROUP $ MILLION


Trade and other receivables 159 64 223

Property, plant and equipment 111 83 194

Intangible assets 328 12 340

Other assets 115 59 174

Total assets 713 218 931

Trade and other payables (119) (95) (214)

Borrowings (193) (37) (230)

Deferred tax liabilities (112) (6) (118)

Other liabilities¹ (101) (10) (111)

Total liabilities (525) (148) (673)

Fair value of identifiable net assets 188 70 258

1 Provisions of $80 million have been recognised for contingencies relating to tax and legal matters arising in the normal course of business. The timing and amount of the future obligations are uncertain, as they are contingent on the outcome of a number of administrative and judicial proceedings. The amount recognised has been based on management’s best estimate of the amount that will be required to settle the obligations. The outcome of most of the obligations is not expected to be determined within the next year and therefore the provisions are classified as non-current.

8 ASSETS HELD FOR SALE

Darnum manufacturing plant – AustraliaOn 16 March 2015, Fonterra acquired an 18.8 per cent shareholding in Beingmate Baby & Child Food Co., Ltd. (Beingmate). In conjunction with this investment, Fonterra and Beingmate confirmed their intention to establish a partnership to purchase the Darnum manufacturing plant in Australia. The sale of the plant to the partnership is subject to regulatory approvals and is expected to complete within one year of balance date. Accordingly the Darnum manufacturing plant is classified as held for sale at 31 July 2015.

9 EQUITY ACCOUNTED INVESTMENTS

The Group’s significant equity accounted investments are listed below. The ownership interest in these entities is 50 per cent or less and the Group is not considered to exercise a controlling interest.

OWNERSHIP INTERESTS (%)

EQUITY ACCOUNTED INVESTEE NAME¹ COUNTRY OF INCORPORATION²AS AT

31 JULY 2015AS AT

31 JULY 2014

DMV Fonterra Excipients GmbH & Co KG Germany 50 50

Dairy Industries (Jamaica) Limited Jamaica 50 50

DairiConcepts, L.P. USA 50 50

DairiConcepts Management, L.L.C. USA 50 50

Dairy Partners Americas Brasil Limitada3 Brazil – 50

Lacven Corporation3 Barbados – 25

Beingmate Baby & Child Food Co., Ltd China 18.8 –

International Nutritionals Limited New Zealand 50 50

1 Except for International Nutritionals Limited, all investees have balance dates of 31 December. International Nutritionals Limited has the same balance date as the Group.2 This is also the principle place of business.3 On 1 August 2014, the Group purchased additional voting equity interests in DPA Brazil (Dairy Partners Americas Brasil Limitada) and DPA Venezuela (Lacven Corporation).

These entities became consolidated subsidiaries from that date. Please refer to Note 7 for further information.




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FINANCIAL RISK MANAGEMENT

10 FINANCIAL RISK MANAGEMENT

OverviewGlobal financial and commodity markets remain volatile. The nature of Fonterra’s business is such that managing risks in the foreign exchange, interest rate, commodity, credit and liquidity markets is critical to minimising the volatility in returns to equity holders.

The Board has overall responsibility for the establishment and oversight of the Group’s financial risk management framework. The Board:

– has established financial risk management policies and procedures to identify, analyse and, where appropriate, manage the financial risks faced by the Group;

– has approved a Treasury Policy that covers appropriate financial risk limits and controls (including, but not limited to, delegated authority levels and authorised use of various financial instruments); and

– monitors financial risks and adherence to approved limits.

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 the 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. Fonterra manages financial risk, including foreign exchange risk, interest rate risk, credit risk, liquidity risk and commodity price risk.

Key financial risk management activities

Capital structure The Board’s objective is to maximise equity holder returns over time by maintaining an optimal capital structure. For further detail refer to Note 3.

Bank facility renewal Fonterra’s banking 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. For further detail refer to Note 5.

Leverage ratiosThe Board closely monitors the Group’s leverage ratios, which include the gearing ratio and debt coverage ratios (debt payback and interest coverage ratios). For further detail refer to Note 5.

OTHER

11 TAXATION

Taxation – income statementThe total taxation credit in the income statement is summarised as follows:

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Current tax expense 97 54

Prior period adjustments to current tax – (2)

Deferred tax movements:

– Origination and reversal of temporary differences (179) (94)

Tax credit (82) (42)



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11 TAXATION CONTINUED

The taxation charge that would arise at the standard rate of corporation tax in New Zealand is reconciled to the tax expense/(credit) as follows:

GROUP $ MILLION

31 JULY 2015 31 JULY 2014


Prima facie tax expense at 28% 119 38

Add/(deduct) tax effect of:

– Effect of tax rates in foreign jurisdictions (31) (13)

– Non-deductible expenses/additional assessable income 44 31

– Non-assessable income/additional deductible expenses (71) (36)

– Prior year over provision – (2)

Tax expense before distributions and deferred tax 61 18

Effective tax rate before distributions and deferred tax¹ 14.4% 13.1%

Tax effect of distributions to farmer shareholders (107) (38)

Tax credit before deferred tax (46) (20)

Effective tax rate before deferred tax¹ (10.8)% (14.6)%


– Origination and reversal of other temporary differences 2 (45)

– Losses of overseas Group entities (recognised)/not recognised (38) 23


Effective tax rate1 (19.3)% (30.7)%

Imputation credits

Imputation credits available for use in subsequent reporting periods 20 20

Tax losses

Gross tax losses available for which no deferred tax asset has been recognised 55 201

1 The effective tax rate is the tax charge on the face of the income statement expressed as a percentage of the profit before tax.

12 CONTINGENT LIABILITIES, PROVISIONS AND COMMITMENTS

Contingent liabilitiesIn the normal course of business, Fonterra, its subsidiaries and equity accounted investees, are exposed to claims and legal proceedings that may in some cases result in costs to the Group.

In early August 2013, Fonterra publicly announced a potential food safety issue with three batches of Whey Protein Concentrate (WPC80) produced at the Hautapu manufacturing site and initiated a precautionary product recall.

In late August 2013, the New Zealand Government confirmed that the Clostridium samples found in WPC80 were not Clostridium botulinum and were not toxigenic, meaning the consumers of products containing the relevant batches of WPC80 were never in danger from Clostridium botulinum.

In January 2014, Danone formally initiated legal proceedings against Fonterra in the High Court of New Zealand and separate Singapore arbitration proceedings against Fonterra in relation to the WPC80 precautionary recall. The New Zealand High Court proceedings have been stayed pending completion of the Singapore arbitration. The hearing of the arbitration is scheduled to occur in February 2016.

Based on current information available and the claims made to date in both proceedings, Fonterra will vigorously defend its position in these proceedings. Uncertainty exists regarding the outcome of the proceedings. Fonterra has provided $11 million (31 July 2014: $11 million) in respect of the Danone claims, which represents the maximum contractual liability to Danone.

The Directors believe that these proceedings have been adequately provided for and disclosed by the Group and that there are no additional claims or legal proceedings in respect of this matter that are pending at the date of these financial statements that require provision or disclosure.

The Group has no other contingent liabilities as at 31 July 2015 (31 July 2014: nil).




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13 NET TANGIBLE ASSETS PER SECURITY

GROUP

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Net tangible assets per security¹

$ per listed debt security on issue 5.62 3.55

$ per equity instrument on issue 2.12 2.34

Listed debt securities on issue (million) 603 1,053

Equity instruments on issue (million) 1,599 1,598

1 Net tangible assets represents total assets less total liabilities less intangible assets.



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88 | INDEPENDENT AUDITORS’ REPORT

TO THE SHAREHOLDERS OF FONTERRA CO-OPERATIVE GROUP LIMITED

REPORT ON THE SUMMARY FINANCIAL STATEMENTS

We have audited the accompanying Group summary financial statements of Fonterra Co-operative Group Limited (“the Company”) on pages 70 to 87 which comprise the statement of financial position as at 31 July 2015, the income statement, statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and the notes to the financial statements, which are derived from the audited financial statements of the Group for the year ended 31 July 2015. The Group comprises the Company and the entities it controlled at 31 July 2015 or from time to time during the financial year.

The summary financial statements do not contain all the disclosures required for full financial statements under generally accepted accounting practice in New Zealand. Reading the summary financial statements, therefore, is not a substitute for reading the audited financial statements of Fonterra Co-operative Group Limited.

Directors’ Responsibility for the Summary Financial Statements

The Directors are responsible on behalf of the Company for the preparation of the summary financial statements in accordance with FRS-43: Summary Financial Statements (“FRS-43”).

Auditors’ Responsibility

Our responsibility is to express an opinion on the summary financial statements based on our procedures, which were conducted in accordance with International Standard on Auditing (New Zealand) 810: Engagements to Report on Summary Financial Statements.

Our firm carries out other assignments for the Group in relation to other advisory, other assurance and attestation services. Partners and employees of our firm may deal with the Group on normal terms within the ordinary course of trading activities of the Group. These matters have not impaired our independence as auditors of the Group.

Opinion on the Group’s Financial Statements

Our audit of the financial statements for the year ended 31 July 2015 was completed on 23 September 2015 and our unmodified opinion was issued on that date.

Opinion on the Summary Financial Statements

In our opinion, the summary financial statements have been correctly derived from the audited financial statements of Fonterra Co-operative Group Limited for the year ended 31 July 2015 and are consistent, in all material respects, with those financial statements, in accordance with FRS-43.

RESTRICTION ON DISTRIBUTION OR USE

This report has been prepared for inclusion in the Fonterra Annual Review report. We disclaim any responsibility for reliance on this report or the amounts included in the summary financial statements, for any purpose other than that for which they were prepared.

Chartered AccountantsAuckland 23 September 2015

INDEPENDENT AUDITORS’ REPORT FOR THE YEAR ENDED 31 JULY 2015


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STATUTORY INFORMATION | 89

STATUTORY INFORMATION FOR THE YEAR ENDED 31 JULY 2015

CURRENT CREDIT RATING STATUS

Standard & Poor’s long term rating for Fonterra is A with a rating outlook of CreditWatch negative. Fitch’s long and short term default rating is AA- with a rating outlook of stable. Retail Bonds have been rated the same as the Company’s long term rating by both Standard & Poor’s and Fitch. Capital Notes which are subordinate to other Fonterra debt issued are rated A- by Standard & Poor’s and A+ by Fitch.

EXCHANGE RULINGS AND WAIVERS

NZX Limited (NZX) has ruled that Capital Notes do not constitute “equity securities” under the NZX Main Board/Debt Markets Listing Rules (Rules). This means that where Capital Notes are quoted on NZX’s Debt Market (NZDX), the Company is not required to comply with certain Rules which apply to an issuer of quoted equity securities.

NZX has granted waivers from NZDX Rule 11.1.1 to enable Fonterra to decline to accept or register transfers of Capital Notes or Retail Bonds (NZDX listed debt securities FCGHA, FCG020 and FCG030) if such transfer would result in the transferor holding or continuing to hold Capital Notes or Retail Bonds with a face value or principal amount of less than $5,000 or if such transfer is for an amount of less than $1,000 or not a multiple thereof. The effect of these waivers is that the minimum holding amount in respect of the Capital Notes and Retail Bonds will at all times be $5,000 in aggregate and that Retail Bonds can only be transferred in multiples of $1,000.

NZX has also granted a waiver from NZDX Rule 5.2.3 in respect of Retail Bonds FCG020 and FCG030 to enable these Retail Bonds to be quoted on the NZDX market even though they did not meet the requirement that at least 500 members of the public held at least 25 per cent of the Retail Bonds being issued.

NZX TRADING HALTS

On 10 March 2015, NZX Regulation (NZXR) placed a trading halt on the following Fonterra Co-operative Group Limited securities: FCG, FCG010, FCG020 and FCGHA. This halt was part of an industry-wide action taken by NZXR to place all listed issuers within the dairy industry on a trading halt as a result of the infant formula contamination threat. Following the public release of a Ministry for Primary Industries announcement regarding the contamination threat, NZXR then lifted the trading halt on Fonterra Co-operative Group Limited and other industry participants’ securities. The trading halt was in place between 3.21pm and 4.17pm on 10 March 2015.


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90 | FIVE YEAR SUMMARY

FIVE YEAR SUMMARYFOR THE YEAR ENDED 31 JULY 2015

JULY 2015 JULY 2014 JULY 2013 JULY 2012 JULY 2011

SHAREHOLDER SUPPLIER RETURNS

Payout

Farmgate Milk Price (per kgMS)1 4.40 8.40 5.84 6.08 7.60

Dividend (per share) 0.25 0.10 0.32 0.32 0.30

Cash payout2 4.65 8.50 6.16 6.40 7.90

Retentions (per share)3 0.04 – 0.14 0.10 0.25

OPERATING PERFORMANCE

Average commodity prices (US$ per MT FOB)

Whole Milk Powder4 2,639 4,824 3,394 3,359 3,606

Skim Milk Powder4 2,552 4,504 3,625 3,285 3,321

Butter4 3,027 3,920 3,550 3,546 4,344

Cheese5 3,477 4,706 4,124 3,498 4,285

Average NZD/USD spot exchange rate applying throughout the year6 0.76 0.84 0.82 0.80 0.77

Fonterra’s average NZD/USD conversion rate7 0.79 0.81 0.80 0.77 0.72

Revenue ($ million)

Ingredients and other revenue 12,144 17,748 13,926 14,824 14,623

Consumer revenue 6,701 4,527 4,717 4,945 5,248

Total revenue 18,845 22,275 18,643 19,769 19,871

Dairy ingredients manufactured in New Zealand (000s MT) 2,753 2,519 2,312 2,353 2,143

Total ingredients sales volume (000s MT)8 2,982 3,052 2,765 2,660 2,486

Segment earnings ($ million)9

Global Ingredients and Operations 662 280 480 477 419

Oceania (143) 31 93 218 278

Asia 192 50 207 182 193

Greater China (5) 30 – – –

Latin America 256 111 137 124 121

Eliminations (20) 1 20 (14) 17

Segment earnings 942 503 937 987 1,028

Normalisation adjustments 32 – 65 41 (23)

Normalised segment earnings 974 503 1,002 1,028 1,005

Profit after tax attributable to shareholders ($ million) 466 157 718 609 754

Earnings per share10 0.29 0.10 0.44 0.41 0.53

1 From the beginning of the 2009 season 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 principles set out in the Farmgate Milk Price Manual which is independently audited.

2 Average Payout for a 100 per cent share-backed supplier.3 Retentions are calculated as net profit after tax attributable to Co-operative shareholders at 31 July divided by the number of shares at 31 May, less dividend per share.4 Source: Fonterra Farmgate Milk Price Statement representing the weighted-average United States Dollars (USD) contract prices of Reference Commodity Products.5 Source: Oceania Export Series, Agricultural Marketing Service, US Department of Agriculture.6 Average spot exchange rate is the average of the daily spot rates for the financial period.7 Fonterra’s average conversion rate is the rate that Fonterra has converted net United States dollar receipts into New Zealand dollars based on the hedge cover in place.8 For the year ended 31 July 2014, the total ingredients sales volume has been restated to reflect Fonterra’s strategic platforms. Figures for the years ended 31 July 2013 and

earlier have not been restated.9 Represents segment earnings before unallocated finance income, finance costs and tax. For the years ended 31 July 2015 and 2014, Greater China has been disclosed

separately in alignment with the disclosures in the segment note. For the years ended 31 July 2013 and earlier, Greater China was part of Asia. The year ended 31 July 2014 has been restated to reflect changes to the organisation of business units that occurred in the year ended 31 July 2015. The year ended 31 July 2012 has been restated to reflect changes to the organisation of business units within reported segments which occurred in the year ended 31 July 2013. The year ended 31 July 2011 has been restated to reflect changes to the organisation of business units within reported segments which occurred in the year ended 31 July 2012.

10 On 27 February 2013, Fonterra announced a non-cash bonus issue of one share for every 40 shares held. The bonus issue increased the number of shares on issue by 40.4 million. The record date for the bonus issue was 12 April 2013 and the issue date was 24 April 2013. Earnings per share for the years ended 31 July 2012 and 31 July 2011 have been restated as if the bonus issue was effective at the beginning of the periods presented.


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FIVE YEAR SUMMARY | 91


CAPITAL EMPLOYED ($ million)

Total assets employed 18,315 15,529 14,373 15,117 15,530

Average net assets11 12,918 10,860 11,135 10,900 10,772

Total equity 6,659 6,534 6,748 6,655 6,541

Equity excluding cash flow hedge reserve 7,196 6,452 6,830 6,592 6,025

Net interest bearing debt 7,192 4,498 4,227 3,833 3,766

Economic net interest bearing debt12 7,120 4,732 4,467 4,229 4,331

Return on net assets11 7.5% 4.6% 9.0% 9.4% 9.3%

Headline debt to debt plus equity ratio13 50.0% 41.1% 38.2% 36.8% 38.5%

Economic debt to debt plus equity ratio13 49.7% 42.3% 39.6% 39.1% 41.8%


STAFF EMPLOYED

Total staff employed (000s, permanent full time equivalents) 22.0 18.2 17.5 17.3 16.8

New Zealand 11.9 11.4 11.2 11.0 10.8

Overseas 10.1 6.8 6.3 6.3 6.0


SEASON STATISTICS14

Total NZ milk collected (million litres) 18,143 17,932 16,673 16,951 15,427

Highest daily volume collected (million litres) 89.7 87.1 84.8 81.2 76.8

NZ shareholder supply milk solids collected (million kgMS) 1,520 1,533 1,424 1,463 1,320

NZ contract supply milk solids collected (million kgMS) 94 51 39 30 26

NZ milk solids collected (million kgMS) 1,614 1,584 1,463 1,493 1,346

Total number of shareholders at 31 May 10,753 10,721 10,668 10,578 10,485

Total number of sharemilkers at 31 May 3,379 3,398 3,449 3,595 3,928

Total number of shares at 31 May (million) 1,599 1,598 1,598 1,433 1,377

11 Return on net assets (RONA) is derived by dividing normalised EBIT (as reported in financial statements) by 13 month average net assets (excluding net debt and deferred tax).

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

13 Headline debt to debt plus equity ratio is before taking account of the effect of debt hedging. Economic debt to debt plus equity includes the effect of debt hedging.

14 All season statistics are based on the 12 month milk season of 1 June–31 May.


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92 | NON-GAAP MEASURES

NON-GAAP MEASURES

Fonterra uses several non-GAAP measures when discussing financial performance. For further details and definitions of non-GAAP measures used by Fonterra, refer to the glossary on page 93. These are non-GAAP measures and are not prepared in accordance with NZ IFRS.

Management believes that these measures provide useful information as they provide valuable insight on the underlying performance of the business. They may be used internally to evaluate the underlying performance of business units and to analyse trends. These measures are not uniformly defined or utilised by all companies. Accordingly, these measures may not be comparable with similarly titled measures used by other companies. Non-GAAP financial measures should not be viewed in isolation nor considered as a substitute for measures reported in accordance with NZ IFRS.

Reconciliations for the NZ IFRS measures to certain non-GAAP measures referred to by Fonterra are detailed below.

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

GROUP $ MILLION

31 JULY 2015 31 JULY 2014


Add: Depreciation 453 437

Add: Amortisation 108 101



Total EBITDA 1,503 1,041

Add: Impairment of assets in Australia 108 –

Add: Restructuring and redundancy provisions 33 –

Add: Time value of options 20 –

Less: Gain on Latin America realignment (129) –

Total normalisation adjustments 32 –

Normalised EBITDA 1,535 1,041

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

GROUP $ MILLION

31 JULY 2015 31 JULY 2014




Total EBIT 942 503

Add: Normalisation adjustments (as detailed above) 32 –


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

GROUP $ MILLION

31 JULY 2015 31 JULY 2014


Add: Normalisation adjustments (as detailed above) 32 –

Less: Tax on normalisation adjustments (42) –

Total normalised earnings 496 179

Less: Share attributable to non-controlling interests (40) (22)

Net normalised earnings attributable to equity holders of the Parent 456 157

Weighted average number of shares (thousands of shares) 1,598,464 1,597,834

Normalised earnings per share ($) 0.29 0.10


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GLOSSARY | 93

GLOSSARY

NON-GAAP MEASURES

Fonterra refers to non-GAAP financial measures throughout the Annual Review, and these measures are not prepared in accordance with NZ IFRS. The definitions below explain how Fonterra calculates the non-GAAP measures referred to throughout the Annual Review.

Average net assets is calculated as net interest bearing debt and total equity less deferred tax averaged over a rolling 13 month period.

Constant currency means a measure that eliminates the effect of exchange rate movements. Constant currency variances are calculated by taking the current period financial measure in local currency less the prior period financial measure in local currency and dividing this by prior period financial measure in local currency using the prior period local currency to the New Zealand Dollar exchange rate.

Contribution margin is calculated as segmental gross profit less distribution, selling and marketing expenses.

EBIT means earnings before interest and tax and is calculated as profit for the period before net finance costs and tax.

EBIT margin % is calculated as profit for the period before net finance costs and tax and divided by revenue.

EBITDA 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 debt to debt plus equity ratio

is calculated as net interest bearing debt divided by net interest bearing debt plus equity. Net interest bearing debt includes the effect of debt hedging, and equity excludes the cash flow hedge reserve.

Farmgate Milk Price 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.

Net tangible assets means 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 a specific event or set of circumstances that are outside the control of the business, or relate to the major acquisitions or disposals of an asset/group of assets or business. It may also include certain fair value movements created by required accounting treatments, in particular if they are non-cash movements, and will have no impact on profit over time. Unusual transactions by size are those that are unusually large in a particular accounting period. Unusually large is defined as greater than $30 million.

Normalised EBIT means profit for the period before net finance costs, tax and after normalisation adjustments.

Normalised EBIT margin % means profit for the period before net finance costs, tax and after normalisation adjustments divided by revenue.

Normalised EBITDA means profit for the period before net finance costs, tax, depreciation, amortisation and after normalisation adjustments.

Normalised segment earnings means segmental profit for the period before depreciation, amortisation, net finance costs, taxation expense, and after normalisation adjustments.

Payout means the total cash payment to farmer shareholders. It is the sum of the Farmgate Milk Price (kgMS) and the dividend per share. Both of these components have established policies and procedures in place on how these are determined.

Retentions means net profit after tax attributable to farmer shareholders divided by the number of shares at 31 May, less dividend per share.

Segment earnings means segmental profit for the period before net finance costs, tax and normalisation adjustments.


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94 | DIRECTORY

FONTERRA BOARD OF DIRECTORS

John Wilson

Malcolm Bailey

Ian Farrelly

Leonie Guiney

Simon Israel

David Jackson

David MacLeod

John Monaghan

Sir Ralph Norris

Blue Read

Nicola Shadbolt

Michael Spaans

John Waller

FONTERRA MANAGEMENT TEAM

Theo Spierings

Lukas Paravicini

Jacqueline Chow

Maury Leyland

Johan Priem

Robert Spurway

Alex Turnbull

Kelvin Wickham

REGISTERED OFFICE

Fonterra Co-operative Group Limited Private Bag 92032 Auckland 1010 New Zealand

Fonterra Centre 9 Princes Street Auckland Central Auckland 1010 New Zealand

Phone +64 9 374 9000 Fax +64 9 374 9001

AUDITORS

PricewaterhouseCoopers Level 22, PwC Tower 188 Quay Street Auckland 1142 New Zealand

FARMER SHAREHOLDER AND SUPPLIER SERVICES

Freephone 0800 65 65 68

DIRECTORY

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 7, Zurich House 21 Queen Street Auckland Central 1010 New Zealand

INVESTOR RELATIONS ENQUIRIES

Phone +64 9 374 9000 [email protected]

www.fonterra.com


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This document is printed on an environmentally responsible paper produced using elemental chlorine free (ECF)FSC® certified mixed source pulp, sourced from well managed and legally harvested forests, and manufactured under the strict ISO14001 environmental management system.

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ANNUAL FINANCIAL

RESULTSFOR THE YEAR ENDED

31 JULY 2015

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CONTENTS

DIRECTORS’ STATEMENT 1

INCOME STATEMENT 2

STATEMENT OF COMPREHENSIVE INCOME 3

STATEMENT OF FINANCIAL POSITION 4

STATEMENT OF CHANGES IN EQUITY 5

CASH FLOW STATEMENT 6

BASIS OF PREPARATION 7

NOTES TO THE FINANCIAL STATEMENTS 8


STATUTORY INFORMATION 45

FIVE YEAR SUMMARY 58

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FONTERRA ANNUAL FINANCIAL RESULTS 2015

DIRECTORS’ STATEMENT FOR THE YEAR ENDED 31 JULY 2015

The Directors of Fonterra Co-operative Group Limited (Fonterra) are pleased to present to Shareholders the Annual Report¹ and financial statements for Fonterra and its subsidiaries (together the Group) and the Group’s interest in its equity accounted investees for the year ended 31 July 2015.

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 that period.

The Directors consider 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 Reporting 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 2015. For and on behalf of the Board:

JOHN WILSON DAVID JACKSONCHAIRMAN DIRECTOR

23 September 2015 23 September 2015

1 This document, in conjunction with the Fonterra Annual Review 2015, constitutes the 2015 Annual Report to Shareholders of Fonterra Co-operative Group Limited.

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The accompanying notes form part of these financial statements.

INCOME STATEMENTFOR THE YEAR ENDED 31 JULY 2015

GROUP $ MILLION


Revenue from sale of goods 18,845 22,275

Cost of goods sold 2 (15,567) (19,813)

Gross profit 3,278 2,462

Other operating income 288 139

Selling and marketing expenses (693) (593)

Distribution expenses (700) (499)

Administrative expenses (874) (762)

Other operating expenses (493) (356)

Net foreign exchange gains 19 70 39

Share of profit of equity accounted investees 18 66 73

Profit before net finance costs and tax 4 942 503

Finance income 8 39 13

Finance costs 8 (557) (379)



Tax credit 20 82 42


Profit after tax is attributable to:




GROUP $

31 JULY 2015 31 JULY 2014

Earnings per share:

Basic and diluted earnings per share 3 0.29 0.10

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STATEMENT OF COMPREHENSIVE INCOMEFOR THE YEAR ENDED 31 JULY 2015


GROUP $ MILLION

31 JULY 2015 31 JULY 2014


Items that may be reclassified subsequently to profit or loss:

Cash flow hedges:

– Net fair value (losses)/gains (1,361) 732

– Transferred and reported in revenue from sale of goods 501 (505)

– Tax credit/(expense) on cash flow hedges 241 (63)

Net investment hedges:

– Net fair value (losses)/gains on hedging instruments (164) 25

– Tax credit/(expense) on net investment hedges 46 (7)

Available-for-sale investments:

– Net fair value (losses) on available-for-sale investments (2) (1)

Foreign currency translation gains/(losses) attributable to equity holders 385 (207)

Foreign currency translation reserve transferred to income statement 78 –

Hyperinflation movements attributable to equity holders 20 –

Share of equity accounted investees’ movements in reserves 4 (11)

Total items that may be reclassified subsequently to profit or loss (252) (37)

Items that will not be reclassified subsequently to profit or loss:

Foreign currency translation (losses) attributable to non-controlling interests (6) (4)

Hyperinflation movements attributable to non-controlling interests 13 –

Total items that will not be reclassified subsequently to profit or loss 7 (4)

Total other comprehensive (expense) recognised directly in equity (245) (41)


Total comprehensive income is attributable to:




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STATEMENT OF FINANCIAL POSITIONAS AT 31 JULY 2015

GROUP $ MILLION


ASSETS

Current assets


Trade and other receivables 9 2,322 1,950

Inventories 10 3,025 3,701

Tax receivable 22 20


Assets held for sale 90 58

Other current assets 232 112

Total current assets 6,077 6,484

Non-current assets

Property, plant and equipment 13 6,159 5,091

Equity accounted investments 18 1,185 388

Livestock 14 331 202

Intangible assets 15 3,273 2,791

Deferred tax assets 20 732 231

Available-for-sale investments 74 74


Other non-current assets 111 114


Total assets 18,315 15,529

LIABILITIES

Current liabilities



Trade and other payables 11 1,984 1,638

Owing to suppliers 12 159 1,771

Tax payable 39 18


Provisions 21 77 47

Other current liabilities 59 74

Total current liabilities 5,031 5,133

Non-current liabilities



Provisions 21 186 65

Deferred tax liabilities 20 109 5

Other non-current liabilities 36 13

Total non-current liabilities 6,625 3,862

Total liabilities 11,656 8,995

Net assets 6,659 6,534

EQUITY

Subscribed equity 5,814 5,807

Retained earnings 1,289 1,059

Foreign currency translation reserve (110) (455)

Cash flow hedge reserve (537) 82

Other reserves 17 (1)

Total equity attributable to equity holders of the Co-operative 6,473 6,492


Total equity 6,659 6,534

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STATEMENT OF CHANGES IN EQUITYFOR THE YEAR ENDED 31 JULY 2015


ATTRIBUTABLE TO EQUITY HOLDERS OF THE CO-OPERATIVE

GROUP $ MILLIONSUBSCRIBED

EQUITYRETAINED

EARNINGS

FOREIGN CURRENCY

TRANSLATION RESERVE

CASH FLOW HEDGE

RESERVEOTHER

RESERVES TOTAL

NON-CONTROLLING

INTERESTSTOTAL

EQUITY

As at 1 August 2014 5,807 1,059 (455) 82 (1) 6,492 42 6,534

Profit after tax – 466 – – – 466 40 506

Other comprehensive income/(expense) – 4 345 (619) 18 (252) 7 (245)

Total comprehensive income/(expense) – 470 345 (619) 18 214 47 261



Acquisition of subsidiaries – – – – – – 120 120

Equity instruments issued 7 – – – – 7 – 7


As at 31 July 2015 5,814 1,289 (110) (537) 17 6,473 186 6,659

As at 1 August 2013 5,807 1,249 (266) (82) – 6,708 40 6,748

Profit after tax – 157 – – – 157 22 179

Other comprehensive (expense)/income – (11) (189) 164 (1) (37) (4) (41)

Total comprehensive income/(expense) – 146 (189) 164 (1) 120 18 138




As at 31 July 2014 5,807 1,059 (455) 82 (1) 6,492 42 6,534

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CASH FLOW STATEMENTFOR THE YEAR ENDED 31 JULY 2015

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Cash flows from operating activitiesProfit before net finance costs and tax 942 503

Adjustments for:

Foreign exchange (gains)/losses (70) 11

Depreciation and amortisation 561 538

Movement in provisions (157) 132

Other (63) (41)

271 640

Decrease/(increase) in working capital:

Inventories 809 (757)

Trade and other receivables 182 (111)

Amounts owing to suppliers (1,612) 1,060

Payables and accruals 104 111

Other movements 27 (28)

Total (490) 275

Cash generated from operations 723 1,418

Net taxes paid (55) (51)

Net cash flows from operating activities 668 1,367

Cash flows from investing activities


– Proceeds from sale of business operations 62 46

– Proceeds from disposal of property, plant and equipment 20 12

– Proceeds from sale of livestock 30 13

– Other cash inflows 36 8


– Acquisition of business operations (771) (18)

– Acquisition of available-for-sale investments – (78)

– Acquisition of property, plant and equipment (1,189) (791)

– Acquisition of livestock (121) (88)

– Acquisition of intangible assets (104) (102)

– Other cash outflows (3) (11)

Net cash flows from investing activities (2,040) (1,009)

Cash flows from financing activities


– Proceeds from borrowings 7,470 4,241

– Interest received 8 13

– Other cash inflows – 8


– Interest paid (427) (332)

– Repayment of borrowings (5,443) (3,894)

– Settlement of borrowing derivatives – (24)

– Dividends paid to non-controlling interests (23) (16)

– Dividends paid to equity holders of the Co-operative (233) (336)

Net cash flows from financing activities 1,352 (340)

Net (decrease)/increase in cash and cash equivalents (20) 18

Cash and cash equivalents at the beginning of the year 319 329

Effect of exchange rate changes on cash balances 4 (28)

Cash and cash equivalents at the end of the year 303 319

Reconciliation of closing cash balances to the statement of financial position:


Bank overdraft (39) (21)

Closing cash balances 303 319

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BASIS OF PREPARATIONFOR THE YEAR ENDED 31 JULY 2015

A) GENERAL INFORMATION

Fonterra Co-operative Group Limited (Fonterra 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 interest in its equity accounted investees after adjustments to align to the accounting policies of the Group.

The Group operates predominantly in the international dairy industry and is a profit-oriented entity. The Group is primarily involved in the collection, manufacture and sale of milk and milk derived products and in fast moving consumer goods and foodservice businesses.

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 New Zealand Generally Accepted Accounting Practice (NZ GAAP). In accordance with the Financial Market Conducts Act 2013, where a reporting entity prepares consolidated financial statements, parent company disclosures are not required. As such these financial statements now present the consolidated results of the Group.

These financial statements are prepared on a historical cost basis, except for derivative financial instruments, available-for-sale assets, livestock and the hedged risks on certain debt instruments, which are recognised at their fair values.

These financial statements are presented in New Zealand Dollars ($ or NZD), which is Fonterra’s functional currency, and rounded to the nearest million, except where otherwise stated.

In the process of applying the Group’s accounting policies, management make a number of judgements, estimates of future events, and assumptions. These are all believed to be reasonable based on the most current set of circumstances available to the Group. Judgements and estimates that have the most significant effect on the amounts recognised in the financial statements are described below and in the following notes:

Intangible assets (Note 15)The recoverability of the carrying value of goodwill and indefinite life brands is assessed at least annually to ensure they are not impaired. Performing this assessment requires management to estimate future cash flows, pre tax discount rates and terminal growth rates.

Provisions and contingent liabilities (Note 21)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.

Taxation (Note 20)Estimates are required relating to the amount of tax that will ultimately be payable and the availability and utilisation of losses to be carried forward. Judgement is required in determining the provision for taxes as tax treatment is often by its nature complex, and may not be finally determined until a formal resolution has been reached with the relevant tax authority. Judgement is also required in assessing the amount of deferred tax asset that can be recognised. Deferred tax assets relating to tax losses carried forward can only be recognised if it is probable that they can be used. A deferred tax asset can be used if there are future taxable profits to offset against the losses carried forward. This requires management to assess the likelihood, timing and expected amount of future taxable profits.

C) BASIS OF CONSOLIDATION

In preparing these financial statements, subsidiaries are fully 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 NZDThe 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. 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. The financial statements of a subsidiary in a hyperinflationary economy are translated into NZD at the year end exchange rate.

The government in Venezuela has established multiple foreign currency systems. For consolidation, Fonterra translates its operations in Venezuela using the rate most representative of the entity’s economic circumstances, taking into consideration management’s intention to reinvest in the Venezuelan operations.

D) NEW AND AMENDED INTERNATIONAL FINANCIAL REPORTING STANDARDS

i) New and amended standards adopted by the GroupThe Group has early adopted the amendments to NZ IAS 1 Presentation of Financial Statements, which clarifies existing requirements relating to materiality, order of the notes, subtotals, accounting policies and disaggregation. These amendments support the new structure of these financial statements.

ii) New and amended standards issued but not yet effectiveNew and amended standards that could be expected to have a material impact on the Group’s financial statements, which were available for early adoption but have not been adopted, are stated below. At this time it is not possible to reasonably estimate the impact of the adoption of these standards.

– NZ IFRS 9 Financial Instruments addresses the classification, measurement and derecognition of financial assets, financial liabilities, impairment of financial assets and hedge accounting.

– NZ IFRS 15 Revenue from Contracts with Customers establishes the framework for revenue recognition.

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

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NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 JULY 2015

NOTE PAGE

PERFORMANCE 9

1 Segment reporting 9

2 Cost of goods sold 13

3 Earnings per share 14

4 Profit before net finance costs and tax 14

DEBT AND EQUITY 15

5 Subscribed equity instruments 15

6 Dividends paid 16

7 Borrowings 16

8 Net finance costs 19

WORKING CAPITAL 20

9 Trade and other receivables 20

10 Inventories 21

11 Trade and other payables 21

12 Owing to suppliers 21

LONG TERM ASSETS 22

13 Property, plant and equipment 22

14 Livestock 24

15 Intangible assets 25

INVESTMENTS 27

16 Business combinations 27

17 Assets held for sale 28

18 Equity accounted investments 29

FINANCIAL RISK MANAGEMENT 30

19 Financial risk management 30

OTHER 36

20 Taxation 36

21 Contingent liabilities, provisions and commitments 38

22 Related party transactions 40

23 Group entities 42

24 Net tangible assets per security 43

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FINANCIAL STATEMENTS PRESENTATION

Fonterra is pleased to present a new structure for our financial statements. The new structure has been designed to improve the clarity and usefulness of this report. The report has been structured under the following categories:

• Performance

• Debt and equity

• Working capital

• Long term assets

• Investments

• Financial risk management

• Other

Significant accounting policies which are relevant to an understanding of the financial statements and summarise the measurement basis used are provided throughout the Notes in blue frames.

PERFORMANCE

This section focuses on Fonterra’s financial performance and the returns provided to equity holders.

This section includes the following Notes:

Note 1: Segment reporting

Note 2: Cost of goods sold

Note 3: Earnings per share

Note 4: Profit before net finance costs and tax

1 SEGMENT REPORTING

a) Operating segmentsThe Group has five reportable segments that reflect the Group’s management and reporting structure as viewed by the Fonterra Management Team.

During the year ended 31 July 2014, transactions between segments were based on estimated market prices adjusted for the difference between the Farmgate Milk Price calculated in accordance with the Farmgate Milk Price Manual and that determined by the Board. During the year ended 31 July 2015, transactions between segments were based on estimated market prices.

REPORTABLE SEGMENT DESCRIPTION

Global Ingredients and Operations (formerly New Zealand Milk Products (NZMP))

Represents the collection, processing and distribution of New Zealand milk, global sales and marketing of New Zealand and non-New Zealand milk products (including North Asia), Global Brands and Nutrition, Co-operative Affairs and Group Services.

Oceania Represents Fast Moving Consumer Goods (FMCG) businesses in New Zealand (including export to the Pacific Islands) and all FMCG and ingredients businesses in Australia (including Milk Supply and Manufacturing). It includes foodservice sales in Australia and New Zealand, and Fonterra Farm Source stores.

Asia Represents FMCG and foodservice businesses in Asia (excluding North Asia and Greater China), Africa and the Middle East.

Greater China Represents FMCG, foodservice and farming businesses in Greater China.

Latin America Represents FMCG and ingredients businesses in South America and the Caribbean.

From 1 August 2014, Greater China has been reported separately from Asia. In addition, Fonterra’s organisational structure was realigned and as a result the Taiwanese ingredients business has moved out of Greater China into Global Ingredients and Operations. Comparatives have been restated to reflect these changes.F

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NOTES TO THE FINANCIAL STATEMENTS CONTINUED FOR THE YEAR ENDED 31 JULY 2015


GROUP $ MILLION



CHINALATIN


GROUP






Cost of goods sold (11,576) (2,873) (1,224) (599) (1,516) 2,221 (15,567)

Segment gross profit 1,496 412 508 208 674 (20) 3,278




Segment operating expenses (1,099) (601) (314) (226) (570) 50 (2,760)


Net foreign exchange gains/(losses) 83 (1) (4) – (8) – 70

Share of profit of equity accounted investees 62 7 – (5) 2 – 66

Segment earnings before net finance costs and tax 662 (143) 192 (5) 256 (20) 942

Normalisation adjustments 37 119 3 1 (128) – 32

Normalised segment earnings before net finance costs and tax 699 (24) 195 (4) 128 (20) 974

Normalisation adjustments (32)

Finance income 39

Finance costs (557)



Depreciation (321) (66) (10) (19) (37) – (453)

Amortisation (77) (25) (3) (1) (2) – (108)

Normalisation adjustments consist of the following amounts:

Net gain on Latin America strategic realignment¹ – – – – (129) – (129)

Impairment of assets in Australia² – 108 – – – – 108

Restructuring and redundancy provisions³ 17 11 3 1 1 – 33

Time value of options⁴ 20 – – – – – 20

Total normalisation adjustments 37 119 3 1 (128) – 32



Equity accounted investments 276 42 – 858 9 – 1,185

Capital expenditure⁵ 930 93 36 382 90 – 1,531

1 Of the $129 million normalisation adjustment, $141 million relates to other operating income, $4 million to cost of goods sold and $8 million to other operating expenses. Refer Note 16.

2 Of the $108 million normalisation adjustment, $58 million relates to other operating expenses and $50 million to cost of goods sold.

3 The $33 million normalisation adjustment relates to administrative and other operating expenses.

4 The $20 million normalisation adjustment relates to net foreign exchange losses.


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GROUP $ MILLION



CHINALATIN


GROUP






Cost of goods sold (17,032) (3,017) (1,224) (436) (894) 2,790 (19,813)

Segment gross profit 1,043 583 386 182 267 1 2,462




Segment operating expenses (963) (574) (328) (174) (198) 27 (2,210)


Net foreign exchange gains/(losses) 50 (1) (12) – 2 – 39

Share of profit of equity accounted investees 54 5 – – 14 – 73

Segment earnings before net finance costs and tax 280 31 50 30 111 1 503

Finance income 13

Finance costs (379)



Depreciation (323) (72) (8) (8) (26) – (437)

Amortisation (75) (22) (3) – (1) – (101)



Equity accounted investments 218 36 – – 134 – 388

Capital expenditure¹ 602 93 32 198 44 – 969


There were no normalisation adjustments for the year ended 31 July 2014.

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b) Strategic platformsThe Group also presents financial information that reflects Fonterra’s strategic platforms. These strategic platforms are organised on a different basis than the Group’s operating segments presented in section a) of this note. The basis of presentation is explained in the table below.

Fonterra considers this information is useful as it provides more clarity on the financial performance of the ingredients, consumer and foodservice, and international farming businesses.

PLATFORM DESCRIPTION

Ingredients Represents the Global Ingredients and Operations reportable segment, the ingredients businesses in Australia and South America, and Fonterra Farm Source stores, and excludes the foodservice businesses in Asia and Greater China and unallocated costs.

Consumer and foodservice

– Oceania

Represents the Oceania reportable segment, excluding the ingredients business in Australia and Fonterra Farm Source stores.

– Asia Represents the Asia reportable segment and the Asia foodservice business reported in Global Ingredients and Operations.

– Greater China Represents the Greater China reportable segment, excluding International Farming and including the foodservice business in Greater China reported in Global Ingredients and Operations.

– Latin America Represents the Latin America reportable segment excluding the ingredients businesses in South America.

International Farming Represents China farming operations.

GROUP

31 JULY 2015


FARMING


ELIMINATIONS TOTAL

OCEANIA ASIAGREATER

CHINALATIN

AMERICA TOTAL



Sales revenue1 ($ million) 14,341 2,021 1,918 729 2,033 6,701 141 (2,338) 18,845

Normalised EBIT ($ million) 973 51 202 45 110 408 (44) (363) 974

Capital employed2 ($ million) 8,592 465 145 45 403 1,058 594 (757) 9,487

Return on capital3 (%) 9.3% 5.0% 96.2% 71.5% 18.6% 25.5% (7.3)% 8.9%


GROUP

31 JULY 2014


FARMING


ELIMINATIONS TOTAL

OCEANIA ASIAGREATER

CHINALATIN

AMERICA TOTAL



Sales revenue1 ($ million) 19,553 2,102 1,811 560 848 5,321 103 (2,702) 22,275

Normalised EBIT ($ million) 679 (24) 51 8 94 129 21 (326) 503

Capital employed2 ($ million) 9,403 294 154 (23) 220 645 288 (1,843) 8,493

Return on capital3 (%) 5.6% (15.0)% 17.0% N/A 24.6% 5.9% 7.1% 4.7%


1 Includes sales to other strategic platforms. Total column represents total external sales.

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

3 Return on capital is calculated as normalised EBIT, less equity accounted investees’ earnings, less a notional royalty charge for use of the Group’s brands, less a notional tax charge, divided by capital employed.

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c) Geographical revenue

GROUP $ MILLION

CHINAREST OF

ASIA AUSTRALIANEW

ZEALAND USA EUROPELATIN

AMERICAREST OF WORLD TOTAL

Geographical segment external revenue:

Year ended 31 July 2015 2,111 5,222 1,560 1,882 1,198 725 3,113 3,034 18,845

Year ended 31 July 2014 5,537 5,787 1,666 2,162 1,014 946 1,802 3,361 22,275

Revenue is allocated to geographical segments on the basis of the destination of the goods sold.

d) Non-current assets

GROUP $ MILLION

GLOBAL INGREDIENTS AND OPERATIONS OCEANIA ASIA

GREATER CHINA

LATIN AMERICA

TOTAL GROUP

NEW ZEALAND

REST OF WORLD

NEW ZEALAND AUSTRALIA

Geographical segment reportable non-current assets:

As at 31 July 2015 4,783 464 1,394 814 822 1,751 1,105 11,133

As at 31 July 2014 4,300 391 1,387 1,022 705 410 445 8,660

GROUP $ MILLION

AS AT31 JULY 2015

AS AT31 JULY 2014

Reconciliation of geographical segment non-current assets to total non-current assets:

Geographical segment non-current assets 11,133 8,660




2 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 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 audited.

For the year ended 31 July 2014, the Fonterra Board announced a Farmgate Milk Price lower than that calculated in accordance with the Farmgate Milk Price Manual.

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Opening inventory 3,701 3,078

Cost of Milk:

– New Zealand sourced 7,121 13,226

– Non-New Zealand sourced 1,151 1,192

Other purchases 6,619 6,018

Closing inventory (3,025) (3,701)

Total cost of goods sold 15,567 19,813

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3 EARNINGS PER SHARE

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.

GROUP

31 JULY 2015 31 JULY 2014

Basic and diluted earnings per share attributable to equity holders of the Co-operative ($) 0.29 0.10

Earnings attributable to equity holders of the Co-operative ($ million) 466 157

Weighted average number of shares (thousands of shares) 1,598,464 1,597,834

4 PROFIT BEFORE NET FINANCE COSTS AND TAX

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

The following items have been included in profit before net finance costs and tax:

Auditors’ remuneration:

– Fees paid for the audit or review of the financial statements 5 5

– Fees paid for other services¹ 1 1

Operating lease expense 76 66

Research and development costs 83 87

Donations 1 1

Research and development grants received from government (5) (5)

Total employee benefits expense 2,178 1,717

Contributions to defined contribution plans included in employee benefits expense 74 61

1 The Group uses the services of PricewaterhouseCoopers on assignments additional to their statutory audit duties where their expertise and experience with the Group are important and auditor independence is not impaired. Other services include advisory services $0.5 million (31 July 2014: $0.3 million) and other assurance and attestation services $0.1 million (31 July 2014: $0.2 million).

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DEBT AND EQUITY

This section outlines Fonterra’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.


Note 5: Subscribed equity instruments

Note 6: Dividends paid

Note 7: Borrowings

Note 8: Net finance costs

5 SUBSCRIBED EQUITY INSTRUMENTS

Subscribed equity instruments comprise Co-operative shares and units in the Fonterra Shareholders’ Fund. Incremental costs directly attributable to equity transactions are recognised as a deduction from subscribed equity.

Co-operative shares, including shares held within the GroupCo-operative shares may only be held by a shareholder supplying milk to the Company (farmer shareholder), by former farmer shareholders for up to three seasons after cessation of milk supply, or by Fonterra Farmer Custodian Limited (the Custodian). Voting rights in the Company are dependent on milk supply supported by Co-operative shares¹.

CO-OPERATIVE SHARES (THOUSANDS)

Balance at 1 August 2014 1,597,834

Shares issued² 1,260

Shares surrendered –

Balance at 31 July 2015 1,599,094

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

2 1,260,116 shares with a total value of $7 million were issued under the Dividend Reinvestment Plan during the year ended 31 July 2015.

No shares were issued or surrendered during the year ended 31 July 2014.

The rights attaching to Co-operative shares are set out in Fonterra’s Constitution, available in the ‘About/Our Governance’ section of Fonterra’s website.

Units in the Fonterra Shareholders’ Fund The Custodian holds legal title of Co-operative shares of which the Economic Rights have been sold to the Fund on trust for the benefit of the Fund. At 31 July 2015, 105,480,366 Co-operative shares (31 July 2014: 109,777,717) were legally owned by the Custodian, on trust for the benefit of the Fund.

UNITS (THOUSANDS)


Units issued 21,906




Units issued 13,116



The rights attaching to units are set out in the Trust Deed constituting the Fonterra Shareholders’ Fund, available in the ‘Financial/Trading Among Farmers’ section of Fonterra’s website.

Capital management and structureThe Board’s objective is to maximise equity holder returns over time by maintaining an optimal capital structure. As part of the key financial risk management activities undertaken by the Group, Trading Among Farmers (TAF) was launched in November 2012 to support the establishment of the Fonterra Shareholders’ Market. The establishment of the Fonterra Shareholders’ Market eliminates redemption risk and provides a permanent capital base for the Co-operative.

The Group provides returns to farmer shareholders through a milk price, and to equity holders through dividends and changes in the Company’s share price.

The Fund is subject to the issue and redemption of units at the discretion of Fonterra and Fonterra’s farmer shareholders. Fonterra has an interest in ensuring the stability of the Fund and has established a Fund Size Risk Management Policy, which requires that the number of units on issue remain within specified limits and that within these limits, the number of units is managed appropriately. Fonterra may use a range of measures to ensure the Fund size remains within the specified limits, including introducing or cancelling a dividend reinvestment plan, operating a unit and/or share repurchase programme and issuing new shares.

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6 DIVIDENDS PAID

All Co-operative shares, including those held by the Fonterra Farmer Custodian Limited (the Custodian) on trust for the benefit of the Fonterra Shareholders’ Fund (the Fund), are eligible to receive dividends if declared by the Board. Dividends paid to the Custodian are passed on to unit holders by the FSF Management Company Limited (the Manager).

Dividends are recognised as a liability in the Group’s financial statements in the period in which they are declared by the Board.

$ MILLION

DIVIDENDSYEAR ENDED

31 JULY 2015YEAR ENDED

31 JULY 2014

2015 Interim dividend – 10.0 cents per share¹ 160 –

2014 Final dividend – 5.0 cents per share² 80 –

2014 Interim dividend – 5.0 cents per share³ – 80

2013 Final dividend – 16.0 cents per share⁴ – 256

1 Declared on 24 March 2015 and paid on 20 April 2015 to all Co-operative shares on issue at 10 April 2015. The Dividend Reinvestment Plan applied to this interim dividend.


3 Declared on 25 March 2014 and paid on 17 April 2014 to all Co-operative shares on issue at 10 April 2014.


Dividends declared after balance dateOn 23 September 2015, the Board declared a final dividend of 15 cents per share, to be paid on 20 October 2015 to all Co-operative shares on issue at 8 October 2015.

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 does apply to this dividend. Full details of the Dividend Reinvestment Plan are available on the financial section of Fonterra’s website.

7 BORROWINGS

The Group borrows in the form of bonds, bank facilities and other financial instruments. The interest expense incurred on Fonterra’s borrowings is shown in Note 8.

Borrowings 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. Changes in fair value of those hedged risks are recognised in the income statement, except where they relate to borrowings classified as net investment hedges and cash flow hedges and recorded directly in other comprehensive income.

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Commercial paper 473 464

Bank loans 1,717 437

Finance leases 169 180

Capital notes 35 35

NZX listed bonds 500 948

Medium-term notes 4,666 2,834



Total current borrowings 1,681 1,534

Total non-current borrowings 5,879 3,364


– Finance leases are secured over the related item of property, plant and equipment (Note 13).

– Capital notes are unsecured subordinated borrowings.

– All other borrowings are unsecured and unsubordinated.

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Leverage ratiosThe Board closely monitors the Group’s leverage ratios, which include the gearing ratio and debt coverage ratios (debt payback and interest coverage ratios). The primary debt payback ratios comprise funds from operations divided by economic net interest bearing debt, and economic net interest bearing debt divided by EBITDA. The gearing ratio is calculated as economic net interest bearing debt divided by total capital. Economic net interest bearing debt is calculated in the table below. Total capital is calculated as equity, as presented in the statement of financial position (excluding the cash flow hedge reserve), plus economic net interest bearing debt. The gearing ratio as at 31 July 2015 was 49.7 per cent (31 July 2014: 42.3 per cent).The Group is not subject to externally imposed capital requirements.

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

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Net interest bearing debt position


Cash and cash equivalents (342) (340)

Interest bearing advances included in other non-current assets (65) (81)


Net interest bearing debt 7,192 4,498

Value of derivatives used to manage changes in hedged risks and other foreign exchange movements on debt (72) 234

Economic net interest bearing debt 7,120 4,732

Finance leases

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Finance leases – minimum lease payments

Not later than one year 37 20

Later than one year and not later than five years 175 82

Later than five years 8 136

220 238

Future finance charges on finance leases (51) (58)

Present value of finance leases 169 180

The present value of finance leases is as follows:

Not later than one year 26 9

Later than one year and not later than five years 136 42

Later than five years 7 129

Total present value of finance leases 169 180

Liquidity riskLiquidity 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 is to ensure that it will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation.

The Group has a policy in place to ensure that it has sufficient cash or facilities on demand to meet expected operational expenses for a period of at least 80 days, including the servicing of financial obligations; this excludes the potential impact of extreme circumstances that cannot reasonably be predicted, such as natural disasters. In such situations back-up funding lines are maintained and as set out in the Company’s constitution, the Company can defer payments to farmer shareholders if necessary.

The Group manages its liquidity by retaining cash and marketable securities, the availability of funding from an adequate amount of committed credit facilities and the ability to close out market positions. Fonterra’s funding facilities are reviewed at least annually, which is one of the key financial risk management activities undertaken by the Group to ensure an appropriate maturity profile given the nature of the Group’s business. At balance date the Group had undrawn lines of credit totalling $2,520 million (31 July 2014: $3,215 million).

Liquidity and refinancing risks are also managed by ensuring that Fonterra can maintain access to funding markets throughout the world. To that end, Fonterra maintains debt issuance programmes in a number of key markets and manages relationships with international investors.

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Exposure to liquidity riskThe following tables show the timing of the gross contractual cash flows of the Group’s financial instruments.

GROUP $ MILLION

AS AT 31 JULY 2015

CARRYING AMOUNT

CONTRACTUAL CASH FLOWS

3 MONTHS OR LESS

3–12 MONTHS

1–5 YEARS

MORE THAN 5 YEARS

Non-derivative financial liabilities

Borrowings

– Commercial paper (473) (475) (415) (60) – –

– Bank loans (1,717) (1,818) (150) (320) (1,348) –

– Finance leases (169) (220) (21) (16) (175) (8)

– Capital notes (35) (44) (1) (1) (7) (35)

– NZX listed bonds (500) (610) (13) (163) (61) (373)

– Medium-term notes (4,666) (6,104) (285) (528) (2,117) (3,174)

Bank overdraft (39) (40) (16) (24) – –

Owing to suppliers (159) (159) (159) – – –

Trade and other payables (excluding employee entitlements) (1,697) (1,697) (1,697) – – –

Financial guarantees issued¹ – (31) (31) – – –

Total non-derivative financial liabilities (9,455) (11,198) (2,788) (1,112) (3,708) (3,590)

Derivative financial instruments

Gross settled derivatives

– Inflow 18,308 9,123 5,572 1,578 2,035

– Outflow (19,379) (9,388) (6,187) (1,726) (2,078)

Total gross settled derivative financial instruments (877) (1,071) (265) (615) (148) (43)

Net settled derivatives (114) (102) (20) 34 (100) (16)

Total financial instruments (10,446) (12,371) (3,073) (1,693) (3,956) (3,649)

1 Maximum cash flows under guarantees provided by the Group.

GROUP $ MILLION

AS AT 31 JULY 2014

CARRYING AMOUNT

CONTRACTUAL CASH FLOWS

3 MONTHS OR LESS

3–12 MONTHS

1–5 YEARS

MORE THAN 5 YEARS

Non-derivative financial liabilities

Borrowings

– Commercial paper (464) (466) (354) (112) – –

– Bank loans (437) (452) (165) (150) (137) –

– Finance leases (180) (238) (5) (15) (82) (136)

– Capital notes (35) (44) – (1) (8) (35)

– NZX listed bonds (948) (1,017) (21) (836) (160) –

– Medium-term notes (2,834) (3,826) (41) (179) (1,608) (1,998)

Bank overdraft (21) (22) (21) (1) – –

Owing to suppliers (1,771) (1,771) (1,771) – – –

Trade and other payables (excluding employee entitlements) (1,418) (1,418) (1,418) – – –

Financial guarantees issued¹ – (56) (56) – – –

Total non-derivative financial liabilities (8,108) (9,310) (3,852) (1,294) (1,995) (2,169)

Derivative financial instruments

Gross settled derivatives

– Inflow 20,128 11,988 5,979 1,568 593

– Outflow (20,359) (11,912) (5,731) (1,783) (933)

Total gross settled derivative financial instruments 4 (231) 76 248 (215) (340)

Net settled derivatives 8 (108) (16) 23 (66) (49)

Total financial instruments (8,096) (9,649) (3,792) (1,023) (2,276) (2,558)

1 Maximum cash flows under guarantees provided by the Group.

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Interest rate risk The Group’s interest rate risk arises from its borrowings and funds on deposit. Borrowings issued and funds on deposit held at variable rates expose the Group to cash flow interest rate risk. Borrowings issued at fixed rates expose the Group to fair value interest rate risk.

The Group borrows a mixture of fixed and variable rate debt in a range of currencies. The Group actively hedges its repricing profile using interest rate swaps in accordance with its Treasury Policy in order to manage the volatility of finance costs.

Exposure to interest rate risk and analysis of fair value sensitivitySensitivities to interest rate risk have been assessed on the basis of a 100 basis point movement in interest rates. A 100 basis point movement is considered reasonably possible over the short term.

A 100 basis point movement in interest rates to which the Group is exposed would result in the following post-tax, increase/(decrease) to equity and profit. The fair value sensitivity to a 100 basis point movement in interest rates (based on financial assets and liabilities held at the balance date) is as follows:

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

EQUITY PROFIT EQUITY PROFIT

Fair value gain/(loss) from 100 basis point increase (11) 61 12 62

Fair value gain/(loss) from 100 basis point decrease 14 (65) (13) (67)

Cash flow sensitivity analysis A change in interest rates would also impact on interest payments and receipts on the Group’s floating rate debt instruments, including the floating leg of any interest rate derivatives. The cash flow sensitivity to a 100 basis point movement in interest rates, based on financial assets and liabilities held at the balance date, is as follows:

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

One year cash flow impact of 100 basis point increase (4) (3)

One year cash flow impact of 100 basis point decrease 4 3

8 NET FINANCE COSTS

Interest income and expense is recognised on an accrual basis in profit or loss, using the effective interest method.

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Finance income¹ 39 13

Interest expense on financial liabilities measured at amortised cost (404) (319)

Interest expense on derivatives classified as held for trading (10) (16)

Total interest expense calculated on an amortised cost basis (414) (335)

Change in fair value of hedged risks on debt instruments designated in a fair value hedge relationship (40) 31

Change in fair value of derivative instruments designated as a fair value hedge² 42 (39)

Change in fair value of financial instruments classified as held for trading (145) (36)

Finance costs (557) (379)


1 Includes a $31 million gain on restatement of the net monetary position of hyperinflationary foreign operations.

2 This includes the fair value impact of the basis risk adjustment inherent in the valuation of cross currency interest rate swaps that do not form part of the debt instrument hedging relationship.

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WORKING CAPITAL

This section provides information about the primary elements of Fonterra’s working capital. Working capital represents the short term operating assets and liabilities generated by Fonterra. Movements in these items have a direct impact on the net cash flows generated from operating activities.


Note 9: Trade and other receivables

Note 10: Inventories

Note 11: Trade and other payables

Note 12: Owing to suppliers

9 TRADE AND OTHER RECEIVABLES

Revenue from sale of goods is recognised at the fair value of the consideration received or receivable, net of returns, discounts and allowances. Revenue is recognised when the amount can be reliably measured, significant risks and rewards of ownership of the inventory have passed to the buyer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, and there is no continuing management involvement with the goods.

Trade receivables are amounts due from customers for goods or services sold. Trade receivables are recognised initially at their fair value, which is represented by their face value, and subsequently measured at the amount expected to be collected.

Estimates are used in determining the level of receivables that may not, in the opinion of management, be collected. A provision for impairment is established when there is sufficient evidence that the Group will not be able to collect all amounts due.

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Trade receivables 2,023 1,775

Less: provision for impairment of trade receivables (15) (8)

Trade receivables net of provision for impairment 2,008 1,767

Receivables from related parties¹ 24 29

Other receivables 190 75

Total receivables 2,222 1,871

Prepayments 100 79

Total trade and other receivables 2,322 1,950

1 There were no material provisions for impairment of receivables from related parties.

Customer credit risk Customer credit risk is the risk of financial loss to the Group if a customer fails to meet its contractual obligations.

The Group operates a policy of only entering into contracts for sale with customers whose credit limits are in accordance with the Group’s delegated authorities approved by the Board. For export customers located outside of New Zealand, credit risk mitigant tools such as letters of credit may be utilised in conjunction with credit limits.

The aging profile of the Group’s trade and other receivables (excluding prepayments) is as follows:

PAST DUE BUT NOT IMPAIRED

GROUP $ MILLION

NEITHER PAST DUE NOR

IMPAIRED

LESS THAN 1 MONTH PAST DUE

MORE THAN 1 MONTH BUT

LESS THAN 3 MONTHS

PAST DUE

MORE THAN 3 MONTHS

PAST DUE TOTAL

As at 31 July 2015 1,934 206 62 20 2,222

As at 31 July 2014 1,663 138 48 22 1,871

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10 INVENTORIES

Inventories are stated at the lower of cost and net realisable value on a first in first out basis.

In the case of manufactured inventories and work in progress, cost includes all direct costs plus the portion of fixed and variable production overhead incurred in bringing inventories into their present location and condition.

Net realisable value is the estimated selling price in the ordinary course of business, less the costs of completion and selling expenses.

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Raw materials 700 619

Finished goods 2,428 3,281

Impairment of finished goods (103) (199)

Total inventories 3,025 3,701

11 TRADE AND OTHER PAYABLES

Trade and other payables, excluding amounts owing to farmer shareholders and contract milk suppliers, are initially recognised at the amount invoiced by the supplier. They are subsequently measured at amortised cost using the effective interest method. Due to their short term nature, trade and other payables are not discounted.

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Trade payables 1,569 1,335

Amounts due to related parties 19 11

Other payables 109 72

Total trade and other payables (excluding employee entitlements) 1,697 1,418

Employee entitlements 287 220

Total trade and other payables 1,984 1,638

12 OWING TO SUPPLIERS

Amounts owing to suppliers are amounts Fonterra owes to farmer shareholders and contract milk suppliers for the collection of milk, which includes end of season adjustments, offset by amounts owing from farmer shareholders for services provided to them by Fonterra.

These amounts are initially recognised at fair value, being the amount due to the supplier for the milk provided. They are subsequently measured at amortised cost using the effective interest method.

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:

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Final milk price for the season $4.40 $8.40

Of this amount:

– Total advance payments made during the year $4.33 $7.30

– Total owing as at 31 July $0.07 $1.10

Amount advanced during the year as a percentage of the milk price for the season ended 31 May 98% 87%

The total amount owing to suppliers at 31 July 2015 is $159 million (31 July 2014: $1,771 million).

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LONG TERM ASSETS

This section provides information about the investments Fonterra 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 livestock, and non-physical assets such as brands and goodwill. This section also explains the estimates and judgements applied in the measurement of these assets.


Note 13: Property, plant and equipment

Note 14: Livestock

Note 15: Intangible assets

13 PROPERTY, PLANT AND EQUIPMENT

Items of property, plant and equipment are measured at cost less accumulated depreciation and 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.

DepreciationDepreciation 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 15–50 years

– Plant, vehicles and equipment 3–25 years

GROUP $ MILLION

LAND

BUILDINGS AND LEASEHOLD

IMPROVEMENTS

PLANT, VEHICLES AND

EQUIPMENTCAPITAL WORK

IN PROGRESS TOTAL

As at 31 July 2015

Cost 366 2,316 6,789 1,103 10,574

Accumulated depreciation and impairment – (811) (3,604) – (4,415)

Net book value at 31 July 2015 366 1,505 3,185 1,103 6,159

As at 31 July 2014

Cost 327 1,986 6,175 510 8,998

Accumulated depreciation and impairment – (703) (3,204) – (3,907)

Net book value at 31 July 2014 327 1,283 2,971 510 5,091

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13 PROPERTY, PLANT AND EQUIPMENT CONTINUED

GROUP $ MILLION

LAND

BUILDINGS AND LEASEHOLD

IMPROVEMENTS

PLANT, VEHICLES AND

EQUIPMENTCAPITAL WORK

IN PROGRESS TOTAL

Net book value

As at 1 August 2014 327 1,283 2,971 510 5,091

Additions¹ – 6 16 1,316 1,338

Transfer from capital work in progress 10 181 540 (731) –

Acquisition of subsidiaries 18 85 81 10 194

Hyperinflationary movements 16 28 27 5 76

Transfer to assets held for sale (6) (18) (66) – (90)

Depreciation charge – (93) (360) – (453)

Impairment losses – (17) (39) – (56)

Disposals (2) (1) (10) – (13)

Foreign currency translation 3 51 25 (7) 72

As at 31 July 2015 366 1,505 3,185 1,103 6,159

Net book value

As at 1 August 2013 318 1,206 2,729 554 4,807

Additions¹ – 8 40 740 788

Transfer from capital work in progress 11 173 596 (780) –

Depreciation charge – (83) (354) – (437)

Impairment losses – – (2) – (2)

Disposals – (1) (12) (1) (14)

Foreign currency translation (2) (20) (26) (3) (51)

As at 31 July 2014 327 1,283 2,971 510 5,091

1 Additions include borrowing costs of $15 million (2014: $8 million) capitalised using a weighted average interest rate of 6.30 per cent (2014: 5.97 per cent).

During the year ended 31 July 2015, Fonterra recorded impairment losses of $108 million in relation to the Australian yoghurt and dairy desserts business. This impairment reflected the continuing challenges in that business’s market environment. $50 million was for property, plant and equipment, and $58 million was for intangible assets. The impairment was determined by reference to Fonterra’s estimate of the business’s fair value less costs to sell, which is a level 3 measurement in the fair value hierarchy. This impairment was recorded in the Oceania segment.

Leased assets

Leases of property, plant and equipment where the Group assumes substantially all the risks and rewards of ownership are classified as finance leases.

Assets under finance leases are recognised as property, plant and equipment in the statement of financial position. They are recognised initially at their fair value, or if lower, at the present value of the minimum lease payments. A corresponding liability is established and each lease payment allocated between the liability and interest expense using the effective interest method. The assets recognised are depreciated on the same basis as equivalent property, plant and equipment.

Leases that are not finance leases are classified as operating leases and the leased assets are not recognised on the Group’s statement of financial position. Operating lease payments are recognised as an expense on a straight line basis over the lease term.

The net book value of property, plant and equipment subject to finance leases is as follows:

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Land 5 5

Building and leasehold improvements 102 115

Plant and equipment 29 30

Net book value of property, plant and equipment subject to finance leases 136 150

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14 LIVESTOCK

The Group’s livestock balance primarily comprises dairy cows, which provide Fonterra with a quality milk source in China.

Livestock is measured at fair value less costs to sell, with any resulting gain or loss recognised in the income statement. The Group’s dairy cow herd comprises both immature and mature livestock.

Immature 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 immature livestock are capitalised to the statement of financial position. The fair value of immature livestock is determined by reference to market prices, adjusted to reflect the age of the herd.

Mature livestock includes dairy cows which have produced their first calf and begun milk production. Costs incurred in relation to mature livestock are recognised in the income statement. The fair value of mature dairy cows is determined by reference to an independent valuer’s report. The independent valuer primarily uses a discounted cash flow methodology. The Group also holds immaterial quantities of other livestock (such as bulls, beef and sheep).

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

HEADCOUNT

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Immature dairy cows 55,755 48,837

Mature dairy cows 31,444 20,964

Other livestock 2,825 2,647

Total livestock headcount 90,024 72,448

During the year the Group collected 200 million litres of milk (31 July 2014: 127 million litres) from its dairy cows.

The value of livestock at 31 July 2015 is as follows:

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Opening balance 202 111

Purchase of livestock 32 33

Rearing costs of immature livestock 89 55

Change in fair value – birth and growth (7) 10

Change in fair value – price changes 17 18

Sale of livestock (44) (19)

Effect of movements in exchange rates 42 (6)

Closing balance 331 202

Livestock – at fair value less costs to sell

Immature dairy cows 189 130

Mature dairy cows 141 71

Other livestock 1 1

Total livestock at fair value less costs to sell at 31 July 331 202

Valuation techniques and significant unobservable inputsThe following table shows the inter-relationship between the significant unobservable inputs and fair value measurement for mature livestock:

TYPE VALUATION TECHNIQUESIGNIFICANT UNOBSERVABLE INPUTS

INTER-RELATIONSHIP BETWEEN KEY UNOBSERVABLE INPUTS AND FAIR VALUE MEASUREMENT

Mature livestock Discounted cash flows Raw milk yield A 5% increase/(decrease) in the raw milk yield would result in a $9 million increase/(decrease) in fair value.

Milk price A 5% increase/(decrease) in the selling price of milk would result in a $20 million increase/(decrease) in fair value.

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15 INTANGIBLE ASSETS

Intangible assets include goodwill, brands and other intangibles, and computer software. Amortisation of intangible assets, with the exception of goodwill and brands with indefinite useful lives, is recorded over the assets’ estimated useful lives.

Intangible assets are reviewed for impairment whenever there is an indication that the carrying amount may not be recoverable. In addition, goodwill and intangible assets with indefinite useful lives are tested annually for impairment. If the estimated recoverable amount of an asset is less than its carrying amount, the asset is written down to its estimated recoverable amount and an impairment loss is recognised in the income statement. The recoverable amount of an asset is the higher of its fair value less costs to sell and value in use.

Intangible assets (excluding goodwill) that have been impaired are reviewed for possible reversal of impairment at each balance date. A reversal of an impairment loss shall not exceed the carrying amount that would have been determined, net of amortisation or depreciation, had no impairment loss been recognised for the asset in prior years.

GoodwillGoodwill 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 is subsequently measured at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed.

Goodwill is allocated to cash-generating units for the purposes of impairment testing. Goodwill is allocated to those cash-generating units or groups of cash-generating units that are expected to benefit from the business combination in which the goodwill arose.

Brands and other identifiable intangible assetsBrands and other intangible assets purchased by the Group are recognised if the asset is controlled through custody or legal rights and could be sold separately from the rest of the business. Brands and other intangible assets have a combination of both indefinite and finite useful lives.

Intangibles with finite useful lives are carried at cost less accumulated amortisation and accumulated impairment losses, and are amortised on a straight line basis to allocate the cost over their licence period (three to 25 years).

Computer softwareCosts that are directly associated with the development of identifiable and unique software products controlled by the Group, and that will generate economic benefits exceeding costs beyond one year, are recognised as intangible assets. The costs incurred to acquire specific software licenses are capitalised. Costs associated with maintaining computer software programmes are recognised as an expense as incurred.

Computer software licences and development costs recognised as assets are amortised on a straight line basis over their estimated useful lives, being three to 10 years.

GROUP $ MILLION

GOODWILL BRANDS SOFTWARESOFTWARE

WIP OTHERTOTAL

INTANGIBLES

As at 31 July 2015

Cost 1,101 1,892 1,091 92 102 4,278

Accumulated amortisation and impairment (2) (193) (741) – (69) (1,005)

Net book value at 31 July 2015 1,099 1,699 350 92 33 3,273

As at 31 July 2014

Cost 940 1,500 1,007 73 94 3,614

Accumulated amortisation and impairment (2) (118) (640) – (63) (823)

Net book value at 31 July 2014 938 1,382 367 73 31 2,791

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15 INTANGIBLE ASSETS CONTINUED

GROUP $ MILLION

GOODWILL BRANDS SOFTWARESOFTWARE

WIP OTHERTOTAL

INTANGIBLES

Net book value

As at 1 August 2014 938 1,382 367 73 31 2,791

Additions¹ – – 2 98 – 100

Acquisition of subsidiaries 176 340 – – – 516

Transfer from work in progress – – 79 (79) – –

Amortisation – (6) (100) – (2) (108)

Impairment loss – (66) – – – (66)

Foreign currency translation (15) 49 2 – 4 40

As at 31 July 2015 1,099 1,699 350 92 33 3,273

Net book value

As at 1 August 2013 970 1,417 221 217 33 2,858

Additions¹ – – 3 96 5 104

Transfer from work in progress – – 235 (235) – –

Amortisation – (5) (90) – (6) (101)

Disposals (4) – (2) – – (6)

Foreign currency translation (28) (30) – (5) (1) (64)

As at 31 July 2014 938 1,382 367 73 31 2,791

1 Additions include borrowing costs of $1 million (2014: $3 million) capitalised using an interest rate of 6.30 per cent (2014: 6.59 per cent).

Amortisation is recognised in other operating expenses in the income statement.

Goodwill and other indefinite life intangibles

GoodwillGoodwill for each cash generating unit (CGU) except DPA Brazil has been tested for impairment on a value in use basis. The goodwill for DPA Brazil was tested on a fair value less costs to sell basis, reflecting the recent fair value assessment performed when Fonterra acquired a controlling interest on 1 August 2014.

Impairment testing was undertaken at 31 May 2015, using external sources of information where appropriate. Cash flow forecasts used as inputs to determine value in use are based on the Group’s three year business plans, applying a long term growth rate.

The discount rates applied to the future cash flows are between 7.5 per cent and 11 per cent (31 July 2014: between 6.6 per cent and 9.1 per cent) and long term growth rates applied to future cash flows are between 2.6 per cent and 4.5 per cent (31 July 2014: between 3.0 per cent and 3.8 per cent).

There was sufficient headroom between the recoverable amount and the carrying value of goodwill therefore no impairment was recognised.

Of those CGUs tested, the goodwill of the Fonterra Brands New Zealand CGU is considered significant in the context of the carrying value of goodwill for the Group. For the Fonterra Brands New Zealand CGU the carrying value of goodwill is $650 million (31 July 2014: $650 million) and the carrying value of indefinite life brands attributable to the CGU is $389 million (31 July 2014: $389 million).

Indefinite life brandsOf the total brands held, 99 per cent ($1,661 million) have indefinite useful lives (31 July 2014: 93 per cent, $1,283 million). In concluding that a brand has an indefinite life, management considers its intention to acquire, hold and support brands through advertising and promotional spending for an indefinite period.

Individual indefinite life brands are tested annually for impairment through a value in use test using a discounted cash flow methodology, using the same assumptions as those for goodwill impairment testing.F

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INVESTMENTS

This section provides information about Fonterra’s interest in other entities. These investments include subsidiaries and equity accounted investments.


Note 16: Business combinations

Note 17: Assets held for sale

Note 18: Equity accounted investments

16 BUSINESS COMBINATIONS

The acquisition of subsidiaries is accounted for by allocating the cost of the business combination to the fair value of the assets acquired and the liabilities and contingent liabilities assumed at the date of acquisition.

Where the amount of consideration transferred is greater than the net assets acquired, goodwill on acquisition is recognised. Goodwill is not amortised and instead is tested annually for impairment. Where the consideration transferred is less than the fair value of the net assets acquired, the difference is recognised in the income statement as a gain on bargain purchase.

On 1 August 2014, the Group acquired additional voting shares in DPA Brazil (Dairy Partners Americas Brasil Limitada – from 50 per cent to 51 per cent, with Nestlé holding the balance) and DPA Venezuela (Lacven Corporation – 25 per cent to 60 per cent, with a local partner holding the balance). These equity accounted investments became consolidated subsidiaries from that date.

On 1 October 2014, the Group’s equity accounted investments in Ecuador (Ecuajugos S.A.) and DPA’s milk powder manufacturing business (DPA Manufacturing Holdings Limited) were sold to Nestlé.

The fair value of consideration transferred at the acquisition date is:

GROUP $ MILLION


Carrying value of existing interest 106 23 129

Gain/(loss) on remeasuring to fair value¹ 165 (6) 159

Fair value of existing interest 271 17 288

Cash paid 2 – 2

Fair value of consideration transferred 273 17 290

Represented by:

Share of identifiable acquired net assets 97 41 138

Goodwill on acquisition 176 – 176

Gain on bargain purchase² – (24) (24)

Total 273 17 290

1 The gain/(loss) on remeasuring the previous equity accounted interests is determined with reference to the fair value determined by independent experts.

2 Gain on bargain purchase arises on the consolidation of Venezuela into the Group. The business was no longer a strategic fit for another owner, and therefore the Group was able to negotiate a favourable purchase price for the additional 35 per cent.

The cash inflow on acquisition is:

GROUP $ MILLION


Net cash acquired with subsidiary 9 17 26

Cash paid (2) – (2)

Net consolidated inflow on acquisition 7 17 24

The contribution of the acquired entities to the Group’s revenue and profit for the year ended 31 July 2015 is:

GROUP $ MILLION


Revenue 495 673 1,168

Profit after tax 4 45 49

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16 BUSINESS COMBINATIONS CONTINUED

The Group has recorded a one-off gain relating to the business combinations, sale of equity accounted investments and the settlement of other relationships with the parties.

GROUP $ MILLION

BRAZIL VENEZUELA OTHER TOTAL

Fair value gain/(loss) revaluing existing interest 165 (6) – 159

Foreign currency translation reserve transferred to income statement (39) (15) (24) (78)

Gain on bargain purchase – 24 – 24

Gain on sale of equity accounted investment – – 5 5

Other items – – 19 19

Total gain¹ 126 3 – 129

1 The gain is included in other operating income ($141 million), cost of goods sold ($4 million expense) and other operating expenses ($8 million expense).

The fair values of the major classes of identifiable assets acquired and liabilities assumed at the acquisition date are:

GROUP $ MILLION


Trade and other receivables 159 64 223

Property, plant and equipment 111 83 194

Intangible assets 328 12 340

Other assets 115 59 174

Total assets 713 218 931

Trade and other payables (119) (95) (214)

Borrowings (193) (37) (230)

Deferred tax liabilities (112) (6) (118)

Other liabilities¹ (101) (10) (111)

Total liabilities (525) (148) (673)

Fair value of identifiable net assets 188 70 258

1 Provisions of $80 million have been recognised for contingencies relating to tax and legal matters arising in the normal course of business. The timing and amount of the future obligations are uncertain, as they are contingent on the outcome of a number of administrative and judicial proceedings. The amount recognised has been based on management’s best estimate of the amount that will be required to settle the obligations. The outcome of most of the obligations is not expected to be determined within the next year and therefore the provisions are classified as non-current.

17 ASSETS HELD FOR SALE

Darnum manufacturing plant – AustraliaOn 16 March 2015, Fonterra acquired an 18.8 per cent shareholding in Beingmate Baby & Child Food Co., Ltd. (Beingmate). In conjunction with this investment, Fonterra and Beingmate confirmed their intention to establish a partnership to purchase the Darnum manufacturing plant in Australia. The sale of the plant to the partnership is subject to regulatory approvals and is expected to complete within one year of balance date. Accordingly the Darnum manufacturing plant is classified as held for sale at 31 July 2015.

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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. 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 other 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 recognises any impairment in the income statement.

The Group’s significant equity accounted investments are listed below. The ownership interest in these entities is 50 per cent or less and the Group is not considered to exercise a controlling interest.


EQUITY ACCOUNTED INVESTEE NAME¹ COUNTRY OF INCORPORATION²AS AT

31 JULY 2015AS AT

31 JULY 2014

DMV Fonterra Excipients GmbH & Co KG Germany 50 50

Dairy Industries (Jamaica) Limited Jamaica 50 50

DairiConcepts, L.P. USA 50 50

DairiConcepts Management, L.L.C. USA 50 50

Dairy Partners Americas Brasil Limitada3 Brazil – 50

Lacven Corporation3 Barbados – 25

Beingmate Baby & Child Food Co., Ltd China 18.8 –

International Nutritionals Limited New Zealand 50 50

1 Except for International Nutritionals Limited, all investees have balance dates of 31 December. International Nutritionals Limited has the same balance date as the Group.

2 This is also the principle place of business.

3 On 1 August 2014, the Group purchased additional voting equity interests in DPA Brazil (Dairy Partners Americas Brasil Limitada) and DPA Venezuela (Lacven Corporation). These entities became consolidated subsidiaries from that date. Please refer to Notes 16 and 23 for further information.

The Group holds investments in a number of joint ventures and associates that are not individually significant to the Group. 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 2015

AS AT 31 JULY 2014

AS AT 31 JULY 2015

AS AT 31 JULY 2014

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Carrying amount of investment 863¹ 7 322 381 1,185 388

Profit from continuing operations (3) 1 69 72 66 73

Other comprehensive income/(expense) – – 4 (11) 4 (11)

Total comprehensive income (3) 1 73 61 70 62

1 On 16 March 2015, Fonterra acquired an 18.8 per cent shareholding in Beingmate Baby & Child Food Co., Ltd. (Beingmate) for cash consideration of $756 million. Beingmate is an infant formula business in the People’s Republic of China, listed on the Shenzhen stock exchange.

The Group has provided financial guarantees to certain equity accounted investees as set out in Note 22.

The Group’s equity accounted investees have entered into non-cancellable operating leases, and the Group’s share of the future aggregate minimum lease payments under these leases is $21 million (31 July 2014: $7 million).

The Group’s share of capital expenditure contracted for at balance date but not recognised by equity accounted investees is $1 million (31 July 2014: $12 million).

There are no contingent liabilities relating to the Group’s interests in joint ventures or equity accounted investees.

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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

OverviewGlobal financial and commodity markets remain volatile. The nature of Fonterra’s business is such that managing risks in the foreign exchange, interest rate, commodity, credit and liquidity markets is critical to minimising the volatility in returns to equity holders.

The Board has overall responsibility for the establishment and oversight of the Group’s financial risk management framework. The Board:

– has established financial risk management policies and procedures to identify, analyse and, where appropriate, manage the financial risks faced by the Group;

– has approved a Treasury Policy that covers appropriate financial risk limits and controls (including, but not limited to, delegated authority levels and authorised use of various financial instruments); and

– monitors financial risks and adherence to approved limits.

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 the 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.

Fonterra manages financial risk, including foreign exchange risk, interest rate risk, credit risk, liquidity risk and commodity price risk. The table below shows where information on how each of these risks is managed can be found.

Information on capital management and structure, financial instrument fair values and disclosures and offsetting of financial assets and liabilities is also included in the table below.

ITEM DISCLOSURE

Foreign exchange risk See section a) below.

Interest rate risk Interest rate risk principally arises from the Group’s borrowings and funds on deposit and associated derivative financial instruments. Interest rate risk is addressed in Note 7 in the Debt and Equity section.

Credit risk Credit risk principally arises from the Group’s receivables from customers and derivative financial instruments. Credit risk on receivables is discussed in Note 9 in the Working Capital section. Credit risk on derivative financial instruments is addressed in section b) below.

Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. Liquidity risk is addressed in Note 7 in the Debt and Equity section.

Capital management and structure The Board’s objective is to maximise equity holder returns over time by maintaining an optimal capital structure. Capital management is addressed in Note 5 in the Debt and Equity section.

Dairy commodity price risk See section c) below.

Fair values and classifications See section d) below.

Offsetting of financial assets and liabilities See section e) below.

a) Foreign exchange riskThe Group operates internationally and is exposed to foreign exchange risk on sales, purchases, investments and borrowings that are denominated in foreign currencies. Foreign exchange risk arises from future commercial transactions, recognised assets and liabilities, and net investments in foreign operations.

The main impacts of foreign exchange movements on the Group arise from:

– transaction risk: variations in the New Zealand dollar value of the Group’s sales receipts and other cash flows; and

– translation risk: the value of the Group’s investment in foreign operations and the Group’s foreign currency debt.

The Group’s objective is to ensure foreign exchange exposure is managed in a prudent manner in order to reduce volatility on the returns to equity holders and farmer shareholders.

In respect of transaction hedging, the Group’s policy is to hedge 100 per cent of the net recognised foreign currency trade receivables and foreign currency trade payables, and up to 100 per cent of forecast cash receipts from sales for a period of up to 18 months. The level of hedging undertaken is influenced by current exchange rates and the time until the expected cash flows occur, within the limits approved by the Board. The Group seeks to designate items in a hedge relationship where it is practical to do so; therefore some derivative instruments entered into as economic hedges may not be in a designated hedge relationship for accounting purposes.

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19 FINANCIAL RISK MANAGEMENT CONTINUED

Approximately 96 per cent (31 July 2014: 96 per cent) of the Group’s net transaction foreign exchange exposure, before taking into consideration hedging activity, is against the United States Dollar.

In respect of translation hedging, the Group principally uses foreign currency denominated borrowings to hedge exposures arising from net investments in foreign operations. The Group uses forward foreign exchange contracts, currency options and cross currency interest rate swaps to hedge translation exposure arising from foreign currency debt that is not in a net investment hedge.

Of the Group’s translation exposure arising from investment in foreign operations, before taking into consideration hedging activity, approximately 24 per cent (31 July 2014: 32 per cent) is against the Australian Dollar, 14 per cent (31 July 2014: 4 per cent) is against the Hong Kong Dollar, 13 per cent (31 July 2014: 9 per cent) is against the Chinese Renminbi, and 12 per cent (31 July 2014: 16 per cent) is against the Singapore Dollar.

Of the Group’s translation exposure arising from foreign currency debt, before taking into consideration hedging activity, approximately 44 per cent (31 July 2014: 39 per cent) is against the United States Dollar, 19 per cent (31 July 2014: 27 per cent) is against the Australian Dollar, and 19 per cent (31 July 2014: 9 per cent) is against the Chinese Renminbi.

Net foreign exchange gains

Foreign currency transactionsForeign currency transactions are translated using the exchange rate at the dates of transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation, using the exchange rates at the balance date, of monetary assets and liabilities denominated in foreign currencies are recognised in the income statement, except when deferred in other comprehensive income as qualifying cash flow or qualifying net investment hedges.

The table below provides a breakdown of the net foreign exchange gains or losses recognised in the income statement.

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Net foreign exchange (losses)/gains on debt instruments designated in a fair value hedge relationship (352) 19

Net foreign exchange gains/(losses) on derivative instruments designated as a fair value hedge 357 (21)

Net foreign exchange (losses)/gains on financial instruments classified as held for trading (267) 125

Net foreign exchange gains/(losses) on financial assets classified as loans and receivables 618 (275)

Net foreign exchange (losses)/gains on financial liabilities measured at amortised cost (286) 191

Net foreign exchange gains 70 39

Foreign exchange sensitivity A 10 per cent movement in the value of the New Zealand Dollar against the key currencies to which the Group is exposed would result in the following post-tax, using appropriate tax rates, increase/(decrease) to equity and profit. A 10 per cent movement in exchange rates is considered reasonably possible over the short term, given historical fluctuations in the value of the New Zealand Dollar.

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

EQUITY PROFIT EQUITY PROFIT

Impact of a 10% strengthening of the NZD 28 14 231 (7)

Impact of a 10% weakening of the NZD (46) (11) (210) 31

b) Credit riskCredit risk is the risk of financial loss to the Group if a counterparty to a financial instrument fails to meet its contractual obligations. In relation to derivative financial instruments, the Group has a policy to limit its exposure to credit risk by entering into transactions only with financial counterparties that have a credit rating of at least ‘A-’ from Standard & Poor’s or equivalent. Given this high credit rating threshold, management does not expect these counterparties to fail to meet their obligations. Exceptions to this policy are authorised in accordance with the Board-approved Financial Risk Management Standard.

The maximum credit risk on cash and cash equivalents, trade and other receivables, derivative financial instruments and other investments is best represented by their carrying values. The Group has no undue concentrations of credit risk.

c) Dairy commodity price risk Dairy commodity price risk is the risk of volatility in profit or loss from a movement in dairy commodity prices to which the Group may be exposed. Volatility in global dairy commodity prices can have an adverse impact on Fonterra’s earnings and milk price by eroding selling prices or increasing input costs.

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The Group primarily manages its 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 GlobalDairyTrade (GDT) prices; and

– using derivative contracts to manage earnings volatility. The Group has direct trading in dairy commodity derivatives. Fonterra aims to use its industry knowledge to obtain the best price for future sales. The markets for these types of derivatives are relatively limited and this reduces the scope for using derivatives to manage earnings volatility. As markets for these derivatives grow, the scope of such commodity risk management activities may increase.

Commodity price risk sensitivity analysis The table below summarises the impact on dairy commodity derivatives for changes in dairy commodity prices on the Group’s profit after tax. The analysis is based on the assumption that dairy based commodity derivative prices had changed by 10 per cent with all other variables held constant:

GROUP $ MILLION

31 JULY 2015 PROFIT

31 JULY 2014 PROFIT

Impact of 10% increase in quoted dairy commodity derivative prices (14) (3)

Impact of 10% decrease in quoted dairy commodity derivative prices 14 3

d) Fair values and classifications

A financial asset or liability is recognised if the Group becomes a party to the contractual provisions of the asset or liability. A financial asset or liability is recognised initially at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the instrument. Financial assets and liabilities carried at fair value through profit or loss are initially recognised at fair value and transaction costs are expensed in the income statement.

Financial assets are classified on initial recognition into the following categories: at fair value through profit or loss, loans and receivables, and available-for-sale. Financial liabilities are classified as either fair value through profit or loss, or financial liabilities measured at amortised cost. The classification depends on the purpose for which the financial assets and liabilities were acquired. Management determines the classification of its financial assets and liabilities at initial recognition.

After initial recognition, financial instruments are measured at their fair values, except for loans and receivables, which are measured at amortised cost less any provision for impairment, and financial liabilities measured at amortised cost.

Financial assets and liabilities at fair value through profit or loss are either designated as fair value through profit or loss, or classified as held for trading. All derivatives are classified as held for trading except when they are in hedge accounting relationships. Other financial assets and financial liabilities may be designated at fair value through profit or loss where this eliminates an accounting mismatch, or where they are managed on a fair value basis.

Financial assets are derecognised if the Group’s contractual rights to the cash flows from the financial assets expire or if the Group transfers the financial asset to another party without retaining control or substantially all risks and rewards of the asset. Financial liabilities are derecognised if the Group’s obligations specified in the contract expire or are discharged or cancelled.

Derivative financial instruments and hedging activitiesThe Group uses derivative financial instruments within predetermined policies and limits in order to reduce its exposure to fluctuations in foreign currency exchange rates and interest rates.

Derivatives are initially recognised at fair value on the date a derivative contract is entered into (the trade date) and transaction costs are expensed immediately. They are subsequently remeasured to their fair value. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument, and if so, the nature of the item being hedged. The Group designates certain derivatives as either:

– hedges of the fair value of recognised assets or liabilities, or a firm commitment (fair value hedges);

– hedges of a particular risk associated with a recognised liability or a highly probable forecast transaction (cash flow hedges); or

– hedges of a net investment in a foreign operation (net investment hedges).

The Group documents, at the inception of the transaction, the relationship between hedging instruments and hedged items, as well as its risk management objectives and strategy for undertaking various hedging transactions. The Group also documents its assessment, both at hedge inception and on an ongoing basis, of whether the derivatives used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items.

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The full fair value of a hedging derivative is classified as a non-current asset or liability when maturity of the hedged item exceeds 12 months. It is classified as a current asset or liability when the maturity of the hedged item is less than 12 months.

Fair value hedges Changes in the fair value of derivatives that are designated and qualify as fair value hedges are recognised in the income statement, together with any changes in the fair value of the hedged asset or liability attributable to the hedged risk.

If the hedge no longer meets the criteria for hedge accounting, the adjustment to the carrying amount of a hedged item for which the effective interest method is used is amortised and recognised in the income statement over the period to maturity.

Cash flow hedgesThe effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges are recognised directly in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement. Amounts accumulated in equity are transferred to the income statement when the hedged item affects profit or loss.

When a hedging instrument expires or is sold, or when a hedge no longer meets the criteria for hedge accounting, any cumulative gain or loss existing in equity at that time remains in equity and is recognised when the forecast transaction is ultimately recognised in the income statement. When a forecast transaction is no longer expected to occur, the cumulative gain or loss that was reported in equity is recognised immediately in the income statement.

When the forecast transaction that is hedged results in the recognition of a non-financial asset (e.g. inventory or property, plant and equipment) the gains and losses previously deferred in equity are transferred from equity and included in the initial measurement of the cost of the asset.

Net investment hedgesHedges of net investments in foreign operations are accounted for similarly to cash flow hedges. Any gain or loss on the hedging instrument relating to the effective portion of the hedge is recognised in other comprehensive income. The gain or loss relating to the ineffective portion is recognised immediately in the income statement.

Gains and losses accumulated in equity are included in the income statement when all or part of a foreign operation is disposed of or sold.

Valuation techniques for determining fair valuesThe 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 forward 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 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 interest rate yield curves.

Fair value hierarchyAll financial instruments for which a fair value is recognised are categorised within level 1 or level 2 of the fair value hierarchy. The fair value of the Group’s livestock is categorised within level 3. These categories are described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

– 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).

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The following table shows the fair value hierarchy for financial instruments and livestock measured at fair value on the statement of financial position:

GROUP $ MILLION

LEVEL 1 LEVEL 2 LEVEL 3

AS AT 31 JULY 2015

AS AT 31 JULY 2014

AS AT 31 JULY 2015

AS AT 31 JULY 2014

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Derivative assets

– Commodity derivatives 13 4 3 – – –

– Foreign exchange derivatives – – 16 304 – –

– Interest rate derivatives – – 386 149 – –

Derivative liabilities

– Commodity derivatives (29) (16) (4) – – –

– Foreign exchange derivatives – – (1,009) (11) – –

– Interest rate derivatives¹ – – (367) (418) – –

Available-for-sale investments 74 74 – – – –

Livestock – – – – 331 202

Fair value 58 62 (975) 24 331 202

1 Includes cross currency interest rate swaps.

The following table shows the fair value hierarchy for each class of asset and liability where the carrying value in the statement of financial position differs from the fair value:

GROUP $ MILLION

CARRYING VALUE LEVEL 1 LEVEL 2

AS AT 31 JULY 2015

AS AT 31 JULY 2014

AS AT 31 JULY 2015

AS AT 31 JULY 2014

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Financial assets

Long-term advances 65 81 – – 64 80

Financial liabilities

Borrowings

– NZX listed bonds (500) (948) (502) (960) – –

– Capital notes (35) (35) (35) (33) – –

– Commercial paper (473) (464) – – (473) (463)

– Bank loans (1,717) (437) – – (1,718) (439)

– Medium-term notes (4,666) (2,834) – – (4,960) (3,073)

– Finance leases (169) (180) – – (192) (199)

The Group’s policy is to recognise transfers between the levels of the fair value hierarchy as of the date of the event or circumstances that caused the transfer.

The timing of the maturity of the release of the Group’s gross cash flow hedge reserve is:

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Within 12 months (591) 158

Later than 12 months (156) (45)

Total carrying value (747) 113

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The fair value of derivatives in hedge relationships by type of hedging relationship is:

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Cash flow hedge (748) 133

Fair value hedge 243 (179)

Net investment hedge (5) –

Total fair value of derivatives in hedge relationships (510) (46)

e) 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.

In the normal course of business, 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.

The table below sets out the financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and other agreements.

GROUP $ MILLION

AMOUNTS OFFSET IN THE STATEMENT OF FINANCIAL POSITION

GROSS FINANCIAL ASSETS/

(LIABILITIES)

GROSS FINANCIAL ASSETS/

(LIABILITIES) SET OFF

NET FINANCIAL ASSETS/

(LIABILITIES) PRESENTED

AMOUNTS NOT OFFSET NET

Derivative financial assets 557 (140) 417 (283) 134

Trade and other receivables (excluding prepayments) 2,579 (357) 2,222 – 2,222

3,136 (497) 2,639 (283) 2,356

Derivative financial liabilities (1,548) 140 (1,408) 283 (1,125)

Trade and other payables (excluding employee entitlements) (1,987) 290 (1,697) – (1,697)

Owing to suppliers (226) 67 (159) – (159)

Borrowings (7,560) – (7,560) – (7,560)

(11,321) 497 (10,824) 283 (10,541)

31 July 2015 (8,185) – (8,185) – (8,185)

Derivative financial assets 542 (85) 457 (433) 24

Trade and other receivables (excluding prepayments) 2,084 (213) 1,871 – 1,871

2,626 (298) 2,328 (433) 1,895

Derivative financial liabilities (530) 85 (445) 194 (251)

Trade and other payables (excluding employee entitlements) (1,572) 154 (1,418) – (1,418)

Owing to suppliers (1,830) 59 (1,771) – (1,771)

Borrowings (4,898) – (4,898) 239 (4,659)

(8,830) 298 (8,532) 433 (8,099)

31 July 2014 (6,204) – (6,204) – (6,204)

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OTHER

This section contains additional notes and disclosures that aid in understanding Fonterra’s position and performance but do not form part of the primary sections.


Note 20: Taxation

Note 21: Contingent liabilities, provisions and commitments

Note 22: Related party transactions

Note 23: Group entities

Note 24: Net tangible assets per security

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 by the 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.

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 statementThe total taxation credit in the income statement is summarised as follows:

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Current tax expense 97 54

Prior period adjustments to current tax – (2)

Deferred tax movements:

– Origination and reversal of temporary differences (179) (94)


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The taxation charge that would arise at the standard rate of corporation tax in New Zealand is reconciled to the tax expense/(credit) as follows:

GROUP $ MILLION

31 JULY 2015 31 JULY 2014


Prima facie tax expense at 28% 119 38


– Effect of tax rates in foreign jurisdictions (31) (13)

– Non-deductible expenses/additional assessable income 44 31

– Non-assessable income/additional deductible expenses (71) (36)

– Prior year over provision – (2)

Tax expense before distributions and deferred tax 61 18

Effective tax rate before distributions and deferred tax¹ 14.4% 13.1%

Tax effect of distributions to farmer shareholders (107) (38)

Tax credit before deferred tax (46) (20)

Effective tax rate before deferred tax¹ (10.8)% (14.6)%


– Origination and reversal of other temporary differences 2 (45)

– Losses of overseas Group entities (recognised)/not recognised (38) 23


Effective tax rate1 (19.3)% (30.7)%

Imputation credits

Imputation credits available for use in subsequent reporting periods 20 20

Tax losses

Gross tax losses available for which no deferred tax asset has been recognised 55 201

1 The effective tax rate is the tax charge on the face of the income statement expressed as a percentage of the profit before tax.

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b) Taxation – statement of financial positionThe table below outlines the deferred tax assets and liabilities that are recognised in the statement of financial position, together with movements in the year:

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Deferred tax

Property, plant and equipment (47) (94)

Intangible assets (535) (428)

Derivative financial instruments 230 (55)

Employee entitlements 55 51

Inventories 85 27

Receivables, payables and provisions 66 40

New Zealand tax losses 484 476

Offshore tax losses 303 202

Other (18) 7

Total deferred tax 623 226

Movements for the year

Opening balance 226 211

Recognised in the income statement 179 94

Deferred tax on acquisition (91) –

Recognised directly in other comprehensive income 281 (70)

Foreign currency translation 28 (9)

Closing balance 623 226



Deferred tax liabilities (109) (5)


Balance expected to be recovered or settled:

Within 12 months 475 233

Later than 12 months 148 (7)


$2,039 million (31 July 2014: $1,866 million) of tax loss carry forwards are recognised by Group operations which reported a taxable loss in 2015 or 2014. Fonterra considers it probable that these tax losses can be offset against future taxable income, taking into consideration Fonterra’s future expectations including approved business plans for those operations.

The Group has not recognised deferred tax liabilities in respect of unremitted earnings that are considered indefinitely reinvested in foreign subsidiaries. As at 31 July 2015, these earnings amount to $729 million (31 July 2014: $624 million). These could be subject to withholding and other taxes on remittance.

21 CONTINGENT LIABILITIES, PROVISIONS AND COMMITMENTS

Contingent liabilitiesIn the normal course of business, Fonterra, its subsidiaries and equity accounted investees, are exposed to claims and legal proceedings that may in some cases result in costs to the Group.

In early August 2013, Fonterra publicly announced a potential food safety issue with three batches of Whey Protein Concentrate (WPC80) produced at the Hautapu manufacturing site and initiated a precautionary product recall.

In late August 2013, the New Zealand Government confirmed that the Clostridium samples found in WPC80 were not Clostridium botulinum and were not toxigenic, meaning the consumers of products containing the relevant batches of WPC80 were never in danger from Clostridium botulinum.

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21 CONTINGENT LIABILITIES, PROVISIONS AND COMMITMENTS CONTINUED

In January 2014, Danone formally initiated legal proceedings against Fonterra in the High Court of New Zealand and separate Singapore arbitration proceedings against Fonterra in relation to the WPC80 precautionary recall. The New Zealand High Court proceedings have been stayed pending completion of the Singapore arbitration. The hearing of the arbitration is scheduled to occur in February 2016.

Based on current information available and the claims made to date in both proceedings, Fonterra will vigorously defend its position in these proceedings. Uncertainty exists regarding the outcome of the proceedings. Fonterra has provided $11 million (31 July 2014: $11 million) in respect of the Danone claims, which represents the maximum contractual liability to Danone.

The Directors believe that these proceedings have been adequately provided for and disclosed by the Group and that there are no additional claims or legal proceedings in respect of this matter that are pending at the date of these financial statements that require provision or disclosure.

The Group has no other contingent liabilities as at 31 July 2015 (31 July 2014: nil).

Provisions

Provisions are recognised in the statement of financial position only where the Group has a present legal or constructive obligation as a result of a past event, when it is probable, being more likely than not, that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount can be made.

Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognised as a finance cost in the income statement.

GROUP $ MILLION

RESTRUCTURING AND RATIONALISATION

PROVISIONSLEGAL CLAIMS

PROVISIONSOTHER

PROVISIONSTOTAL

PROVISIONS

As at 1 August 2014 17 24 71 112

Additional provisions 36 9 22 67

Unused amounts reversed (4) (1) (2) (7)

Charged to income statement 32 8 20 60

Utilised during the year (11) (5) (13) (29)

Foreign currency translation 1 1 8 10

Acquisition of subsidiary – 71 39 110

As at 31 July 2015 39 99 125 263


Current liabilities 77

Non-current liabilities 186

Total provisions 263

GROUP $ MILLION

RESTRUCTURING AND RATIONALISATION

PROVISIONSLEGAL CLAIMS

PROVISIONSOTHER

PROVISIONSTOTAL

PROVISIONS

As at 1 August 2013 40 32 86 158

Additional provisions 12 – 26 38

Unused amounts reversed (9) (7) (10) (26)

Charged to income statement 3 (7) 16 12

Utilised during the year (25) – (27) (52)

Foreign currency translation (1) (1) (4) (6)

As at 31 July 2014 17 24 71 112


Current liabilities 47

Non-current liabilities 65

Total provisions 112

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21 CONTINGENT LIABILITIES, PROVISIONS AND COMMITMENTS CONTINUED

The nature of the provisions are:

– the provision for restructuring and rationalisation includes obligations relating to planned changes throughout the business to improve efficiencies and reduce costs. The provisions are expected to be utilised in the next year.

– the legal claims provisions include obligations relating to tax, customs and duties and legal matters arising in the normal course of business. The timing and amount of the future obligations are uncertain, as they are contingent on the outcome of a number of judicial proceedings. The outcome of most of the obligations is not expected to be determined within the next year and therefore most of these provisions are classified as non-current.

– other provisions arise in the normal course of business.

Commitments

a) Capital commitmentsCapital expenditure contracted for at balance date but not recognised in the financial statements are as follows:

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Buildings 75 124

Plant, vehicles and equipment 208 238

Software 15 6

Livestock 8 5

Total commitments 306 373

b) Operating lease commitmentsThe Group leases premises, plant and equipment. The future aggregate minimum lease payments under non-cancellable operating leases are as follows:

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Less than one year 104 73

One to five years 217 120

Greater than five years 181 39

Total operating lease commitments 502 232

22 RELATED PARTY TRANSACTIONS

Equity accounted investees (refer to Note 18 for a list) and key management personnel are related parties of the Group. Key management personnel comprises the Board and the Fonterra Management Team.

Transactions were entered into and year end balances arose from transactions with related parties as follows:

Key management personnel remuneration

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Short-term employee benefits 15 10

Termination benefits – 2

Directors’ remuneration 3 3

Total key management personnel remuneration 18 15

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22 RELATED PARTY TRANSACTIONS CONTINUED

Transactions with related parties during the year

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Equity accounted investees

Revenue from the sale of goods¹ 85 77

Sale of services² 1 2

Royalty and other income³ 3 18

Dividends received 58 49

Interest income from financing arrangements 1 1

Purchases of goods⁴ (16) (43)

Purchases of services⁵ (35) (16)

Key management personnel

Purchases of goods⁴ (87) (146)

1 Goods sold to related parties are primarily commodity products and are provided under normal trade terms.

2 Services provided to related parties include management fees and are provided under normal trade terms.

3 Royalty and other income received from related parties are provided under normal trade terms.

4 Goods purchased from related parties are primarily commodity products, which are acquired under normal trade terms. Key management personnel may also engage in transactions with other Group entities under normal trade terms.

5 Services purchased from related parties are primarily commissions paid and are under normal trade terms.

Outstanding balances with related parties

GROUP $ MILLION

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Equity accounted investees

Total receivables arising from the sale or purchase of goods or services⁶ 24 29

Total receivables arising from financing arrangements⁷ 49 57

Total payables arising from the sale or purchase of goods or services (19) (11)

Total payables arising from financing arrangements (1) (1)

Key management personnel

Total payables arising from the sale or purchase of goods or services⁸ (2) (20)

6 There were no material provisions for impairment on the receivables from related parties.

7 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 one month and 12 years.

8 Payables to key management personnel relate to amounts owing for milk supplied to the Group by farmer shareholder Directors.

Financial guaranteesThe Group has provided financial guarantees for several equity accounted investees. The aggregate drawn down amount of equity accounted investees’ liabilities for which the Group is jointly and severally liable is $17 million (31 July 2014: $29 million).

Transactions with related entitiesAs part of the administration of Trading Among Farmers, Fonterra 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, Fonterra has agreed to provide corporate facilities, support functions and other services at no cost to the Fund.

GROUP $ MILLION

31 JULY 2015 31 JULY 2014

Dividends paid to key management personnel 3 4

CommitmentsIn addition to the transactions disclosed above, the Group has prospective commitments with related parties including contracts with equity accounted investees for the supply of dairy products, energy and the provision of various management services.

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23 GROUP ENTITIES

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 re-measured to fair value and any surplus or deficit arising from that re-measurement is recognised in the income statement.

Equity accounted investments are discussed in further detail in Note 18.

The Group’s subsidiaries and equity accounted investees are involved in the marketing, distribution, processing, technology or financing of dairy products. All Group entities have a balance date of 31 July unless otherwise indicated. Subsidiaries and equity accounted investees with different balance dates from that of the Group are due to legislative requirements in the country the entities are domiciled. Equity accounted investees may also have a different balance date due to alignment with their other investor’s balance date or to align with the milk season.

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:


SUBSIDIARY NAME COUNTRY OF INCORPORATION1AS AT

31 JULY 2015AS AT

31 JULY 2014

Fonterra Australia Pty Limited Australia 100 100

Fonterra Brands (Australia) Pty Limited Australia 100 100

Dairy Partners Americas Brasil Limitada2,3 Brazil 51 –

Soprole S.A.2 Chile 99.9 99.9

Fonterra Commercial Trading (Shanghai) Company Limited2 China 100 100

Fonterra (Yutian) Dairy Farm Co. Limited2 China 100 100

Fonterra (Ying) Dairy Company Limited2 China 100 100

PT Fonterra Brands Indonesia Indonesia 100 100

Fonterra Brands (Malaysia) Sdn Bhd Malaysia 100 100

Fonterra (Ing.) Limited Mauritius 51 51

Fonterra (Europe) Coöperatie U.A. Netherlands 100 100

Fonterra Europe Manufacturing B.V. Netherlands 100 100

Fonterra Brands (Singapore) Pte Limited Singapore 100 100

Fonterra Brands (New Young) Pte Limited Singapore 51 51

Fonterra (SEA) Pte Limited Singapore 100 100

Fonterra Brands Lanka (Private) Limited Sri Lanka 100 100

Fonterra (USA) Inc. USA 100 100

Corporación Inlaca CA3 Venezuela 60 –

Canpac International Limited New Zealand 100 100

Fonterra Brands (New Zealand) Limited New Zealand 100 100

Fonterra Brands (Tip Top) Limited New Zealand 100 100

Fonterra Limited New Zealand 100 100

Fonterra (New Zealand) Limited New Zealand 100 100

RD1 Limited New Zealand 100 100

1 This is also the principal place of business. Exceptions are Fonterra (Ing.) Limited and Fonterra Brands (New Young) Pte Limited, whose principal place of business is Taiwan.

2 Balance date 31 December.

3 On 1 August 2014, the Group purchased additional voting equity interests in DPA Brazil and DPA Venezuela. These entities became consolidated subsidiaries from that date. Please refer to Notes 16 and 18 for further information.

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23 GROUP ENTITIES 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 COUNTRY OF INCORPORATION1AS AT

31 JULY 2015AS AT

31 JULY 2014

Fonterra (Japan) Limited Japan 50 50

Fonterra Brands (Middle East) L.L.C. UAE 49 49

1 This is also the principal place of business.

In addition to the entities above, Fonterra 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 unit trust 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.

24 NET TANGIBLE ASSETS PER SECURITY

GROUP

AS AT 31 JULY 2015

AS AT 31 JULY 2014

Net tangible assets per security¹

$ per listed debt security on issue 5.62 3.55

$ per equity instrument on issue 2.12 2.34

Listed debt securities on issue (million) 603 1,053

Equity instruments on issue (million) 1,599 1,598

1 Net tangible assets represents total assets less total liabilities less intangible assets.

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TO THE SHAREHOLDERS OF FONTERRA CO-OPERATIVE GROUP LIMITED

REPORT ON THE FINANCIAL STATEMENTS

We have audited the Group financial statements of Fonterra Co-operative Group Limited (“the Company”) on pages 2 to 43, which comprise the statement of financial position as at 31 July 2015, the income statement, statement of comprehensive income, statement of changes in equity and cash flow statement for the year then ended, and the notes to the financial statements that include significant accounting policies and other explanatory information for the Group. The Group comprises the Company and the entities it controlled at 31 July 2015 or from time to time during the financial year.

Directors’ Responsibility for the Financial Statements

The Directors are responsible on behalf of the Company for the preparation and fair representation of these financial statements in accordance with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards and for such internal controls as the Directors determine are necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing (New Zealand) and International Standards on Auditing. These standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider the internal controls relevant to the Company’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates, as well as evaluating the overall presentation of the financial statements.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.

Our firm carries out other assignments for the Group in relation to other advisory, other assurance and attestation services. Partners and employees of our firm may deal with the Group on normal terms within the ordinary course of trading activities of the Group. These matters have not impaired our independence as auditors of the Group.

Opinion

In our opinion, the financial statements on pages 2 to 43 present fairly, in all material respects, the financial position of the Group as at 31 July 2015, and its financial performance and cash flows for the year then ended in accordance with New Zealand Equivalents to International Financial Reporting Standards and International Financial Reporting Standards.

RESTRICTION ON DISTRIBUTION OR USE

This report is made solely to the Company’s shareholders. Our audit work has been undertaken so that we might state to the Company’s shareholders those matters which we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed.

Chartered AccountantsAuckland 23 September 2015

INDEPENDENT AUDITORS’ REPORT FOR THE YEAR ENDED 31 JULY 2015

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STATUTORY INFORMATION FOR THE YEAR ENDED 31 JULY 2015

EQUITY SECURITIES HELD AT BALANCE DATE

In accordance with Rules of the Fonterra Shareholders’ Market (FSM) Rule 9.4.4(c), the following table identifies the Equity Securities in which each Director has a Relevant Interest as at 31 July 2015.

UNITS ISSUED BY THE FONTERRA SHAREHOLDERS’ FUND¹ CO-OPERATIVE SHARES

Ian Farrelly – 17,488

Leonie Guiney – 878,824

John Monaghan – 140,179

Ian (Blue) Read – 62,843

Nicola Shadbolt – 366,705

Reindert (Michael) Spaans – 195,812

John Wilson – 4,922,875

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 a Farmer 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.

The interests of Mr Malcolm Bailey and Mr David MacLeod in Fonterra shares at balance date did not meet the ‘Relevant Interest’ definition applicable to the disclosure above. However, their respective interests in Fonterra shares qualify them as Elected Directors under the Fonterra Constitution. Other Fonterra 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.

CO-OPERATIVE STATUS

In accordance with section 10 of the Co-operative Companies Act 1996, the Directors of Fonterra unanimously resolved on 24 August 2015 that the Company was, for the year ended 31 July 2015, 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).

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STATUTORY INFORMATION CONTINUED FOR THE YEAR ENDED 31 JULY 2015

REMUNERATION OF DIRECTORS

The total remuneration and value of other benefits received by each Director in the 12 month period from 1 August 2014 to 31 July 2015 are scheduled below:

BOARD FEES

COMMITTEE CHAIR FEES

TRAVEL ALLOWANCE

TOTAL REMUNERATION ($)

Malcolm Bailey (Chairman of the Risk Committee) 165,000 31,000 – 196,000

Ian Farrelly 165,000 – – 165,000

Leonie Guiney 119,308 – – 119,308

Simon Israel 165,000 – 60,000¹ 225,000

David Jackson (Chairman of the Audit and Finance Committee) 165,000 31,000 – 196,000

David MacLeod 165,000 – – 165,000

John Monaghan (Chairman of the Co-operative Relations Committee) 165,000 31,000 – 196,000

Sir Ralph Norris 165,000 – – 165,000

Blue Read 165,000 – – 165,000

Nicola Shadbolt 165,000 – – 165,000

Michael Spaans 165,000 – – 165,000

Jim van der Poel 46,326 – – 46,326

John Waller (Chairman of the Milk Price Panel) 165,000 31,000 – 196,000

John Wilson (Chairman of the Board of Directors) 405,000 – – 405,000

1 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.

SUBSIDIARY COMPANY DIRECTORS

The following companies were subsidiaries of Fonterra as at 31 July 2015. Directors as at that date are listed; those who resigned during the year are denoted with an R. Alternate Directors are denoted with an A.

616059 Limited:G A Duncan, S D T Till

Anchor Ethanol Limited:G A Duncan, P D Washer

Canpac International Limited:G A Duncan, M R Spiers

Civil Whey Distributors Limited:G A Duncan, M R Spiers

Dairy Industry Superannuation Scheme Trustee Limited:M A Apiata-Wade, B J Kerr, D M Marshall, T P McGuinness, D W C Scott, A K Williams, P D Wynen

Dairy Transport Logistics Limited:G A Hoddinott (R), M E Leslie, R J Spurway

Fonterra (Asia) Limited:G A Duncan, M W Smith

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:M E Leslie, R J Spurway

Fonterra (Middle East) Limited:G A Duncan, P D Washer

Fonterra (New Zealand) Limited:G A Duncan, C E Rowe

Fonterra (Number One) Limited:G A Duncan, S D T Till

Fonterra Brands (China Holdings) Limited:G A Duncan, K A Wickham

Fonterra Brands (New Zealand) Limited:G A Duncan, P J W McClure (R), T H Deane (R), M R Cronin

Fonterra Brands (Tip Top Investments) Limited:S C Brooks (R), G A Duncan, K M Turner

Fonterra Brands (Tip Top) Limited:G A Duncan, P J W McClure (R), M R Cronin

Fonterra Brands Limited:G A Duncan, L J Paravicini, T H Deane (R)

Fonterra Commodities Limited:G A Duncan

Fonterra Dairy Solutions Limited:G A Duncan, R McNickle

Fonterra Enterprises Limited:G A Duncan, J P Minkhorst

Fonterra Equities Limited:G A Duncan, S D T Till

Fonterra Farming Ventures Limited:G A Duncan, J P Minkhorst

Fonterra Finance Corporation Limited:G A Duncan, S D T Till

Fonterra Holdings (Americas) Limited:G A Duncan, K J Murray (R), R M Kennerley

Fonterra Holdings (Argentina) Limited:G A Duncan, K J Murray (R)

Fonterra Holdings (Brazil) Limited:G A Duncan, K J Murray (R), R M Kennerley

Fonterra Holdings (Ecuador) Limited:G A Duncan, K J Murray (R)

Fonterra Holdings (Venezuela) Limited:G A Duncan, K J Murray (R), R M Kennerley

Fonterra Investments (China) Limited:G A Duncan, K A Wickham

Fonterra IP Limited:G A Duncan, S D T Till

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Fonterra Limited:B Connolly (R), G A Duncan (R), K A Wickham, R J Spurway

Fonterra Manufacturing (Americas) Limited:G A Duncan, K J Murray (R)

Fonterra PGGRC Limited:G A Duncan, J P Minkhorst

Fonterra Research Centre Limited:G A Duncan, M W Smith (R)

Fonterra TM Limited:G A Duncan, S D T Till

Food Solutions Group 2000 Limited:G A Duncan, S D T Till

Glencoal Energy Limited:G A Duncan, M R Spiers

GlobalDairyTrade Holdings Limited:G A Duncan, L J Paravicini

Kapiti Fine Foods Limited:S C Brooks (R), G A Duncan, K M Turner

Kotahi GP Limited:J P Coote (R), H M J Kean, M E Leslie, K G Winders, R J Spurway

MIH Limited:G A Duncan, J P Minkhorst

Milktest GP Limited:P G Brown, B Greaney, M E Leslie, C J Mortland, P J Spooner (R), R G Townshend, T A Winter

MyMilk Limited:M W Hurrell, R M Kennerley

New Zealand Dairy Board:G A Duncan, C E Rowe

New Zealand Milk (Australasian Holdings) Limited:G A Duncan, L J Paravicini

New Zealand Milk (International) Limited:G A Duncan, L J Paravicini

New Zealand Milk Brands Limited:G A Duncan, S D T Till

NZAgbiz Limited:G A Duncan, J P Minkhorst

NZM (Dairy Holdings) Limited:G A Duncan, K K Gupta (R), L J Paravicini

RD1 Limited:S C Brooks (R), P J W McClure (R), T H Deane (R), J P Minkhorst, K M Turner

SAITL Limited:P G Brown (R), P J van Boheemen (R), B Greaney, M E Leslie

Tangshan Dairy Farm (NZ) Limited:G A Duncan, P J Moore (R), K A Wickham

ViaLactia Biosciences (NZ) Limited:G A Duncan, J P Minkhorst

Whareroa Co-Generation Limited:G A Duncan, M R Spiers

A.C.N. 008 668 602 Pty Ltd [Australia]:G A Duncan, D A Steele





A.C.N. 606-428-639 Pty Ltd [Australia]J Swales

Anchor Insurance Pte. Limited [Singapore]:L J Paravicini, S S Herbert, M W Smith, C L Khoon (A)

Anmum (Malaysia) Sdn. Bhd. [Malaysia]:M F Bin Wahab, D A Ross (R), M W Smith, K K Gupta (R), J M Porraz

Auckland Limited [Barbados]:G C Aubry (R), M P Campbell (R), B M Jost (R), M F Maldonado, J C Pestana (R), K J Murray, A Turnbull, J Chow, L Hartmann

Australasian Food Holdings Pty Limited [Australia]:G A Duncan, D A Steele

Bonlac Finance Pty Limited [Australia]:G A Duncan, D A Steele

Bonlac Staff Retirement Pty Ltd [Australia]:G A Duncan, D A Steele

Bonland Cheese Trading Pty Ltd [Australia]:G A Duncan, D A Steele

Comercial Dos Alamos S.A. [Chile]:T J Appleton, H Covarrubias Lalanne, G Rencoret Mujica,

Comercial Santa Elena S.A. [Chile]:T J Appleton, H Covarrubias Lalanne, G Rencoret Mujica

Corporación Inlaca C.A [Venezuela]:A Alegrett (A) (R), J L Bianco (A) (R), F O Costa (R), B M Jost (R), M F Maldonado, O N de Massiani, M M Perez, J R Odon

Dairy Enterprises (Chile) Limitada [Chile]:M P Campbell, A J Duncan, K J Murray, R Sepúlveda Seminario, M W Smith, J P Egaña Bertoglia (A), J C Gumucio Schönthaler (A), L O Herrera Larraín (A), A Montaner Lewin (A), S Obach González (A)

Dairy Enterprises International (Chile) Limited [Cayman Islands]:M P Campbell, E A Teisaire

Dairy Fresh Pty. Ltd. [Australia]:G A Duncan, D A Steele

Dairymas (Malaysia) Sdn Bhd [Malaysia]:M F Bin Wahab, D A Ross (R), M W Smith, K K Gupta (A) (R), J M Porraz

Dairy Partners Americas Brasil Limitada [Brazil]:A K Berger (R), D H Broad (R), A J Duncan (R), J D A Hauser (R), B M Jost (R), J C Pestana (R), A D Turnbull (R), I F Zurita (R), V Cornut, O C L Faccina, J C M De Oliveira Frederico, M C O Davila, O E Citta

Dairy Partners Americas Nordeste-Productos Alimenticios Ltda [Brazil]:A K Berger (R), D H Broad (R), A J Duncan (R), J D A Hauser (R), B M Jost (R), J C Pestana (R), A D Turnbull (R), I F Zurita (R), V Cornut, O C L Faccina, J C M De Oliveira Frederico, M C O Davila, O E Citta

Falcon Dairy Holdings Limited [Hong Kong]:R M Kennerley, G A Duncan, J S White, J F Ginascol

Fast Forward FFW Limited [United Kingdom]:K Allum (R), M P Campbell, G Sweeney, J van der Windt (R), H Huistra, M Gallagher

Fazenda MIH Ltda [Brazil]:R Santos, F Jorge (R), R Carneiro

Fonterra (Brasil) Ltda [Brazil]:F Jorge (R), R Santos (R), F Spinelli, R Carneiro

Fonterra (Canada), Inc. [Canada]:G A Duncan, B Kipping, M Piper, P D Washer (R), B M Ryan

Fonterra (Centro America) S.A. [Guatemala]:A J Cordner, G A Duncan, K J Murray

Fonterra (China) Limited [Hong Kong]:G A Duncan, Sin W Y, K A Wickham

Fonterra (CIS) Limited Liability Company [Russian Federation]:M Bates, S Bennett (R)

Fonterra (Europe) Coöperatie U.A. [Netherlands]:G A Duncan, J van der Windt (R), W Zwaan

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Fonterra (Europe) GmbH [Germany]:J van der Windt

Fonterra (France) SAS [France]:J van der Windt

Fonterra (Ing.) Limited [Mauritius]:Lee G, R M Kennerley (R), B M Ryan

Fonterra (Japan) Limited [Japan]:P G Brown (R), T H Deane (R), K Kumagai, H Ono, Y Saito, K Ueta, B M Ryan, K A Wickham

Fonterra (Logistics) Ltd [United Kingdom]:G R Sharma, J van der Windt

Fonterra (Mexico) S.A. de C.V. [Mexico]:G A Duncan, M M Pérez Ortiz, P D Washer, L Barona Mariscal (A), F R Camacho (A), G A Castro Palafox (A)

Fonterra (SEA) Pte. Ltd. [Singapore]:G N Kane, M W Smith

Fonterra (Switzerland) SA [Switzerland]:J Gauthier, K M Turner

Fonterra (Thailand) Limited [Thailand]:G N Kane, K Vunthanadit

Fonterra (USA) Inc. [United States]:G A Duncan, M Piper, P D Washer (R), B M Ryan

Fonterra (Ying) Dairy Farm Company Limited [China]:G Lee (R), R M Kennerley, P J Moore (R), A van der Nagel, G A Duncan

Fonterra (Yutian) Dairy Farm Company Limited [China]:G Lee (R), R M Kennerley, P J Moore (R), A van der Nagel, G A Duncan

Fonterra Argentina S.R.L. [Argentina]:L P Wiener

Fonterra Australia Pty Ltd [Australia]:G A Duncan, J Swales

Fonterra Beijing Farm Management Consulting Company Limited [China]:P J Moore (R), C James (R), G Lee (R), R M Kennerley, A van der Nagel, L O’Neill

Fonterra Brands (Asia Holdings) Pte. Ltd [Singapore]:P Y De Petrini (R), M W Smith, J C Pestana

Fonterra Brands (Australia) Pty Ltd [Australia]:G A Duncan, J Swales

Fonterra Brands (Centram), S.A. [Panama]:A J Cordner, G A Duncan, K J Murray

Fonterra Brands (Far East) Limited [Hong Kong]:G A Duncan, C Sin, K A Wickham

Fonterra Brands (Guangzhou) Ltd [China]:T L Tan (R), P A Turner (R), K A Wickham, A R R Kasireddy, R M Kennerley

Fonterra Brands (Guatemala), S.A. [Guatemala]:A J Cordner, G A Duncan, K J Murray

Fonterra Brands (Hong Kong) Limited [Hong Kong]:G A Duncan, C Sin, K A Wickham

Fonterra Brands (Japan) Limited [Japan]:T H Deane (R), Y Saito, K A Wickham, B M Ryan

Fonterra Brands (Malaysia) Sdn Bhd [Malaysia]:M F Bin Wahab, D A Ross (R), M W Smith, K K Gupta (A) (R), J M Porraz

Fonterra Brands (New Young) Pte. Ltd. [Singapore]:A J Bruce (R), Y Lin, C Lin, J Ling, M W Smith, A M Fitzsimmons (A) (R), K A Wickham (R), R M Kennerley (R), J H Priem, S Deschamps

Fonterra Brands (Singapore) Pte. Ltd [Singapore]:P Y De Petrini (R), M W Smith, J C Pestana

Fonterra Brands (Thailand) Ltd [Thailand]:S Aramthip, A M Fitzsimmons, C Phaonimmongkol, M W Smith

Fonterra Brands (Viet Nam) Company Limited [Viet Nam]:A M Fitzsimmons, M W Smith

Fonterra Brands Indonesia, PT [Indonesia]:B Kuncoro (R), P A Richards, J C P Soto, M W Smith, A Afiffudin, J Fryer

Fonterra Brands Lanka (Private) Limited [Sri Lanka]:L M Clement, J H P Gallage, M W Smith

Fonterra Brands Manufacturing Indonesia, PT [Indonesia]:B Kuncoro (R), M W Smith, J C Pestana, P A Richards, M A Nasution, T A Siswanto, J Fryer

Fonterra Brands Myanmar Co Ltd [Myanmar]:G A Duncan, M W Smith

Fonterra Brands Phils. Inc. [Philippines]:L T Barin, C Mendoza (R), R A Mendoza, E T Ogsimer, D D C Salvadore (R), M W Smith, S Choo, M T Boness

Fonterra Commercial Trading (Shanghai) Company Limited [China]:W F Chu, G A Duncan, A R R Kasireddy, R M Kennerley, K A Wickham

Fonterra Egypt Limited [Egypt]:G A Duncan, A Anwar

Fonterra Europe Manufacturing B.V. [Netherlands]:G A Duncan (R), J van der Windt (R), H Berghorst, C Rowe

Fonterra Europe Manufacturing Holding B.V. [Netherlands]:G A Duncan, J van der Windt (R), W Zwaan

Fonterra Farming Ventures (Australia) Pty Ltd [Australia]:G A Duncan, D A Steele

Fonterra Foods Pty Ltd [Australia]:G A Duncan, D A Steele

Fonterra Foodservices (USA), Inc. [United States]:G A Duncan, M Piper, R J Pedersen

Fonterra Global Business Services Asia Sdn Bhd [Malaysia]:J Ling, J M Porraz

Fonterra Holdings (Thailand) Limited [Thailand]:G N Kane, K Vunthanadit

Fonterra India Private Limited [India]:G N Kane, K M Turner, H D Gowans

Fonterra Ingredients Australia Pty Ltd [Australia]:G A Duncan, D A Steele, J Swales

Fonterra Investments Netherlands Coöperatie U.A. [Netherlands]:A D Turnbull, J van der Windt (R), H Huistra

Fonterra Investments Pty Limited [Australia]:G A Duncan, D A Steele

Fonterra Middle East FZE [United Arab Emirates]:G A Duncan, A M Fitzsimmons

Fonterra MIH Holdings Brasil Ltda [Brazil]:F Jorge (R), R Santos, R Carneiro

Fonterra Milk Australia Pty Ltd [Australia]:G A Duncan, D A Steele

Fonterra Tangshan Dairy Farm (HK) Limited [Hong Kong]:P J Moore (R), K A Wickham (R), A van der Nagel, R M Kennerley

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Fonterra Venezuela, S.A. [Venezuela]:C P Caldwell (R), F C Ortega Becea, P D Washer (R), O N de Massiani (A) (R), S Guevara Camacho (A) (R), L A Tinoco Arria (A) (R), G A Duncan, M M Perez

Inversiones Dairy Enterprises S.A. [Chile]:M P Campbell, A J Duncan, J P Egaña Bertoglia (A), L O Herrera Larraín (A), S Obach González (A), J C Gumuccio Schönthaler (A), A Montaner Lewin (A), K J Murray, M W Smith, R Sepúlveda Seminario

Key Ingredients, Inc. [United States]:G A Duncan, M Piper, P D Washer (R)

Lactaid Holdings Ltd [Venezuela]:M F Maldonado, K J Murray, A Turnbull, J Chow, L Hartmann

Lacven Corp [Venezuela]:M F Maldonado, K J Murray (R), A Turnbull, J Chow, L Hartmann, E Mezzano (R)

Mainland Dairies Pty. Ltd. [Australia]:G A Duncan, D A Steele

Mainland Foodservice Pty Limited [Australia]:G A Duncan, D A Steele

Milk Products Holdings (Middle East) EC [Bahrain]:M W Smith, G A Duncan, A Fitzsimmons

Milk Products Holdings (North America) Inc. [United States]:G A Duncan, M Piper, P D Washer (R), B Ryan, R Pederson

Murrumbidgee Dairy Products Pty Ltd [Australia]:G A Duncan, D A Steele

New Tai Milk Products Co Ltd [Taiwan]:K A Wickham (R), G N Kane, C Lee, J Lee, G Lee, M Lee, P D Washer (R), R M Kennerley (R), B M Ryan, J G M Priem

New Zealand Milk Products (Ethiopia) SC [Ethiopia]:A Fitzsimmons, M Woodward, M W Smith, M Smith, A B Abubeker, M B Abubeker

New Zealand Milk (Australasia) Pty Ltd [Australia]:G A Duncan, D A Steele

New Zealand Milk (Barbados) Ltd [Barbados]:G A Duncan, K J Murray

New Zealand Milk (LATAM) Ltd [Bermuda]:G A Duncan, K J Murray

Newdale Dairies (Private) Limited [Sri Lanka]:L M Clement, J H P Gallage, M W Smith

NZMP (AEM) Ltd [United Kingdom]:G R Sharma, W Zwaan, J van der Windt (R)

Recombined Dairy Systems A/S [Denmark]:G R Sharma, J van der Windt (R), W Zwaan, P Rasmussen

Sociedad Agrícola y Lechera Praderas Australes S.A. (“Pradesur”) [Chile]:T J Appleton, H Covarrubias Lalanne, G Rencoret Mujica

Sociedad Procesadora de Leche Del Sur S.A. [Chile]:E Alcalde Undurraga, A Cussen Mackenna, J Milic Barros, K J Murray, S Obach González, J R Valente Vias, G Varela Alfonso, J M Alcalde Undurraga (A), E Huiddobro Grove (A) (R), G Jiménez Barahona (A), J P Matus Pickering (A), A Montaner Lewin (A) (R), S Oddo Gómez (A), C Perez-Cotapos Subercaseaux (A), J P E Bertoglia (A), F Spinelli

Solid Fresh Food & Beverage (M) Sdn. Bhd. [Malaysia]:M F Bin Wahab, D A Ross (R), M W Smith, K K Gupta (A) (R), J M Porraz

Soprole Inversiones SA [Chile]:G A Bitrán Dicowsky, M P Campbell (R), K J Murray (R), A D Turnbull, J R Valente Vias, G Varela Alfonso, A Walker Prieto, S Diez Arriagada (A), C Herrera Barriga (A), E Huidobro Grove (A) (R), R Sepúlveda Seminario (A), M Somarriva Labra (A), R Tisi Lanchares (A), M L Valdes Steeves (A) (R), L J B Paravicini, F Spinelli, P L Linhares

Soprole S.A. [Chile]:G A Bitrán Dicowsky, M P Campbell (R), J R Valente Vias, G Varela Alfonso, A Walker Prieto (R), R Fernández Robinson (A) (R), C Herrera Barriga (A), R Sepúlveda Seminario (A) (R), R A Tisi Lanchares (A), A Turnbull (A), P L Linhares (A), S Diez Arriagade (A)

Tangshan Fonterra Dairy Farm Ltd [China]:P J Moore (R), R M Kennerley, G Lee, J L Zhang, A van der Nagel, G A Duncan

Unilac Australia Pty Ltd [Australia]:G A Duncan, D A Steele

United Milk Tasmania Pty Limited [Australia]:G A Duncan, D A Steele

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REMUNERATION FRAMEWORK

An effective remuneration framework is an important consideration in attracting and retaining talent, driving change, and motivating employees to succeed.

Fonterra’s remuneration framework for salaried staff is based on a ‘total remuneration’ approach, meaning packages include fixed remuneration (e.g. salary and benefits) and variable remuneration (e.g. Short Term Incentive plan (STI)).

Packages are compared against peer companies in the relevant market, using information obtained from independent remuneration consultants. Adjustments to packages may occur regularly, such as an annual base salary review, or on an as-needed basis to recognise additional responsibilities. The framework is designed to differentiate rewards for exceptional performance whilst also considering budget constraints, internal equity and governance factors such as local legislation.

SHORT TERM INCENTIVE PLANS

Most permanent salaried employees in Fonterra participate in an annual STI plan.

STI plans align employees with what is important to Fonterra. At the beginning of each year a series of Group and business unit Key Performance Indicators (KPIs) are identified and agreed. These KPIs may include important financial measures, goals around Health & Safety (H&S), and other important operational and qualitative measures. Some employees have a portion of their STI aligned with their individual performance.

Incentive programmes drive Fonterra’s performance by:

• Aligning the objectives of the Co-operative to ensure collaboration and a one team approach to achieve Fonterra’s goals;

• Establishing targets which are challenging yet achievable;

• Linking specific levels of reward to individual, team (such as business unit) and Group-wide performance; and

• Provide the opportunity for employees to share in Fonterra’s success.

At the end of each operating year, performance against the Fonterra Group KPIs is independently reviewed and approved by the People, Culture and Safety Committee.

OTHER INCENTIVE PLANS

Some business units, both in New Zealand and offshore, adopt sales incentive plans to drive specific growth objectives and, in some cases, other outcomes-based plans for specific employee groups.

Employees in these plans do not, typically, participate in other short term incentive plans.

LONG TERM INCENTIVE PLAN

For certain senior executives, Fonterra operates a Long Term Incentive plan (LTI). This plan is by invitation only and is designed to motivate, reward and retain key executives. This plan is based on achievement of specified long term strategic goals for the Co-operative.

BENEFITS

As Fonterra operates a total remuneration approach, benefits are provided when required by legislation or when they represent typical market practice in that country or region.

FIXED REMUNERATION STI PLANS LTI PLAN

• Provides ‘stable’ base level of reward

• External and internal relativities and budget constraints taken into account

• Typically set at market median (for local market) using independent external benchmark data

• Varies based on employee skills and performance

• Most permanent salaried employees eligible

• Comprehensive range of financial and non-financial measures

• When targets are exceeded total remuneration will be above market median

• Highest performance receives the highest reward, lowest performance receives no STI payment

• Restricted to senior executives

• Focus on key long term strategic goals of the Co-operativeF

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EMPLOYEE REMUNERATION

The Group operates in a number of countries where remuneration market levels differ widely. During the year ended 31 July 2015, the number of employees, not being Directors of Fonterra, who received remuneration and the value of other benefits exceeding $100,000 was as follows:

REMUNERATION RANGE ($)NEW

ZEALAND¹ OFFSHORE² CESSATIONS³ TOTAL

100,000 110,000 792 241 39 1,072110,001 120,000 766 274 35 1,075120,001 130,000 338 203 22 563130,001 140,000 206 106 20 332140,001 150,000 162 107 9 278150,001 160,000 116 81 11 208160,001 170,000 104 70 13 187170,001 180,000 84 50 8 142180,001 190,000 57 49 11 117190,001 200,000 54 32 7 93200,001 210,000 58 28 11 97210,001 220,000 33 17 7 57220,001 230,000 30 26 3 59230,001 240,000 26 15 2 43240,001 250,000 24 22 3 49250,001 260,000 22 17 3 42260,001 270,000 13 13 2 28270,001 280,000 15 5 1 21280,001 290,000 9 21 4 34290,001 300,000 6 14 1 21300,001 310,000 6 9 – 15310,001 320,000 10 7 1 18320,001 330,000 6 10 2 18330,001 340,000 8 6 2 16340,001 350,000 6 5 1 12350,001 360,000 4 6 1 11360,001 370,000 5 8 1 14370,001 380,000 8 2 3 13380,001 390,000 5 7 – 12390,001 400,000 6 5 – 11400,001 410,000 1 5 – 6410,001 420,000 5 1 – 6420,001 430,000 3 5 1 9430,001 440,000 5 3 1 9440,001 450,000 4 – – 4450,001 460,000 2 1 – 3460,001 470,000 – 2 1 3470,001 480,000 1 3 – 4480,001 490,000 4 – – 4490,001 500,000 1 3 – 4500,001 510,000 3 2 1 6510,001 520,000 – 1 – 1520,001 530,000 1 3 – 4530,001 540,000 1 4 – 5540,001 550,000 – 5 1 6550,001 560,000 2 – – 2

1 Includes employees employed in New Zealand during the reporting period.

2 Includes employees employed in an offshore operation during the reporting period. Amounts paid in foreign currency have been translated 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, as it has in some of our markets during the prior twelve months. Should the New Zealand Dollar strengthen against those markets, 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 (which were accrued at 31 July 2014) and termination entitlements including those arising from employment arrangements entered into by legacy companies prior to the formation of Fonterra.

REMUNERATION RANGE ($)NEW

ZEALAND¹ OFFSHORE² CESSATIONS³ TOTAL

560,001 570,000 – 1 1 2570,001 580,000 1 1 – 2580,001 590,000 2 1 – 3590,001 600,000 1 1 – 2600,001 610,000 1 – – 1610,001 620,000 1 2 – 3620,001 630,000 1 – 1 2630,001 640,000 1 2 – 3640,001 650,000 1 1 – 2650,001 660,000 – 2 – 2660,001 670,000 1 1 – 2670,001 680,000 2 1 1 4680,001 690,000 – 4 – 4710,001 720,000 1 3 – 4740,001 750,000 1 1 – 2750,001 760,000 – – 1 1760,001 770,000 – 1 – 1790,001 800,000 – 1 – 1810,001 820,000 2 – – 2820,001 830,000 – 1 – 1840,001 850,000 – – 1 1890,001 900,000 – 1 – 1900,001 910,000 1 – – 1920,001 930,000 – 1 – 1930,001 940,000 – – 1 1940,001 950,000 – 1 – 1960,001 970,000 – – 1 11,000,001 1,010,000 1 – – 11,030,001 1,040,000 – – 1 11,050,001 1,060,000 – 2 – 21,080,001 1,090,000 – 1 – 11,090,001 1,100,000 2 – – 21,120,001 1,130,000 – 2 – 21,140,001 1,150,000 1 – – 11,200,001 1,210,000 – 1 – 11,260,001 1,270,000 – 1 1 21,270,001 1,280,000 – 1 – 11,360,001 1,370,000 – 1 – 11,580,001 1,590,000 – 1 – 11,650,001 1,660,000 1 – – 11,700,001 1,710,000 – 1 – 11,980,001 1,990,000 – – 1 12,040,001 2,050,000 1 – – 12,150,001 2,160,000 – 1 – 14,930,001 4,940,000 1 – – 1Total 3,036 1,533 238 4,807

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CURRENT CREDIT RATING STATUS

Standard & Poor’s long term rating for Fonterra is A with a rating outlook of CreditWatch negative. Fitch’s long and short term default rating is AA- with a rating outlook of stable. Retail Bonds have been rated the same as the Company’s long term rating by both Standard & Poor’s and Fitch. Capital Notes which are subordinate to other Fonterra debt issued are rated A- by Standard & Poor’s and A+ by Fitch.

EXCHANGE RULINGS AND WAIVERS

NZX Limited (NZX) has ruled that Capital Notes do not constitute ‘equity securities’ under the NZX Main Board/Debt Market Listing Rules (Rules). This means that where Capital Notes are quoted on NZX’s Debt Market (NZDX), the Company is not required to comply with certain Rules which apply to an issuer of quoted equity securities.

NZX has granted waivers from NZDX Rule 11.1.1 to enable Fonterra to decline to accept or register transfers of Capital Notes or Retail Bonds (NZDX listed debt securities FCGHA, FCG020 and FCG030) if such transfer would result in the transferor holding or continuing to hold Capital Notes or Retail Bonds with a face value or principal amount of less than $5,000 or if such transfer is for an amount of less than $1,000 or not a multiple thereof. The effect of these waivers is that the minimum holding amount in respect of the Capital Notes and Retail Bonds will at all times be $5,000 in aggregate and that Retail Bonds can only be transferred in multiples of $1,000.

NZX has also granted a waiver from NZDX Rule 5.2.3 in respect of Retail Bonds FCG020 and FCG030 to enable these Retail Bonds to be quoted on the NZDX market even though they did not meet the requirement that at least 500 members of the public held at least 25 per cent of the Retail Bonds being issued.

NZX TRADING HALTS

On 10 March 2015, NZX Regulation (NZXR) placed a trading halt on the following Fonterra Co-operative Group Limited securities: FCG, FCG010, FCG020 and FCGHA. This halt was part of an industry-wide action taken by NZXR to place all listed issuers within the dairy industry on a trading halt as a result of the infant formula contamination threat. Following the public release of a Ministry for Primary Industries announcement regarding the contamination threat, NZXR then lifted the trading halt on Fonterra Co-operative Group Limited and other industry participants’ securities. The trading halt was in place between 3:21pm and 4:17pm on 10 March 2015.

STOCK EXCHANGE LISTINGS

Fonterra’s co-operative shares are listed and quoted on the Fonterra Shareholders’ Market under the code ‘FCG’. Fonterra has two issues of retail bonds listed and quoted on the NZDX under the codes ‘FCG020’ and ‘FCG030’. 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 14 August 2015 there were 1,599,093,577 Fonterra Co-operative shares on issue.

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ANALYSIS OF SHAREHOLDING

Analysis of Fonterra’s shareholding as at 14 August 2015:

FCG Largest Recorded Share Holdings¹

NAME NUMBER OF SHARES % OF SHARES

Fonterra Farmer Custodian Limited 104,859,235 6.55

Ellis-Lea Farms (2000) Limited 1,402,996 0.08

Plantation Road Dairies Limited 974,170 0.06

Oscar Farming Company Limited 970,571 0.06

Singletree Dairies 2013 Limited 940,177 0.05

Pengxin New Zealand Farm Group Limited – Bennydale 2 924,765 0.05

Stewart Partnership Limited 922,500 0.05

Van't Klooster Farms Limited 885,190 0.05

McIntyre Williamson Partners 878,952 0.05

Twin Terraces Limited 874,768 0.05

Hopkins Farming Group Limited 863,006 0.05

Moffitt Dairy Limited 853,134 0.05

Landcorp Farming Limited 839,708 0.05

Poplar Partnership Limited 817,827 0.05

Cumberland Dairy Farm Limited 815,665 0.05

Feather Holdings Limited 800,467 0.05

Elderslie Holdings Limited 798,174 0.04

Pengxin New Zealand Farm Group Limited – Bennydale 1 796,255 0.04

McBain Farms Limited 776,977 0.04

McIntyre Williamson Partners 766,908 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 HoldersAccording to notices given to the Company under the Financial Markets Conduct Act 2013, as at 31 July 2015, 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 14 August 2015 was 1,599,093,577.

SUBSTANTIAL PRODUCT HOLDERS NUMBER OF VOTING SECURITIES DATE OF MOST RECENT NOTICE

Fonterra Farmer Custodian Limited 113,642,185 7 August 2014

FSF Management Company Limited 113,542,226 7 August 2014

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.)

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FCG Fonterra Co-operative SharesAnalysis of Fonterra Co-operative Shares as at 14 August 2015:

FROM–TO HOLDER COUNT % HOLDING QUANTITY %

1–50,000 1,726 16.05 41,415,299 2.59

50,001–100,000 3,169 29.47 240,890,840 15.06

100,001–200,000 3,586 33.35 502,765,401 31.44

200,001–400,000 1,896 17.63 515,171,325 32.22

400,001 and over 376 3.50 298,850,712 18.69

ANALYSIS OF CAPITAL NOTE AND RETAIL BOND HOLDING

Analysis of Fonterra’s Capital Note Holding as at 17 August 2015:

FCGHA Capital Notes


1–1,000 11 1.39 4,958 0.01

1,001–5,000 25 3.15 62,650 0.06

5,001–10,000 283 35.69 1,998,927 1.95

10,001–100,000 433 54.60 12,072,730 11.77

100,001 and over 41 5.17 88,379,989 86.21

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 17 August 2015:

FCG020 $150 million Retail Bond issue


5,000–9,999 41 10.10 221,000 0.15

10,000–49,999 247 60.83 5,083,000 3.39

50,000–99,999 60 14.78 3,628,000 2.42

100,000–999,999 52 12.81 13,747,000 9.16

1,000,000 and over 6 1.48 127,321,000 84.88

FCG030 $350 million Retail Bond issue


5,000–9,999 38 9.05 220,000 0.06

10,000–49,999 255 60.71 5,460,000 1.56

50,000–99,999 55 13.10 3,341,000 0.95

100,000–999,999 57 13.57 15,426,000 4.41

1,000,000 and over 15 3.57 325,553,000 93.02For

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ENTRIES IN THE INTERESTS REGISTER

Directors’ interests in transactions

General disclosures of interestThe following general disclosures of interest were made in the period from 1 August 2014 to 31 July 2015:

Malcolm Bailey Ceased to be a Director of Agrico Holding Ltd; Chairman of the Executive Committee of the Dairy Companies Association of New Zealand Incorporated; Chairman of the Red Meat Profit Partnership General Partner Limited; Director of RMI NZ Limited; and of BBD Industrial Properties Limited.

Ian Farrelly Director of Tower Peak Station Limited; and of Hinewai Holdings Limited.

Leonie Guiney Director and shareholder of Shamrock Fern Dairies Limited, Hillcrest Dairy Limited, Wimborne Dairy Farm Limited and Greenburn Dairy Farm Limited.

David Jackson Ceased to be Chairman and a Director of the New Zealand Refining Company.

John Monaghan Director of Waitohi Dairy 2 Limited, Waitonui Holdings GP Limited, Sunset Holdings 2 Limited and Elderslie Holdings 2 Limited.

Sir Ralph Norris Notified intention to resign as Director of Fonterra Co-operative Group Ltd and as Director of the Manager of the Fonterra Shareholders’ Fund. Chairman and shareholder of RANQX Holdings Limited. Director of RANQX Global Limited and RANQX Limited. Resigned as a Director of Origin Energy Limited.

Blue Read Director of Wairere Dairies Limited; Director and shareholder of Calma Holdings Limited; Director of Cooperative Business New Zealand; Member of governance group of Waitara Alive!

Michael Spaans Shareholder in Canterbury Grasslands; Director of ASB Bank Limited; Ceased to be a Director of Waikato Innovation Park, Innovate Waikato Limited and New Zealand Food Innovation (Waikato) Limited; Ceased to be a Director of Manuka SA, Trebol Investments, Trebol Nominees, Rimu SA and Toromiro SA.

Jim van der Poel Ceased to be a Director of and shareholder of Cloverdale Holdings Limited, Lacmor Dairies Limited, Quintag Holdings Limited, Spectrum Dairies Limited, Burmont Holdings Limited, Singletree Dairies Limited, Dairy Desk Limited, Spectrum Land Company Limited, Spectrum Management Services Limited; Ceased to be a Director of Dexcel Holdings Limited, Mitcham Dairies Limited; Ceased to be a Director of Island Glen Dairies Limited, and ceased to be a Director and Shareholder of Mitcham Holdings Limited, Chertsey Dairies Limited, as a Shareholder of Te Awa Enterprises Limited, Jamieson Dairies Limited and as an Officer of Netherbrook Dairies Limited. Ceased to be a Director of Fonterra Co-operative Group Limited and the Manager of the Fonterra Shareholders’ Fund.

John Waller Ceased to be a Director of Alliance Group Limited; Ceased to be a Director of the Bank of New Zealand and National Australia Bank; Ceased to be a Director of National Equities Limited and BNZ Investments Limited.

John Wilson Director of Winterburg GP Limited and Bendigo Terrace GP Limited. Ceased to be a Director of Rangiattack Farming Company Limited.

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.

Securities dealings of DirectorsThe following entries were made in the Interests Register during the year.

New disclosuresDirectors disclosed the following holdings of Co-operative shares during the year:

RELEVANT INTERESTS IN CO-OPERATIVE SHARES

Leonie Guiney (on appointment 12 November 2014) 878,824For

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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

DIRECTORNUMBER OF

SECURITIES ACQUIREDNUMBER OF

SECURITIES DISPOSEDCONSIDERATION

$ DATE

John Wilson 6,975 – 44,222 29 September 2014

John Wilson 74,374 – 471,905 29 September 2014

John Wilson¹ 53,370 53,370 – 9 October 2014

Jim van der Poel 395,000 – – 7 November 2014

Jim van der Poel¹ 521,037 521,037 – 28 November 2014

John Monaghan 30,000 – 184,200 2 December 2014

John Monaghan 2,500 – 15,125 3 December 2014

Jim van der Poel 130,000 – – 12 December 2014

John Monaghan 124 – 744 30 December 2014

Ian Farrelly 3,735 – 19,657 20 April 2015

Nicola Shadbolt 5,607 – 30,278 23 April 2015


Ian Farrelly 17,177 – 91,725 24 April 2015

Nicola Shadbolt 9,853 – – 28 April 2015

Nicola Shadbolt 66 – 358 28 April 2015

John Wilson 54,289 – 264,075 2 June 2015

John Wilson 128,386 – 623,117 2 June 2015

Ian Farrelly – 1,235,441 – 3 June 2015

Ian Farrelly – 200,000 980,000 3 June 2015

John Monaghan – 737,186 – 3 June 2015

John Wilson 486 – 2,280 11 June 2015

John Wilson 103,190 – 484,789 11 June 2015

1 Transfers between related entities.

Unit transactions¹

DIRECTORNUMBER OF



$ DATE

Jim van der Poel² 60,860 60,860 – 7 November 2014

Jim van der Poel – 395,000 – 7 November 2014

Jim van der Poel – 130,000 – 12 December 2014


Nicola Shadbolt – 9,853 – 28 April 2015

1 Securities acquired and/or disposed of are units issued by the Fonterra Shareholders’ Fund which can be converted to Co-operative Group shares.

2 Transfers between related entities.

Retail Bond transactions

DIRECTORNUMBER OF



$ DATE

John Waller – 10,000 10,970 10 September 2014

David Jackson¹ – 100,000 100,000 10 March 2015

John Waller¹ – 200,000 200,000 10 March 2015

1 Redemption of Retail Bonds on 10 March 2015.

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Capital Note transactionsThere were no transactions by Directors (or their associated persons) in Capital Notes reported during the period from 1 August 2014 to 31 July 2015. No current holdings of Capital Notes have been advised by Directors (or their associated persons).

Directors’ remunerationThe Directors’ Remuneration Committee, comprising six shareholders elected in accordance with the Constitution, makes recommendations for shareholder approval as to the level of Directors’ fees.

At the Annual Meeting of shareholders held on 12 November 2014, 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 $405,000 p.a.

Directors $165,000 p.a.

Discretionary additional payments to the Chairmen of permanent Board Committees (except if the Chairman is the Fonterra Chairman)

$31,000 p.a.

The Board has approved payment of the discretionary additional payment, at the prevailing approved rate, to the Chairmen of permanent Board Committees.

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 2015 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.

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.

Directors’ indemnity and insuranceFonterra 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.

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FIVE YEAR SUMMARYFOR THE YEAR ENDED 31 JULY 2015


SHAREHOLDER SUPPLIER RETURNS

Payout

Farmgate Milk Price (per kgMS)1 4.40 8.40 5.84 6.08 7.60

Dividend (per share) 0.25 0.10 0.32 0.32 0.30

Cash payout2 4.65 8.50 6.16 6.40 7.90

Retentions (per share)3 0.04 – 0.14 0.10 0.25

OPERATING PERFORMANCE

Average commodity prices (US$ per MT FOB)

Whole Milk Powder4 2,639 4,824 3,394 3,359 3,606

Skim Milk Powder4 2,552 4,504 3,625 3,285 3,321

Butter4 3,027 3,920 3,550 3,546 4,344

Cheese5 3,477 4,706 4,124 3,498 4,285

Average NZD/USD spot exchange rate applying throughout the year6 0.76 0.84 0.82 0.80 0.77

Fonterra’s average NZD/USD conversion rate7 0.79 0.81 0.80 0.77 0.72

Revenue ($ million)

Ingredients and other revenue 12,144 17,748 13,926 14,824 14,623

Consumer revenue 6,701 4,527 4,717 4,945 5,248

Total revenue 18,845 22,275 18,643 19,769 19,871

Dairy ingredients manufactured in New Zealand (000s MT) 2,753 2,519 2,312 2,353 2,143

Total ingredients sales volume (000s MT)8 2,982 3,052 2,765 2,660 2,486

Segment earnings ($ million)9

Global Ingredients and Operations 662 280 480 477 419

Oceania (143) 31 93 218 278

Asia 192 50 207 182 193

Greater China (5) 30 – – –

Latin America 256 111 137 124 121

Eliminations (20) 1 20 (14) 17

Segment earnings 942 503 937 987 1,028

Normalisation adjustments 32 – 65 41 (23)

Normalised segment earnings 974 503 1,002 1,028 1,005

Profit after tax attributable to shareholders ($ million) 466 157 718 609 754

Earnings per share10 0.29 0.10 0.44 0.41 0.53

1 From the beginning of the 2009 season 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 principles set out in the Farmgate Milk Price Manual which is independently audited.

2 Average Payout for a 100 per cent share-backed supplier.3 Retentions are calculated as net profit after tax attributable to Co-operative shareholders at 31 July divided by the number of shares at 31 May, less dividend per share.4 Source: Fonterra Farmgate Milk Price Statement representing the weighted-average United States Dollars (USD) contract prices of Reference Commodity Products.5 Source: Oceania Export Series, Agricultural Marketing Service, US Department of Agriculture.6 Average spot exchange rate is the average of the daily spot rates for the financial period.7 Fonterra’s average conversion rate is the rate that Fonterra has converted net United States dollar receipts into New Zealand dollars based on the hedge cover in place.8 For the year ended 31 July 2014, the total ingredients sales volume has been restated to reflect Fonterra’s strategic platforms. Figures for the years ended 31 July 2013 and

earlier have not been restated.9 Represents segment earnings before unallocated finance income, finance costs and tax. For the years ended 31 July 2015 and 2014, Greater China has been disclosed

separately in alignment with the disclosures in the segment note. For the years ended 31 July 2013 and earlier, Greater China was part of Asia. The year ended 31 July 2014 has been restated to reflect changes to the organisation of business units that occurred in the year ended 31 July 2015. The year ended 31 July 2012 has been restated to reflect changes to the organisation of business units within reported segments which occurred in the year ended 31 July 2013. The year ended 31 July 2011 has been restated to reflect changes to the organisation of business units within reported segments which occurred in the year ended 31 July 2012.

10 On 27 February 2013, Fonterra announced a non-cash bonus issue of one share for every 40 shares held. The bonus issue increased the number of shares on issue by 40.4 million. The record date for the bonus issue was 12 April 2013 and the issue date was 24 April 2013. Earnings per share for the years ended 31 July 2012 and 31 July 2011 have been restated as if the bonus issue was effective at the beginning of the periods presented.

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CAPITAL EMPLOYED ($ million)

Total assets employed 18,315 15,529 14,373 15,117 15,530

Average net assets11 12,918 10,860 11,135 10,900 10,772

Total equity 6,659 6,534 6,748 6,655 6,541

Equity excluding cash flow hedge reserve 7,196 6,452 6,830 6,592 6,025

Net interest bearing debt 7,192 4,498 4,227 3,833 3,766

Economic net interest bearing debt12 7,120 4,732 4,467 4,229 4,331

Return on net assets11 7.5% 4.6% 9.0% 9.4% 9.3%

Headline debt to debt plus equity ratio13 50.0% 41.1% 38.2% 36.8% 38.5%

Economic debt to debt plus equity ratio13 49.7% 42.3% 39.6% 39.1% 41.8%


STAFF EMPLOYED

Total staff employed (000s, permanent full time equivalents) 22.0 18.2 17.5 17.3 16.8

New Zealand 11.9 11.4 11.2 11.0 10.8

Overseas 10.1 6.8 6.3 6.3 6.0


SEASON STATISTICS14

Total NZ milk collected (million litres) 18,143 17,932 16,673 16,951 15,427

Highest daily volume collected (million litres) 89.7 87.1 84.8 81.2 76.8

NZ shareholder supply milk solids collected (million kgMS) 1,520 1,533 1,424 1,463 1,320

NZ contract supply milk solids collected (million kgMS) 94 51 39 30 26

NZ milk solids collected (million kgMS) 1,614 1,584 1,463 1,493 1,346

Total number of shareholders at 31 May 10,753 10,721 10,668 10,578 10,485

Total number of sharemilkers at 31 May 3,379 3,398 3,449 3,595 3,928

Total number of shares at 31 May (million) 1,599 1,598 1,598 1,433 1,377

11 Return on net assets (RONA) is derived by dividing normalised EBIT (as reported in financial statements) by 13 month average net assets (excluding net debt and deferred tax).

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

13 Headline debt to debt plus equity ratio is before taking account of the effect of debt hedging. Economic debt to debt plus equity includes the effect of debt hedging.

14 All season statistics are based on the 12 month milk season of 1 June–31 May.

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Fonterra Co-operative Group Limited Private Bag 92032, Auckland 1142, New Zealand64 9 374 9000 (Phone) 64 9 374 9001 (Fax)Shareholder And Supplier Services Freephone 0800 65 65 68For global locations visit www.fonterra.com

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2015 ANNUAL

RESULTS

SEPTEMBER 2015

JOHN WILSON, CHAIRMAN

THEO SPIERINGS, CEO

LUKAS PARAVICINI, CFO For

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© Fonterra Co-operative Group Ltd. Page 2

Forward Looking Statements

This presentation contains forward looking statements, and forecasts, including statements of current intention, statements of

opinion and predictions as to possible future events. Such statements are not statements of fact and there can be no certainty of

outcome in relation to the matters to which the statements relate. These forward looking statements involve known and unknown

risks, uncertainties, assumptions and other important factors that could cause the actual outcomes to be materially different from the

events or results expressed or implied by such statements. Those risks, uncertainties, assumptions and other important factors are

not all within the control of the Fonterra Group and cannot be predicted by the Fonterra Group and include changes in

circumstances or events that may cause objectives to change as well as risks, circumstances and events specific to the industry,

countries and markets in which the Fonterra Group operates. They also include general economic conditions, exchange rates,

interest rates, regulatory environments, competitive pressures, selling price, market demand and conditions in the financial markets

which may cause objectives to change or may cause outcomes not to be realised.

None of Fonterra Co-operative Group Limited or any of its respective subsidiaries, affiliates and associated companies (or any of

their respective officers, employees or agents) (Relevant Persons) makes any representation, assurance or guarantee as to the

accuracy or likelihood of fulfilment of any forward looking statement or forecast or any outcomes expressed or implied in any

forward looking statement or forecast. The forward looking statements and forecasts in this report reflect views held only at the date

of this report.

Statements about past performance are not necessarily indicative of future performance.

Except as required by applicable law or any applicable Listing Rules, the Relevant Persons disclaim any obligation or undertaking to

publicly update any forward looking statements or forecasts, whether as a result of new information or future events.

No offer of securities

This presentation does not constitute investment advice, or an inducement or recommendation to acquire or dispose of any

securities in Fonterra or the Fonterra Shareholders’ Fund, in any jurisdiction.

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JOHN WILSON – CHAIRMAN

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3.87 7.59 4.72 6.10 7.60 6.08 5.84 8.40 4.40

0.59

0.07

0.48

0.27

0.30

0.32 0.32

0.10

0.25

4.46

7.66

5.20

6.37

7.90

6.40 6.16

8.50

4.65

2007 2008 2009 2010 2011 2012 2013 2014 2015

Farmgate Milk Price¹ Dividend² Final Cash Payout – three-year rolling average³

A TOUGH SEASON FOR FARMERS

1. Farmgate Milk Price: $ per kgMS.

2. Dividend: $ per share.

3. Final Cash Payout weighted by milk solids volume.

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Economic and

geopolitical issues

• Forecast milk price lowered from $7.00 to $4.40 – difficult to predict milk price

• Slump in prices longer than market expectations

• Many major global dairy companies impacted

• Long term outlook for dairy remains positive

• China Slowdown

• Eurozone

• Oil and mineral prices

• Russian embargo

• ISIS Middle East

CHALLENGING YEAR GLOBALLY

0

2,000

4,000

6,000

Jan-14 Jul-14 Jan-15 Jul-15

US

D p

er

MT

Whole Milk Powder

Demand

Supply

Fall in dairy prices Dairy supply/demand

imbalance

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DAIRY SUPPLY / DEMAND IMBALANCE

Note: All figures are year-to-date (excl New Zealand): Australia (July), United States (July), EU (June), China (July), Asia (May), Middle East & Africa (May).

Source: Government milk production statistics / GTIS trade data / Fonterra analysis

Demand

Supply China

Year to date

imports -21%

Middle East & Africa

Year to date

imports

Russia

EU’s largest dairy

export market

Trade embargo remains US

Year to date

production +1%

EU

Year to date

production

Australia

Year to date

production +4%

New Zealand

Fonterra 2014/15

season production

Forecast for 2015/16

season production

+2%

-5%

Asia (excl China)

Year to date

imports +14%

+3%

+1%

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KEY DRIVERS OF MILK PRICE

• Revenue has been

volatile

• Dairy prices

• Currency (FX)

• Costs relatively stable

• Cost of capital

• Operating costs

1. 2014 Milk Price includes adjustment of 53 cents.

Revenue, cash costs and capital costs

0.00

2.00

4.00

6.00

8.00

10.00

12.00

2011 2012 2013 2014 2015

$ p

er

kg

MS

Revenue Cash and Capital Costs

Farmgate Milk Price¹

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MILK PRICE REVENUE

Dairy Prices

• Significant volatility 2012

to 2015

• WMP prices fell 44% in last

12 months

Exchange Rate

• Hedging benefit over last

5 years

– Average 27 cents per

kgMS p.a.

– Reduces volatility

• Impact of lower spot rate in

2015 spread over 2015 to

2017 hedging

Dairy price volatility has had a significant impact on Milk Price

1. Hedging impact is expressed in $/KgMS, calculated on the same basis as is used in the Milk Price Statement being the difference between the spot rate and the hedged

achieved rate for the season. For example for the 2015 season the foreign exchange rate is applied to cash received from Sep-2014 to Dec-2015.

2. Where the forecast exposure is less than 100% hedged the Achieved Rate assumes that the unhedged balance is hedged on the basis of the forward curve as at 31 July 2015

0

2,000

4,000

6,000

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

WM

P P

ric

e

US

D/M

T

0.60

0.70

0.80

0.90

Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Cu

rre

nc

y

NZ

D/U

SD

Spot Rate

Achieved Rate²

Dairy Prices (USD per MT)

Exchange Rate NZD / USD

Hedging

impact1 $0.22 $0.42 ($0.50) $0.32 $0.88

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• Capital costs are lower

reflecting lower cost of debt

• Benefited milk price by 15

cents per kgMS or $240 million

to milk price in 2015 vs. 2011

• Inflationary increases in cash

costs offset in part by

efficiency gains

• Capital cost steadily reduced

Milk Price Cost of Capital Milk Price Cost of Capital

Milk Price cash and capital costs ($/kgMS) Total Costs

MILK PRICE COSTS Stable total cost base

8.5% 7.7% 7.4% 6.8% 6.1%

2011 2012 2013 2014 2015

1.91 1.78 1.88 1.69 1.76

2011 2012 2013 2014 2015

Cash Costs Capital Costs

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• Supporting farmer cash flows through timing of

advance rate ($900 million)

• Farm Source benefits

– 6-month extended credit at Fonterra

Farm Source stores

– $4 million of Fonterra Farm Source rewards

dollars taken up by 9,000 farmers

– Compliance relief to April 2015

• Acceleration of business transformation to adapt to

new realities

WE RESPONDED BY DRAWING ON

OUR CO-OP STRENGTHS

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2016 OUTLOOK

• The 2015/16 pay-out:

– A forecast Farmgate Milk Price of $4.60 per kgMS

– A strong forecast EPS performance of 40-50 cps

• In addition 50 cents per kgMS loan to support farmers¹

• Global markets remain volatile and difficult to forecast

milk price early in season

• Capex for the 2016 financial year lowered to

$900 million

1. All share-backed farmers.

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THEO SPIERINGS – CEO

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$974M

25 CPS

4.3M MT

$506M

$18.8BN

STRONG REBOUND IN PROFITABILITY

1. Total volume, excluding DPA consolidation (324,650 MT), is up 0.3%

2. Total revenue, excluding DPA consolidation, is down 21%.

3. Return on Capital (ROC) excludes goodwill, brands and equity accounted investments.

Group ROC including goodwill, brands and equity accounted investments was 6.9%.

DIVIDEND PER SHARE

NORMALISED EBIT

Consumer and Foodservice

Volume⁵ 1.7m MT

Normalised EBIT $408m

Return on Capital³ 25.5%

International Farming

Volume 0.2m MT

Normalised EBIT ($44m)

Ingredients

Volume 3.0m MT

Normalised EBIT⁴ $973m

Return on Capital³ 9.3%

VOLUME¹

NET PROFIT AFTER TAX

REVENUE²

94% 9% 15%

150% 183%

8.9%

RETURN ON CAPITAL³

4. Ingredients excludes unallocated costs

5. Consumer and Foodservice volume, excluding DPA consolidation

(324,650 MT), is up 3%

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STRENGTHENING OF PERFORMANCE

IN THE SECOND HALF

1. Volume includes 324,650 MT from DPA consolidation. Excluding this, volume increased 0.3%.

Volume¹ (000 MT) Normalised EBIT ($m)

1,988 2,189

1,977 2,114

3,965 4,303

2014 2015

First Half Second Half

403 376

100

598 503

974

2014 2015


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Beingmate

Essential +

Growth Capex

STRATEGIC INVESTMENTS FOR

THE FUTURE Led to higher financing costs

$690m

$450m

$750m

$900m

Additional

financing

costs of

6 cps Depreciation

and retained

earnings

Incremental

debt

Essential and strategic investments Timing

$360m

New Zealand

China

Other

Offshore Advance

rate timing

Accelerated

Capacity

• Pahiatua

• Edendale

• Lichfield

China Farms

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LUKAS PARAVICINI – CFO

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974 100 (427)

(26) 621 (138) (77) 60 466

NormalisedEBIT

DPA Interest Other AdjustedNPAT

FinancialInstruments

AustraliaYDD

DPA &Hyperinflation

Profitto

Shareholders

PROFIT AVAILABLE FOR DIVIDEND Total Dividend of 25 cents per share

Cents per Share

61 6 (27) (1) 39 (9) (5) 4 29

Profit Available for Dividend Non Cash Adjustments

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Volume

-2%

Normalised

EBIT Growth

+43%

INGREDIENTS

292 299

387

674

679

973

2014 2015


• NZ ingredients:

$264 million gross margin higher

– Improved stream returns

– Optimised product mix to pricing

– Lower peak costs

• Australian ingredients:

($92) million normalised EBIT

– Adverse product mix

• Stanhope cheese fire

• Darnum – lower nutritionals

• Return on Capital of 9.3%

1. Ingredients EBIT excludes unallocated group costs

A solid result driven by New Zealand ingredients

Normalised EBIT¹ ($m)

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NEW ZEALAND INGREDIENTS

1. Comparatives reflect business structures at the time and have not been restated

2. For comparative purposes, includes unallocated group costs

Solid performance over last 5 years¹

Gross Margin ($ per MT)

Normalised EBIT² ($ million)

454 461 443 366

530

2011 2012 2013 2014 2015

$ p

er

MT

420 501 494

280

699

2011 2012 2013 2014 2015

$ m

illi

on

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94 116

292 129

408

2014 2015

Second Half

First Half

3,934

4,501

2014 2015

Volume (m LME)1

+14%

Normalised EBIT ($m)

+216%

1. Excluding DPA consolidation (66 million LME), volumes are up 13%

CONSUMER AND FOODSERVICE Strong volume and margin growth

• Asia and Greater China – record performance

• Lower input costs for NZ sourced product

• Australia margins impacted by yoghurt and

dairy desserts

• Solid performance from Latin America


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• Sri Lanka recovery grew volumes

• Foodservice growth of 11 per cent

– Targeting Italian kitchen and Asian

bakeries

– Growth in butter and UHT

• Pricing strategy delivered higher margins and

maintained market share

• Strong margin uplift reflecting the strength of

our brands and lower input costs


Volume

Value

ASIA

CONSUMER AND FOODSERVICE Record Performance

51

202

2014 2015

1,234 1,558

2014 2015

Volume (m LME)

+26%


+296%

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• Consolidation of DPA

• New products launched in Brazil

• Increased consumer prices in Chile

• Driving market share through product

innovation

• Margins improved due to pricing and on-going

cost reductions


Volume

Value

1. Excluding consolidation of DPA, LME volumes are up 5%

LATIN AMERICA

CONSUMER AND FOODSERVICE Solid growth in normalised EBIT

94

110

2014 2015

511

603

2014 2015

+18%

+17%

Volume (m LME)


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• Lower volume in NZ due to UHT production

moving into ingredients

• Australian domestic foodservice up

10 per cent

• Growth due to NZ consumer and key

Australian brands

• Continued innovation and launch of

new products

• Australian yoghurt and dairy desserts

continued margin squeeze


Volume

Value

OCEANIA CONSUMER AND

FOODSERVICE Progress in Australian reshape and driving product innovation in NZ

(24)

51

2014 2015

1,760 1,749

2014 2015

Volume (m LME)

-1%


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• END GAME

• A Profitable

Australian

business

• # 1 supplier

Coles/Woolworths

• Strong brand

performance

• 3-year nutritionals

contract

• 10% foodservice

volume growth

• Maintained milk

supply

• Cost reductions

• Winning supply

chain

• Working capital

improvements

• Multi-hub strategy

• Integrated model

• Cheese/whey/

nutritionals

A profitable business

TAKING DECISIVE STEPS TO TURNAROUND

AUSTRALIAN PERFORMANCE

Review Fix leaks Improve

Portfolio

Transform

Business In progress In progress

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8

45

2014 2015

429 591

2014 2015

Volume (m LME)

GREATER CHINA

CONSUMER AND FOODSERVICE Record Performance

+38% • Growth driven by foodservice and Anchor™

• Foodservice business rolled out to 13 new

cities to total of 40

Volume

• Lower inputs costs improved margins

• Distribution of Anmum™ infant formula

through Beingmate now underway


Value Normalised EBIT ($m)

+463%

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INTERNATIONAL FARMING Important part of our strategy to build an integrated dairy business in China

Hangu

(汉沽)

Yutian

(玉田) Beijing

(北京市)

Ying

(应县)

Shanxi

Province

(山西省)

Hebei

Province

(河北省)

Ying Hub in Ying County

Capacity 200 million litres

Milking cows 7,000

Young stock 13,400

Yield 28.5 litres per

cow per day

Yutian Hub east of Beijing

Capacity 200 million litres

Milking cows 17,800

Young stock 15,300

Yield 29 litres per

cow per day

Normalised EBIT ($44m)

• Chinese milk price has

decreased 10% over last

12 months

• Managed production in low

milk price environment by

reducing volume and

variable costs

• Farm development costs

and livestock revaluation

further impacted earnings

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• Higher operating

expenses of $177m in

2015 comprise:

– One-off costs of

$100 million relating

to yoghurt and dairy

desserts and

restructuring

– $77 million including

distribution

expenses, other

operating costs and

FX translation

1,346

1,493 1,463

1,584 1,614

2011 2012 2013 2014 2015

2,119

2,238

2,256

2,210

2,387

2011 2012 2013 2014 2015

Operating Expenses¹

($m)

NZ Milk Solids collected

(m kgMS)

4.6% 3.0%

1. 2015 operating expenses exclude impact of DPA consolidation.

OPERATING EXPENSES CONTROLLED Growing at a slower rate than milk collection

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Working Capital Days Gearing

Strong fundamentals

1. Adjustment to show impact of Advance Rate timing.

FINANCIAL STRENGTH AND DISCIPLINE

Credit Rating Fitch AA- (stable outlook)

S&P A (credit watch)

Debt Weighted Average

Term to Maturity As at 31 July 2015 4.6 years

39.6% 42.3% 49.7% 3.3% 46.4%

2013 2014 2015 AdvanceRate

Timing¹$900m

2015Adjusted

105 106

98 103

87

2011 2012 2013 2014 2015

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Bank Facility

47%

Diversified profile¹ Prudent liquidity

Bank facility maturity profile²

At 31 July 2015 ($ billion)

DCM maturity profile³ At 31 July 2015 ($ billion)

1. Includes undrawn facilities and commercial paper.

2. Since balance date, $280 million of bank facilities maturing in FY17 have been extended until FY20 and FY21. Facilities maturing in FY16 comprise short term

subsidiary working capital facilities.

3. Excluding commercial paper.

DIVERSIFIED AND PRUDENT

FUNDING PROFILE

0.0

0.6

1.2

1.8

2016 2017 2018 2019 2020 2021 2022 2023 2024

0.0

0.6

1.2

1.8

2016 2018 2019 2020 2021 2022 2024 2025 2027 2030

Undrawn

Facilities

$3.2.bn

65%

Drawn Facilities

$1.7bn

35%

AUD DCM 11%

CNY DCM 7% GBP DCM 6%

NZD DCM 14%

USD DCM 16%

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THEO SPIERINGS – CEO

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DRIVE PERFORMANCE Shifting volume to higher value

1. Includes inter-company sales to other strategic platforms

Deliver on Foodservice potential

Selectively invest in milk pools

Grow our Anlene™ business

Develop leading positions in

paed & maternal nutrition

Optimise NZ milk

1

Align our business and organisation

Build and grow beyond our current

consumer positions

3

2

4

5

6

7

Consumer and

Foodservice FY14 FY15 FY18

Percentage of

total LME 18% 19% 23%

LME¹ (bn) 3.9 4.5 5.9

CAGR

(FY14-FY18)

GDT -2.4%

Ingredient Sales +4.9%

Foodservice +16.3%

Consumer +8%

3%

23%

Ingredient Sales

51%

10%

13%

30% 12%

3%

49%

6%

‘14 ‘15 ‘18

12%

28%

50%

7%

3%

Total FY14 FY15 FY18

LME (bn) 22.2 22.8 25.8

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CASH MINDSET + PERFORMANCE =

ON-GOING TRANSFORMATION

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BUSINESS TRANSFORMATION Recurring and one-off savings building over 24 months

Sales mix / pricing

Operations

Procurement

Supply Chain

Overheads

Working Capital

Capex

Transformation Scope

Total Shareholder

Returns

Milk Price

Earnings

Balance Sheet

Cash flow

Cash Impact

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From (2015) Ambition

Revenue $0.8 / LME $1.2 / LME

$10 / kgMS $14 / kgMS

Gross Margin 17% 20%+

Normalised EBIT $974m 50%–100% uplift

Return on Capital 8.9% 11%–13%

Gearing¹ 45%–50% 40%–45%

EXECUTING OUR STRATEGY TO

DELIVER SUPERIOR PERFORMANCE

1. Fonterra’s target is to maintain its strong investment grade credit rating and debt payback and cash flow coverage metrics that support this.

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STRONGER TOGETHER

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SUPPLEMENTARY SLIDE

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$ million Year ended

31 July 2015

Year ended

31 July 2014

Total EBIT 942 503

Gain on Latin America strategic realignment (129) -

Impairment of assets in Australia 108 -

Restructuring and redundancy provisions 33 -

Time value of options 20

Total normalisation adjustments 32 -


NORMALISATION ADJUSTMENTS

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FARMGATE MILK PRICE STATEMENT

FONTERRA FARMGATE MILK PRICE STATEMENT 2015FOR THE SEASON ENDED 31 MAY 2015

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INTRODUCTION 1

FARMGATE MILK PRICE FOR THE 2015 SEASON 2

FARMGATE MILK PRICE REVENUE AND COSTS 3MILK SUPPLY, PRODUCTION AND SALES VOLUMES 4PRICES 5LACTOSE 6FARMGATE MILK PRICE CASH COSTS 6FARMGATE MILK PRICE CAPITAL COSTS 7CALCULATION OF BENCHMARK WEIGHTED AVERAGE COST OF CAPITAL (WACC) 8

FARMGATE MILK PRICE MANUAL CHANGES 9

CHANGES IN APPROACH TO THE CALCULATION 10

APPENDIX 1 11FARMGATE MILK PRICE OVERVIEW

APPENDIX 2 13PWC INDEPENDENT ASSURANCE REPORT

ATTACHMENT 1 14MILK SUPPLIED AND PRODUCTION VOLUME

ATTACHMENT 2 15SALES VOLUME

ATTACHMENT 3 16AVERAGE NUMBER OF MONTHS PRIOR TO SHIPMENT THAT PRICES WERE STRUCK

ATTACHMENT 4 18AVERAGE USD PRICES

ATTACHMENT 5 19AVERAGE USD:NZD CONVERSION AND SPOT RATES

GLOSSARY 20

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INTRODUCTION

The primary purpose of this Statement is to help Fonterra farmer shareholders, unit holders in the Fonterra Shareholders’ Fund, and other interested parties better understand the Farmgate Milk Price.

This Farmgate Milk Price Statement sets out information about the Farmgate Milk Price and outlines the way that Fonterra Co-operative Group Limited (Fonterra) has calculated the Farmgate Milk Price for the milk season that ended on 31 May 2015 (2015 season).

The appendices provide an overview of the Farmgate Milk Price and a report by Fonterra’s external auditors that confirms that the Farmgate Milk Price for the 2015 season has been derived in accordance with the Principles, Methodologies and Detailed Rules in Fonterra’s Farmgate Milk Price Manual, dated 1 August 2014. Five attachments provide further detail for the past three seasons on the most significant factors that affect the Farmgate Milk Price. A glossary of the terms used completes the report.

Fonterra has also released as an adjunct to this Statement a Microsoft Excel-based financial model that shows how the information set out in the Statement has been used to calculate the Farmgate Milk Price for the 2015 season.

Numbers in this Statement have been rounded and, as a result, some tables may not exactly total or sum to 100 per cent.1 The information on the Farmgate Milk Price presented in this Statement is based on data used within the Milk Price Model, not Fonterra’s actual data.

A Farmgate Milk Price Statement is made made available each year with Fonterra’s annual results on www.fonterra.com.

1 Percentage changes shown in tables in this statement have been calculated by reference to the underlying data, and may differ from percentage movements between the rounded data presented in the tables.

FONTERRA FARMGATE MILK PRICE STATEMENT 2015 1

FONTERRA FARMGATE MILK PRICE INTRODUCTIONF

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FARMGATE MILK PRICEFOR THE 2015 SEASON

This section sets out the Farmgate Milk Price for the 2015 season. It also describes the way the Farmgate Milk Price relates to Fonterra’s financial year ended 31 July 2015.The Manual sets out the methodology for determining the base amount to be paid by Fonterra for milk supplied to Fonterra in New Zealand in a season. Fonterra’s Milk Price Panel advises the Fonterra Board on matters concerning the Manual, including the calculation of the Farmgate Milk Price.

The Farmgate Milk Price is the total amount calculated under the Manual, and is NZD$7.096 billion for the 2015 season. For convenience, the Manual also defines the ‘Farmgate Milk Price per kgMS’ as this total amount divided by Fonterra’s total New Zealand milk supply (1.614 billion kilograms of milk solids (kgMS)), or NZD$4.40 per kgMS.

The Farmgate Milk Price of NZD$7.096 billion is used for payments for New Zealand milk supplied in the 2015 season.

It includes payments for milk supplied by farmer shareholders, milk supplied on contract, and a portion of the premiums paid for winter milk.

The cost of New Zealand-sourced milk, as disclosed in Fonterra’s most recent financial statements, is NZD$7.121 billion. The NZD$25 million difference between this amount and the Farmgate Milk Price of NZD$7.096 billion primarily reflects the following three factors: first, the financial statements report the cost of milk acquired during the financial year comprising the 12-month period ending 31 July 2015. In contrast, the Farmgate Milk Price for the season is the cost of milk supplied in respect of the 12-month period ending 31 May 2015. Secondly, some payments for winter milk, and premiums for specialty milk, are not funded from the Farmgate Milk Price.1 Thirdly, the difference between payments under the Guaranteed Milk Price scheme and the amount that would have been paid had the scheme not been put in place are also not funded from the Farmgate Milk Price.

FARMGATE MILK PRICE

$4.40/kgMS

1 A commodity manufacturer of milk powders is unlikely to pay premiums for specialty milk or to pay the level of premiums for winter milk that an integrated processor such as Fonterra would pay. Premiums for speciality milks and a portion of the premiums paid for winter milk are therefore not funded from the total amount calculated under the Manual and are paid in addition to this total amount. For the 2015 season, these Approved Adjustments amounted to NZD$18 million.

2 FONTERRA FARMGATE MILK PRICE STATEMENT 2015

FONTERRA FARMGATE MILK PRICE FOR THE 2015 SEASONF

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FARMGATE MILK PRICEREVENUE AND COSTS

The most significant factor that affects the Farmgate Milk Price from season to season is revenue.

Table 1 below summarises the Farmgate Milk Price for the milk supplied in the 2013, 2014 and 2015 seasons. Both Table 1 and Figure 1 below show that changes in the Farmgate Milk Price over the past three seasons have been driven mainly by changes in commodity prices converted into NZD.

The first three subsections below describe the key factors that influence revenue.

Key determinants of the movements in average costs between the 2014 and the 2015 seasons are explained in later subsections.

TABLE 1: FARMGATE MILK PRICE SUMMARY

SEASON2015

$b2015

$/kgMS2014

$b2014

$/kgMS2013

$b2013

$/kgMS

2015/2014% CHANGE

($/kgMS)

2014/2013%CHANGE

($/kgMS)

Farmgate Milk Price Revenue 10.54 6.53 17.50 11.04 12.06 8.24 –40.9% 34.0%

Lactose (0.60) (0.37) (0.66) (0.42) (0.76) (0.52) –10.6% –20.0%

Net Revenue 9.94 6.16 16.83 10.62 11.30 7.72 –42.1% 37.6%

Farmgate Milk Price Cash Costs (1.89) (1.17) (1.82) (1.15) (1.73) (1.18) 1.9% –2.9%

Farmgate Milk Price Capital Costs* (0.95) (0.59) (0.86) (0.54) (1.02) (0.69) 8.3% –21.7%

Total Costs (2.84) (1.76) (2.68) (1.69) (2.75) (1.88) 4.0% –9.8%

Farmgate Milk Price 7.10 4.40 14.15 8.93 8.55 5.84 –50.8% 52.9%

Million kgMS 1,614 1,584 1,463 1.9% 8.3%

* Includes depreciation, tax and capital charge

FIGURE 1: CHANGES IN THE FARMGATE MILK PRICE: SEASONS 2013 – 2015

0.00

2.00

4.00

6.00

8.00

10.00

Adjusted Farmgate Milk Price

2014 Milk Price adjustment

Farmgate Milk Price

Milk Price Capital Costs

Milk Price Cash Costs

Net Revenue

2014 Season 2013 Season

$/kgMS

7.72 1.18

0.695.84

2015 Season

6.16 1.17

0.594.40

10.62 1.15

0.548.93 0.53

8.40

The Milk Price Adjustment of 53 cents per kgMS in the 2014 season to the Farmgate Milk Price calculated under the Manual was made in response to an unprecedented divergence in returns to the milk powder-based products included in the Farmgate Milk Price and other commodity products manufactured by Fonterra. With no adjustment, Fonterra would have incurred a loss, which could have put the Co-operative at risk of a loss of confidence of its stakeholders. Further explanation of the Milk Price Adjustment is provided in the Farmgate Milk Price Statement for 2014.


FONTERRA FARMGATE MILK PRICE REVENUE AND COSTSF

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MILK SUPPLY, PRODUCTION AND SALES VOLUMESFarmgate Milk Price Revenue varies according to the milk supplied during the season, product mix, sales volumes and prices in NZD. Farmgate Milk Price Revenue is the most significant driver of the Farmgate Milk Price.

Figure 2 shows the relationship between when milk is collected during a season (the light blue line), the volume of products manufactured from that milk (the grey line) and when that product is shipped (the light green line). The key points to note are as follows:

• Milk supplied during the 2015 season comprised 1.614 billion kgMS. Attachment 1 provides information on milk supplied every quarter for each of the past three seasons.

• This amount of milk is assumed to be converted into Reference Commodity Products. The mix between the various products that goes into the Farmgate Milk Price is aligned to Fonterra’s actual mix between Whole Milk Powder (WMP) and Skim Milk Powder (SMP), and between butter and Anhydrous Milk Fat (AMF) (production of Buttermilk Powder (BMP) is a residual amount). Attachment 1 provides Farmgate Milk Price production by quarter for each Reference Commodity Product for the past three seasons.

• Between September and November 2014, milk collected by Fonterra in the North Island exceeded the processing capacity assumed in the Milk Price model. To accommodate this, it was assumed that the notional Milk Price business would have refrained from adding lactose to a quantity of milk powder to adjust the protein content to a standard level aligned to internationally recognised specifications. This resulted in a net reduction in assumed production of

Reference Commodity Products of 10,000 MT, and a reduction in revenue, net of the avoided lactose costs, of NZD$11 million, or 0.7 cents per kgMS.

• Sales volumes reflect the pattern of Fonterra’s actual shipments of Reference Commodity Products manufactured from milk supplied during the season. Figure 2 shows the lag between production and shipment, as well as the fact that minimal milk is

supplied in June and July. These factors mean that shipments of products manufactured from milk collected in a season (beginning 1 June) do not normally commence until August at the earliest. Shipments are normally complete by the end of October in the following year, again as illustrated in Figure 2. Attachment 2 sets out sales volumes by quarter for each of the past three seasons.

0

50

100

150

200

250

300

350

400

450

NOV 15OCT 15SEP 15AUG 15JUL 15JUN 15MAY 15APR 15MAR 15FEB 15JAN 15DEC 14NOV 14OCT 14SEP 14AUG 14JUL 14JUN 14

Sales VolumeProduction VolumeMilk Supply (million kgMS)

METRIC TONNES ’000sJU

N 14

JUL

14

AU

G 14

SEP

14

OC

T 14

NO

V 14

DEC

14

JAN

15

FEB

15

MA

R 15

APR

15

MAY

15

JUN

15

JUL

15

AU

G 15

SEP

15

OC

T 15

NO

V 15

FIGURE 3: LAG BETWEEN WHEN PRICES WERE STRUCK AND SHIPMENT

0

500

1,000

1,500

2,000

2,500

3,000

3,500

Cumulative Shipment VolumeCumulative Contracted Sales Volume

JUN

14

JUL

14

AU

G 14

SEP

14

OC

T 14

NO

V 14

DEC

14

JAN

15

FEB

15

MA

R 15

APR

15

MAY

15

JUN

15

JUL

15

AU

G 15

SEP

15

OC

T 15

METRIC TONNES ‘000S

FIGURE 2: TIMING OF SUPPLY, PRODUCTION AND SALES VOLUMES

FARMGATE MILK PRICEREVENUE AND COSTSCONTINUED



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Revenues are recognised when sales are invoiced, at the time of shipment. Sales prices included in the Farmgate Milk Price are always set prior to the month of shipment, primarily via GDT events. Figure 3 on page 4 shows the average lag between when prices are struck and when product is shipped. This matches Fonterra’s actual average lag for product that is sold on terms that are typical for the sale of commodity products from New Zealand. To ensure that this is the case, contracts with more than five months between when a price is set and shipment occurs are not taken into account in determining shipment prices.2

Attachment 3 sets out the average number of months prior to shipment that prices were established for each quarter over the past three seasons. Attachment 3 also sets out the average percentage of sales contracted in each month prior to shipment in the past three seasons.

PRICESSince the 2012 season, GDT has been the sole source of prices for WMP, SMP and AMF, and is a primary reference point for BMP and butter. Non-GDT contracts Fonterra enters into are also used to establish prices for butter and BMP.

Detailed rules in the Manual dictate which contracts can be taken into account. Contracts that are excluded, for example, include sales to Fonterra subsidiaries.

Attachment 1 highlights that WMP, SMP and AMF (2,754,000 MT) accounted for 90 per cent of the Farmgate Milk Price production of Reference Commodity Products (3,071,000 MT) in the 2015 season.

The average shipment prices incorporate provisions for the lower prices received for ‘downgrade product’. These are products that do not meet manufacturing specifications, some of which may only be suitable for use as stock feed.

Table 2 above shows the weighted average United States Dollars (USD) contract prices of Reference Commodity Products for the past three seasons. It shows that prices for the Reference Commodity Products decreased on average by 42.4 per cent between the 2014 season and the 2015 season, compared to an increase of 35.5 per cent between the 2013 season and the 2014

season. Average USD prices per MT for each Reference Commodity Product by quarter for the past three seasons are set out in Attachment 4.

The Manual provides for the conversion of notional USD Farmgate Milk Price receipts to NZD for each month at the average rate at which Fonterra actually converts its USD-equivalent foreign currency receipts for the month, taking into account the costs and benefits of Fonterra’s hedging activities. Fonterra’s policy is to hedge 100 per cent of net recognised foreign currency trade receivables and payables. It also requires hedging of forecast cash receipts from sales for a period of up to 18 months within limits approved by Fonterra’s Board. Fonterra uses both forward foreign exchange contracts and currency options to hedge its foreign exchange risk.

Fonterra’s hedging policy is designed to provide certainty and to reduce the impact on the Milk Price of volatility in the New Zealand dollar, and results in the spot exchange rate at a particular point in time being reflected in the hedged conversion rate over the subsequent 18 months. Consequently, a significant portion of the benefit from the sharp decline in the spot rate in the 2015 Season will be reflected in hedged conversion rates for the 2016 and 2017 Seasons.3

2015 SEASON AVERAGE PRICES WERE LOWER THAN 2014 SEASON BY

42.4%

TABLE 2: WEIGHTED AVERAGE USD PRICE 2013 – 2015 SEASONS

WEIGHTED AVERAGE PRICE (USD) PER MT 2015 2014 20132015/2014

% CHANGE2014/2013

%CHANGE

WMP 2,639 4,824 3,394 –45.3% 42.1%

SMP 2,552 4,504 3,625 –43.4% 24.3%

Butter 3,027 3,920 3,550 –22.8% 10.4%

AMF 3,577 4,853 3,450 –26.3% 40.7%

BMP 2,657 4,752 3,457 –44.1% 37.5%

–42.4% 35.5%

2 For the 2015 season, approximately 7 per cent of sales of Reference Commodity Product were sold under contracts with more than 5 months between the price being set and shipment occurring.3 Fonterra’s hedging policy also enables Fonterra to enter into future conversion rates that are typically lower than the spot rate, and the use of currency options has enabled Fonterra to further participate in

some of the recent decline in the spot exchange rate.


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Table 3 shows that Fonterra’s hedging policy resulted in an average foreign exchange conversion rate for the 2015 season of USD:NZD 0.7882 against an average spot rate of 0.7329 USD:NZD. In contrast to the 2015 season, Fonterra’s hedging activities resulted in an average increase in the Farmgate Milk Price of 48 cents in each season from 2010 to 2014, relative to translation at the spot exchange rate. Attachment 5 on page 19 shows the average foreign exchange conversion rate (USD:NZD) for the Farmgate Milk Price Revenue for each quarter in the 2015 Season, based on Fonterra’s actual hedging contracts in place, compared to the weighted average spot rate that prevailed in the quarter. Attachment 5 also provides equivalent information by quarter for the 2013 and 2014 seasons.

As at 31 July 2015, Fonterra had foreign exchange contracts in place in respect of approximately 67 per cent of the USD-equivalent operating cash flow exposure expected to impact on the Farmgate Milk Price for the 2016 Season. If the balance was hedged based on a spot exchange rate of 0.6603, the average USD:NZD conversion rate would be 69 cents.4

LACTOSELactose is used as an ingredient in the manufacture of WMP, SMP and BMP to achieve a standard protein composition aligned to internationally recognised specifications. Most of the lactose content of milk powders is obtained from the milk supplied to Fonterra. However, a portion is purchased at international prices. Because the cost of purchased lactose depends on global prices and the exchange rate, it is presented in Table 1 and Figure 1 as a deduction from Farmgate Milk Price Revenue.

Table 4 above provides the basis for the cost of purchased lactose in the 2015, 2014 and 2013 seasons.

FARMGATE MILK PRICE CASH COSTSFarmgate Milk Price Cash Costs reflect:

• Fonterra’s actual supply chain and collection costs.

• Costs associated with modern plants with sufficient capacity to process all milk collected by Fonterra, located on more than 20 reference manufacturing sites (some of which contain multiple plants) with associated overhead costs. The costs of operating these plants are based on daily processing capacities that match Fonterra’s averages, and on operating parameters that reflect manufacturers’ specifications and Fonterra’s per-unit costs.

• Overhead and selling costs that are typical of a commodity-only business that sells product from New Zealand. Overhead costs are calculated by reference to Fonterra’s actual costs, but exclude costs that are attributable to the much broader scope of Fonterra’s business. Selling costs primarily reflect the cost of selling products through GDT with an offshore supporting network.

Table 5 and Figure 4 on page 7 summarise the major categories of cash costs and the sources of movements in each category between the 2014 and 2015 seasons.

The movements in costs reflect the following:

• Milk supply increased by 1.9 per cent in the 2015 season compared to the 2014 season. By itself, this factor resulted in a decrease in cash costs of 0.6 cents per kgMS.

• Costs increased by an average of 2.4 per cent, or 2.8 cents per kgMS, due to inflationary factors.

• The NZD$2 million reduction in costs due to structural changes is due to:

– As explained in the 2014 Milk Price Statement, a revised approach has been used to calculate provisions for a number of relatively minor costs, relating to effluent, cleaning, consumables, laboratory testing and water costs. Where the previous approach effectively assumed the relevant costs increased in line with production, the revised approach recognises that some of these costs


4 As noted above, Fonterra uses currency options as well as forward exchange contracts to hedge its foreign currency receipts. Use of options means the average hedged conversion rate may vary with the spot exchange rate.

TABLE 3:EFFECT OF HEDGING POLICY ON THE FARMGATE MILK PRICE FOR THE 2013 – 2015 SEASONS

2015 2014 2013

SEASON MILK PRICE SPOT MILK PRICE SPOT MILK PRICE SPOT

Average Conversion Rate (USD:NZD)

0.7882 0.7329 0.8086 0.8396 0.7986 0.8214

Milk Price (NZD/kgMS) 4.40 4.90 8.93 8.51 5.84 5.62

Effect of Hedging (NZD/kgMS)

–0.50 0.42 0.22

TABLE 4: PURCHASED LACTOSE AND PRICE

SEASON 2015 2014 20132015/2014

% CHANGE2014/2013

%CHANGE

Purchased Lactose (000 Metric Tonnes) 346 331 297 4.6% 11.4%

Average Price (USD) per MT 1,406 1,605 2,036 –12.4% –21.1%

Total Lactose Purchases (USD $m) 486 531 604 –8.4% –12.1%



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do not vary with production (i.e. they are ‘fixed’). This change in approach resulted in a decrease in costs of approximately 0.9 cents per kgMS.

– An update to assumed energy usages in the milk powder plants, based on data obtained from energy audits conducted at two Fonterra plants, resulting in an increase in costs of approximately 0.7 cents per kgMS.

• An allowance of NZD$6.7 million was included for additional raw milk testing costs arising from the 1080 poisoning threat and for other minor specific quality issues faced by Fonterra. There was a partially offsetting reduction of NZD$2.3 million in variable manufacturing costs as a consequence of the reduction in the assumed production of Reference Commodity Products due to the excess of peak period milk supply over processing capacity discussed above. The net impact of these adjustments was NZD$4.4 million, or 0.3 cents per kgMS. There were no costs of a similar nature in 2014.

FARMGATE MILK PRICE CAPITAL COSTSThe Milk Price Model uses ‘standard’ plants to calculate both operating and plant-related capital costs. These

plants have capacities that approximate Fonterra’s average daily capacities for each type of plant and reflect current technology of the type typically employed across the industry.5 The standard plants are smaller than Fonterra’s newest large manufacturing plants, such as the ED4 drier installed at Fonterra’s Edendale manufacturing site in Southland in 2009 and the DD2 drier installed at Fonterra’s Darfield Site in Canterbury in 2013, but are larger and more efficient than Fonterra’s older smaller plants.

The basis for deriving the benchmark depreciation, tax costs and capital

charge is set out in detail in the Manual. In broad terms:

• The capital charge on fixed assets is designed to recover the full cost (through a depreciation charge) of the manufacturing and other assets required to manufacture Reference Commodity Products over the assets’ economic lives, and to generate a return at the benchmark Weighted Average Cost of Capital (WACC, see below) on the undepreciated balance each year.

• The capital charge is calculated in a manner that results in its aggregate amount growing each year approximately in line with milk supply

5 The average daily processing capacity of the standard WMP and SMP plants installed prior to the 2013 season is approximately 1.9 million litres. Incremental and replacement WMP and SMP plants incorporated in the asset base from the 2013 season have an average daily processing capacity of approximately 2.5 million litres, equivalent to the plants installed by Fonterra at Darfield in 2011 and Pahiatua in 2015.

TABLE 5: SUMMARY OF MOVEMENTS IN CASH COSTS

NZD $ MILLION F14VOLUME

IMPACTCOST / PRICE MOVEMENTS

STRUCTURAL CHANGES ONE OFF F15

% CHANGE DUE TO COST

TOTAL % CHANGE

Sales Costs 121 1 4 – – 126 3.3% 3.7%

Variable manufacturing and supply chain costs

742 20 20 (47) (3) 732 2.6% –1.4%

Fixed manufacturing (including repairs and maintenance)/site overheads and supply chain costs

343 – 16 45 – 404 4.8% 17.8%

Collection costs 362 3 1 – – 367 0.4% 1.3%

Other costs 251 – 3 – 7 261 1.0% 3.7%

Total Cash Costs 1,819 23 44 (2) 4 1,889 2.4% 3.8%

% movements 1.3% 2.4% –0.1% 0.2%

FIGURE 4: SOURCES OF MOVEMENTS IN AVERAGE CASH COSTS

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

F15One O�StructuralChanges

Cost/priceMovements

F14Adjusted

VolumeImpact

F14

$/kgMS

1.148 1.1421.172

0.0060.001

0.0030.028


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and capital goods inflation, as long as the WACC does not change. This means that changes in the average age of the asset base do not result in material year-on-year movements in the capital charge, and therefore in the Farmgate Milk Price.

• The Farmgate Milk Price cost base also includes a provision for a capital charge on the monthly net working capital balances implied by the sale and manufacture of the Reference Commodity Products, and by the phasing of Fonterra’s payments for milk to its suppliers. Each of these items varies somewhat between years, resulting in some annual variation in this element of the capital charge.

• The WACC used to determine the capital charge is specified on an after-tax basis, so the Farmgate Milk Price cost base includes a separate provision for corporate tax. This amount is a relatively constant proportion of the WACC charges on fixed assets and net working capital each year.

Table 6 shows the capital costs and the total book value of the Farmgate Milk Price fixed asset base and monthly average net working capital for the 2015, 2014 and 2013 seasons.

Two matters are relevant to a comparison of capital costs between the 2015 and 2014 seasons:

• In the 2015 season, the WACC rate was 6.1 per cent, down from the 6.8 per cent used in 2014. By itself, this change resulted in a reduction of NZD$45 million in the capital charge on fixed assets, a reduction of NZD$16 million in the charge on net working capital, and a reduction of NZD$17 million in the tax charge, partially offset by an increase in depreciation expense of NZD$13 million. The fixed asset-related reductions were partially offset by an increase in capital costs due to the

effects of the underlying methodology, which is designed to result in an aggregate capital charge that increases approximately in line with inflation and milk supply, holding other things equal.

• The WACC charge on net working capital in 2014 was significantly lower than the charge in prior years. This was mainly due to the impact of the record high 2014 Farmgate Milk Price on the average balance owing to farmers for the supply of milk. The WACC charge for 2015 has returned to a more typical level.

CALCULATION OF BENCHMARK WEIGHTED AVERAGE COST OF CAPITAL (WACC)The WACC used to determine the Fixed Asset Capital Charges and the Net Working Capital Charge is calculated using the ‘simplified Brennan Lally’ methodology employed by the Commerce Commission.6 The methodology applied through to the 2011 season provided for input parameters into the WACC to be updated every four years. Consequently, the WACC was held constant at 8.5 per cent between the 2009 and 2011 seasons, and reflected market interest rates as of mid-2008. From the 2012 season, the methodology was revised to be based on rolling five-year averages of market interest rates, including the five-year

New Zealand government stock rate, resulting in a reduction in the WACC to 7.7 per cent for the 2012 season, 7.4 per cent for the 2013 season and 6.8 per cent for the 2014 season.

For the 2015 season, the WACC methodology has been revised to reflect two matters:

• The asset beta has been revised from 0.45 to 0.38 based on a review by an independent expert, Associate Professor Alastair Marsden of the University of Auckland Business School.7

• As noted in the Farmgate Milk Price Statement for the 2014 season, the Manual was amended with effect from the 2015 season to include the inclusion of a ‘specific risk premium’ in the calculated WACC. A specific risk premium of 0.15, as recommended by Dr Marsden, was added to the assessed cost of equity capital.

The net impact of these two adjustments was to reduce the WACC for the 2015 season from 6.5 per cent to 6.1 per cent.

The 2016 season WACC will be 5.9 per cent, reflecting a further reduction in five-year average market interest rates.


TABLE 6: CAPITAL COSTS, BOOK VALUE OF FIXED ASSET BASE AND AVERAGE NET WORKING CAPITAL

NZD $ MILLION 2015 2014 2013

WACC rate % (post-tax) 6.1% 6.8% 7.4%

Depreciation 263 250 244

WACC Charge – fixed assets 393 436 447

WACC Charge – net working capital 120 26 134

Tax 176 151 191

Total capital costs 952 863 1017

Total fixed assets (book value) 6,505 6,437 6,098

Average Net Working Capital 2,335 887 1,601

6 See, for example, www.comcom.govt.nz/cost-of-capital/7 http://www.comcom.govt.nz/regulated-industries/dairy-industry/review-of-fonterra-s-farm-gate-milk-price-and-manual/statutory-review-of-milk-price-calculation-2/review-of-milk-price-calculation-

201415-season/



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FARMGATE MILK PRICEMANUAL CHANGES

Since the Manual was introduced in the 2009 season, various minor refinements have been made as practical issues were identified and addressed. Such refinements are to be expected given the importance to Fonterra of ensuring the Farmgate Milk Price approach is robust. Any modification to the Manual is required to be consistent with the Milk Price Principles which are set out in both the Manual and Fonterra’s constitution.The Manual itself also allows for adjustments to various parameters. An example of this is the Detailed Rule that allows for the addition of new Reference Commodity Products if certain conditions established in the Manual are met. The Manual also provides for reviews of various aspects of the Manual to be carried out at least once every four years. These reviews can result in changes to the application of rules in the Manual or inputs into the Farmgate Milk Price. The first of these four-yearly reviews was completed in the 2012 season and the results were incorporated into the 2013 Milk Price.

As noted in Appendix 1, the Commerce Commission’s final report on the 2014/15 Manual was released on 15 December 2014.

The Board approved a number of amendments to the Manual in July 2015, which will take effect from the 2016 season. The updated version of the Manual is available on www.fonterra.com. The following six of these amendments could be considered substantive, but are not expected to have a material effect on the Farmgate Milk Price for the 2016 season:

• Section 2.6, which was added to Part A in 2015, contained a commitment that ‘in normal circumstances’ the Milk Price and inputs into its calculation will evolve over time in a manner that could be achieved by a ‘real world’ dairy processor, and that Fonterra will disclose any change in approach to the application of the Manual where that change results in a materially different value of an input.8 The phrase ‘in normal circumstances’ has been replaced with ‘other than in exceptional circumstances’, to make it more clear that it is not anticipated that this commitment would be overridden other than in highly unusual circumstances.

• The Part B rule relating to repairs and maintenance (R&M) has been further amended to explicitly exclude milk collection and dry stores fixed assets from the calculation (as the relevant R&M costs are provided for elsewhere in the calculation methodology), and consistent methods and assumptions are to be used in determining the replacement costs of the relevant Fonterra and Milk Price Model fixed assets. This amendment makes more explicit the approach actually applied to date.

• A new rule has been added to Part B that is intended to comprise a ‘catch all’ provision with respect to any non-recurring costs that could reasonably be expected to have been incurred by the Milk Price Business, and that are not otherwise provided for (whether on an ex ante or ex post basis) in the base milk price calculation methodology. Again, this approach makes more explicit the approach actually applied to date (for example, in calculating this season’s provision for 1080-related costs).

• Rule 36 in Part B has been amended to make it explicit that on adding a manufacturing site to the model, appropriate provisions will be made for the cost of land and site-specific fixed assets, and that on removal of a site allowances will be made for the net financial implications.

• Rule 3 in Part B has been amended to include additional criteria for determining whether a product should be added or removed from the reference basket, to provide that a change should be made only where this is expected to result in a higher average milk price over time.

• Rule 26 in Part B, relating to assumed notional plant capacity, has been amended to provide that notional capacity will be aligned to the average capacity of Fonterra’s relevant plants only for WMP and SMP plants (and not for butter, AMF or BMP plants). This change will provide additional flexibility to establish installation costs for new notional butter and AMF plants, in particular, by reference to costs actually incurred by Fonterra, but will not have any material impact on calculated capital costs.

8 We have also amended this provision to provide that we will provide public explanations of changes in approach to the application of the Manual that result in materially different values of inputs in our ‘reasons paper’ to the Commerce Commission in support of the Milk Price for the relevant year, as well as in the Milk Price Statement.


FONTERRA FARMGATE MILK PRICE MANUAL CHANGESF

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CHANGES IN APPROACHTO THE CALCULATION

As noted above, Fonterra included in the 2015 Manual an undertaking to disclose any changes to the application of the Manual that result in materially different values of any input into the Milk Price calculation.

Four changes in approach to the application of the Manual have resulted in materially different values of inputs into the Milk Price calculation for the 2015 season:

• As explained above, a revised approach was implemented for the 2015 season to calculate provisions for a number of relatively minor costs, relating to effluent, cleaning, consumables, laboratory testing and water costs. This revision resulted a decrease in costs for the 2015 season of approximately 0.9 cents per kgMS.

• The update to the asset beta and implementation of the new specific risk premium described above resulted in a net decrease in capital-related costs of 2.1 cents per kgMS.

• The assumption relating to the target level of moisture content in WMP, which affects the quantity of WMP which can be manufactured from a given volume of milk solids, was revised on advice from an independent expert. This amendment resulted in a net increase in the Milk Price of 0.5 cents per kgMS.

• For the 2014 season, assumed energy usages were based on equipment manufacturer specifications. For the 2015 season, our assumed energy usages have been updated to incorporate results obtained from energy audits conducted at two Fonterra sites to measure actual energy usages under operating conditions equivalent to those assumed in the Milk Price Model. The net impact of these updates was an increase in calculated energy costs of 0.7 cents per kgMS.


FONTERRA FARMGATE MILK PRICE CHANGES IN APPROACHF

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APPENDIX 1FARMGATE MILK PRICE OVERVIEW

RATIONALE FOR FARMGATE MILK PRICEFonterra currently collects around 85 per cent of New Zealand’s milk production. Because Fonterra purchases such a large proportion of New Zealand’s total milk, there is no ‘market price’ for milk that is independent of the price paid by Fonterra. As a result, since its formation in 2001, Fonterra has calculated a Milk Price that enables total returns to be allocated between payments for milk and returns on the capital invested by Fonterra farmer shareholders and more recently by unit holders in the Fonterra Shareholders’ Fund.

FARMGATE MILK PRICE METHODOLOGYSince the 2009 season, the Farmgate Milk Price has been calculated in accordance with the Manual by:

• Determining the revenue that Fonterra would earn if the equivalent of all the milk Fonterra collects were converted into commodity specifications of WMP and SMP, and their by-products, which are butter, AMF and BMP. These products are referred to in the Manual as ‘Reference Commodity Products’. Prices primarily reflect USD prices achieved on the twice-monthly GlobalDairyTrade (GDT) trading events, converted to NZD using Fonterra’s actual average monthly foreign exchange conversion rate9.

• Deducting costs, including the cost of transporting raw milk to factories, and the cost of efficiently manufacturing Reference Commodity Products and then transporting them to the point of export from New Zealand, along with selling and administration expenses. These costs also include amounts for depreciation of fixed assets and an appropriate return on investment, including investment in working capital.

The balance comprises the Farmgate Milk Price. While this is an aggregate amount, it is usually referred to on the basis of a Farmgate Milk Price per kgMS.

RATIONALE FOR REFERENCE COMMODITY PRODUCTSManufacture of the Reference Commodity Products comprised more than 75 per cent of Fonterra’s total New Zealand ingredients production in the 2015 season.

Almost all additional milk collected over the past decade in New Zealand by Fonterra and its competitors has been used to make milk powders. Because returns from the sale of milk powders and their by-products represent the ‘marginal’ returns that would drive the price of milk in a competitive market in New Zealand, the Farmgate Milk Price is based on these products. Returns from non-powder commodities, such as cheese and casein, have largely been irrelevant in driving investment in the dairy industry over the past 10 years and are therefore not taken into account in determining the Farmgate Milk Price.

The Farmgate Milk Price approach does not include any returns earned by Fonterra from specialised ingredients and consumer branded products. These types of products earn premiums over the returns to standard commodity ingredients. It is therefore appropriate that these premiums are recognised in Fonterra’s earnings rather than in the Farmgate Milk Price.

FARMGATE MILK PRICE GOVERNANCEThe Fonterra Board sets the total amount to be paid by Fonterra for all milk supplied to it in New Zealand in each season. For the 2015 season, this amount is made up of the Farmgate Milk Price and Approved Adjustments (e.g. premium payments for some winter milk and specialty milk such as organic milk).

Both Fonterra’s constitution and the Dairy Industry Restructuring Act (2001) (DIRA) require Fonterra to maintain the Manual, which sets out Fonterra’s policies and methodology for determining the Farmgate Milk Price. The Manual must reflect the Milk Price Principles set out in Fonterra’s constitution. The Farmgate Milk Price has been calculated in accordance with the Manual since the start of the 2009 season.

The Fonterra Board has established a robust governance structure to oversee the setting of the Farmgate Milk Price, which comprises the elements illustrated in the diagram on page 12.

1 Milk Price PanelThe Milk Price Panel plays a key role in overseeing the integrity of the Farmgate Milk Price. It has five members. Two are Fonterra-appointed directors (one of whom is the Chair), one is a Fonterra farmer-elected director and two are appropriately qualified nominees of the Fonterra Shareholders’ Council. The current members of the Panel are: John Waller (Chair) and David Jackson, who are appointed Fonterra directors; Michael Spaans, who is a farmer-elected Fonterra director; and Paddy Boyle and Bill Donaldson, who are nominees of the Council. Bill Donaldson replaced Richard Punter, who retired by rotation at the end of September 2014.

The Panel oversees the governance of the Farmgate Milk Price and the Manual, including changes to the Manual and verification by independent external experts of key parameters (such as resource usage rates, product yields and fixed manufacturing costs).

9 For WMP, SMP and AMF, which comprised 89 per cent of revenue in the 2015 Farmgate Milk Price, all prices were sourced from GDT. For butter and BMP a mixture of GDT and non-GDT prices were used.

THE FONTERRA FARMGATE MILK PRICE STATEMENT 2015


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The Panel is responsible for:

• overseeing the calculation of the Farmgate Milk Price and making a recommendation on it to the Fonterra Board

• providing recommendations to the Fonterra Board on changes to the Manual

• providing assurance to the Fonterra Board that the Farmgate Milk Price has been calculated each year in accordance with the Manual.

2 Milk Price GroupThe Milk Price Group is a working group established by Fonterra. The Head of the Milk Price Group is independent of Fonterra’s management and reports directly to the Chair of the Milk Price Panel. The role of the Milk Price Group includes:

• ensuring that the Farmgate Milk Price is calculated in accordance with the Manual and making recommendations in respect of the Farmgate Milk Price to the Panel

• considering any proposed amendments to the Manual, including those the Milk Price Group itself considers are appropriate, and ensuring they are in accordance with the Milk Price Principles in Fonterra’s Constitution

• providing assurance to the Fonterra Board over the calculation of the forecast of the Farmgate Milk Price

• managing engagement with External Reviewers

• engaging with the Commerce Commission, including to ensure full disclosure of all material aspects of the Farmgate Milk Price derivation each year.

The functions of the Milk Price Group are contracted out to Ernst & Young and other technical experts who are not employees of Fonterra.

3 External ReviewersExternal reviewers provide expert advice on various inputs, as well as assurance over the accuracy of financial models. In addition they participate in reviews of key parameters of the Farmgate Milk Price at regular intervals (which can be up to four years).

4 External AuditorThe external auditor audits the Farmgate Milk Price each year and provides assurance that the Farmgate Milk Price has been determined in accordance with the Milk Price Principles, Methodologies and Detailed Rules of the Farmgate Milk Price Manual. Fonterra’s external auditor is PricewaterhouseCoopers.

5 Commerce Commission Milk Price Oversight

Subpart 5A of DIRA, which was passed into law in July 2012, gives the Commerce Commission an oversight role with respect to Fonterra’s milk price. The purpose of Subpart 5A is to promote the setting of a milk price that provides an incentive to Fonterra to operate efficiently, while providing for contestability in the market for the purchase of milk from farmers (section 150A). Each year, the Commission is required to review and report on the extent to which the Manual and Fonterra’s actual milk price are consistent with this purpose:

• The Commerce Commission’s final report on the Manual for the 2014/15 season was released on 15 December 2014 and can be found at www.comcom.govt.nz/regulated-industries/dairy-industry/review-of-fonterra-s-farm-gate-milk-price-and-manual/statutory-review-of-milk-price-manual/201415-season/.

• The final report on the F15 Farmgate Milk Price calculation was released on 15 September 2015 and can be found at www.comcom.govt.nz/regulated-industries/dairy-industry/review-of-fonterra-s-farm-gate-milk-price-and-manual/statutory-review-of-milk-price-calculation-2/review-of-milk-price-calculation-201415-season/

6 Internal AuditFonterra’s internal audit team provides assurance over the processes and controls relating to Fonterra data used in the calculation of the Farmgate Milk Price.

7 Fonterra Senior ManagersFonterra senior managers provide internal oversight of the calculation of the actual and forecast Farmgate Milk Price in accordance with the Manual and detailed models and procedures.

Source: Fonterra

EXTERNAL2

Milk PriceGroup

3External

Reviewers

4ExternalAuditor

INTERNAL7

Fonterra Senior Managers

6InternalAudit

5Commerce

Commission

BOARD MAKES DECISIONS ON THE RECOMMENDATIONS OF THE MILK PRICE PANEL

MILK PRICE PANEL1

2 x Appointed FonterraDirectors (one being Chair)

1 x Fonterra FarmerDirector

2 x Shareholder CouncilAppointees

+Farmgate Milk Price Manual

THE FONTERRA FARMGATE MILK PRICE STATEMENT 2015


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APPENDIX 2INDEPENDENT ASSURANCE REPORTTO THE DIRECTORS OF FONTERRA CO-OPERATIVE GROUP LIMITED

Scope We have audited the application of the Principles, Methodologies and Detailed Rules as defined in the Farmgate Milk Price Manual of 1 August 2014 (the Manual) by the Milk Price Group (MPG) in deriving the F15 Season’s Farmgate Milk Price of $4.40 (the Fonterra Farmgate Milk Price). We have confirmed the balances contained in the Fonterra Farmgate Milk Price Statement are correctly extracted from the calculation of the Fonterra Farmgate Milk Price.

Milk Price Group’s Responsibilities The MPG are responsible for the calculation of the Fonterra Farmgate Milk Price based upon the Manual, ensuring the Fonterra Farmgate Milk Price has been derived in accordance with the Principles, Methodologies and Detailed Rules set out in the Manual. The MPG is also responsible for the preparation of the Fonterra Farmgate Milk Price Statement.

Independent Auditors’ Responsibilities We are responsible for expressing an independent opinion on whether the Fonterra Farmgate Milk Price has been derived in accordance with the Manual, in all material respects, and that the Fonterra Farmgate Milk Price Statement includes information that has been correctly extracted, in all material respects, from the calculation of the Fonterra Farmgate Milk Price and reporting our opinion to you.

We conducted our independent assurance engagement in accordance with ISAE (NZ) 3000 Assurance engagements other than audits or reviews of historical financial information and SAE 3100 Compliance Engagements issued in New Zealand. Those standards require that we comply with ethical requirements and plan and perform our procedures to obtain reasonable assurance about whether, in all material respects, the calculation of the Fonterra Farmgate Milk Price has complied with the Principles, Methodologies and Detailed Rules set out in the Manual, and that the balances contained in the Fonterra Farmgate Milk Price Statement are correctly extracted, in all material respects, from the calculation of the Fonterra Farmgate Milk Price.

Inherent LimitationsOur engagement includes examining, on a test basis, evidence relevant to the amounts used to derive the Fonterra Farmgate Milk Price and the balances in the Fonterra Farmgate Milk Price Statement. It also includes assessing the significant assumptions, estimates and judgements made by the MPG in the calculation of the Fonterra Farmgate Milk Price and ensuring the Principles, Methodologies and Detailed Rules applied are consistent with those set out in the Manual. Because of the inherent limitations, it is possible that fraud, error or non-compliance may occur and not be detected. As the procedures performed are undertaken on a test basis, our assurance engagement cannot be relied on to detect all instances where the Principles, Methodologies and Detailed Rules set out in the Manual have not been complied with. Our opinion expressed in this report has been formed on that basis.

Our firm carries out assignments for the Group in relation to other advisory, other assurance and attestation services. Partners and employees of our firm may deal with the Group on normal terms within the ordinary course of trading activities of the Group. These matters have not impaired our independence as auditors of the Fonterra Farmgate Milk Price.

Opinion In our opinion the MPG has complied, in all material respects, with the Principles, Methodologies and Detailed Rules in the Manual in deriving the Fonterra Farmgate Milk Price of $4.40 for the F15 Season. We have confirmed the balances contained in this Fonterra Farmgate Milk Price Statement are correctly extracted, in all material respects, from the Fonterra Farmgate Milk Price calculation.

Restriction on Distribution or UseThis report is made solely to the Directors. Our report has been prepared at the request of the Directors and for no other purpose. To the fullest extent permitted by law we do not accept or assume responsibility to anyone other than Fonterra Co-operative Group Limited for this report, or for the opinions we have formed.

PricewaterhouseCoopersAuckland 23 September 2015


APPENDIX 2 INDEPENDENT ASSURANCE REPORTF

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ATTACHMENT 1MILK SUPPLIED AND PRODUCTION VOLUMES

2015 SEASON MILK SUPPLIED (MILLION kgMS) PRODUCTION (000 MT) FINISHED PRODUCT

WMP SMP BUTTER AMF BMP TOTAL

JUN 14 TO AUG 14 127 168 43 10 17 5 244

SEP 14 TO NOV 14 643 728 287 113 70 27 1,225

DEC 14 TO FEB 15 521 665 175 88 45 19 992

MAR 15 TO MAY 15 323 440 83 42 32 13 611

TOTAL 1,614 2,000 589 254 164 63 3,071



JUN 13 TO AUG 13 121 168 35 11 13 4 231

SEP 13 TO NOV 13 621 740 254 108 61 24 1,187

DEC 13 TO FEB 14 530 663 187 93 46 20 1,009

MAR 14 TO MAY 14 313 453 58 37 29 11 588

TOTAL 1,584 2,025 534 248 149 59 3,015



JUN 12 TO AUG 12 117 171 24 9 13 3 221

SEP 12 TO NOV 12 598 642 294 119 63 25 1,143

DEC 12 TO FEB 13 498 541 232 86 64 22 945

MAR 13 TO MAY 13 251 340 63 31 27 10 472

TOTAL 1,463 1,694 614 245 168 61 2,781


ATTACHMENT 1 MILK SUPPLIED AND PRODUCTION VOLUMESF

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2015 SEASON SHIPMENTS (000 MT) OF FINISHED PRODUCT

WMP SMP BUTTER AMF BMP TOTAL SALES

AUG 14 TO OCT 14 253 35 24 20 5 337

NOV 14 TO JAN 15 671 208 83 48 15 1,025

FEB 15 TO APR 15 519 150 60 33 14 775

MAY 15 TO JUL 15 431 117 46 38 16 648

AUG 15 TO OCT 15 127 80 41 25 13 286

TOTAL 2,000 589 254 164 63 3,071



AUG 13 TO OCT 13 309 66 5 14 8 402

NOV 13 TO JAN 14 676 169 86 40 15 986

FEB 14 TO APR 14 548 102 73 36 16 776

MAY 14 TO JUL 14 402 118 57 41 14 633

AUG 14 TO OCT 14 89 79 27 18 5 218

TOTAL 2,025 534 248 149 59 3,015



AUG 12 TO OCT 12 197 57 16 17 10 297

NOV 12 TO JAN 13 559 225 70 54 19 928

FEB 13 TO APR 13 561 156 61 48 11 838

MAY 13 TO JUL 13 312 111 50 39 14 527

AUG 13 TO OCT 13 65 64 47 9 6 191

TOTAL 1,694 614 245 168 61 2,781

ATTACHMENT 2SALES VOLUMES


ATTACHMENT 2 SALES VOLUMESF

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2015 SEASON AVERAGE NUMBER OF MONTHS PRIOR TO SHIPMENT

WMP SMP BUTTER AMF BMP

AUG 14 TO OCT 14 2.6 2.9 3.0 3.0 3.1

NOV 14 TO JAN 15 3.0 3.0 2.8 3.2 2.6

FEB 15 TO APR 15 3.0 3.1 2.7 3.0 2.5

MAY 15 TO JUL 15 2.8 2.6 2.5 2.6 2.4

AUG 15 TO OCT 15 3.1 3.2 3.0 3.1 3.2

2.9 3.0 2.8 3.0 2.7



AUG 13 TO OCT 13 2.6 2.4 2.7 2.7 2.6

NOV 13 TO JAN 14 2.9 2.7 2.5 2.9 2.6

FEB 14 TO APR 14 2.8 2.6 2.9 2.7 2.7

MAY 14 TO JUL 14 2.7 2.5 2.5 2.6 2.4

AUG 14 TO OCT 14 3.3 3.0 2.7 2.9 3.2

2.8 2.6 2.6 2.8 2.6



AUG 12 TO OCT 12 2.7 2.9 2.5 3.0 2.7

NOV 12 TO JAN 13 2.7 3.0 2.5 3.1 3.1

FEB 13 TO APR 13 2.7 2.9 2.9 3.0 2.8

MAY 13 TO JUL 13 3.2 2.9 2.5 2.9 2.5

AUG 13 TO OCT 13 2.5 2.8 2.7 2.8 2.9

2.8 2.9 2.7 3.0 2.8

The tables on the next page supplement that above by providing information on the average percentages of sales contracted in each of months 1 to 5 prior to shipment in the 2013 to 2015 seasons.

ATTACHMENT 3AVERAGE NUMBER OF MONTHS PRIOR TO SHIPMENT THAT PRICES WERE STRUCK


ATTACHMENT 3 AVERAGE NUMBER OF MONTHS PRIOR TO SHIPMENT THAT PRICES WERE STRUCKF

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2015 SEASON AVERAGE PERCENTAGE OF SALES CONTRACTED IN EACH OF MONTHS 1- 5 PRIOR TO SHIPMENT


1 8% 6% 9% 7% 10%

2 33% 34% 33% 32% 41%

3 27% 31% 36% 31% 26%

4 20% 19% 18% 19% 20%

5 12% 10% 4% 11% 3%



1 6% 11% 6% 6% 10%

2 39% 42% 41% 39% 36%

3 31% 25% 34% 29% 34%

4 16% 14% 17% 18% 16%

5 9% 7% 2% 8% 4%



1 7% 5% 13% 5% 5%

2 40% 33% 34% 32% 38%

3 33% 33% 36% 30% 32%

4 14% 21% 12% 21% 22%

5 8% 8% 5% 12% 3%

AVERAGE % OF SALES CONTRACTED IN EACH MONTH PRIOR TO SHIPMENT

ATTACHMENT 3CONTINUED


ATTACHMENT 3 AVERAGE NUMBER OF MONTHS PRIOR TO SHIPMENT THAT PRICES WERE STRUCKF

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2015 SEASON USD PER MT OF FINISHED PRODUCT

SHIPMENT PERIOD WMP SMP BUTTER AMF BMP

AUG 14 TO OCT 14 3,130 3,217 3,213 3,642 4,122

NOV 14 TO JAN 15 2,694 2,761 2,808 3,417 3,056

FEB 15 TO APR 15 2,423 2,487 3,217 3,922 2,713

MAY 15 TO JUL 15 2,593 2,482 3,338 3,781 2,351

AUG 15 TO OCT 15 2,419 1,938 2,733 3,072 1,919

2,639 2,552 3,027 3,577 2,657



AUG 13 TO OCT 13 4,923 4,624 3,639 4,817 4,687

NOV 13 TO JAN 14 5,023 4,625 3,759 4,959 4,794

FEB 14 TO APR 14 4,950 4,938 3,985 5,417 5,050

MAY 14 TO JUL 14 4,434 4,363 4,283 4,654 4,595

AUG 14 TO OCT 14 3,949 3,792 3,530 3,961 4,231

4,824 4,504 3,920 4,853 4,752



AUG 12 TO OCT 12 2,740 2,780 2,921 2,903 2,531

NOV 12 TO JAN 13 3,086 3,117 3,191 3,030 2,925

FEB 13 TO APR 13 3,271 3,511 3,431 3,214 3,552

MAY 13 TO JUL 13 4,219 4,608 4,189 4,219 4,317

AUG 13 TO OCT 13 5,144 4,726 3,767 4,871 4,562

3,394 3,625 3,550 3,450 3,457

ATTACHMENT 4AVERAGE USD PRICES


ATTACHMENT 4 AVERAGE USD PRICESF

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Note that the spot data is based on the weighted average conversion rate that would have been achieved if the revenue collected during the shipping period was converted at the average spot rate in the month of collection. Data in Farmgate Milk Price Statements prior to 2014 was based on the average spot rate in the month of shipment.

2015 SEASONFONTERRA'S AVERAGE

CONVERSION RATESPOT

EXCHANGE RATE

AUG 14 TO OCT 14 0.8035 0.7848

NOV 14 TO JAN 15 0.7957 0.7628

FEB 15 TO APR 15 0.7943 0.7488

MAY 15 TO JUL 15 0.7706 0.6749

AUG 15 TO OCT 15 0.7625 0.66031

REVENUE-WEIGHTED ANNUAL AVERAGE 0.7882 0.7329


CONVERSION RATESPOT

EXCHANGE RATE

AUG 13 TO OCT 13 0.8083 0.8283

NOV 13 TO JAN 14 0.7997 0.8263

FEB 14 TO APR 14 0.8078 0.8580

MAY 14 TO JUL 14 0.8194 0.8595

AUG 14 TO OCT 14 0.8285 0.7998



CONVERSION RATESPOT

EXCHANGE RATE

AUG 12 TO OCT 12 0.7874 0.8191

NOV 12 TO JAN 13 0.8015 0.8357

FEB 13 TO APR 13 0.8026 0.8334

MAY 13 TO JUL 13 0.7919 0.7909

AUG 13 TO OCT 13 0.8043 0.8221


ATTACHMENT 5AVERAGE USD:NZD CONVERSION AND SPOT RATES

1 The spot exchange rate for the period from August to October 2015 equals the spot rate at 9am on 31 July 2015.


ATTACHMENT 5 AVERAGE USD:NZD CONVERSION AND SPOT RATEF

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In this Statement, unless the context otherwise requires, the following terms have the meanings set out next to them:

AMF means anhydrous milk fat.

Approved Adjustments means an amount approved by the Fonterra Board to be paid for milk in addition to, or to be subtracted from, the amount calculated under the Farmgate Milk Price Manual, but excludes the Milk Price Adjustment.

BMP means buttermilk powder.

Detailed Rules means the detailed rules for calculating the Farmgate Milk Price as set out in the Manual.

DIRA means the Dairy Industry Restructuring Act 2001, which authorised Fonterra’s formation and regulates its activities.

Farmgate Milk Price means Fonterra’s Farmgate Milk Price as determined under the Manual.

Farmgate Milk Price Capital Costs are defined in the Manual.

Farmgate Milk Price Cash Costs are defined in the Manual.

Farmgate Milk Price Manual or Manual means Fonterra’s Farmgate Milk Price Manual.

Financial year means Fonterra’s financial year, which runs from 1 August to the following 31 July.

Fonterra means Fonterra Co-operative Group Limited.

GlobalDairyTrade or GDT means the electronic auction platform that is used to sell commodity dairy products.

Independent Processors means entities which are independent of Fonterra and process raw milk.

kgMS means kilograms of milksolids.

Methodologies means the methodologies for calculating the Farmgate Milk Price as set out in the Manual.

Milk Price Model means the model used to calculate the Farmgate Milk Price set out in the Manual.

Milk Price Principles or Principles means the Milk Price Principles set out in Fonterra’s Constitution.

MT means metric tonnes.

NZD means New Zealand dollars.

Season means the 12-month period from 1 June to the following 31 May.

SMP means skim milk powder.

Specialty Milk means milk that has special properties such as organic milk.

Raw Milk Regulations means the Dairy Industry Restructuring (Raw Milk) Regulations 2001 or, where applicable, the Dairy Industry Restructuring (Raw Milk) Regulations 2012.

Reference Commodity Products means the commodity products used to calculate the Farmgate Milk Price, comprising WMP, SMP, BMP, AMF and butter.

USD means United States dollars.

Winter Milk means milk supplied by farmers in the months of May, June and July.

WMP means whole milk powder.

GLOSSARY


GLOSSARYF

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Fonterra Co-operative Group Limited Private Bag 92032, Auckland 1142, New Zealand64 9 374 9000 (Phone) 64 9 374 9001 (Fax)Shareholder And Supplier Services Freephone 0800 65 65 68For global locations visit www.fonterra.com

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APPENDIX 3 – FSM Rules

Number of pages including this one

(Please provide any other relevant

FSM Rule 6.8.2. For rights, Rules 6.6.8 and 6.6.10. details on additional pages)

For change to allotment, FSM Rule 6.8.1, a separate notice is required.

Full name

of Issuer

Name of officer authorised to Authority for event,

make this notice e.g. Directors' resolution

Contact phone Contact fax

number number Date

Nature of event Bonus If ticked, Rights Issue

Tick as appropriate Issue state whether: Taxable / Non Taxable Conversion Interest Renouncable

Rights Issue Capital Call Dividend If ticked, state Full

non-renouncable change x whether: Interim Year X Special DRP Applies X

EXISTING securities affected by this If more than one security is affected by the event, use a separate form.

Description of the ISIN

class of securities

If unknown, contact NZX

Details of securities issued pursuant to this event If more than one class of security is to be issued, use a separate form for each class.

Description of the ISIN

class of securities

If unknown, contact NZX

Number of Securities to Minimum Ratio, e.g

be issued following event Entitlement 1 for 2 for

Conversion, Maturity, Call Treatment of Fractions

Payable or Exercise Date

Tick if provide an

pari passu OR explanation

Strike price per security for any issue in lieu or date of the

Strike Price available. ranking

Monies Associated with Event Dividend payable, Call payable, Exercise price, Conversion price, Redemption price, Application money.

Source of

Amount per security Payment

(does not include any excluded income)

Supplementary Amount per security

Currency dividend in dollars and cents

details -

FSM Rule 6.8.5

Total monies

Taxation Amount per Security in Dollars and cents to six decimal places

In the case of a taxable bonus Resident Imputation Credits

issue state strike price Withholding Tax (Give details)

Foreign FDP Credits

Withholding Tax (Give details)

Timing (Refer Appendix 4 in the FSM Rules)

Record Date 5pm Application Date

For calculation of entitlements - Also, Call Payable, Dividend /

Interest Payable, Exercise Date,

Conversion Date. In the case

of applications this must be the

last business day of the week.

Notice Date Allotment Date

Entitlement letters, call notices, For the issue of new securities.

conversion notices mailed Must be within 5 business days

of application closing date.

OFFICE USE ONLY

Ex Date:

Commence Quoting Rights: Security Code:Cease Quoting Rights 5pm:

Commence Quoting New Securities: Security Code:Cease Quoting Old Security 5pm:

$

8 October, 2015 20 October, 2015

N/A N/A

$

NZD

$239,864,037 Date Payable

NZFCGE0001S7

N/A

In dollars and cents

Profit$0.150

N/A N/A

Enter N/A if not

applicable

N/A

Shares (FCG)

(09) 374 9000 (09) 379 8281 23 09 2015

EMAIL: [email protected]

Notice of event affecting securities

Fonterra Co-operative Group Limited

Lukas Paravicini Directors' resolution

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Documents

Australian Securities Exchange · Page 1 Reporting Period Year ended 31 July 2015 Previous Reporting Period Year ended 31 July 2014 31 July 2015 (NZD million) 31 July 2014 (NZD million)