Dairy Crest Capital Markets Day Mark Allen Tom Atherton

Chief Executive Finance Director

19 September 2016

SEPTEMBER 2016 TRADING UPDATE

2

● Clover, Country Life and Frylight in volume growth

● Cathedral City

– Successful brand refresh supported by advertising campaign

– Chosen not to discount as heavily as some

– H1 margins up but volumes slightly down – will improve in H2

● Demineralised whey and GOS on track

● Strong cash generation

● Profit expectations unchanged for full year

● Inflation across dairy markets – risks and opportunities

UK MILK PRODUCTION – YEAR ON YEAR CHANGE

MILK COSTS AND DAIRY RETURNS

Welcome to

Mike Barrington Supply Chain Director

20 September 2016

PRODUCTION SITES & INNOVATION CENTRE

DAVIDSTOW MANUFACTURING PLANT – 65 YEARS OF HIGH QUALITY CHEESE MAKING

1951 – Davidstow was established by Cow & Gate

1963 - First major site rebuild

2004 – Dairy Crest invest in major new site build;

2016 – D90 and GOS investment completed

2010 – Biomass boilers installed

1979 - Milk Marketing Board buys Davidstow

SITE OVERVIEW

● We process over 500ml milk per annum, …

● … and make over 50kT cheddar cheese

● We are an intensive operation:

─ 365 days / 24 hour production ─ 195 employees

● We now have capability for: ─ ~29kT p.a. D90 whey powder ─ ~13.5kT p.a. GOS syrup

● We respect our local environment: ─ 1.7m litres per day of high quality water

recovery ─ Over 75% site steam usage from biomass

Cheese process D90 process GOS process

● One Source

─ One dedicated, local milk pool

─ One source of whey from Davidstow cheddar cheese

─ Robust traceability from milk to whey

● One Site

─ Davidstow – 65 years’ cheese heritage

─ Dedicated, experienced team

─ State of the art manufacturing equipment… and make over 50kT cheddar cheese

● Premium Quality

─ All farms audited to Davidstow Farm Standards

─ Internationally recognised site accreditations

─ On site laboratory provides timely microbiological, chemistry and GOS polymer analysis

─ Award winning cheese ─ Excellent service delivery

DAVIDSTOW: ONE SOURCE, ONE SITE, PREMIUM QUALITY

Davidstow Milk Field The foundation of our business

Alexandra Richards Milk Procurement Manager

20 September 2016

● A sustainable supply of British milk is crucial to Dairy Crest

● c.500 million litres of British milk per annum

● Around 400 farmers in Devon and Cornwall, all within 80 miles of the Creamery – diverse range of sizes

● Represents 60% of the milk in Cornwall supplying Davidstow

● This is the best place to produce milk in the United Kingdom – exceptional pasture growth and climatic conditions

OUR DAVIDSTOW MILK POOL

Davidstow Milk pool

BUILDING LONG-TERM RELATIONSHIPS WITH OUR FARMERS

● Dairy Crest Direct (DCD) - UK’s first Dairy Producer

Organisation (DPO)

● Tailored support services from our Farm Business

team

– Farm Business Centre

– Farm Business Manager

– Farm Connect (online)

● WhiteGold - independent practical on-farm advice

free of charge

● Open days, meetings with Management - dialogue

High quality milk

World class facilities

High quality Cheese and Whey

Market competitive

Brands

Improved realisation

Sustained marketing investment

Leading milk prices to

committed dairy farmers

THE VIRTUOUS CIRCLE LINKING OUR DAVIDSTOW FARMERS AND OUR CUSTOMERS

● We pay a competitive, market-related milk price to our farmers – strength of brands allows us to pay a premium

● Long-term security for both Dairy Crest and our farmers

● This allows us to make big capital investments in our business

● Provenance – high quality West Country milk to go into our cheese

● Single type of cheese makes great whey for our new products and customers

● Traceability for our customers – critical for Infant Formula markets

● Work together with our farmers to ensure quality assurance through world-leading standards

● Both parties are encouraged to think long-term and grow in partnership

HOW THE MODEL WORKS FOR EVERYONE

Generating growth by building strong positions in infant formula ingredients

Richard Jones Managing Director, Functional Ingredients

20 September 2016

WHAT IS INFANT FORMULA?

● Infant formula is made from a mixture of dairy and other ingredients and is designed to mimic human milk as closely as possible

● Although it is made to a common international codex, formulation ingredients vary

● Key common ingredients are: Water, Skim Milk Powder, Lactose, Vegetable Oils, Whey Protein and Galactooligosaccharide (GOS)

● Different brands, for example, Abbott Similac and Nestle NAN HA Gold 2 infant formula then have up to an additional 40 ingredients which together make up <2% of total ingredients

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39%

29%

26%

0% 6%

52%

30%

9%

8% 1%

Lactose

Fats

Protein

Oligosaccharisdes

Minerals

Role of GOS in Infant Formula

• GOS is a prebiotic i.e. non digestible fibres that stimulate the growth of specific, healthy bacteria in the digestive system

• Oligosaccharides are the third most prominent component in human breast milk

• GOS is added to infant formula to better match human breast milk

• Health promoting benefits of GOS include:

increases presence of good bacteria

aids in intestinal health

supports digestive comfort

improves mineral absorption

works synergistically with probiotics

Oligosaccharides: Less

than 0.1%

Milk Composition

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Human

Cow

DEMINERALISED WHEY POWDER & GOS ARE BOTH PRIMARILY SOURCED FROM WHEY

Whey

Solids 6.6%

Water 93.4%

Fat 0.1%

Solids Non Fat 6.5%

Protein 0.8%

Curds Cheese

Whole Milk

Lactose 4.8%

Minerals 0.9%

Demineralised whey powder contains lactose and whey protein

Lactose is mixed with a proprietary enzyme to produce GOS

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DAIRY CREST FUNCTIONAL INGREDIENTS PRODUCT CREDENTIALS

● Davidstow production facility capitalises on latest control systems and state of the art manufacturing equipment

● Production process delivers consistent functionality and quality including tight micro-biological limits

● Fully compliant with strict Chinese market specifications

● Dedicated quality milk pool ensures full end to end traceability and availability

● 5 year contract with world’s largest dairy

exporter

● Actively engaged in EU, Asian and global

markets to develop sales pipeline

● Fonterra markets and sells all product for

human use

● Technical and regulatory support

● Commitment to take all demin production

● Agreed GOS growth plan

● Jointly develop human use applications and

new products for these markets

Fonterra Partnership

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DEMINERALISED WHEY (D90)

● The D90 plant has the capacity to process 80 tonnes of D90 per day incorporating high levels of care, consistent with production of infant formula

● The investment has delivered: – A new demineralisation process

– Modifications to the existing sweet whey powder operations

– New packing facilities

– An upgraded waste water treatment plant

– A new laboratory

● Following successful food and infant formula quality audits the plant is now fully commissioned with full production underway since March 2016

● All output and quality targets are being achieved in line with expectations

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GALACTO-OLIGOSACCHARIDE (GOS)

● The current GOS plant will has the capacity to produce 13.5 k tonnes of infant formula GOS syrup per annum

● The modular build can grow capacity to 35k tonnes per annum

● The new plant produces GOS syrup at 57% polymer level which is the level required for use as an infant formula nutritional ingredient

● Demonstrated ability to increase polymer levels to meet customer specific requirements

● The plant is now fully commissioned with successful infant formula audits

● Quality and specification targets are being achieved

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INFANT FORMULA MARKET OUTLOOK – CONTINUED STRONG GROWTH

● Paediatric market worth $50bn with strong global growth forecast

● 65% of total volume growth to come from China

● Fonterra well placed to support the areas of greatest expansion

● Europe + Australasia account for >75% of the volume of imports to China

$150bn 5.3mMT

$43bn 2.5mMT

Fonterra Focus Geographies

Source: Euromonitor Milk Formula Market updated to 2014 /5 2024 is projected based on current 5 year forward CAGR’s, value growth

CAGR +13%

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RISING WHEY PRICES HAD LED TO AN INCREASE IN INVESTMENT WHICH HAS NOW SLOWED

● Leading industry players Arla, Nestle, Valio and Friesland Campina have all increased capacity

● The majority of cheese manufacturers have now fully invested in added value whey production, limiting the amount of remaining convertible capacity

Source: Rabobank

Source: 3A Consulting and Giract

Source: Giract and DC Estimate

Demand: 2016 Market Share %

Supply: 2016 Market Share %

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MILK PRODUCTION IS A KEY DRIVER OF DAIRY PRICES, WITH THE MARKETS RECOVERING IN 2016

Global dairy commodity markets were impacted by the record milk volumes being produced and prices were driven down

As global milk production has slowed, the markets have begun to rebalance and dairy prices, including whey, have started to recover

● SWP prices have increased rapidly in recent months. However, demin price movements are tracking behind, particularly infant grade product due to higher stock levels. As levels reduce, prices should increase

● The intent is to establish a premium infant formula quality product – this takes time and in the intervening period some production will be sold for alternative (lower value) uses e.g. food

Source: EU Milk Market Observatory Source: US Department Agriculture and ZuiveINL

Indicative D90 Price

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PREBIOTICS MARKET: A RANGE OF GROWTH OPPORTUNITIES

Source: Grand View Research: Prebiotics by Ingredients Market Analysis 2013

The Prebiotics Ingredients market growth is expected to continue at an annual rate of 9-12% to achieve c$5.5bn by 2020

● Food and Beverage expected growth will be driven by trends in low calorie foods

● Growth in Infant Formula applications will drive growth in Health Supplements sector

● Animal feed prebiotics are expected to grow at c12%

GOS is 2nd biggest segment accounting for 17% market volume with high growth expected due to its multiple product benefits

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MARKET OPPORTUNITY: FUNCTIONAL FOODS & HEALTH SUPPLEMENTS IN SIGNIFICANT GROWTH

Source: DC Internal Research

The Global Nutraceuticals Market is expected to reach $263bn by 2020 ● Health supplements (incl sports nutrition); c 30% share ● Functional Food and Beverages (incl probiotic dairy): c70% share

This market is estimated to be growing at an annual rate of 8% ● Consumers view of nutritional products as the key to managing health with a

focus on preventative healthcare ● Shift in consumer preference from synthetic to ‘natural’ and ‘organic’ ingredients ● Growing clinical evidence of broad range of health benefits ● Wide range of new ingredient applications from fruit juices, hot beverages and

sports drinks

Prebiotics together with probiotics are key Nutraceutical ingredients which are well placed to benefit from growth ● Offer a broad range of health benefits – from weight management and lower

blood sugars to brain and gut health ● Low calorific count ● Processing stability

Nutraceuticals $263bn

Probiotics $40.0bn

Probiotic Supplements

$4bn

Prebiotics $2.4bn

Prebiotic Supplements

£0.2bn

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MARKET OPPORTUNITY: ANIMAL FEED & ADDITIVES REPRESENT HUGE GROWTH POTENTIAL

● The Global Animal Feed Additive market estimated to be worth $14-20bn increasing to $30bn by 2020 growing at 3%-5% CAGR

● Animal Growth Promoters Market is expected to grow at 5% CAGR

● Global Eubiotics Market (Microflora enhancing additives) is expected to grow at 7.9% CAGR

● Prebiotics accounts for less than 2% of the total Additives market but it is expected to grow at c12% CAGR - the fastest growing segment

Animal Feed Additives

$30bn

Animal Growth

Promoters $9.7bn

Global Eubiotics $7.0bn

Prebiotics in Animal

Feed $0.5bn

A recent Feed International Survey on the use of alternatives to Antibiotics in poultry productions further suggests potential for growth with a relatively low awareness as to the effectiveness of prebiotics.

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Source: DC Internal Research

GOS MARKET – VOLUMES 2016

● 3 key players have over 80% volume share: ─ Friesland Campina dominate the market

with Vivinal GOS ─ Yakult is the 2nd largest manufacturer who

use much of their production internally, but sell some product under their Oligomate brand

─ There are some Asian manufacturers supplying local markets e.g. New Fransisco (King-Prebiotics)

● The market is estimated to be growing at c9% pa in volume terms

Source: DC estimates

The Global market for GOS is currently estimated at 80k tonnes

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GOS STRATEGY UPDATE

● Acquisition of the remaining 50% share of Promovita Ingredients Ltd provides Dairy Crest control over direction and pace of development of the GOS business

● Initial focus remains on infant formula applications via Fonterra

● Other opportunities for human nutrition are in development

● A number of trials for animal feed applications are underway with encouraging results showing improvements to weight gain and feed conversion efficiency

● We will give specific updates in November 2016

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SUMMARY

● Significant investment completed and delivering to expectations

● High specification product being produced to consistently high quality standards

● Fonterra partnership provides ideal platform to unlock significant pediatric and nutritional market opportunities

● Demand growth opportunities driven by increasing spend on premium nutrition and increasing middle class disposable incomes

● Increased control over pace and direction of GOS platform, research underway on new applications

Well placed to generate growth by building strong positions in added value markets in line with our strategy

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Building a Sustainable Brand Portfolio Adam Braithwaite Will Hemmings Group Commercial Director Head of Marketing

20 September 2016

Branded Portfolio – Half 1 Highlights

● Cathedral City new ‘Master Brand’ introduced into the market

– Supported by new ‘Rules of Cheese’ communication campaign

– Successful Spreadable launch

– Increased brand premium

● BSO portfolio well placed to meet consumer needs;

– Clover & Country Life gain market share

– Vitalite re-launched with improved packaging and product – gaining share

– Frylight in strong growth

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The consumer landscape is changing which presents both challenges and opportunities

18 months of Food Price deflation

Fragmenting lifestyles impacting meal occasions

Source: IGD, IRI, AC Nielsen, Kantar, Mundi 33

Population

Consumption

Cathedral City

● Cheese has consistently shown volume growth over the last 5 years, despite 99% penetration

● However, price deflation has removed £137M from category value in the last 52 w/e

The overall cheese category continues to expand, with recent volume growth driven by increased frequency, consumption and deflation

Source: Kantar 52 we 14.08.16

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£6.33/kg

-4.9%

36x

+2.2%

98.6%

FLAT

0.44 kgs

+1.2%

Penetration Average Volume

Frequency Average Price

● A broad and deep range of Cathedral City products, supported by a well developed innovation pipeline, means we are well placed for long term share growth

Consumers are switching into more convenient formats – Sliced, Grated & Snacks are all showing good growth

Source: IRI 52 we 14.08.16

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Cathedral City remains the #1 cheese brand with significant headroom to grow across the category

Source: IRI 52 we 14.08.16 Grocer Top 100 Brands 2016 & Checkout Smart 2016

● 16th biggest UK brand and 7th largest online brand

● Cathedral City has over 12% of total pre-packed cheese market

● This equates to 25% of branded cheese and 28% of total block cheese

● Opportunities to grow across the category

#1

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And we have continued to invest in the brand – Cathedral City had become an inconsistent range of sub-brands with diluted consumer impact. During H1 we moved from this...

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To this… Cathedral City has a new ‘Master Brand’ identity to simplify our brand and improve visibility

● In 2016, a new ‘Master Brand’ design rolled out across 80 SKU’s supported by significant investment. The new design simplifies and strengthens our range, allowing us to build equity across all subsectors of the growing cheese category

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The relaunch was supported by a new and highly effective ATL campaign…

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… And we successfully launched a new Spreadable range

● We launched a superior tasting Spreadable cheese range in May ’16

● Initial results are strong; Repeat rate at 28%, penetration growing at 115 vs YA, Extra Mature and Mature ranked #2 and #3 rate of sale in market ahead of ATL support

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In a deflating category and as category leader, Cathedral City has built a price and profit premium against branded and retailer own label competition

Source: IRI 52 we 14.08.16

Average Price / Kg Everyday Cheese

£6.33

£7.01

£6.78

-9%

2014

2015

2016

● Average ‘Everyday Cheese’ price decreased by -9% over the last two years, led by Own Label

● Over this period, Cathedral City has improved its price premium vs Own Label and competitors

● We have carefully balanced volume and profit during H1

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Looking forward Cathedral City is well placed to grow long term share and profit

● Cathedral City continues to benefit from a world class efficient supply chain

● Our brand is well positioned to grow due to its new ‘Master Brand’ identity supported by a highly effective communications campaign

● Our brand equity remains very strong and we can stretch into new and growing segments of the market via an exciting innovation pipeline

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Butter, Spreads & Oils

● Category growth drivers include making products more natural, more healthy and driving usage with food

Unlike Cheese, the BSO category is in volume decline, with lower consumer usage driven by changing consumption trends

Source: IRI SIG & Kantar Discount / Bargain Stores 52 we 14.08.16

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Butter Spreads

Spreads in decline

Growth in Dairy Free

Butter in vol growth

But Value decline

-3%

Category Decline

However, we have a portfolio of leading spreads & butter brands aligned to consumer trends and gaining share

Source: IRI SIG & Kantar Discount / Bargain Stores 52 we 14.08.16

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Spreads Butter

Volume Share +0.1%

Volume Share +1.4%

Volume Share +0.5%

Market and performance update

● Oil market has grown +4.2% in value to

£331m*

● Frylight growth well ahead of the market

● No 1 brand and has a highest ever market

share of 8.4%

● Rapeseed and Coconut NPD launched

successfully

● New Frylight relaunch later in 2016/17 with

“No Artificial” packaging and new advertising

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* Source: Kantar 52 weeks ending 17 July 2016

FryLight also continues to grow strongly supported by consumer communication, innovation and increased awareness

However, input costs are inflating rapidly and our priority is to protect profitability in H2

Butter cost prices have doubled since May, driven by the rapidly falling milk volumes which has in turn reduced the availability of cream.

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This year has seen an increase in prices across the entire oil complex, but a key driver has been Palm Oils. Driven by reduction in supply.

Looking forward – Growth will be hard to sustain in the short term, but the portfolio is well positioned against the longer term consumer drivers

Source: IRI 52 we 14.08.16

● Continued focus on positioning and supporting the brands against key consumer drivers – Taste & Health

● Frylight will benefit from further investment in H2

● Inflation is flowing into the supply chain – managing our cost base and profit protection are key priorities for H2

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In summary…

● Cathedral City new ‘Master Brand’ introduced with new packaging, communication and innovation – well placed for continued long term growth

– H2 focus on balancing input cost inflation, market share and profit

● Butter & Spreads portfolio aligned to consumer trends and gaining share

– Prioritising significant input cost inflation recovery ahead of short term share

● Frylight continues to win in a growing market

– Focus on driving value, share and innovation in H2

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