CHIEF EXECUTIVE'S ADDRESS ANDREW FERRIER Fonterra ...

CHIEF EXECUTIVE’S ADDRESSANDREW FERRIERFonterra Annual Meeting18 November 2010Firstly, I’d like to say it is great being back in Hawera. For me, this is where it all started a littleover 7 years ago when I faced you for the first time as CEO, and you were kind enough not toask me too many curly questions, as I had only been on the job for 10 days. However, I doremember struggling with understanding Kiwi accents!What I did say to you was the following. I said that 10 days into my job, it was the last time Icould speak to you as a truly objective outsider. And I said that you should be congratulated onthe vision you showed in creating Fonterra, a truly global power in the dairy industry. And now,2,626 days later, I am certainly not an ‘objective outsider’. But I will reiterate that your vision wasspot on. Fonterra is a truly global power in the Dairy Industry, much stronger than it was in2001, and with a great future.Coming back to Hawera, it’s close to 125 years since Chew Chong set up Taranaki’s first dairyfactory just up the road at Eltham – so it’s great we’re here all these years later to review yetanother year of progress for Fonterra and the Kiwi dairy industry.Taranaki’s a big part of our Co-op – around 15% of our total shareholders and a bit over 10% ofthe national cow herd. At peak, this equates to about 580 tanker loads per day rolling intoWhareroa. Long may it last.This time last year I stood in Ashburton saying it was good to have a forecast for this seasonhaving a 6 in front of it. This year, I could say the same about a forecast starting around a 7.With me today from management is Jonathan Mason our Chief Financial Officer and KelvinWickham our Group Director of Supplier and External Relations. Good to have you heregentleman.HOW FONTERRA PERFORMEDIn 2009/10 we succeeded despite the conditions, rather than because of them.Some parts of New Zealand were in drought, the global recession was still in force andbusiness was up and down. Despite these challenges, we still hit new records for milksolidscollection and for product exports.We greatly strengthened our balance sheet. With your strong support it’s now in the best shapein Fonterra’s history.At balance date our debt position stood at $4.5 billion, that’s more than $700 million lower thana year earlier. We reduced the gearing ratio from 53% down to a shade under 45%.From my perspective, Fonterra has really hit its straps this year. We achieved a lot at a timewhen many companies were still trying to fight their way out of the recession.We turned in our second-highest Milk Price on the back of improved world dairy markets.Page 1

Although the higher Milk Price reduced underlying earnings within our ingredients operations,our consumer businesses achieved record earnings despite a stronger New Zealand dollar.We also booked significant one-off gains from selling non-core assets as we reshaped ourbusiness to align with our strategy.Profitability was helped by a substantial reduction in net finance costs, as reduced borrowingsmeant we paid less interest.The net outcome was a profit of $685 million, 12 per cent higher than the prior year.But it’s not just about the numbers.During the year we rolled out a whole new vision, to be the natural source of dairy nutrition foreverybody, everywhere, every day.We confirmed our three key strategies are the right ones, we refreshed our values and reallylived them.So let me drill a bit deeper into our results under each of our three key strategies.SUSTAINABLE CO-OPERATIVE PERFORMANCEIn 2009/10 Fonterra collected 14.7 billion litres of raw milk from 4.5 million cows in NewZealand. That’s about 89 per cent of the milk produced in New Zealand – so it’s vital we get oursystems humming.At the beginning of the year we brought our manufacturing, supply and trading activitiestogether under Gary Romano’s leadership into Fonterra Trade & Operations (FTO). The aimwas to get all these activities, spread across New Zealand and around the world, workingtogether more effectively. This will help us become even better at collecting farmers’ milk everyday and turning it as efficiently as possible into the most valuable product.During the year we stepped up our communication, with an extra 4,000 farm visits by areamanagers, increased use of the re-vamped Fencepost website by farmers and many face-tofacemeetings through the consultation on changes to our capital structure.On the processing side, the new ED4 drier at Edendale in Southland had a successful firstseason and showed what can be achieved when scale and technology come together.Growing supply helped the business case for ED4 and it is also behind our planning for a new$200 million factory at Darfield in central Canterbury, expected to open in late 2012.Our scale and reach means logistics are always complex. But it also means the prize is bigger ifwe make the right step-change.Our new Crawford Street cool and dry store logistics hub in Hamilton has taken more than50,000 truck movements off local roads and removed our need for contracted storage aroundthe Waikato. We’ve done the same at Mosgiel, near Dunedin which opened last month.We are making more extensive use of rail to move product around New Zealand, frommanufacturing sites to logistics hubs and onto a more focused set of export ports.Page 2

We’re on track to achieve our goal of targeted savings of $200 million in our supply chain overthe three years to July 2011.We have also made big strides in how we sell products, not just how we make and distributethem.In July 2010, our globalDairyTrade TM trading platform turned two years old. In 2010, we soldaround 15 per cent of total ingredients sales volumes, via globalDairyTrade TM . It’s given ourfarmers and our customers a much better real-time view on global market conditions. gDT hasexceeded our expectations in that it is increasingly viewed by industry members around theworld as the best reflection of global dairy prices. The greater transparency of dairy ingredientprices also helps underpin a Milk Price for Fonterra that is sufficiently robust and credible tosupport the capital structure changes.Finally, on the theme of sustainable cooperative performance, late in the fiscal year Iannounced the appointment of Kelvin Wickham to our Executive Committee in the role of groupdirector of supplier and external relations. This includes milk supply, government relations, andFonterra's sustainability agenda. To be truly successful, we must be sustainable not onlyeconomically, but socially and environmentally as well. Kelvin will champion this. I will talk moreabout this later.GROW LASTING CUSTOMER PARTNERSHIPSSince Fonterra was created, we have had a deliberate strategy of building lasting customerpartnerships, especially with the major global players. We’re on a mission to become a vital partof their business.We want to be a true partner to our customers, so that we can work with them to add valueabove basic dairy ingredients.Andrei Mikhalevsky’s team in Global Ingredients & Foodservices (GIF) is leading the chargewith our range of premium ingredients which are more advanced than standard dairyingredients.Examples are nutritional bases for infant formula and growing-up milk powders. Fonterra isalready a key supplier to the world’s five largest infant formula companies, and our sales ofnutritional bases have doubled since 2006 to about 65 thousand tonnes of formula blends fromour New Zealand and Australian manufacturing sites.In 2010, we entered into a partnership to commercialise Fonterra’s groundbreaking CHEDDARplus TM cheese ingredient in the United States. We are also in the process of commercialisingfunctional milk protein that we’ve branded as DeluxeProtein TM for yoghurts, which are one of thefastest-growing dairy segments globally.At the high-end of premium ingredients are some of our advances in functional nutrition (suchas protein for sports and medical beverages as well as for snack foods). Although theseproducts are niche contributors, they earn higher margins and we believe they have goodgrowth potential.A premium ingredients category with exciting prospects is pharmaceutical lactose, with Fonterraa world leader in lactose excipients through our joint venture with Royal FrieslandCampina. Inlate 2009, we expanded our JV with the acquisition of the Domo Pharma Lactose business.Page 3

Another key sector where customer relationships matter is the foodservices industry, where wepartner with some of the biggest names worldwide in convenience and fast-service restaurants.Our already strong partnership with McDonalds was strengthened early in the financial yearwhen McDonald’s TM started to include CalciYum TM flavoured milk in their healthy choices forchildren’s Happy Meals, and we have made further in-roads with Starbucks TM in Australia andNew Zealand over the past year.It’s very important for our partnering strategy that we have the ability to service our customersfrom multiple geographies to complement our New Zealand milk. In 2010, Fonterra and itspartners sourced almost seven billion litres of milk from around the world, including Australia,United States, South America, China, Sri Lanka and Thailand.The Chinese market has become increasingly important to Fonterra. In 2010, it was our largestsingle market for ingredients sales, reflecting the strong demand from Chinese customers andconsumers for quality dairy products. Our successful Anlene TM brand was re-introduced toconsumers in selected Chinese cities, and our foodservices business achieved promisinggrowth.Our pilot farm at Tangshan in northern China is demonstrating that we can profitably producehigh quality local milk at good volumes, as part of our commitment to build a safe, secure andsustainable milk supply for our customers in China. The farm now has more than 5,800 cowsand we have recently announced plans to establish a second farm in nearby Yutian County.CONSUMER BUSINESSOur third strategy is to build trusted brands in chosen markets. Our consumer businesses aresignificant and growing profit contributors, and help buffer us against volatile ingredientsmarkets.The consumer businesses also provide an important and secure outlet for New Zealandfarmers’ milk, taking around 13 per cent of the product manufactured from Fonterra’s NewZealand supply.Our focus is growth markets within Asia/AME and LATAM, and our existing strong marketfranchises in ANZ.In Asia/AME, Mark Wilson’s team grew our business strongly in the past year. Normalised profitincreased 48 per cent on a constant currency basis, though currency movements did cost ussome of this.Our Asia AME business is capitalising on rising dairy consumption across key Asian marketsand an expanding health-conscious middle class. An excellent example of our brand strategy atwork is Anlene TM which was created in Asia in 1991 to support bone health and is now the clearnumber one high-calcium milk brand across Asia.In ANZ, John Doumani’s team demonstrated that good growth can be achieved in maturemarkets through strong marketing and by investing in dairy categories that offer superior growthand margin prospects. A real success story was our growth in yoghurts since acquiring thelicenses of Ski TM and Nestlé TM brands in the prior year. We are investing significantly to marketthese brands and to bring production in house. Normalised segment profit was 17 per centhigher than the prior year.Page 4

CONCLUSIONI’d like to conclude by taking you all back to 2001 when as shareholders you took a huge leap offaith to swap a monopoly on global trade in New Zealand dairy produce, for the scale and globalmuscle of a ‘mega-co-op’.As we head into our tenth year, it would be nice to think we are now repaying that faith. Itprobably took longer than we thought to weld three very different organisations and cultures intoone seamless entity focused on our customers and shareholders. We’ve now built up a greathead of steam and momentum as we look to continually refine our business in line withchanging market trends and dynamics. The benefits are now showing through in our businessresults.It’s appropriate to end by paying tribute and sending a big round of thanks to one of your localboys, who’s played a great part over all of Fonterra’s nine years, plus a good more before that.Mike Corbett retired this year as Whareroa Hub Operations Manager after 41 years of greatservice to Fonterra and its predecessors.It’s people like Mike who make your Co-operative a force to be reckoned with. I’m sure we allwish Mike the very best for his well-deserved retirement.Thank you.Page 6