Craig Norgate Speech: Knowledge Wave

Thank you for the opportunity to speak with you today, and for your interest in the dairy industry and Fonterra. It’s good to be here. I’m determined that Fonterra - as a leading New Zealand company - will stay in close contact with the rest of the New Zealand business community. This morning is part of that.

I spoke early last month to the Chamber of Commerce in Wellington, the home of the Dairy Board, which over the years has created such a wonderful platform for our industry. It’s appropriate I speak here today, to the Chamber of Commerce & Industry in Auckland, which is now the home of Fonterra, the company with the responsibility to build on that platform and to take our industry and New Zealand forward.

I don’t underestimate the important role the business community played in the creation of Fonterra. As a regulated industry seeking deregulation, we needed to work with the Government and we needed to make the case to maintain our scale. It was businesspeople - and exporters in particular - who understood most clearly that for New Zealand to be a country of only small and medium-sized businesses - by world standards - would be a limited, parochial view. It would limit our business community, and our potential.

It was businesspeople who saw that this country needs at least one company of truly global scale, to be a national champion and to play a leading role in helping New Zealand catch the knowledge wave. Fonterra is that company. And, one of the reasons I am able to address you today, as CEO of a company, backed by our shareholders, facilitated by the Government, and now well and truly on our way to delivering on our promise is because of the support we received from the business community. We now have to deliver.

We begin as New Zealand’s largest company. That’s well known. We’re one of the world’s top ten dairy companies. That’s well known too. We employ 20,000 people, manufacturing and marketing dairy products to customers in 120 countries around the world. We earn over 20 percent of New Zealand’s export receipts, and seven percent of our GDP. Last year, we paid a record milk price to our shareholders, based on record production. Those statistics roll off the tongue easily, but they mean little, except that they set a standard that we now have to exceed.

Our first obligation is to deliver on the Business Case that our shareholders voted on. It outlined over $300 million in gains by the third full year after the merger. It’s a challenge we have to meet - with no excuses - despite the more difficult international environment following 11 September. We plan to get there as quickly as possible.

But the expectations for our company go well beyond that immediate obligation. The case that we put to maintain the unity of our business was that it would enable us to launch an aggressive strategy of acquisitions and joint ventures, to earn the status of one of the world’s leading multinational dairy companies. That is our strategy. We will be ruthless in our use of capital. We will make decisions strictly on a commercial basis. We will focus on those parts of the world and those product lines where we see the best potential for growth. If we can’t make a long-term return above what our shareholders could make themselves, we should sell the assets and give the money back to them.

The world market we now face - like the markets you all face - is now very uncertain. We have told our shareholders that for the current season we continue to be confident we can deliver another record payout, despite the significant fall in market prices over the past three months. But looking further ahead, the outlook for the 2002/3 season is much more uncertain. Our chairman has written to our shareholders advising them to brace themselves for the full impact of this fall in 2002/3. We’re recommending that they take a conservative approach with respect to their farming businesses this season. If we do deliver a record payout this season, many farmers will want to keep money in the bank for 2002/3.

However whilst there are storm clouds on the horizon, looking longer term, the general picture of how the world dairy market is likely to develop over the next five years has not changed. Summarised quickly, population growth in the developed world - Western Europe, North America, Japan, Australia, New Zealand - is forecast to be stagnant. In the developed world, demand for dairy products is expected to grow, but by only around one percent a year. Product by product, consumption of traditional lines is expected to remain static. For yellow fats, including butter, it’s likely consumption will continue to fall. The growth opportunities, in the developed world, will be found in products such as pizza cheese, functional foods, milk drinks, and - in a small way - organics.

There are also trade barriers in the developed world that prevent us from developing the markets as well as we could - and also shut out the poorest countries in the world, preventing them from developing their agricultural industries, and keeping them in poverty. Those trade barriers may come down over time through the WTO Round, and we will work for that. In the meantime, we need to position ourselves carefully if we are to take advantage of what growth opportunities are available in the wealthy markets.

Clearly, however, our fastest growth is not going to be in the developed world. It’ll be found elsewhere.

I consistently define our domestic market as including Asia. If Asia isn’t our domestic market then, frankly, we don’t have one. In Asia, much stronger growth is expected than in the fully developed world. Indonesia is a key opportunity with its huge population right on our doorstep. In India, growth in demand for dairy products is expected, of up to three percent a year over the next five years, compounding. China, of course, is important for any exporter. Its membership of the WTO will see its tariffs on butter and cheese fall from 50 percent to ten to twelve percent respectively. It’s a substantial market, it’s a growth market, and we regard it as part of our domestic market. That’s Asia.

Turn now to the Americas, in particular Latin America. As a dairy market, Mexico is as big as all the countries of South East Asia, combined. It’s a country where incomes and demand have raced ahead. In Mexico, in Brazil, elsewhere in Latin America - and also in the US and Canada - dairy products are already an integral part of the diet. The platform is already established. We don’t have the hard work to do of influencing diets towards dairy products. From the base that is there, Latin America is forecast to have the strongest growth in demand for dairy products in the world: four percent a year over the next five years - four times faster than growth in Western Europe - and compounding. And much of the growth is expected to be in higher-value, fresh and chilled products.

This is the background to the five major initiatives we have been able to rigorously pursue since our farmers voted for the merger less than six months ago:

- Our export arrangement with Dairy America, to become the largest exporter of skimmilk powder out of the United States, and to the rest of the Americas and the world

- Our purchase of two Mexican companies - La Mesa and Eugenia - making us the number one player for cheese and number three for spreads in a market, the importance of which I have already highlighted

- Our alliance with Nestle to establish joint ventures throughout the Americas for a wide range of dairy products including shelf-stable and fresh milks

- Our joint venture with Arla in the UK and EU to bring our Anchor brand and its Lurpak brand together into one entity, to position us better in that highly-competitive yellow fats market

- And, the fifth initiative is our first step into India, with our joint venture with Britannia - a bakery business with a national distribution network, partly owned by Danone and now moving into the dairy category

Deals such as these were in the pipeline before the merger, but they could not be completed without it. We’re now in a position, once the alliance is in place, to have a 50 percent shareholding in Nestle’s business in the Americas. It wouldn’t have been imaginable a generation ago. It was barely imaginable a year ago, when we signed our merger agreement.

It’s leading to dairy farmers expanding their view of the world. They continue to demand the best possible milk collection services and the highest possible price for milk, and rightly so. But they are also demanding information on the weighted cost of capital, forecast returns, and the risk profile we may be taking on with, for example, the alliance with Nestle.

Due diligence with Nestle continues. We remain on track to establish a new entity, owned 50:50 between us, with equal representation on the board, and with executives drawn from both companies on merit. We’ll be using our brands and their brands - whichever is best for a particular market. Neither of us intends to be precious. Fresh milk will be sourced locally in the Americas, and dairy ingredients will be sourced from New Zealand. In Nestle, we saw the world’s most respected food company with the world’s leading brands, and a global research and product development capacity. They saw in us the world’s largest exporter of dairy products, with strong brands, and with unique skills in large-scale procurement, processing and management. Less than a year after our merger agreement was signed, I’m delighted we’re down to the real business of bringing such an alliance together.

Ever since our merger was first floated, we’ve talked about earning the status of a true New Zealand national champion - of helping New Zealand catch the knowledge wave. I’ve chosen my words carefully. We plan to earn the status of a true New Zealand national champion. We do not claim it.

We are a co-operative, and proud of it. For most dairy farmers in New Zealand, we are currently the only realistic, large-scale customer for their milk. New customers may well emerge, as a result of deregulation. But our constitution demands that our suppliers also become shareholders of our company and they are locked in for at least a year. They can’t just sell their shares on the open market if they disagree with our decisions. It places an even higher obligation on us - than for a public company - to ensure every decision we make is one we can stand in front of our shareholders and defend, on short-term and long-term commercial grounds.

National championship primarily means performing commercially and delivering value back to New Zealand through our shareholders. It’s through that performance, through making the right commercial decisions and through leadership that we plan to earn the status of a national champion.

We’re a New Zealand company, and a multinational company, based in Auckland. We hope that means this country’s business support infrastructure - the top international consultancies, the business advisors - place just that much more emphasis on understanding this country’s business environment. That knowledge and those services then become available to the rest of the business community. That’s an element of what national championship is about.

Science is another. We are the country’s biggest non-Government investor in research and development. That creates a more lively scientific community in this country. Our scientists have colleagues and students that they work with, that they teach, that they learn from, that they inspire. Our investment creates a critical mass of scientific exploration, which benefits the rest of the agri-business sector and New Zealand society as a whole.

On environmental issues, we strive to establish our credentials as a leader. It makes sense commercially as a multinational company because some of our marketing effort draws on images of New Zealand, including our clean and green status. It makes sense commercially to lead on the environment because it is always better to develop new technologies and new best practice, to stay ahead of the regulators, rather than lag behind. And it makes sense simply because we are a New Zealand company. We have a good environmental record already, because our farmers rely on the market for 100 percent of their income. Our farms are as environmentally responsible as you will find anywhere in the world. You will find exceptions to the rule - of course - and they will be the examples highlighted by environmental groups, and that’s fair enough.

National championship can perhaps best be understood in the context of career opportunities. National championship demands we employ the best the world has to offer. But the fact we are based in New Zealand - and the better we perform commercially - opens up career opportunities to New Zealanders to be part of a global network that may not otherwise be available. We want New Zealand’s best and brightest to want to work for us and with our partners internationally. We want every young New Zealander to aspire to work with us, the same way they may aspire to represent New Zealand in sport. That’s national championship.

Our environment will be one where we challenge our people to go beyond their existing boundaries - to extend themselves - to become brighter transportation and logistics experts, brighter manufacturers, brighter marketers, brighter scientists, brighter international managers, and brighter leaders - brighter than when they began with us. And then you’ll try to head hunt them. And that’s fantastic. We won’t make it easy for you. But our company will build a pool of talent - from here and overseas - to benefit our business and benefit this country.

We see no contradiction in delivering to our shareholders and to New Zealand at the same time. There is no contradiction in performing commercially, socially and environmentally at the same time. Resolving apparent conflicts - finding a path forward that no one has travelled before - harnessing the power of the “and”, not being captured by the tyranny of the “or” - that’s what true innovation is all about.

The expectations on our company are very high. We have raised them. And we need, now, to deliver. In some projects, we are likely to fail. That is the price of setting the bar high. And we will be telling you when we fail. But I would like to think that, in 18 months, I could stand again in front of this audience and report that we are well on our way to achieving our goals - goals that we have set for ourselves, and which our shareholders, and you, expect us to deliver.

Thank you again for your interest in the dairy industry and in Fonterra. I look forward to Fonterra being part of a vibrant business community and thank you for the opportunity to meet with you today.

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