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Fonterra CEO Spech To Hautapu Facility Opening

Address By Andrew Ferrier Ceo Fonterra At The Opening Of The Hautapu Lactoferrin Facility October 19 2004

Thanks for the introduction Rob. May I add my own personal welcome to everyone here today. As Patrick has noted, it is an important milestone for Fonterra and it is a pleasure to be able to celebrate it with you.

This is the second opportunity we’ve had in two months to celebrate the commissioning of new plant. Last month our third dryer was commissioned at our Clandeboye site in the South Island, making it the second largest plant in the world in terms of capacity. The dryer was an important investment for us, helping cement our place as a competitive, low-cost supplier of dairy ingredients to the global market, and follows on from our expansion at Edendale. Today, we celebrate the completion of a quite different project. This one is more concerned with the value-add side of our business and the tremendous potential that lies in the bioactive ingredients of milk.

Both of these investments underline Fonterra’s commitment to excel in two very different segments of the dairy market – commodities and value-add products. I often call this being “the best of both worlds”. Through our milk volumes, scale, manufacturing capacity and global supply chain capabilities we have secured a position as the leading supplier of dairy ingredients to the global market. Through our knowledge of milk and its components, and through our understanding of consumer trends and desires, we also have a strong presence in the value add market, represented through specialist ingredients, such as lactoferrin, and through our consumer dairy brands business, New Zealand Milk.

Investing in both worlds is in the best interests of our shareholders. A low-cost competitive position is not only crucial to our ability to develop long-term customer relationships in dairy commodities markets, but also our ability to return the best commodities earnings to our shareholders. We are currently enjoying a good run, with commodity prices continuing last season’s upward trend. However, the reality of markets is that commodity prices do fluctuate and that is where our value-add businesses come into their own. Their margins are at their best when their input costs are low, so they provide our shareholders with a natural hedge against lower commodity revenues. At the same time and regardless of world pricing trends, our value-add businesses strengthen our abilities to form long-term relationships with our ingredients customers and they generate revenues from our portfolio of branded dairy products.

Our lactoferrin investment is significant for two reasons. First, it enables our Hautapu site to produce lactoferrin, a minor component in milk with clinically proven anti-bacterial and immune-enhancing properties. Even more importantly - and this is the main driver behind the investment - it establishes for Fonterra a competitive position in leading-edge fractionation technologies.

These are the technologies used to separate whey into various proteins with individual, unique applications. Whey proteins are separated from each other and transformed into usable, isolated ingredients, such as alpha-lactalbumin, lactoferrin and other concentrated proteins. The potential for these proteins is considerable, so it is important to our value-add growth that we have superior technologies.

Investments in plants like these are as important as our investments in our commodity manufacturing capacity. To understand why, you need only look in your local supermarket to see how health trends and concerns are shaping what we eat. Increasingly, we are prescribing diets for ourselves that respond to our health concerns.

It’s not unusual today to see a family kitchen stocked with milk that is enriched with additional calcium, vitamins or Omega 3 to promote bone or heart health, yoghurts designed to promote healthy digestive systems, oils that combine the flavour of butter with the healthy qualities of olive oil, protein supplements that assist in weight loss, or dietary supplements to increase immunity. Without exception, all these products have components derived from milk.

As the world’s major food manufacturers respond to these functional foods trends, it is important for the future of our industry that we ensure specialist dairy ingredients, such as lactoferrin as just one example, are their first choice when it comes to creating innovative and healthy foods. We want to grow the total dairy market, and innovation and the identification and development of specialist bioactives is one path to that growth.

Indeed, we have in our LactoPharma partnership, a team solely focused on the many novel components of milk that have yet to be discovered. LactoPharma, a partnership with the University of Auckland’s commercial arm, UniServices, is systematically taking milk apart to unlock its secrets. This ‘blue sky’ research is showing real promise with several patents registered. Discovery of the next novel component could hold the answer to controlling one of any number of global health problems.

Our commitment to growth through innovation is evidenced by the $100 million we invest annually in research, our specialist Marketing & Innovation team in Palmerston North and the disciplines we apply in the business to ensure commercial opportunities are quickly identified and developed.

Our Health & Nutrition Business, which drove today’s project, is just one of five Growth Businesses that have innovation and value-add as their primary focus. The opening of this facility represents an important step forward on this value-add path.

In closing I would like to congratulate the team who brought this project home on time, in specification and within budget. I fully endorse Patrick’s thanks to all those who took the idea from conception through to delivery in a remarkably short time.

Thank you all.

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