Farmlands Annual Report 2013 by Farmlands

Annual Report

Notice of Annual General Meeting

05

November

Notice is hereby given that the fiftieth Annual General Meeting of shareholders of Farmlands Co-operative Society Limited will be held at 3pm on Tuesday 5th November 2013, at Club Mount Maunganui, Tauranga.

Shareholders are invited to join the Directors and Executive personnel of the Society for cocktails at the conclusion of the meeting. At this function, shareholders will be entered into a complimentary sweepstake in the Melbourne Cup that will run at 5.00pm. The shareholder who wins the sweepstake will receive a trip for two to Melbourne including six nights accommodation*. The prize includes transfers, a show and a meal on the Colonial Tram, value $3,300. We look forward to your attendance at our Annual General Meeting.

Please RSVP by Friday 25th October to rsvp@farmlands.co.nz or 0800 278 583.

Business

1. To receive and adopt the Annual Report for the year ended 30 th June 2013.

Resolution to be put: That the Annual Report for the year ended 30th June 2013 be adopted.

2. To appoint the auditors.

Resolution to be put: That the auditors, PricewaterhouseCoopers, continue in office and that the directors be authorised to fix their remuneration.

* Terms and conditions apply

3. To transact any other business that may be properly considered at the Annual General Meeting.

By order of the board Stephen Higgs, Secretary Christchurch 26 September 2013

While the big news for the financial year has been the merger of two prominent co-operatives, the work behind the scenes shows a united team, passionate about providing the best services and prices for its shareholders.

Aware of the combined services and buying power available, shareholders’ loyalty and acceptance is being rewarded. As the shareholders are the only reason this co-operative exists, it is important to ensure the performance of your business is as strong as possible – it directly affects ours.

We recognise the value of local service in an environment that is becoming increasingly global in focus. With a shared vision, we will continue to provide locally, for locals.

Chairman and Chief Executive Officer’s Report

Esler Chief Executive Officer

The 2013 year has been a significant one in the history of Farmlands and CRT, with the shareholders of the two co-operatives voting to merge the businesses, effective from the 1st of March this year. This begins a whole new chapter in the evolution of the farmer owned rural supply co-operatives.

Farmlands and CRT each have 50 years of history, growing from small regional entities to strong North and South Island businesses. Your new national co-operative now enters its second half century well positioned, with the scale required to deliver increased value to shareholders.

operate more efficiently and deliver more innovation in our service to shareholders. These advantages will be achieved in the background – and the pursuit of these goals will not disrupt the commitment to excellent service given by our staff through our network of 80 branches and associated

The merged business will buy better, operate more efficiently and deliver more innovation in our service to shareholders. ” “

The rural supplies market is now fiercely price competitive, thanks largely to the successful role the co-operatives had in challenging and changing the traditional rural supplies model. Low gross margins are now the reality of the rural supplies market and the co-operative requires scale and innovation for it to continue to exert competitive pressure in the future.

The merged business will buy better,

services. We know the importance of the relationship between our shareholders and our staff and in a market that is very price competitive, the importance that is placed on knowledge and trust in those relationships. We would like to acknowledge the excellent performance of our staff throughout the merger process, as they have continued to deliver business as usual through this change.

Lachie Johnstone Chairman

Brent

We are proud to present this first annual report of Farmlands Co-operative Society Limited. Due to merging, this first year’s accounts make it difficult to compare with the previous year’s performance.

The accounts reflect 15 months trading of the CRT business, 1st April 2012 –30th June 2013 and four months trading of the legacy Farmlands business from 1st March 2013 – 30th June 2013. The last year comparative figures in the accounts are just those of CRT for the 12 months ended 31st March 2012, the date of the last annual report.

The 1st of July 2013 marks the beginning of reporting as a fully merged entity. During this transition we have monitored and managed the business performance based on a rolling 12 months of the combined business results:

Total Turnover

2.17 billion

Operational efficiencies and some changes in the mix of business assisted in lifting gross profit by 6.2 percent during this period.

Gross Profit (before monthly rebates)

Total Monthly Rebates

74.69 million

In the 12 months ended 30th June 2013, we grew total turnover by 3.0 percent. This result reflects the more subdued market conditions of the year, in comparison with last year’s record performance.

Merger benefits achieved to date are exceeding our expectations in most areas and overall the expenses of merging are in line with our forecast, albeit some have been incurred earlier than the original plan, as operational and integration priorities shift.

The fuel business rebranding commenced on 1st July, with the Farmlands Fuel brand being adopted. The Skeltons brand was changed in favour of Farmlands Horticulture and this was introduced to the Tasman and Marlborough regions. Retail stores in that area will be amongst the first in the South Island to receive the Farmlands brand.

Considerable progress has been made by our Information Technology team in planning the integration of the back office systems and the move to a single systems platform. A common branded card is expected to be launched early in the second quarter of 2014.

Since balance date, we have enjoyed increased strength in sales and the new financial year has started soundly. The cooperative is now finalising the acquisition of the animal nutrition business and brand of NRM, returning this 114 year old brand to New Zealand farmer ownership. The purchase will improve the utilisation

and operational efficiency of our current manufacturing assets and it will deliver benefits to a wide range of shareholders.

The Board have decided not to make any bonus distribution relating to the 30th June result. On 28th February at the time of merging, a total of $39.7 million was distributed, comprised of a bonus issue of $31.6 million and a bonus rebate of $8.1 million.

We appreciate the support of our shareholders through the changes subsequent to merging. We are very focussed on maximising the opportunity presented by the merger whilst preventing any negative impact on shareholders, our staff and our trading partners. There will inevitably be difficult decisions to face through the process as we are committed to achieving the maximum benefit for all of our shareholders. Mistakes are always possible but we are committed to minimising these and we will quickly resolve any that may occur. We are confident that with your support we can deliver well beyond the merger benefits projected.

Lachie Johnstone Chairman Brent Esler Chief Executive Officer

Brent Esler addresses shareholders and staff at the Feilding branch opening

Summary Financial Statements

Summary Statement of Changes in Equity and Members’ Interests

REPORTING ENTITY

The Summary Statements presented are those for Farmlands Co-operative Society Limited and its subsidiaries for the fifteen months to 30th June 2013. On 1st March 2013, Farmlands Trading Society Limited was merged into Combined Rural Traders Society Limited and a change of name to Farmlands Co-operative Society Limited was registered, with a change of balance date to 30th June. Comparative figures for the year to 31st March 2012 are prior to this merger. Consequently, the figures presented are not directly comparable to the previous year.

MERGER OF SOCIETIES

While this was a merger of the two Societies, for accounting purposes Farmlands Co-operative Society Limited acquired all the assets of Farmlands Trading Society Limited and assumed responsibility for their liabilities. There were nonrecurring expenses in connection with the merger of $3,063,000 included in the costs to run the Society in the 15 months to 30th June 2013.

A summary of the effects incorporating the merged Society at 1st March 2013 is as follows:

NOTES TO SUMMARY FINANCIAL STATEMENTS

The specific disclosures included in this summary financial report have been extracted from the full financial report, which was authorised for issue on 26th September 2013. The full financial statements have been prepared in accordance with full NZ GAAP as a profit-oriented entity and the Group has made an explicit and unreserved statement of compliance with IFRS’s in the full financial report. The full financial statements have been audited and an unmodified audit opinion has been issued. These summary financial statements comply with FRS 43. Figures are in New Zealand dollars. The summary financial report cannot be expected to provide as complete an understanding as provided by the full financial report of the Group.

EVENTS SUBSEQUENT TO BALANCE DATE

On 5th September 2013, the Society acquired part of the business of Viterra (NZ) Limited. Property, plant and equipment and the business of “NRM” have been acquired for a consideration of $4.4 million. In addition to this, inventory for normal trading activity up to a value of $12 million will be acquired. The purchase will be completed over the next two months.

If you require a full set of accounts, please write to: The Secretary, Farmlands Co-operative Society Limited, Private Bag 1968, Dunedin 9054, giving your name, address and CRT/Farmlands shareholder number and we will forward a copy to you.

The Board of Directors of Farmlands Co-operative Society Limited authorised this summary of the financial statements on 26th September 2013.

Lachie Johnstone Director

Don McFarlane Director

Stephen Higgs Secretary

Independent Auditors’ Report on Summary Financial Statements

to the shareholders of Farmlands Co-operative Society Limited

We have audited the accompanying summary financial statements, which comprise the summary statement of financial position as at 30th June 2013, the summary statement of comprehensive income and summary statement of changes in equity and summary cash flow statement for the fifteen months then ended and related notes, which are derived from the audited financial statements of Farmlands Co-operative Society Limited for the fifteen months ended 30th June 2013.

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 Farmlands Co-operative Society Limited.

Directors’ Responsibility for the Summary Financial Statements

The Directors are responsible for the preparation of a summary of the audited financial statements in accordance with FRS-43: Summary Financial Statements.

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. Other than in our capacity as auditors we have no relationships with, or interests in, Farmlands Co-operative Society Limited.

Opinion on the Financial Statements

Our audit of the financial statements for the fifteen months ended 30th June 2013 was completed on 30th September 2013 and our unmodified opinion was issued on that date. We have not undertaken any additional audit procedures from the date of the completion of our audit.

Opinion

In our opinion, the summary financial statements have been correctly derived from the audited financial statements of Farmlands Co-operative Society Limited for the fifteen months ended 30th June 2013 and are consistent, in all material respects, with those financial statements, in accordance with FRS-43.

Restriction on Distribution or Use

This report is made solely to the shareholders of Farmlands Co-operative Society Limited, as a body. Our audit work has been undertaken so that we might state to the Society’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 Society and the Society’s shareholders, as a body, for our audit work, for this report or for the opinions we have formed.

Chartered Accountants

Dunedin 30th September 2013

Governance and the Board of Directors

Farmlands has eight shareholder Directors, elected and approved by shareholders and two independent Directors appointed by the Board. Shareholder Directors retire by rotation after three years, that rotation beginning for the new merged co-operative in 2014.

The eight shareholder Directors are located equally between the North and South Islands, four in each, as required by the rules.

The independent Directors are also based one in each island.

Board Responsibilities

The Board has responsibility for the affairs and activities of the co-operative, while the day to day operations and administration are delegated to the Chief Executive.

The Farmlands Board follows best governance practice and the four pillars of governance, as advocated by the New Zealand Institute of Directors, establish the basis for that best practice. The four pillars are:

• Determination of purpose

• An effective governance culture

• Holding to account

• Effective compliance

More specifically, the responsibilities include directing and supervising management in the following areas:

• Ensuring that the co-operatives goals are clearly established and strategies put in place to achieve them

• Establishing there are policies to improve performance

• Monitoring the performance of management

• Overseeing and monitoring the co-operative’s financial position

• Ensuring that the co-operative adheres to appropriate values, ethics, and corporate behaviour

• Ensuring that there are risk management and compliance policies in place

Board Committees

The Farmlands Board operates with three committees;

• Audit and Risk Management - Peter Wilson (Chair), Joe Ferraby, John Foley and David Jensen

• Remuneration - Lachie Johnstone (Chair), Craig Boyce, Nikki Davies-Colley and Don McFarlane

• Shareholder - Howie Gardner (Chair), Joe Ferraby and Tony O’Boyle

The Audit and Risk Management Committee assists the Board in matters relating to auditing, financial reporting and risk.

The Remuneration Committee reviews the performance and sets the remuneration of the Chief Executive, reviews the remuneration of the Executive team and recommends remuneration of Directors to shareholders.

The Shareholder Committee is charged with considering the relationship between shareholders and the co-operative. The Board is united in its belief that a critical component of what can influence the co-operative’s success is how the shareholder relationship is managed - especially communication. Information is provided to shareholders through the monthly shareholder magazines, the Farmlands website, the Annual Report and the Annual General Meeting of the co-operative.

Board Meetings

Farmlands Board meetings are scheduled at the beginning of each month with extra meetings held if required. Management reports from across the business are provided to Directors in the week leading up to the monthly meetings. Senior management from the co-operative are introduced to answer specific queries on those reports and to provide insight into relevant issues.

Farmlands Board of Directors

Lachie Johnstone

Lachie Johnstone joined the Farmlands Trading Society Board in 2000 and was Chairman from 2003 until 2013. He became the inaugural Chairman of the newly merged entity in March of this year. He has a commerce background and worked as an accountant before moving onto the family farm in the Waikato, which expanded to 935ha involving an intensive bull beef system, breeding ewes, cows and trading cattle.

Lachie is currently managing Director and majority shareholder of the food logistics company, Wholesale Frozen Foods Limited. He was previously a Meat New Zealand mentor group member and has been involved in community-based farm research projects conducted through AgResearch and the Foundation for Research, Science and Technology. He is also a councillor on the New Zealand Co-operatives Association and has served as a Board member (and Chair) on school boards.

Don McFarlane

A Nuffield and Kellogg Scholar, Deputy Chairman Don McFarlane has directorships with New Zealand Honey Co-operative, Moeraki Ltd and Presbyterian Support SC. He chairs Clough Holdings/Duncan Ag, which manufactures farm equipment and seed drills for NZ farmers and exports to several countries. He is a Director of Hunter Downs Irrigation Ltd, which has consents to irrigate 35,000ha south of Timaru.

Don, his wife Di and son Hamish farm 700ha fully irrigated near Temuka. The farm produces carrots, cereals, potatoes, grass seeds and blackcurrants. Dairy support and cow wintering, as well as winter lamb finishing are the main grazing activities.

Nikki Davies Colley

Nikki and her husband Peter have been Farmlands shareholders since 2004. Nikki is well known in the Northland business and farming community.

She has been a Board member of Northpower Ltd for the past 15 years and

holds a Masters in Business Administration. Nikki is also a Director of Landcorp Farming Limited, West Coast Energy Pty. Limited and Whangarei Local Fibre Company Limited.

Nikki is experienced in strategic analysis, project management, motivation and ensuring that agreed strategies are carried through to implementation.

Joe Ferraby

A Kellogg Scholar, Joe and his wife Carolyn live on their 690ha irrigated sheep and beef property in the Awatere Valley in Marlborough. Joe is also a Trustee and Director of a large neighbouring property and a Director of a large corporate farming business with properties in New Zealand and Australia. He chairs Terra Vitae Vineyards, a publicly owned viticultural company owning 400ha of vineyards in Marlborough and Hawke’s Bay, is Chairman of ANZPAC Oils Ltd - the Farmlands owned distributorship of Gulf Oil for New Zealand, Australia and the Pacific Islands and is Chairman of a large family owned construction company and its subsidiaries based in Blenheim. His past governance roles have included PPCS, Silver Fern Farms, the Silver Fern Farms North

Island Shareholders Council, Destination Marlborough Trust, Marlborough Lines, Nelson Electricity and Northbank Forests Ltd.

John Foley

John and Ruby run a farming operation comprising a 500ha intensive cropping, dairy support and livestock fattening property in Tokarahi, North Otago. This operation supports their 200ha dairy farm. Alongside this they run an agricultural services business.

John has had many governance roles and has previously won the East Coast FMG Royal Excellence Award and went on to win the AC Cameron Award. He is a graduate of the Rabobank Executive Development Programme, a member of the NZ Institute of Directors and is Vice President of the Oamaru Jockey Club.

Howie Gardner

Howie, his wife Marion and son Rhys run a 12,300 stock sheep and beef unit in the Puerua Valley, South Otago. The operation includes a Perendale stud flock.

The wool industry is of particular interest to Howie and he is a Director of

Independent Directors

Don

both Primary Wool Co-operative and joint venture company Elders Primary Wool. He has been closely involved with the creation and development of the Just Shorn wool carpet and rug brand, currently operating in the United States.

Howie also chairs the Farmlands Shareholder Committee.

David Jensen

David Jensen joined the Farmlands Board in 2006 and was Chairman of its Audit Committee.

David lives at Pyes Pa, Tauranga, where he has a 300ha dairy farm, 14ha of kiwifruit and 5ha of avocados.

David is a Director of Livestock Improvement Corporation and was a Director of Satara Co-operative, a New Zealand kiwifruit and avocado co-operative. He remains Chairman of Satara Kiwifruit Supply Limited, a related but separate entity. He is also on the Executive of Tauranga-Katikati Vet Club.

Previous positions include Director on the Livestock Improvement Regional Board, farm consultancy for the

New Zealand Dairy Board, a councillor of the New Zealand Dairy Group, manager of the National Dairy Excellence Awards and Grower Director and past Chairman of AvoFresh.

Tony

O’Boyle

Tony O’Boyle joined the Farmlands Board in late 2010. Tony, together with his wife Pattie have experience in both dairy and drystock, having grown up in the Central Plateau. They still operate a dairy farm under a 50/50 agreement in the area but now reside in the Wairarapa, where they farm a 1000ha hill country sheep and beef farm.

Tony has had various industry roles, including with NZDG, a Chairman of the Fonterra Shareholders’ Council and various Board sub-committees. Past and present directorships include being a Director of both Rotorua Vet Club and ANZPAC Oils.

Tony is no stranger to the ethos of the co-operative structure, as his grandfather wrote the Co-operative Act 1956.

Craig Boyce

Craig Boyce has been a Director or Chairman of a variety of New Zealand companies operating in diverse market environments. His current involvement includes Ovation New Zealand (formerly Bernard Matthews), Progressive Leathers, Horizon Farms, Datacom, Orion, Smiths City, Snowy Peak and Transdiesel.

Peter Wilson

Peter Wilson joined as an independent Director of the Farmlands Board in 2007. He is a chartered accountant and professional company Director, serving on the boards of several national companies and lives in Otaki. Peter is past Chairman of Westpac New Zealand Limited and past Director of Westpac Banking Corporation of Australia. He is Deputy Chairman of Meridian Energy Limited. He previously worked in public practice in Hawke’s Bay and held numerous Directorships of Hawke’s Bay companies, was Chairman of Healthcare Hawke’s Bay and the Port of Napier Limited. Peter also chaired the former Hawke’s Bay Farmers’ Meat Company during industry restructuring in the late 1980s.

BACK L-R: John Foley, David Jensen, Craig Boyce, Joe Ferraby, Nikki Davies Colley, Tony O’Boyle

FRONT L-R: Howie Gardner,

McFarlane (Deputy Chairman), Lachie Johnstone (Chairman), Peter Wilson

Retail

Geoff Taylor General Manager Retail

The Year in Review

Following the amalgamation of CRT and Farmlands in March 2013, the retail team has been busy ensuring that our frontline teams remain focused on delivering value to our combined shareholders. It has been great to see the cultures of the two co-operatives coming together and enables us to build a new culture that ensures our shareholders are our focus in retail.

While Farmlands is now the largest rural supply company in New Zealand, adding value to our shareholders remains the main focus of the business. Our vision in Retail is “to maximise our shareholders’ profitability through offering rural solutions using innovative co-operative principles” and is made up by three core areas.

• having a strong Technical Sales team both in-field and in-branch

• ensuring our branches have good in stocks of leading branded products at competitive pricing

• having a strong focus on customer service

The retail sales force boasts more than 100 Technical Field Officers (TFOs), along with product specialists and retail staff in 80 retail stores nationwide. Our team of TFOs provide on-farm advice - they are devoted to helping farmers achieve production objectives by providing solutions tailored to individual farm conditions. TFOs have expert knowledge

“

...to maximise our shareholders’ profitability through offering rural solutions using innovative co-operative principles...”

and understanding of modern farming systems to help provide industry leading solutions. Together they provide a network of shared knowledge that shareholders can call on at any time.

A product knowledge development programme was introduced into our branches to ensure our staff can provide

the best advice to our shareholders. Employees who are passionate about developing their knowledge in key areas and take responsibility for their own personal development are formally identified. We then tailor activities that help develop their knowledge.

This previous year has seen further expansion to our store network with a new branch in Wellsford. There have also been relocations to new purpose built stores in both Taumarunui and Gisborne and branch refurbishment in Te Puna.

Result

The last year results were pleasing, given a number of farming sectors experienced challenging times and the impact of drought conditions across large parts of the country. Despite these challenges we achieved 3.5 percent growth in retail sales, which reflected well on the efforts of all our retail team. Retail costs were well managed, with all teams under-spending for the year.

Highlights of the year

• The expansion of our Technical Sales team both in-field and in-branch

• The introduction of new ranges of leading branded products at competitive pricing

• The expansion of Farmlands Horticulture

• Continued growth in both sales and market share

Looking Ahead

We now have our senior management team in place for retail following the merger and it is a great mix of senior members from both co-operatives, with a couple of new faces. The new team’s focus is concentrated in three areas:

• Leveraging of our larger buying power and obtaining better deals for our shareholders

• Identify operational efficiencies that can be gained from the merger

• Identify ways that we can maximise our shareholders’ profitability

Luke Hansen National Horticulture Manager

Farmlands Horticulture

The past year involved two key aspects. The first was to grow our Technical Advisor team to cover the whole of New Zealand and the second was to rebrand Skeltons to Farmlands Horticulture as we bring consistency to our overall branding. The Horticulture team now comprises of 35 Technical Advisors, whom are now domiciled in every main horticultural area

in New Zealand.

Growers have welcomed the increased size and ability to deal with a national supplier. We continue to introduce innovation and have introduced many new products to our growers that reflect our commitment to the industry.

Farmlands Fertiliser

We had a particularly good start to the financial year with unprecedented sales in April underpinning the first quarter. Following a slow start to the spring, November became our best month for sales to date. The strong performance in these two months softened the impact of the drop in sales from the late summer on as many areas suffered from the dry. While sales dipped in the last quarter, it is worth noting that they only fell to be in line with historic averages after what was an exceptional quarter last year.

Despite the challenging environmental factors throughout the year, Farmlands increased fertiliser market share year on year. Factors contributing to this result were strong shareholder support at a local and regional level, an expanding branch network and a great team of staff moulding all of these factors together.

Farmlands conducted a number of innovative fertiliser campaigns during the year in partnership with Ballance Agri-Nutrients where specific groups of shareholders were targeted. The results were extremely positive and we achieved significant new growth in all Farmlands geographic regions and shareholder farm types. Shareholder spend on average was maintained however, as nitrogen based products were in strong demand and prices softened throughout the season. It is good to see the productive capacity of our farms being maintained.