Fonterra Shareholders Fd

Thank you, and good afternoon, everybody. Thank you for joining us this afternoon. I am joined by Celia and Phil from the Investor Relations Team and Andrew Murray, our new CFO, who I know a number of you will meet over the coming days. Hopefully by now you've had a chance to review the detail that we provided through the NZX this morning to give an overview of where we landed. But overall, very pleasing to see that the cooperative has again delivered on our promises and have put ourselves in a very strong position from a balance sheet perspective to go forward. I'd now like to just open straight away for questions. We can answer anything that you have on top of your mind and go from there. So thank you.

Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Nick Ma from Macquarie. Please go ahead.

Good afternoon, guys. Just in terms of the guidance, obviously the fourth quarter margins in food service and consumer were impacted by a rising cost of milk, which will continue into FY25 given the milk price outlook. Can you just talk through what gives you confidence that you can deliver sort of stable to slightly growing earnings across food service and consumer channels in FY25?

Yeah, hi, Nick Miles here. So as we sort of talked previously, when you see sort of quite a quick move up in a milk price, certainly in the consumer and food service space, it's hard to pass on those price increases, given we sort of run a sort of a quarterly contract a lot of the times in that area. So you'll see that those margins sort of strengthen again as we go into the quarter one period from what we ended in quarter four. So that gives us the confidence into the future that we can pass on those milk price increases that we've seen.

That's good. And is a lot of that pricing already sort of put through into the market and has stuck accordingly?

Yeah, I mean, there are various markets at various rates of change and the pace in which you can put it through, of course, governed very much by what the competition play and how they operate. But overall, we're pleased with how the pricing is landing in our key markets.

That's great. And then some of these sort of growth projects that you've announced, the three of them, you know, obviously interesting projects and you're sort of pretty excited about them. What kind of incremental return on capital are you looking for across that spend sort of against the 11.3% you delivered this year?

Yeah, so we haven't specifically talked about the return on capital by project, but I think hopefully what you've seen through the LTA we put out three years ago or so now and sort of where we're going. We do have very strict hurdle rates that we must achieve within the business before a business case even gets to the leadership level. So take from that that these are value accretive. Certainly the two in Stadham and the UHT whare rā slightly different in that we've got an ageing asset down there that needed some work on. So there's some capital to be saved by putting a new investment in, but also some operating costs as we look to reduce our reliance on third party into the future. So there's a combination of both return but also efficiency through the whare rā warehouse. But certainly the UHT and the Stardom you should take as very much value accretive and right in line with where we're heading as an organisation.

That's great. And then on the IT spend, it's really helpful you starting to split out that spend with the digital transformation. We've had some discussions about what it looks like in FY25, which is quite a material step up. Can you just talk about the duration and profile from here of that spend and whether or not you expect to get some return on that investment to some degree through cost savings or betterment of your systems?

Yes, so the cost side of it sort of peaks through 25, but it goes on sort of a year or 18 months sort of beyond that. But certainly F25 will see the peak of that spend. There are efficiency gains to be had by the implementation, but also ERP system was the end of its useful life, and so it was almost a necessity to spend some money on that as well as the digital transformation side.

That's great. And then last one for me, on the tax changes, can you just talk about what the effective tax rate will be going forward for the business team, the council's offshore earnings piece that will be coming through as well?

Andrew here. So we would expect, if we look at that with a combination of the offshore earnings, we'll probably sit around 25%. There or thereabouts.

And therefore, what percentage do you expect to be able to impute the dividend as a combination of New Zealand?

Yeah, we would expect it to be 100% imputed.

Great. Thank you very much. No problem.

Thank you. Your next question comes from Ari Decker from Jarden. Please go ahead.

Oh, good afternoon. Yeah, just the first question was just in relation to the in-scope businesses, just under $300 million of EBIT for FY24 and well up on the PCP. You have made reference to your expectations for improved margins and consumer, and they obviously dominate those in-scope businesses. But, yeah, is there any additional colour you can give in terms of, you know, within your guidance, what you're expecting the in-scope businesses to deliver in terms of EBIT and FY25?

No, we haven't broken that out for the look forward, Ari. But you'll see sort of where the return on capital sort of numbers landed for F24, of which consumer was one of the stronger performances we had from consumer for quite some time. So we'd expect that trajectory to continue, I guess, into F25, if I can give you that sort of indication.

Sure, no, great. That's good. And then just in terms of capital investment... You know, other capital invested of $106 million in the notes, I see the fund investment, or Ketua, I think it is, sort of up to $61 million. Could you just talk a little bit about where the investment's sort of being targeted there? And I see that sort of stepped up from 23 to 24. Are you expecting to continue to sort of increase the investment intensity in Ketua into 25 and 26?

So the simple answer to that is we're not entirely sure at this point, Ari, and the reason I say that is that we'll look at each of these initiatives in its own merit. But for us it's around sort of looking at that next horizon innovation and how do we partner with companies that may be starting to look at that next phase of innovation that complements what we do around our specialty proteins in particular. And so while we've sort of wrapped it up under the Ketua framework, which brings about a tighter governance structure that we've brought to it, we've sort of been running these for a few years now, on and off. And you may remember our investment in Y Foods, sort of 18, 19, all thereabouts, Food Spring, similar timelines. We got dragged along in those sales processes, which, you know, as a minor shielder, you don't have a lot of choice, but they were that they were very successful for us, if you could say that. But so it's those sort of investments as we look to how do we complement what we do here in New Zealand with dairy and bring it into sort of that next horizon. So that's sort of what we're looking at in the investments in the Ketua space, but tightly governed by both the leadership here, but also some external board members that sit on that Ketua fund as well.

Yeah, and then, I mean, I guess the nature of your investment and, you know, minority stakes can have positives as well in the venture space and those governance arrangements you sort of talked about. Does that include really clear sort of hurdles and is there a preparedness to, if they're not meeting your expectations, to just sort of step away and not fund follow-ons? rather than just sort of stay the course. Are there any examples of that yet?

Yeah, not yet, but 100% that is the way we'd be operating in this space. So getting in at the right time and out at the right time is the ultimate game here. But each of these initiatives will be measured on their own merits. And probably just for clarity, while there's some capital gone into these areas, in our forecast going forward, we have assumed no earnings at this point. So just to be clear on that as well in our forecast.

No, that's great. On to the next one, just the dividend. And I see that you clearly highlighted a special dividend there. I mean, if I look at the balance sheet, it's well below, you know, in terms of gearing where you expect it to be when you presented the LTA three years ago. Should we sort of expect to see the payout ratio increase, you know, given your increased confidence and your ability to fund the sustainability and growth investment versus where you were three years ago?

Yeah, let's just say that's always a topic of conversation. So you're in the right space, Ari, that we need to continue to focus on that because we are in a very luxurious position compared to where we've been, clearly. But we do have that significant capital plan coming up, mainly around decarbonisation and water in particular. But it does start asking the question around our dividend policy into the future. So we'll continue to work on that.

Yeah, and then just the last one for me, and I imagine just given the significance of the consumer non-core review that it's not on the immediate horizon, but is buyback still something that sits in the arsenal for the co-op when it's looking at allocating its capital?

Yes, yeah. So the capital allocation framework, which we sort of launched last year, certainly has a buyback as one of the options. And as you allude, very unlikely we'd be wanting to get involved in one of those, given the work we're doing around our consumer. But certainly to be an option post that, whether that's a sale or a no sale, we'll certainly be putting that back on the agenda as an option to think about.

Great, thank you, and yeah, great result. Thanks, Eric.

Thank you. Once again, if you wish to ask a question, please press star 1 on your telephone. Your next question comes from Marcus Curley from UBS. Please go ahead.

Good afternoon. I just wondered if we could start with the ingredients business. Miles, I just wondered if you could talk to what are you assuming is What was the benefit from stream returns in your calculations and the result? How are you thinking about those into the guidance for 2025?

I might ask Phil to take you through a couple of the key points as we look to the outlook. Clearly we've come back in 2023-2024 season from that record high but certainly not back to the normalisation level that we've seen previously. So there is a There is a step up from where we've seen, and we are holding some decent spread between the two. But maybe, Phil, if you want to give a bit of detail. Yeah, thank you.

Yeah, so, Marcus, I think if you think about last year, as Miles alluded, there was obviously a good 39, so we'll talk about a good 39.40 cents coming through in price relativity benefits. This year, it's around the 12 cents EPS, if you're... want to think about in terms of the core operations and the impact it took on its margin. And then if you think forward, play that forward, the relatively said ingredients is going to be stable in terms of outlook. The little piece there to watch, I guess, is you can see that lactose, those lactose prices are going up, which is when you think about the co-op and earnings versus milk price, that is favourable. What we are also still seeing those price rotilities narrow, which is the offsets. That's where we get to our position on being stable year on year.

Could you call out what lactose price assumption is baked into 25 at this stage?

No, we don't give out commodity price forecasting.

OK. Can we just talk about operating costs for a second? So... Just one point of clarification, have you called out the total amount for the IT transformation spend in FY25?

Yeah, I think we do.

What we'd say, Marcus, there is if you think about your 70 cents earnings this year, and then if you want to pick your midpoint for FY25, in terms of that, we've called out the two main drivers, obviously the tax change, that we have, and then also the IT spend is the other half. So in terms of that, it's 10 cents of the change year on year. We haven't called out the full spend.

Okay. And what's the risk in relation to changing those systems over or upgrading those systems?

I guess no more than any other sort of business initiative we take on. It's a very well-governed piece of work and we're sort of, you know, I guess eight months sort of into it now and very pleased with how it's progressing. It's not a big bang, if I can say that, in terms of an ERP transformation. We'll be picking markets and factories to transition over time, so that also sort of eliminates some of the risk, but I don't see it as any more risky than anything else we sort of lean into, but it's certainly something that we're keeping an eye on.

Miles, is it an upgrade of an existing system or a brand new system?

It's an upgrade. So we run SAP in our main ERP system, so it's an upgrade of our SAP system, and then on top of that, adding some digital functionality into our supply chain.

Okay. And then, sorry, just talking about operating costs excluding IT transformation, can you give us any colour in terms of what sort of cost pressure you think is going to be in the business? Obviously, you've been sort of streamlining staff. How are you thinking about the overall OPEX budget in 2025?

Yeah, so if we take a look at 25, I mean, well, obviously, as we continue to push more into food service and the consumer channels, that does increase our OPEX as we sort of favor those channels. But we have a number of initiatives which are aimed at actually offsetting the impact of inflation through the rest of the, yeah, just basically through the rest of the business. So we're feeling actually quite comfortable that we can maintain a good level of OPEX, but with the investment in IT and digital being the outlier.

Okay.

And then finally from me, I just wondered if you could talk anything about, well, it sounds like you're about to make an announcement next week with regard to the sale of the consumer business. Is that the right interpretation of what's been said today?

No, no, sorry. So next week we'll announce, Monday we'll announce our new strategy or an updated strategy But at the same time, you should recognise that sort of some of the announcements we've made recently, Restartum and UHT Cream in Edendale, is sort of in line with where we're heading. So it's a reinforcement of sort of where our current trajectory around our B2B business, but we're making no further updates on the consumer business until certainly later in the year.

Okay. Okay, understood. Thank you.

Thanks, Marcus.

Thank you. There are no further questions at this time. I'll now hand back to Mr Harrell for closing remarks.

Okay. Is that a new question, Marcus, that's just popped up on my screen here? Yeah. It is a new question. Good. Go for it, Marcus.

Yeah. I just wanted to talk a little bit about the China volume outlook. So obviously we're hearing, I suppose, pretty subdued messages out of the China consumer at the moment. Specifically, What are you seeing at the moment in terms of food service demand and do you think there's scope for any substantive growth in volume sales there heading into 25?

Yeah, we are predicting still some growth in that market. So despite the 24 season or even the 24 calendar year to date, that market being a bit sluggish at a macro level, we're still seeing great growth that's come through in our food service business, which I think plays to the importance of the New Zealand provenance, the innovation, the sort of our chef-led sales model that we operate. So we're still predicting that to continue into 2025, and we're comfortable with that. Where we've seen the hit in the last couple of years clearly is around the milk price, given the sluggish demand on the back of increased milk. So we're starting to see milk decline or come off of those highs in China. and that's been a key driver of that upgrade of the milk price to $9 today as well.

Okay. And while I've got you, any views on the level of milk production growth this year? Obviously the season's off to an okay start. Is it a year where we could actually see some reasonable growth?

I would like to think there is. We haven't had a great spring for a while, actually. So, yes, it's a fantastic start across the country, but it's far too early to sort of talk long-term or full year. You know, we sort of like to get a bit closer to Christmas and what the sort of the weather patterns look over the early part of summer before we make any predictions on our forecast for the year. But, you know, certainly we'd like to see a bit more milk than what we've had previously, and so far this year it's started well, as you say.

OK, thank you.

Okay, if there are no further questions, again, thanks for your time. The investor relations team, of course, available at any time if you have any follow-ups. But again, thank you for listening and also your ongoing support of the co-op. Thank you.