Fonterra Shareholders Fd

Thank you for standing by and welcome to the Fonterra full year results briefing. All participants are in a listen only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Myles Harrell, CEO. Please go ahead.

Thank you. Good afternoon, everybody. Joined here today, Andrew, Phil and Richard, to answer any of your questions. By now, hopefully you've had a chance to review the video, had a read of the results that came out this morning. Probably headline from our perspective, we're really pleased as a leadership team with where we've landed this year. A lot of hard work, of course, that goes into these results, but to be sitting here today delivering a decent set of numbers for our farmer owners and unit holders are something that we are all very proud of. With that, I'll hand straight to the host to take us through the questions, please. Thank you.

Thank you. Once again, if you do wish to ask a question, please press star one. If you wish to cancel your request, please press star two. And if you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Ari Decker from Jarden. Please go ahead.

Oh, good afternoon. Thank you. Yeah, just the first one, just on the capex in FY25 at $930 million, it's quite a bit above what went through the cash flow statement at $700. Can you just sort of talk to that and just sort of confirm that there are some timing differences that will need to be incorporated into the cash investment in FY26?

Yeah, so that would be that playing out, RAF. So we will see a bit of timing, obviously, just in terms of how things are ordered and then when they actually come through. So we would expect that we'll see that pick itself up in 26, purely timing.

And that sort of, you know, because $200 million is a decent chunk, but I guess this was a ramp-up year, so more likely to occur. But is that reflected in the payables balance at FY25?

Yeah, everything would be appropriately accounted for in that way, yes.

Yeah, OK, great. Then just on the, I guess, the growth you've sort of signalled in EBIT through to FY28. And, you know, I guess you could put it at circa $250 million as sort of the target. You know, can you just sort of talk to, you know, the extent to which that's sort of an aspirational target, you know, versus like very clear path on what needs to be done? with low execution risk, which way you'd characterise it, and also talk a little bit to the key drivers of the uplift from continuing operations.

Yeah, sure, Ari. I'll have a go and then pass it back to Andrew for a bit of the detail. So it's far more than an aspirational target. I mean, this is something that we are clear as a leadership team what we are going after, and it comes across the board from a new business, and you see that the investment in Stuttham, which will come online next year, the new investment in UHT Cream at Edendale, so seeing those things commissioned and delivering upon their business cases, so that's an important part. We recognise there's some costs to be removed once the transaction completes, and a little bit of stranded costs that sit within the organisation. that needs to also be done so far more than an aspirational target I wouldn't go as far as to say they're a line by line for every dollar that goes behind it but you know certainly clear plans and you know the way that we operate as a leadership team and our board in terms of you know plans and delivering upon those is very clear in how we operate these days so I feel very confident the execution risk I mean we're still in a global business and we've got people out there playing games in the geopolitics and the like so That's always a risk, but no more into the future than what we've been dealing with for the past four or five years.

I think perhaps the only thing I'll add to that, just around, there is a space about us continuing to, we're executing the strategy that we've been executing for the past 12, 18 months. This is about us being really clear. We know what we're doing in ingredients, we know what we're doing in food service, and this is the extension of that. So it's not a whole lot of new things on top. We do obviously have the new capacity coming online, which Miles has already talked about. And, you know, we see that should start off the line coming out to 26. Two other things. One is that obviously there's a cost element to this. We have some very robust plans to take out any of the stranded costs related to the consumer business. So we're very confident in that space. And then, of course, as we get out to FY28 in particular, we'll start to see the ramp down of those ERP costs, which, you know, 26 will be our big year in terms of what that looks like. So we'll start to see that ramp down as well. So, you know, if you look at it, yes, there's a cost element, which we feel very comfortable on. And then we, you know, we're executing the same strategy we have been for the past, yeah, 12, 18 months.

That's very helpful, Carla. I guess the one follow-up, you know, one thing you haven't sort of addressed is, you know, and it's a difficult one, but just, I guess, price relativities and the benefits also of sort of, you know, hedging and your risk management tools. Like, is there a neutral view taken on that, you know, given, you know, the benefits you've had in the last couple of years? Or are you assuming that you retain some of that?

No, no. So, I mean, essentially we assume mean reversion. So we would go back to the sort of long-term averages, to be fair. We've had a benefit in 25, certainly in terms of our hedging program has actually helped us offset some of that narrowing price relativities that we saw in 25. But in terms of our way out, we are not assuming any benefit coming through in that space.

That's great. Thank you. And then there's CapEx guidance provided for 26 and 27. You know, over the last couple of years, you've been very clear in signalling the lift in CapEx that is coming, you know, and sort of, you know, sitting at, you know, circa a billion dollars, you know, through the balance of this decade. Just confirmation given, you know, the amount of decarbonisation, wastewater, and then your broader CapEx programme, that, you know, the level of investment around $1 billion further out beyond $27 remains appropriate as sort of previously guided to?

Yeah, I think probably what we'll see, you know, $26, $27, it might be slightly, sneak a tiny bit over $1 billion. Like, I wouldn't be surprised if we get into sort of $105 or $1.1 potentially even. It does come back down though after that, so it's sort of 20, 29 onwards. I think we would see that coming back to more of a level that's more in line with sort of our depreciation replacement. So I see this as an uplift that we're doing in the next few years, and then we'll see it come back down towards the end of the decade.

Okay, and just because of the materiality versus depreciation, so just to be clear, so from 29 onwards, you'd be signalling capex sort of around $600 million?

much, much sort of closer to that level, yes.

Yeah, OK, no, that's helpful. Thank you. And then just last question, just net debt at the end of FY26, you know, you've provided a sort of a 25 starting point, you know, excluding mainland. There's a capex, I guess, right? including some of the capex from the previous year that needs to come through. Would you say net debt, when you get to the back end of this year, still being on kind of a glide path to the 2.6 level signalled for 28, or do you think that the debt profile could be quite flat through the period through to 28th?

Yeah, I mean, we're definitely on a glide up. So I wouldn't expect it to be particularly, you know, high during 26. But then as that sort of, you know, memory, of course, that we're paying a lot more tax payments, et cetera, out now. So cash, you know, there is more cash going out the door. We see that kind of flow through. So I think through 27, 28, you'll see it go up towards that 2.6. I think, you know, FY26 will probably be a relatively light change.

Thank you.

Thank you. Your next question comes from Matt Montgomery from Forsyth Bar. Please go ahead.

Hi, guys. Good afternoon. Well done on another solid set of numbers. I might just go back to Ari's question about bridging us to FY28 in terms of operating profit target. Andrew, you made a comment about, I guess, being very comfortable on the cost element. That comes out. It'd be useful if you could, I guess, quantify what portion of that, call it $250 million bridging from FY25 to FY28 is the cost base versus, I suppose, the mix change through the ingredients and food service divisions.

Yeah, so, I mean, I think broadly, Matt, we'd probably see about 50-50. Okay. Yeah.

That's helpful. And then just on ERP costs, so I think you sort of signalled 250 mil over 25 and 26. At what point, you know, do you have a number in for 27? Like when, because there's obviously still... Probably a couple hundred million there left to go. Is that all happening in 27? I guess it would be useful to phase us into 27, 28. Yeah. No, no, no.

Sorry, I get where you're coming from. So, look, there will definitely still be some spend in 28. So that's the way that we've got it phased out at the moment. If you wanted to put a number in 27, say, you know, 70 to 90, maybe somewhere around that sort of number, definitely 26 will be our peak year. We'll see it come off in 27 and then there will still be a little bit left in 28.

Yeah, perfect. There may be one for Miles just on the balance sheet in terms of I've noted the change in gearing guidance commentary from two to three times to less than three times. I suppose if we look at the balance sheet, forecast implied we're looking at maybe 1.1, 1.2 times gearing to EBITDA in 28 using the numbers you've provided. I guess my question there is like where's the comfort levels now in the business and I suppose what I'm getting at is scope for further I guess special dividends over and above I guess, paying the top end of your dividend payout policy range.

Yeah. Well, certainly I wouldn't bank on any further capital returns at this point until we've made further progress throughout 26 at least. But as you see from the residual funds from the sales, circa 700, we'll put that through the capital allocation framework and make some decisions throughout 26 and beyond. The rationale for the movement from two to three is to, you know, not be under pressure to move back into a two to three. If we feel comfortable less than two, we will do so. But really it's just a signal that we'll certainly be less than three, but on the more conservative end of that, certainly in the near term.

Yeah, makes sense. And then one more, Myles, just obviously you and the broader management team have done a fantastic job over the last, seven or eight years, I guess, what do we call it, tidying up the low-hanging fruit, and clearly the consumer's the last major jewel, but I'd be interested around, I guess, any further, let's call it low-hanging fruit you see. Like I note, China consumer in particular, obviously a reasonable drag still over the last couple of years, which is now included in food service profitability. So that feels like one, but I suppose comments on that plus anything else that you see from your point of view? Sure.

Well, generally low-hanging fruit implies they're quite easy things to get hold of. Trust me, it's been a heck of a sort of six or seven years, but I'll put that aside for the moment. Look, we acknowledge there's work to do in China, but the rationale for keeping China consumer is all about the link between anchor and anchor food professionals. It's very much aligned in that market. So So beyond anchor, you'd need to understand where we take that business into the future, but it's certainly been on our ticket for the early part of this financial year, so you'll see some progress on that because we know it's an important element. What I think you're starting to see play out this year, the year prior even to a certain extent, is that as you start to get more focused on what we know that we're here for, we're starting to deliver. And so to see our way away from consumer at some point throughout 26, notwithstanding, of course, there's going to be some transitional service agreements that need to play out. Once we're sort of free of that, then I think we're just the tip of the iceberg in terms of where we can take this organisation. So there's still a heck of a lot more to do, but I wouldn't say it's low-hanging fruit. There's still a lot to be done.

Yeah, okay. That's useful and, yeah, probably not the correct language, but thanks for that. No worries.

Thank you. Thank you. Your next question comes from Joshua Dale from Craig's Investment Partners. Please go ahead.

Hi, guys. Well done on a very solid set of numbers yet again. First question, your return on capital target is 10% to 12%. It looks like you could probably get a higher return than that by just buying back your own shares, given where your balance sheet's at or is going to be at a buyback, something you're considering?

We'll always look at that as part of our capital allocation framework. So as we evolve through, that is certainly part of a discussion that we'll have with the board.

Got it. And again, in light of the strength of your balance sheet, it was sort of interesting to note that you've kept your dividend policy payout range at 60 to 80%. In what scenario do you think we could be looking at a 60% payout?

Yeah, well, there's nothing sort of in the foreseeable future. You know, like much of you on this call, I suspect, our farmers and our board have got some pretty long memories, and so... yeah, the last thing they want us to see is to start get too excited and start to change our thinking. So just making sure that there is an element of, you know, let's realise why we're here. And so the last couple of years we've paid at sort of the top end of our policy, in fact even beyond that when it was at a lower range. But it's important we keep the range there because, you know, things happen and when you're dealing in an international market and storms come up on you bloody quickly. It's important we keep that flexibility and conservative nature of the balance sheet, but you've seen the strength of the balance sheet, you've seen our history in delivering and therefore paying out at the higher end. That's certainly how management is focused on, but we need to be conscious of whose capital we're dealing with here.

Thanks. And last question, the existence of the Fonterra shareholders fund, does the strength of your balance sheet lead you to take another look at whether it's worth keeping that in its current state?

Like the earlier conversation that Andrew said, I think all these things are always on the table, but it's not a hot topic right now.

Okay. Thanks very much.

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

Good afternoon. I just wondered if we could go back to the stream returns gents. Could you give us some sort of color in terms of how you would sort of quantify that in terms of the benefit in the FY25 year and by the look of things in the presentation you're sort of expecting a similar number for FY26 if that's correct?

Not quite. So if we look at FY25, we'd probably say with the benefit of our hedging book, we would say about 100, maybe just 120 max would be the benefit that we saw versus FY24 in terms of that space. So that's certainly what we were seeing. But that is because of the benefit of the hedging book. Obviously, stream returns are narrowing. You've seen that narrow towards the end of the year. We started out in FY25 in a reasonable spot, but we certainly don't see that that's where we would actually end through the year. So we do see it changing. So we see it in 26 sort of reverting back to where we were in FY24 is essentially the sort of space. It's more of a long-run average, and that sort of mean reversion is certainly what we'd be expecting it to go to.

And what was the number in 24?

In 24? Oh. Yeah, but 100 less than FY25, yeah.

Okay, so 120 benefit going to, broadly speaking, a $20 million benefit. So a $100 million headwind baked into the guidance for the continued operations in FY26? Yes, that's right, yep. And so could you then... provide a little bit of colour in terms of where the, let's say, the underlying growth in the business is coming from in FY26, you know, against the backdrop of that $100 million headwind?

Yeah, so, I mean, we do continue to see good margins in market. So that's clearly there, particularly from an ingredient standpoint. So we've got good, robust demand there, which we're seeing continue through. And food service is one that we're going to need to watch pretty carefully. You know, those high milk prices are definitely putting some pressure on margins in food service. So we do need to see that that that, you know, pricing in the market particularly goes up there. So those still still volume growth yet. But I would like to see margins come up a little bit. And the other thing that we have the benefit of in 26 is that we did have some one-offs in FY25, probably about $80 million worth of one-off costs in 25 from impairments, et cetera. So we won't have those in 26. So we're getting the benefit of that on the other side.

So those one-off costs of $80 million weren't normalized out in the FY25 result?

No, we didn't do any normalizations with the exception of the costs related to the divestment.

Okay. Where did those one-off costs occur?

Sorry, I missed your question.

What line items were the one-off costs in FY25?

You'll see it in a couple of different species, predominantly in Q4.

A couple of smaller, smallest in the grand scheme of things, but they add up quality issues we had earlier in the season, an exit of a business earlier in the year, and brand impairments. Quite a few small, historically we used to talk $80 million in each item, but a number of small things that added up to about $80 million that we decided not to normalise.

Second question, just on the guidance. Does it incorporate the benefit of the lower net debt in that continued operations EPS? Yes.

So at the moment, that would be a relatively small space for us. Obviously, we've done the continuing business. Depending on what time the sale comes in and how long we hold funds for, there may be some potential upside in terms of us holding funds until we can distribute it back to shareholders, until we have more clarity on exactly when completion data is, when funds come in and when they'll go back out again. We won't make any other projections on that, but there is a potential there for some upside.

And you mentioned briefly or was just acknowledged that the China consumer business is still loss-making. Could you talk a little bit about what sits in behind that? I know, Myles, you briefly talked to it and what the plan is around that.

Yeah. So, I mean, the plan is pretty clear. So, you know, one thing that we did do and part of what's dragging, you know, the... dragging it down is one of the impairments does sit in there and but also that we had some costs related to actually taking out some of some costs so you know we made some um basically we took the team size down and we had some redundancies and stuff to pay so there was some one-offs related to um right sizing i guess you would call it the business and then we actually had to impair from a brand standpoint as well so that's what was sort of dragging it down through 25 And we do still have some further cost optimization to do within that business during 26. And as Miles said, we will actually then trim the portfolio a little bit as well. So we'll take out some of the sort of more tangential products, get really focused on what does create value in that space, which is more of your core anchor and less of some of your other parts. And that just gives us a much more, it gives us a smaller business, but actually one that is more profitable than it was before.

I guess the way to describe it is that, you know, as it's been up until now, it's been a stand-alone consumer business while it reported into the China, a greater China business at a high level. You know, stand-alone and therefore sort of ran their own destiny. Their job now is to facilitate the growth of anchor food professionals. That completely changes the way you go to market. You still want to make sure you have a presence in some of those retail channels, but it changes the way you go about it and how you spend your AMP revenue how many people you need, your approach to distributors. So it's a completely change of model, of which Andrew said we've picked up a fair chunk of those redundancy costs in the last year, which gives us a platform to then go forward under a new operating model. That said, still more to do.

And Miles, does that include exiting some of the products, for example, like UHT?

Can I say maybe? Because there's obviously people involved in all this. So work to do, but I think you know what I'm saying. Sure.

OK, thanks a lot.

Thank you. Your next question comes from Nick Ma from Macquarie. Please go ahead.

Good afternoon. Just on the guidance, could you talk through what the main drivers of the bottom end and the top end of the guidance range will be over the year?

Yeah, yep. Obviously, Probably two things. Food service margin. We really need to make sure that we can keep food service, one, growing, but also that we can keep margin in place. So food service margin definitely there. Stream returns is always going to be something that plays out in the variability within our P&L. And so that is probably that would be the other biggest part that's playing there.

Yeah, downside, well, it's almost a rounding error. You know, we are watching carefully the tariff situation in the US. I mean, the 15% starts to bite, and while we've had some success with our key customers in that market, we're starting to get a bit of pushback as well on that. So we're watching that closely, and so you could see us sort of moving down on the guidance if we don't have any success there.

No, that's helpful. And then just talking about the mainland divestment and the sort of numbers there, if we were to sort of adjust for the divestment costs, it looks like it did sort of $368 million of EBIT, which is sort of quite a lot higher than we were probably thinking. And if we sort of go back to the original presentation, it was sort of $200 million of kind of in-scope EBIT before some of the changes in the perimeter and whatnot. Could you just talk through what's been the driver from that 200 to say the 368 where it's landed?

three key things that are at play there. Well, four, actually, if you include it. It's FY25 and not 24. The perimeter is different. So if you look at what we had put out before, we are now including the Middle East food service business, but also a manufacturing facility within Saudi is in there. So there's a bigger perimeter than was originally there. We have the benefit... Well, yeah, so we also have the... standalone costs. So what we presented was a business that would be standalone. And that means that it had a lot of additional costs within there that are required in order for it to operate as a standalone entity. Those were costs that we obviously disclosed through the due diligence, but that cost would not be stuff that necessarily existed already because it was part of a broader entity. And then as a separated entity, because it's not being created as independent, it will go across to Lacta Lease. Some of those standalone costs are just not required. And certainly they weren't in place in the business during Lacta. during FY25. So that's probably the two biggest parts of it, if I think about what the changes were. So it's the perimeter and then the fact that the standalone costs weren't included.

And then the underlying growth piece, sort of how much has that been year on year and what's driven the majority of that?

Yes, so actually two parts. The Australian ingredients business was probably the biggest part of that. So obviously coming off quite a tough FY24 where they had a particularly high milk price in Australia. So the Australian ingredients business was probably the lion's share of that. But actually, you know, the consumer margins held up pretty well in the context of a high milk price. So, you know, it's actually a good performance for mainland in total, but the big driver would have been the Australian ingredients business. That's great.

Thank you very much.

Thank you. Once again, if you do wish to ask a question, please press star one. We'll pause a moment for any further questions to register. Thank you. Apologies, you do have a follow-up question from Ari Decker from Jarden. Please go ahead.

Just quickly on capital management. Could you just talk to the ability to tax effectively distribute post the $2 return? And I guess just comment on how much available subscribed capital will be left post that $2 return?

Yes. So post the capital return, relatively little, I think. We are in the middle of hunting down to see if there's any in any of the sort of predecessor companies, et cetera. But at the moment, there would be very little that would be on top of what we're paying out now.

Okay, thank you.

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

Great, thank you. Thank you very much for your attendance and your questions. Of course, the team are available for any follow-ups that you may wish to have. But again, thanks for your support.