Fonterra Shareholders Fd

Thank you for standing by and welcome to the Fonterra FY26 interim results briefing. All participants are in a listen only mode. There will be some opening remarks 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 Hurrell, CEO. Please go ahead.

Good morning. Thank you for joining us this morning. I'm joined this morning by Andrew, Murray, Ronald and Richard here to answer your questions on the half year results. But headline numbers for me, headline comments for me is that I'm really pleased with the results that we've been able to put out today on the back of an increase in milk price in recent times of which we've increased our forecast on that this morning. The team have delivered a set of strong results. across all parts of the organisation. So on that, I'll hand across to the questions. 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 today comes from Joshua Dale with Craig's Investment Partners. Please go ahead.

Morning, gentlemen. First question, could you give us a sense of your exposure to the Middle East, I suppose both from a revenue and energy cost perspective, and presumably any exposures captured within the range of your guidance for this year?

Did you say energy cost? I didn't quite get the second part you said there.

That's right. Whether that's diesel, coal, et cetera.

Yeah, got it. Okay. So from a Middle East perspective, at the moment, we've got product flowing up, which is good. So we're pretty comfortable with that. Obviously, a bit of shipping delays in there and there are additional sort of shipping costs that are coming in. So we have got a little bit of impact of that, but nothing obviously in the first half in the expected earnings range. So we have taken an account of that. If I look at in terms of cost, diesel, et cetera, we are well hedged in those positions. So we won't see an impact of that at least through until the sort of last quarter, I would expect, before we see any sort of impact there, because we do maintain a hedging program for all of those things. We're in a pretty good spot from that perspective. The relationship that we have with Katahi is allowing us to get product up into the right space. And so we're pretty much hitting the right ports at this point in time, although there's a little bit more land transport in those Gulf countries. So if I look at it from that perspective, yeah, it's actually not too impactful at the moment. What we have is that if I look at our range for the earnings for the back half, then yeah, we've got a little bit of conservatism in there to take account of the fact that if this goes on for a little bit longer, then it's going to start having knock-on effects. So at the moment, relatively muted, but we have been cautious with our back half just in case this flows out a little bit longer than we were expecting.

That's helpful. Thanks, Andrew. Previously, you said the Sorry, go ahead.

No, just from an energy perspective as well, just if we look at that, you know, we hedge out those as well. So, you know, from an energy perspective, it's not having a knock-on either.

Okay, great. On ERP costs, previously I think it was mentioned those costs were to peak in FY26. I noticed on slide four you're talking FY26-27 now, right? Do you see a ramp down in those costs in FY28 still, or does it push out the timing of your target of getting back to pre-divestment levels of profitability by FY28?

Yeah, it's not going to impact that. So we're just going to have, we'll probably end up with just a little bit less spend in 26 and a little bit more in 27. So we're just having that flow out. We are on track and on budget for the total programme, and we expect that it will still end in the same spot. We've just done a little bit of re-phasing between 26 and 27 as things have played out. So We are live in, well, two sites and in one market at the moment. So that has all gone as we expected it to. So we're not seeing any cost overruns. We're not seeing a time overrun, but just a little bit of phasing between 26 and 27.

Okay, that's helpful. Thanks. Last one. Your dividend policy remains unchanged. Your balance sheet's looking stronger now compared to when it was set initially. Any foreseeable change to dividend policy at all?

No, we're not looking at anything from a dividend policy at this standpoint. Obviously, you know, we look out, you know, we've got our capital programme that we want to continue to invest in. Obviously, that's part of us getting back to our 28 earnings is to continue to invest in the growth parts of the business. So we feel pretty comfortable with where we are from an earnings and a dividend standpoint at the moment.

OK, thanks very much, guys.

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

Oh, good morning. Yeah, firstly, just a quick mention, Miles. Congratulations on an amazing tenure in charge of CEO. I don't think there'd be many cases in terms of the wide gap between the state the business was in when you took over as CEO and in the state you leave it in. So, yeah, well done. Just first question. On the farmer offering slide, obviously very strong growth in milk supply for a range of reasons, including the net gains from competitors, which is great to see. Can you just sort of talk to what your expectations are of sort of the sustainability of milk supply at those sorts of levels and what sort of factors would swing it?

I'm not sure I understand the questions entirely, but we are still seeing new conversion in the South Island is probably a key point. We haven't seen any new competitor builds announced in recent times, so that's helpful for the next couple of years. That said, it's a competitive environment, of course, and And the dairy legislation, while that's up for a review at some point, doesn't mean that that changes the competitive landscape. So we're confident in our farmer offering. It starts with obviously a strong performance of the organisation and obviously we've got sustained performance now and as a result we're starting to see good strong momentum with farmers wanting to come back or existing farmers actually looking to grow also. So Those things give us confidence. Our position into the long term is sort of that slightly up, I guess, if you can call it that. Historically, you might have called it flat. Flat to slight decline might have been a position we've taken historically. Our position at the moment is now flat to slightly up is probably the way to describe it, whether dependent on any given year, of course.

Yeah, and off this FY26 base of supply, you would sort of have expectations of it being flat to slightly up?

Yeah, I think this year's a slight anomaly and obviously a strong milk price last year and this year. So you might want to normalise back slightly, back. So we're at 1565 versus last year's 1509. So, you know, somewhere in the middle of the two might be a good starting point if you wanted to then use my basis of a flat to up slightly. Yeah.

Yeah, no, that's helpful. Thank you. And just on that competitive landscape, I mean, obviously we've seen a number of your competitors struggling. Have you sort of entertained any discussions where you sort of, I mean, consolidation probably wouldn't be the right word, but where sort of assets might have been offered to you and does the co-op have any interest in that?

So probably the first and maybe the only thing I can probably say in this area is that if we were to ever look at any assets that may or may not have come available previously, first and foremost is, is it the right thing to do for our existential database? And if it answers yes, then you start to look at the next phases. So that's probably the most important thing here. Nothing else would come more important than is it, would it support our existing shareholders? And if the answer to that was yes, then you'd go to the next phase and look beyond. But I won't say probably much more than that.

Cool. And then just one final question from me. Just going through the ERP transformation at the moment, as Josh touched on, and the annual spend at the moment, including sort of in first half run rate across both your normal information technology spend, and then the ERP replacement is around the $300 million mark. It must be at a point, presumably, where you sort of have an idea of what that cost base in IT will settle at once the new ERP is implemented in 28. And you're just looking for a bit of a guidance on what that level is, just because it probably informs a reasonable amount of those earnings sort of upsides that you pointed to at the FY25 results.

Yes, I think if we take the EOP programme, obviously that's a significant investment, which gives us a good sort of base technology level, which we've been obviously investing behind. So there's a chunk of that spend that will come out, obviously, because we won't be continuing to do that. However, technology is certainly part of the business that continues to be something that we will invest in. So there's plenty of new technology out there that allows us to perhaps get other efficiencies elsewhere. So what I would say is, you know, we'll certainly reduce down from what's currently there, but I don't think it would be the whole impact of the ERP just coming out. So take it somewhere between those.

Okay, thank you.

Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Matt Montgomery with Forsyth Bar. Please go ahead.

Hi, guys. Good morning. And I was echo comments from Ari with respect to your tenure. Miles, well done. Just maybe firstly on food service and margins specifically, a pretty strong couple of quarters to start the year. Could you maybe just strip out the China consumer components within that? Like, what's sort of been the delta between this year and last year in getting losses maybe back to break even where we sit today on that side?

Yeah, I mean, just at a high level, the consumer piece of it is sort of almost around anywhere, so it's a material in that number. That is a strong growth in food service margin. To be fair, it comes on the back of a declining fat price in the first half of the year, so we've been able to hold those prices up while our our fat pricing came back from a COGS perspective. So that's been a key driver of it, but at the same time, you know, driving, you know, growth as well. So it's a combination of all, but consumers, part of it's very small.

OK. So consumers may be at break-even now, so there's not that sort of earnings benefit to come through. I can't remember what the loss was last year. It was still somewhat significant.

No, it had turned to profitability in the last couple of years, albeit relatively minor.

Beyond some of the brand impairments, yes.

Yeah, beyond brand impairments, yes. Yeah, correct. But it's still minor. Yeah, yeah.

And then just to confirm on one of Josh's earlier questions around the three-year earnings target, is there any reason that hasn't been I guess, reiterated today. You know, presumably you're still well on track, if anything. Yeah, we are.

Yeah, no change. We're 100% committed to that.

And then just on this year's guidance, you know, the midpoint has been lifted, you know, two and a half cents, but it feels like the first half is probably tracking quite a bit better than that. So... I guess if we make the assumption that the Middle East doesn't get out of hand relative to your current expectations, is it fair to assume that we're probably tracking more towards the top end of your range today, albeit I appreciate there's a range there for a reason and the uncontrollables that can come through? Yeah, it just feels like the first half was probably better than, say, what the guidance uplift has been factored into.

Yeah, I think that's a pretty fair reflection, is that the situation we see ourselves in in the Middle East means we've just got to see a bit of water to go under the bridge before we make any further changes. But you're right, a strong first half. More sales will be coming in the second half, given the milk flows. So things look positive in that regard, but with the downside risk of what could play out through the Middle East. So hence the reason we still have kept the top end of the range unchanged.

Yeah, no, thank you.

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

Morning, guys. Just in terms of stream returns and the like, looks like the sort of hedging and risk management products you put on sort of work quite well. Can you just talk to how you sort of view the net impact of those going forward and whether or not you think you've genuinely smoothed a lot of that delta on a clipboard basis?

Yeah, so I mean, I think from that perspective, you know, it's not having a big impact in the half results for sure. So we are starting to see that, you know, as we've developed, as has been the plan, is that we are using our hedging to be able to offset, I guess, the volatility that comes through in that space. So it's not something that we are, you know, particularly thinking is either a big net positive or negative for the results going forward. So that's what we've been designing it around. And so we expect that that will continue. I don't know, Richard, if you had any more.

I would suggest, Nick, if you look at, say, our 26 and 25 sort of contributions, they're pretty similar, based into our current forecast. 24 is a little bit lower than that. You would suggest that that's three years now. That's getting pretty close to what you've got to think our sort of ongoing average is going to be.

Yeah.

Yeah, no, that's good. Just the sort of volatility was quite significant prior to all this, so that's good news. And then in terms of the sort of three-year board, are you guys able to share any more colour in your thinking of composition of the earnings growth between some of the cost out and sort of, I guess, revenue or strategic execution items. I guess you've just sort of said that the ERP won't pull all the way out, so you've got sort of a bit more work to do.

Yeah, so I mean, I think, as Miles said, obviously, we remain comfortable with those as they are. You'll see the, you know, even the investment that we announced today as well in further pastry butter sheets. So the execution of the strategy that we've got is what delivers us the upside. So we're moving more into food service, which we previously indicated, and we're moving out of that, you know, more of the commodity ingredients into the advanced ingredients for ingredients strategy. Advanced ingredients for ingredients. That's good. So that becomes, obviously, that's the core of the plan. I think last year as well, we did see that the makeup was probably around a 50-50 split between costs and then what would actually be earnings growth. And so we do have a cost opportunity within the business as we simplify post-investment. That is coming true. We've had actually some decent progress this year. We've got, you know, a chunk that will come through in the back half as well. So I feel comfortable about us taking the cost out where it needs to because we are a leaner organisation. We have, you know, less complexity. So we'll see that come through. And then, yeah, we continue to do what we said we're going to do around ingredients and food service. So that's the make-up of how it flows through. We feel pretty comfortable about it.

No, that's great. And then lastly, just on mainland, obviously a strong result for the business. And there were some impacts, like you brought up, of inventory revaluation. Do you provide any colour about that and just sort of, I guess, proving that this wasn't sold too cheaply and that this isn't necessarily the run rate for the business going forward?

Yeah, so there is a chunk in there. I think if you look at it, I guess this shows some of the volatility that still is within that business. So you see in there of that 71, let's say 50 of it was in that Australian ingredients business, but it was actually just seeing the benefit of the commodity cycle change. So if you go back maybe even back 18 months, you know, the Australian ingredients was a loss making space. We're now in a space where that isn't the case anymore. So that volatility still remains there. So I would say, what are we looking at? Year-on-year improvement of around about 20 million, maybe let's call that, in terms of underlying performance in the consumer business, actually, not the food service part, but the consumer business, where they've held on to some decent margins and also had the impact, again, as our food service business had, of slightly lower input costs. So that's how that's played out. So it's that same cycle that you would have seen in the consumer business, but it's played well. From our perspective, we're still talking about a 9% return on capital. So look at it from that. And that's based on our capital invested, not what we actually got for it in terms of the pricing. So I look at it and I'm like, is there anything to make us think that we've made the wrong call? Absolutely not. That's great. 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 very much for joining us this morning. Of course, the team are available for any further follow-up questions that you may have. But, again, thank you for those comments that were also made about my tenure. This is my last results that I'll be fronting, and so I appreciate all your support along the way also. But thank you very much, everybody.