Alongside its annual profit result on Thursday, Fonterra announced plans to sell its investments in Chile and review the ownership of its Australian business, which it flagged for a potential sharemarket listing where it would retain a significant stake.
“We see both these moves as critical to enabling greater focus on our New Zealand milk and, importantly, allowing us to free up capital, much of which is intended to be returned to shareholders,” said chief executive Miles Hurrell.
Under Hurrell’s leadership, Fonterra has been selling assets after a period of global expansion failed to deliver the promised profits and left it saddled with too much debt. Hurrell has moved the co-operative’s focus back to New Zealand where he is looking to eke out more value from the milk produced by its 10,000 farmer shareholders.
Fonterra’s Chilean assets, dairy brand Soprole and its milk supplier Prolesur, do not require any New Zealand-sourced milk or expertise while its Australian business used both Australian and New Zealand milk. Assets in countries such as Sri Lanka, Indonesia and Malaysia were reliant on New Zealand milk and were not slated for sale.
Jarden head of research Arie Dekker estimated shareholders could be in for a special dividend of 60 cents per share.
Units in the Fonterra Shareholders’ Fund, which gives investors outside the co-operative access to its dividends, jumped 5.3 per cent to $4.
Hurrell said he wants to differentiate New Zealand milk globally, highlighting its natural, pasture-based credentials which contrast with barn-raised cows in many other parts of the world.
“New Zealand has the unique position of being the lowest carbon producing dairy nation on the planet and when you combine this with our pasture-based model, animal welfare standards and scale efficiency, we have something that can’t be replicated,” Hurrell said.
“Customers want to know where their food comes from and the environmental impact it leaves, and a farmer’s livelihood relies on a stable climate and healthy ecosystems.”
Over the next 10 years, Fonterra plans to invest about $1b in reducing carbon emissions and improving water efficiency and treatment at its manufacturing sites.
The co-operative aims to increase its annual research and development investment by more than 50 per cent to about $160 million a year by 2030, as it looks for ways to curb methane emissions and develop new innovative products to support its value growth plans.
Hurrell said the fundamentals of dairy, and in particular New Zealand dairy, looked strong.
“Put simply, the world wants what we’ve got – sustainably produced, high-quality, nutritious milk,” he said. “This comes at a time when we see total milk supply in New Zealand as likely to decline, and flat at best.
“It gives us more options to be selective about what we do with our co-op’s milk. In doing so, we can increase the value we generate for farmers and New Zealand over the next decade.”
Fonterra has had to rethink how it grows profits as the rapid expansion of dairy farming comes to an end. Cow numbers more than doubled over the last 40 years, but the environmental cost of the rapid change means cow numbers are expected to decline in the future. The Climate Change Commission suggested dairy cattle numbers could fall 13 per cent from 2019 levels by 2030.
The co-operative is also looking to change its capital structure to reduce its risks as it mulls a future with declining or flat milk supply. Farmers are to vote on the proposal at its annual meeting in December.
Fonterra reported a 9 per cent fall in annual profit to $599m as the previous year’s earnings were inflated by one-off asset sales, however an improvement in its underlying performance saw it reduce debt and hike dividend payments.
The co-operative will make a final dividend payment of 15 cents, taking the total for the year to 20 cents. That’s up from a dividend of just 5 cents the previous year.
Fonterra is targeting a 40 to 50 per cent increase in operating profit by 2030. With the reduced interest from having less debt, it expects this to boost earnings by about 75 per cent, giving it the ability to steadily increase dividends to around 40 to 45 cents per share by 2030.
The co-operative will pay its farmers a final farmgate milk price of $7.54 per kgMS for the 2020/21 season, in line with its forecast and ahead of the payment for the 2019/20 season of $7.19 per kgMS.
It reaffirmed its 2021/22 forecast farmgate milk price range of $7.25 per kgMS to $8.75 per kgMS, with a midpoint of $8 per kgMS.