Fonterra kicks off annual meeting with good news on capital restructure, emissions action in wings

Fonterra chairman Peter McBride said the 2030 strategy was starting to deliver for the company. Photo / NZME

The annual shareholders meeting of New Zealand’s biggest business Fonterra had a buoyant start with news a Parliamentary select committee has approved the next step in its capital restructure.

With the primary production select committee unanimously recommending dairy industry legislation be amended to provide for the capital reform, the Dairy Industry Restructuring Act (Fonterra Capital Restructuring) Amendment bill passes to its second reading in Parliament and now looks certain to become law.

But it might take shareholders longer to digest the big cooperative’s announcement at the Rotorua annual meeting that the company is likely to set itself a target for scope 3 carbon emissions.

Scope 3 encompasses carbon emissions not produced by the company itself, but by those it’s indirectly responsible for - including its farmers, said chair Peter McBride.

“From my perspective, setting a scope 3 target will help us to maintain competitive access to some of our key international markets,” he said.

“For example, the EU has proposed a carbon border adjustment tax on certain carbon-intensive goods. They are subject to a carbon emissions price via the EU’s Emissions Trading Scheme. Agriculture is not currently in scope but it is possible it will be brought into the scheme. Others will follow.”

McBride said he expected “these types of barriers” to become more frequent as international governments responded to their own climate commitments.

“It’s important we get ahead of them early. These changes are not just compliance. They are an opportunity for us to leverage our natural advantages.”

The announcement comes as Fonterra’s 8000 farmer-owners enjoy record milk prices in strong global market demand for dairy products.

But they are reeling from inflation-driven soaring farm costs and the Government’s announced proposal for taxing farm carbon emissions.

McBride said Fonterra supported the intent of proposals by pan-agriculture sector He Waka Eke Noa, and like DairyNZ, it had reservations about the Government’s current approach to the levy price setting process, governance and approach to sequestration.

“We are supporting changes on these issues and working with DairyNZ to help farmers engage in the process,” he said.

“It’s important the final package works for all of the primary sector.”

On Fonterra’s undertakings as part of its turnaround 2030 business strategy, McBride said the company was still committed to investment targets for sustainability, higher-value products and research and development.

But there was no mention in his presentation of an earlier suggestion of returning $1 billion to farmer-shareholders and listed unit holders.

“The return to shareholders and unit holders had anticipated divestments including Soprole (Chile operation) and a stake in our Australian business,” McBride said.

“Even though we have since decided not to sell a stake in our Australian business, we are still committed to targeting a significant capital return to our shareholders and unit holders.

“We need to be mindful that we retain the asset in Australia, and the earnings associated with it.

“The amount of any capital return will be determined by the successful completion of the divestment programme as well as the co-op’s financial position at the time.”

Fonterra's annual shareholders meeting is on today in Rotorua. Photo / NZME

McBride said the 2030 strategy was starting to deliver for Fonterra.

The company began a financial turnaround journey in 2019 under a new chief executive Miles Hurrell and a refreshed board, including the appointment of McBride as chair.

The processor and exporter, the world’s sixth biggest dairy company by revenue, delivered disastrous 2018 and 2019 financial results.

Its proposed capital restructure, nearly two years on the drawing board and voted in by farmer-shareholders at last year’s annual meeting, is designed to ensure its many processing sites remain full in flatlining, and expected to decline, national milk production.

The restructure requires Parliament’s blessing because the company was created under special enabling legislation in 2001 and because an aspect of it, delinking the farmer share market and the unit market, could have faced legal challenges.

Chief executive Miles Hurrell told the meeting, attended by 105 of Fonterra’s 8000 farmer-shareholders, the last financial year was a year like no other.

“As an exporter, we’re used to dealing with geopolitical and macroeconomic events. But FY22 was exceptional in term of the number and their impact. Despite this, we stuck to our strategy of maximising the value of your precious milk and in the face of uncertainty, delivered an impressive set of results.

“It was pleasing to see the final farmgate milk price of $9.30. With the total dividend of 20c per share, it meant a final cash payout of $9.50 per kg milksolids for our fully shared-up farmers.”

The milk payment delivered around $13.7b into the domestic economy, Hurrell said.

“A high milk price has the potential to squeeze margins so it was pleasing to make progress on our key metrics. Total group revenue, normalised profit after tax and group normalised ebit were all up. Given lower milk collections, it’s good to see total group gross profit up $226m.

“This was due to significantly higher product prices across our ingredients channel - particularly in the protein portfolio.”

Hurrell said it won’t have escaped shareholders that net debt was up, due to holding more inventory than usual at year end. This also resulted in a lift in working capital.

Progress was made getting the inventory out the door, and the company expected debt and working capital to return to normal levels over this financial year.

Hurrell said by the end of this calendar year, the company would meet farmers to discuss proposed Scope 3 emissions targets.

The company couldn’t go into detail until the target had been identified.

“Our high value customers are setting emissions reductions targets and looking for our help,” Hurrell said.

“If we can’t give them confidence that we will help them achieve their targets, they will look to our competitors - including using alternatives to milk.”