Fonterra wants big capital return to shareholders if consumer products business sold

Fonterra has revealed a revised business strategy, Photo / Supplied

Fonterra intends to make a “significant” capital return to shareholders if it sells its consumer products business, the dairy heavyweight says.

Fonterra’s $3 billion-plus earning consumer products businesses include its integrated New Zealand-Australia business Fonterra Oceania, home to brands such as Anchor, Mainland, Kāpiti, Anlene, Anmum, Fernleaf, Western Star, and Perfect Italiano.

The company will ask its nearly 8000 farmer-shareholders to vote in support of a sale if it decides to take that path at the end of current deliberations.

In a market announcement on Monday outlining a revised business strategy, New Zealand’s biggest business said it would deepen its focus on its high-performing ingredients and foodservice businesses.

This followed a strategic review this year that confirmed the farmer-owned co-operative’s strengths as a business-to-business dairy nutrition provider and resulted in the decision to explore divestment options for its $3b-plus consumer businesses.

Chairman Peter McBride says the revised strategy creates a pathway to greater value creation, allowing the co-op to announce enhanced financial targets and policy settings.

“The co-op exists to provide stability and manage risk on farmers’ behalf, while maximising the returns to farmers from their milk and the capital they have invested in Fonterra.

Fonterra CEO Miles Hurrell and chairman Peter McBride at last week's FY24 financial results briefing.

“Through implementation of our strategy, we can grow returns to our owners while continuing to invest in the co-op, maintaining the financial discipline and strong balance sheet we’ve worked hard to build over recent years.

“We have increased our target average return on capital to 10-12%, up from 9-10%, and announced a new dividend policy of 60-80% of earnings, up from 40-60%. At all times, we remain committed to maintaining the maximum sustainable farmgate milk price.”

Alongside the highest sustainable farmgate milk price, included in the performance measures Fonterra will track its progress against are: Return on capital (ROC): 10-12%; average ROC FY24-30 8.6%; dividend policy 60-80%; capital distributions, guided by Resource Allocation Framework; gearing ratio 30-40%; debt to EBITDA: 2-3 x 2.5x; enduring co-op capital investment requirements, $1b per year in essential, sustainability and growth capital.

Chief executive Miles Hurrell said Fonterra was in a strong position, delivering results well above its five-year average, which puts it in a position to think about the next evolution of its strategic delivery.

“The foundations of our strategy – our focus on New Zealand milk, sustainability, and dairy innovation and science – remain unchanged. What’s changed is how we play to these strengths.

“Following our recent strategic review, we are clear on the parts of the business that create the most value today and where there is further headroom for growth. These are our innovative Ingredients and Foodservice businesses, supported by efficient and flexible operations.

“By streamlining the co-op to focus on these areas, we can grow greater value for farmer shareholders and unit holders, even if we divest our consumer businesses.”

Fonterra said it had made six strategic choices for the next decade and beyond.

First, it said it would work alongside farmers to enable on-farm profitability and productivity and support the strongest payout.

It also planned to deepen its position as a world-leading provider of sophisticated dairy ingredients and build trading capability to grow the farmgate milk price and earnings.

Third, it aimed to expand its Foodservice business in China and other key markets.

It also aimed to invest in an efficient manufacturing and supply chain network which it said would improve its flexibility to allocate milk to the highest returning product and sales channel.

Fifth, it said it would improve the co-op’s sustainability credentials and strengthen partnerships with customers who valued sustainability.

The company said it would use focus on innovation, using science and technology to solve the co-op’s challenges.

Hurrell confirmed the company was exploring divestment options for Fonterra’s global consumer businesses to free up capital.

“This process is ongoing and progressing well. It remains our intention to seek shareholder approval prior to divesting these businesses.

“We also intend to make a significant capital return to shareholders if we divest our Consumer business.”

Fonterra returned $800 million or 50c a share to shareholders last year following the sale of its Latin American consumer product and manufacturing business Soprole.