Fonterra Co-operative Group has released its revised strategy, revealing plans focused on the ingredients and foodservice sectors in an aim to grow value for farmer shareholders and unit holders.
In May the company announced it had undertaken a strategic review that confirmed the co-op’s strengths as a B2B dairy nutrition provider, resulting in Fonterra’s decision to explore divestment options for its global consumer businesses, including Fonterra Oceania.
Chairman Peter McBride said 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,” said McBride.
“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 per cent, up from 9-10 per cent, and announced a new dividend policy of 60-80 per cent of earnings, up from 40-60 per cent. At all times, we remain committed to maintaining the maximum sustainable Farmgate Milk Price,” he said.
The company recorded a net profit after tax for FY24 of NZ$1.2 billion, down from $1.6 billion last year. Fonterra also announced it had lifted this season’s milk price due to a strengthening in global dairy trade prices and constrained milk supply in key producing regions, with a new forecast farmgate milk price range for the 2024/25 season of $8.25-$9.75 per kgMS.
In the strategy, Fonterra identified six strategic areas for growth that it would be focusing on for the next decade and beyond.
- Deliver the strongest farmer offering – working alongside farmers to enable on-farm profitability and productivity and support the strongest payout.
- Unleash the ingredients engine – deepen Fonterra’s position as a provider of sophisticated dairy ingredients and build trading capability to grow both the Farmgate Milk Price and earnings.
- Keep up momentum in foodservice – expanding the company’s foodservice business in China and other key markets to grow earnings.
- Invest in operations for the future – an efficient manufacturing and supply chain network that allows flexibility to allocate milk to the highest returning product and sales channel.
- Build on our sustainability position – further improve the Co-op’s sustainability credentials and strengthen partnerships with customers who value this position.
- Innovate to drive an advantage – use science and technology to solve the Co-op’s challenges and build on competitive advantages.
Fonterra CEO, Miles Hurrell, said the company is 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,” said Hurrell.
“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,” he said.
The company has announced several investments in the past month to support its strategy, including a $150 million cool store at its Whareroa site in Taranaki, New Zealand, a $75 million protein plant at its Studholme site, and a new $150 million UHT cream plant at Edendale.
There have also been collaborations in the ingredients sector, working with food tech company, Nourish Ingredients on fermentation-based animalic fats, and with alternative protein startup, Superbrewed Food, to develop a functional biomass protein from Fonterra’s lactose.
Targets & policy settings
Alongside the highest sustainable Farmgate Milk Price, the performance measures Fonterra will track its progress against are:
“The co-op’s improved returns will primarily be driven by increased earnings in Ingredients and Foodservice along with operational efficiencies,” said Hurrell.
“We continue to have significant capital investment needs ahead of us to maintain fit for purpose assets and we can meet these investment requirements while maintaining our strong balance sheet. We also intend to make a significant capital return to shareholders if we divest our consumer business.”
Fonterra will provide farmers and the market a rolling three-year forward-looking view of the financial assumptions underpinning its performance targets annually and will measure progress through its annual business updates.
“This is the right strategy for the co-op. It has a clear-eyed view of where we best generate returns for farmer shareholders and unit holders and will see us unlock value at every point in our supply chain by focusing on our strengths.
“Together, Fonterra’s Board and Management are looking forward to working alongside our co-op’s farmers and employees to deliver on our vision to be the source of the world’s most valued dairy,” said Hurrell.
