Fonterra announces new strategy and divestments

Company News

by Glenn Dyer


It’s back to the Land of the Long White Cow—sorry, Cloud—for the world’s biggest dairy group, Fonterra, which has just revealed a New Zealand-first strategy for the coming years.

The giant has already proposed asset sales in Australia and Sri Lanka, following its exit from markets like China—where significant losses prompted the move—and Chile.

Fonterra stated that the moves announced on Monday follow a strategic review that "confirmed the co-op's strengths as a B2B dairy nutrition provider." This review led to the company's decision to explore divestment options for its global consumer businesses.

Australia and Sri Lanka are next, and if those sales occur, Fonterra will proceed with a promised capital return to shareholders.

There’s a sharply higher dividend payout policy, strongly linked to plans to maintain its dominant position in New Zealand's milk collection.

The company is prepared to exit most of its consumer-facing businesses to maximize returns from business-to-business activities through the processing and development of new milk product markets.

The group revealed in a lengthy statement to stock exchanges on both sides of the Tasman that its new dividend policy has been raised to 60% to 80% of earnings, up from an average of 50% in the five years leading up to 2023.

It also increased its target rate of return on capital to 10% to 12%, up from an average of 8.6%, and pledged to continue raising the milk price it pays farmers.

Some analysts had anticipated news of sales in the previously announced plan to divest its consumer-facing Fonterra Oceania and Fonterra Sri Lanka businesses, which together accounted for about 15% of the co-operative's total milk solids and contributed 19% of Fonterra's group operating earnings in the first half of FY24.

Fonterra indicated that the divestment process is ongoing and "progressing well." It intends to seek shareholder approval before finalising the sales.

"The co-op’s improved returns will primarily be driven by increased earnings in ingredients and food service, along with operational efficiencies," said Fonterra CEO Miles Hurrell.

"We also intend to make a significant capital return to shareholders if we divest our consumer business."

Chairman Peter McBride stated in Monday’s announcement that the revised strategy creates a pathway to greater value creation, allowing the co-op to establish enhanced financial targets and policy settings.

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

“By implementing our strategy, we can grow returns for 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."

CEO Miles Hurrell expressed confidence that Fonterra is in a strong position, delivering results well above its five-year average, which enables the company to contemplate 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 leverage these strengths.

“Following our recent strategic review, we are clear about the parts of the business that create the most value today and where there is further potential 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 generate greater value for farmer shareholders and unit holders, even if we divest our Consumer businesses,” Mr. Hurrell said.

The question remains: who will be interested in assets in debt-stricken Sri Lanka, and who will want to enter an Australian dairy market that is under pressure from high domestic prices and dominant supermarket customers?

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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