October 25, 2021

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Edited Transcript of FCG.NZ earnings conference call or presentation 26-Sep-19 1:45am GMT

AUCKLAND Apr 1, 2020 (Thomson StreetEvents) — Edited Transcript of Fonterra Co-Operative Group Ltd earnings conference call or presentation Thursday, September 26, 2019 at 1:45:00am GMT

UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research

Hello, and thank you for joining us here at Fonterra. I’m joined by our CFO, Marc Rivers.

Many of you would have seen our 2019 results and media release this morning. Firstly, I’d like to start by acknowledging the frustration that our farmers and unitholders will rightly feel and the impact of this performance and results have had on the share and unit prices and, therefore, on our owner’s balance sheets. We don’t take decision lightly to impair assets and not pay a dividend. These decisions have been tough on the co-op, our shareholders and on our unitholders, and they are the right calls to reset our business and achieve success into our future, which leads me to the first point on the summary slide.

We had significant one-off adverse items totaling $885 million, resulting in a net loss for the year of $605 million. These adverse items reflect changing realities such as the change in local economies, increased competition in markets and challenges in some of our businesses that impacted expected forecast earnings from some assets. Marc will talk through these in more detail on the next slide.

We’ve made good progress on our business reset. You’ll see that in our financial discipline. We have significantly lowered our operating and capital expenditure, reduced debt and improved cash flow, specifically free cash flow, the amount we have available to pay interest, dividends and reduce debt, which increased from $600 million to slightly over $1 billion.

It is also encouraging to see the business units that are the foundation of our new strategy, New Zealand Ingredients and our Foodservice business, have improved on last year, with New Zealand Ingredients gross margin up 3% and Foodservice gross margin up 10%. But we did have a number of challenges across the year, namely Australian Ingredients, our business in Latin America and our Consumer businesses in Sri Lanka, Hong Kong and New Zealand. We need to lift our performance in these business areas. Despite the good progress on our financial discipline, earnings were not where they need to be, and this has resulted in unacceptable return on capital of 5.8%.

And finally, before I hand over to Marc, we had our third consecutive Farmgate Milk Price over $6 at $6.35 per kilogram of milk solids, with milk collections marginally higher than the previous year. The current season is looking well positioned with our current range of $6.25 to $7.25 per kilogram of milk solids.

I’ll now hand over to Marc, who’ll provide further detail on the movements in net profit from F ’18 to F ’19.

Thank you, Miles. So the purpose of this next slide is to look separately at the change in the underlying performance and then the impact of the adverse one-off items. So please note the chart excludes minority interest, and so the NPAT is comparable with earnings per share.

Firstly, looking at the underlying performance. The starting point on the left-hand side of the chart is the 2018 normalized profit of $382 million. We’ve taken into account the benefit received from the $0.05 adjustment to the milk price last year as this is not expected to be part of ongoing operations. This is equivalent to $53 million on an after-tax basis. As mentioned earlier by Miles, our underlying operating earnings is not where we need it to be, down $60 million on an after-tax basis, resulting in an FY ’19 normalized NPAT of $269 million, which is equivalent to $0.17 per share. I’ll discuss this on the next 2 slides in more detail when we look at each business.

As we’ve discussed previously, we commenced a full review of the business following disappointing results in FY ’18. The review included an asset portfolio review, operational performance review and strategic review. And this resulted in divestments of some assets, namely our Venezuelan Consumer business, Tip Top, Foodspring, and we continue to progress the divestment of DFE Pharma and plan to sell our shares in Beingmate. As we’ve announced, other assets are under strategic review, including DPA Brazil, our joint venture with Nestlé in Brazil; and our 2 wholly-owned China Farms, farm-hubs. That review process is underway, and we’ll consider whether these assets are maintained or divested.

We’ve also made some business restructuring decisions during the year. And as a result, we’ve changed the way that we account for our investment in Beingmate as we no longer have a significant influence. And this is a change from being classified as an equity-accounted associate to a share investment. And we’ve made the decision to close our Dennington factory in Australia as a result of falling domestic milk production.

As part of our annual review, we’ve assessed the carrying value of our assets based on forecast of future earnings, and this has resulted in a number of impairments being recognized this year. The total of these adverse one-off items is a loss of $826 million, resulting in a reported net loss after tax attributable to equity holders of $557 million. The key amounts are impairment to Fonterra New Zealand of $210 million, impairment to China Farms of $203 million, impairment to DPA Brazil of $200 million, the disposal of the Venezuelan business which is a $134 million loss, resetting costs and impairment to Australian Ingredients of $50 million, and a change in the accounting treatment of Beingmate which results in a $12 million loss, and other strategic reset costs of $17 million. Now while this is very disappointing, it is a necessary part of resetting our business for future success. And once taken into account the net loss attributable to minority interests, our total reported net loss after tax is $605 million. Additional detail is provided in the FY ’19 accounts, including the assumptions and sensitivities for the determination of updated carrying values.

So moving forward to now looking at our underlying operating earnings. As mentioned, we were down on the previous year. And while we sold slightly more on a metric-tonne basis, our sales revenue was down 2% to $20.1 billion due to lower prices and our product mix, where we sold less butter, which is a higher-dollar-per-metric-tonne product. The group normalized gross margin was down 4% or $137 million. And we had improved margin in New Zealand Ingredients and Foodservice, but this was more than offset by reduced margin from the challenges in Australia Ingredients, Latin America and some of our consumer markets.

Operating expenses reduced by $185 million or 7%, and this meant that we exceeded our target of bringing them back to FY ’17 levels within 2 years. However, we still have more work to do here as the reduction did benefit from not paying performance bonuses in relation to FY ’19, and this contributed about $60 million. Despite operating expense savings more than offsetting the $137 million reduction in gross margin with a net improvement of just under $50 million, other income and equity-accounted investments was down by $131 million, and therefore, EBIT was down $83 million or 9%. So in spite of the good progress we made on improving cash flow and reducing debt, given the disappointing earnings and significant one-off items, we made the decision to not pay a dividend this year.

Just referring to the charts on the bottom of the slide, Ingredients gross margin down 3%, EBIT down 8%. New Zealand Ingredients performance improved on the prior year with gross margin up 3% due to higher volumes and favorable pricing. However, it was partially offset by bringing new plants online and peak volume costs. Australia Ingredients gross margin was down 87% from $77 million to $10 million. Australia was impacted by higher milk prices in response to a competitive market, and our factories were underutilized due to lower collections. We closed Dennington to address overcapacity and undertook a business simplification process, and we expect future cost savings. Prolesur, our Ingredients business in Chile, experienced strong competition for milk, and collections were down 16%, and gross margin was down over 140%. In summary, the total Ingredients normalized gross margin was down 3%. And while Ingredients’ reduction in operating expenses more than offset this, other income was down, resulting in normalized EBIT down 8%.

Now with regards to Consumer and Foodservice, gross margin was down 4%, and EBIT was down 14%. Overall, the Consumer and Foodservice business improved its performance in the second half relative to the first half as both Greater China and Latin America recovered from slow starts, with 70% of Consumer and Foodservice earnings generated in the second half. Foodservice normalized gross margin was up 10%, and normalized EBIT increased 14% mainly due to improved prices and product mix. Overall, Consumer normalized gross margin was down 8% due to the challenges, predominantly in Latin America, Sri Lanka and Hong Kong. Oceania Consumer and Foodservice earnings increased 38% on improved performance in Australia and cost reductions in New Zealand. Overall, Consumer and Foodservice operating expenses decreased but not enough to offset the lower gross margin and lower other income. So as a result, total Consumer and Foodservice normalized EBIT was down 14% on last year from $525 million to $450 million.

China Farms. For our 2 wholly owned hubs, reduced operating expenses meant earnings improved from a $4 million loss to a $5 million gain. But at an EBIT level, we add in the profits and losses from milk sold by our Ingredients, Consumer and Foodservice businesses and the joint venture farm to provide an end-to-end perspective of the whole China Farms businesses. The Ingredients loss has reduced, Consumer and Foodservice profit increased, but we did see increased losses in our joint venture operation, so the net result is our end-to-end loss reduced from $38 million to $30 million.

So in summary, there are a number of areas of progress and also some disappointments driving our performance this year. Firstly, our financial discipline has seen significant improvements in both reduced capital expenditure and operating expenses. Foodservice gross margin across all regions improved. Greater China had growth in Anchor Food Professionals UHT milk and culinary cream, while Asia’s increased gross margin reflected improved performance for Indonesia with increased focus on higher-value products and having dropped the volume ambition. Latin America Consumer gross margin was down due to a “buy local” marketing campaign in Chile impacting Soprole. However, it was good to see Soprole’s performance returning to more normal earning levels in the last quarter. Asia Consumer gross margin was down mainly due to pricing constraints in Sri Lanka, but progress has been made in this market as well.

So at the start of the year, we set clear goals to focus on in order to take stock and get the basics right. In taking stock, we look to reduce our leverage by reducing debt and gearing. And with significantly improved cash flows helped by divestments, we reduced debt by $469 million. Despite lower debt, our gearing ratio is similar to the prior year due to reduced equity from one-off items and impairments. But we’re well on track to meet our reduced leverage target, and we’ll provide more detail on the next slide on that.

So with getting the basics right, we undertook to reduce our expenditure and live within our means. And here, we’ve made very good progress on reducing capital expenditures where we had a target of $200 million reduction in FY ’19. We actually exceeded that by reducing CapEx by $261 million. On operating expenses, our target was to reduce them by $160 million within 2 years, bringing them back to FY ’17 levels, and we actually reduced them by $185 million, although it did include the decision not to pay bonuses this year. So while we’ve made good progress, there’s still more to do.

Regarding more accurate forecasting, this is definitely a work in progress, and we have more work to do on that. There is inherent volatility in our industry, in our business, however, we’re committed to providing timely and realistic information. We’re also committed to providing increased disclosure and transparency. Examples of such changes this year are the additional breakdown of overhead costs and quarterly earnings figures by business units.

So just expanding on our commitment to reduce our financial leverage and strengthening the balance sheet, we have a clear plan, and we’ve made good progress, and we’re confident that we can achieve the targets this financial year. This plan does include divestments, and these can take time to get the best value for them. And that’s our overriding objective. The credit rating agencies have supported our plan to deleverage. Remember, it’s not just about divestments, it requires continued focus on financial discipline. And I’ll cover off next year’s operating and capital expenditure targets under our 4-point plan for next year.

Progress has been made in FY ’19, and I’ve already discussed the key drivers. Further progress is expected in FY ’20 with — when this debt will reduce by over $1 billion. We’re already a significant way there with the 2 divestment processes already announced that we’ll settle in this financial year, these being Foodspring, where the sale has been completed; and DFE Pharma, where the sales process is underway. On their own, they’ll contribute significantly to our debt reduction target. In addition to these announced divestments, our target is to reduce debt by an additional $500 million to $700 million, with the range reflected in our earnings range of $0.15 to $0.25 per share. It also includes reducing CapEx by another $100 million to $500 million and further divestments. So this results in our debt-to-earnings being back under the 4x target and on the way to our long-term target of 2.5 to 3.5x.

I’ve already covered the improved operating performance and the impact of not paying FY ’19 performance bonuses, so I’ll just briefly explain some of the bigger movements within the business units. Within Ingredients, the biggest reductions between FY ’18 and FY ’19 were sales and marketing expenses down $14 million, admin expenses down $28 million mainly from cost savings from rightsizing Australia Ingredients including some one-off costs from closing Dennington, which were normalized. And within other expenses, FY ’18 incurred $20 million in relation to the Danone settlement. Consumer and Foodservice’s biggest reductions between FY ’18 and FY ’19 were sales and marketing expenses down $33 million, mostly A&P; spend distribution expenses down $13 million, which were mostly from reduced costs in Oceania. And we also committed to providing increased transparency on our unallocated costs, which is on the next slide which goes into greater detail.

So here on the next slide, you can see we’ve provided a breakdown of those unallocated costs into categories that we believe are appropriate at this time. So for illustrative purposes, we’ve assigned the 2019 unallocated costs to the business units where the primary function of the costs is to support those business units. The distribution is based on sales volume, and the balances retained is not allocated. So some of the bigger movements, a $29 million one-off impairment of IT assets due to the change in business strategy, the majority of the reduction in farm services because of reclassification of milk testing to the Ingredients business and $14 million reduction in advertising and promotion as a result of reducing our corporate brand advertising spend by about that amount. And within other, most of that is related to reduction in professional fees.

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [3]

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Great. Thanks, Marc. That brings us to our new strategy. And before I step through, I want to be straight with you about the starting point with our strategic review, and that’s very much grounded in the fact that when you go through tough times, you ask yourself the hard questions. Before starting the strategy review, we took a hard look in the mirror and asked ourselves what we really want to be and what we’ve learned.

18 months ago, we might have said we’re a global dairy giant here to make the difference in the lives of 2 billion people. When times get tough, you reflect. We’ve been here nearly 150 years. We want to be here for at least 150 more. At the heart, we’re a cooperative doing amazing things with New Zealand milk to enhance people’s lives and create value for customers and our farmer owners. It may not sound so radical, but this simple change of how we think of ourselves really takes a different place and a stronger long-term future together.

Our external context is complex and changing. Here, you’ll see the opportunities and growing risk we face. We’re seeing consumer trends shifting, and this is driven by demographic changes, increased focus on health and more people wanting to know where their food comes from and how it’s produced. There are also some growing risks in the world that impact us and we have to be very conscious of. These are things like the fact we have to operate in volatile market, the increased trade tensions and new foods that are disrupting the market price, changing regulations and the focus on safe, sustainable produced food.

Our co-op is well placed, but we have to face some hard realities. We have a number of strengths, including our people, scale, efficiency, which gives us optionality, and this means we can make choices over which markets and which products. We also have a deep, long customer relationships and impressive track record of innovation and R&D and a great problem story to tell our cooperative heritage and New Zealandness and our pasture-based farming system.

But there are also some realities we face. Recently, we’ve underperformed and lost trust. Our impact on the environment is real, and improving it will raise costs and risk supply. Offshore corporate processes are coming and don’t require share capital. We need to rebuild confidence that will deliver on our commitments. We’re a farmer co-op that needs to be here for generations, so we need to run a low-risk profile. So how are we going to make this happen? We know dairy demand is strong and we’re well-placed to respond to changing consumer needs. Our new strategy matches our strengths to consumer needs, focusing on the areas where we’re uniquely placed to win in the market and create the most value for our co-op and our customers. It will take what’s special about our cooperative heritage, our sustainable pasture-fed milk, to maximize sustainable value for our farmers’ New Zealand milk.

We’re going to make a real difference by focusing on 5 product consumption categories: core dairy, base and advanced ingredients; pediatrics; sports and active; foodservice; medical and aging. We’ll create new opportunities and new ways of foodservice. This will include diversifying our current focus on China and pushing more into Asia Pacific and other new markets. We’ll still be in Consumer and we’ll focus on markets throughout Asia Pacific. The products we will sell into these markets will be made from New Zealand milk and be similar to those that we sell in our Ingredients business. This creates efficiencies and helps us play to our strengths. We’ll also reduce our consumer product portfolio to those that create superior value.

So in short, how we describe the way we sharpen the new strategy will be prioritizing New Zealand milk; grow our sales of sports and active, medical, aging and pediatric ingredients; develop new foodservice markets; only make consumer products where we have a right to win; lift our research and development spend; use milk components and nondairy ingredients sourced from around the world; collaborate more on intellectual property and skills; divest noncore business; and reduce debt.

To do this, we’re going to prioritize 3 things: innovation, we are to create value for our co-op and our customers; sustainability, to do what’s right and what’s expected of us for the long term; and efficiency, to create value from our unique scale and position in New Zealand. And we’re going to do this in a purposeful way, bringing people together along with us on the journey.

A lot of what is different about the strategy boils down to 2 changes in the way we think. The first is a focus on value. We’ve dropped our volume ambition early on in the piece. It’s helped us cut costs dramatically and also helped us make better decisions day by day. When we talk about value, we mean value back to the co-op. For example, our sports nutrition ingredients are high margin and can deliver more value back instead of some of our consumer products that require significant investment into advertising and promotion.

The second decision is that we don’t have to be all things to all people. This is a New Zealand dairy farmers cooperative, and we’ll be prioritizing New Zealand milk. We’ve put in our research and development effort, energy and investment into these products and places where we know we can win. That means we’ll be in these categories and will likely reduce our product portfolio drastically.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [4]

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And so the last critical part of our strategy is the way we’re going to measure success. We’ll be measuring our success on a triple bottom line. So we’re clear what we’re trying to achieve: healthy people, healthy environment and healthy business. You can’t have 1 without the other 2, so we need a strong co-op to deliver on all 3.

So first, have a healthy business. We need to acknowledge that from a financial perspective, our strategy has 2 masters, a strong milk price and strong earnings. Both are equally important to us. Different parts of the strategy deliver value to one or both. But let’s be clear, milk price doesn’t just happen. There’s a large group of people in the co-op that come to work every day to help deliver that price, and it’s critical to ensure that we maintain our share of milk as international processors continue to compete for milk. Our market share keeps us internationally relevant to many of our largest customers. It also gives us options when it comes to deciding the product mix that will deliver the most value in any given year. And alongside that, we know we need to deliver a return on your capital, which is precious, and to protect the value of your shareholding.

We’ve set ourselves a set of targets to achieve in the medium term, the 2025-2030, and we’ll be measuring our progress against these. So first, for healthy people, we’ve got 3 targets. And the first is that 100% of everyday and advanced nutrition products must meet endorsed nutrition guidelines. Today, 71% meet those. We’ll also continue to focus on health and safety and our zero-harm philosophy. We want our total recordable injury frequency rate to be world-class, and that’s less than 5 per 1 million work hours. Today, we’re sitting at 4.9. And we also measure employee, farmer, customers and public engagement and sentiment.

For healthy environment, we’re going to reduce manufacturing greenhouse gas emissions by 30% by 2030. In FY ’18, we’ve reduced our greenhouse gas emissions by 3% on an FY ’15 base. We’ll reduce water usage by 30% at sites in water-stressed regions by 2030. And we’ll eliminate all solid waste to landfill by 2025. So for healthy business, it’s about having a sustainable payout and return on capital along with reliable dividends.

So this new strategy will result in improved financial performance and financial strength. And the metrics we’re using to measure performance will emphasize cash flow and value creation. This slide summarizes key metrics from our 3- and 5-year plan and are based on our bottom-up budgeting and planning process. And one of the key outcomes will be growth in net earnings from earnings per share of $0.17, to $0.40 and then $0.50. This will be driven by earnings growth from our core components of our strategy. That’s ingredients for pediatrics, sports and active and medical and aging categories. And growth from our Foodservice business will also contribute as we will be developing new markets, especially China’s city expansion and into Asia Pacific.

We’ll still be in Consumer but we’re going to focus on those markets where we have a right to win and where we can get a good return on capital. We’ll build on FY ’19’s strong financial discipline. We’ve set a target of capital expenditure not exceeding $500 million per annum as we continue to focus on getting the basics right. And we’re going to earn the right to invest over and above that. Free cash flow will improve significantly over the 5 years and will provide capacity to pay dividends and reduce debt. We’ll reduce our leverage and targeted debt-to-EBITDA ratio of 2.5 to 3.5x. This is equivalent to a gearing ratio of below 40%. Our return on capital will lift both — due both to improved earnings and a lower capital base from divestments, which are expected to total $1.3 billion to $1.5 billion over the period of the 5-year plan. And this 3- and 5-year plan is based on getting the basics right. In addition, there are aspirational projects that add further value but are not included until we get the basics right and earn the right to undertake them.

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [5]

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Thanks, Marc. So in summary, what’s going to be different? We’ll be a leaner, more focused business, clear about who we are, what we’re going to do and where we can win. I also want to be clear about what you can expect from us. Our culture is changing. We’ll be open and honest about the challenges we’ll inevitably face along the way. We’re committed to delivering our triple bottom line, and our purpose and values will be at the heart of everything we do.

F ’20 will be the first year delivering on our new strategy. We have 4 key priorities that will help take steps towards our goals of healthy people, healthy environment and healthy business. They are, one, building a winning team. A big milestone for us here is introducing and successfully shifting to a new customer-led operating model. This will see us move from 2 large central businesses of Ingredients and Consumer and Foodservice to 3 end-market customer-facing sales and marketing business units that will bring the full strength of our cooperative to our customers. We’ll also create a new team that enables our end-market business units to create value through innovation, sustainability, manufacturing and supply chain scale and efficiency. And we’ll reduce discretionary activities and overlap in responsibilities between our central support functions and the current Ingredients and Consumer and Foodservices business to help with living within our means.

Our second priority is to support regional New Zealand, and we’ll do this by injecting $10 billion into rural communities through competitive milk price payments. As a cooperative, we have a duty to pay our farmers a competitive and sustainable milk price, and this brings significant value to regional New Zealand.

The third priority is to reduce our environmental footprint. Through the cooperative difference, we’ll work with our farmers, farmer owners so that a further 1,000 farm environment plans have been rolled out in the new year. And we’ll work to prepare emissions profile reports for our new — for all our farmer owners. And the manufacturing sites, we’ll continue to improve efficiency through energy and water efficiency at our manufacturing sites.

Our fourth priority is to, of course, hit our financial targets. And those targets are: improving our debt position so that our debt is no more than 3.75x our earnings, down from 4.3x last year; reducing our capital expenditure to no more than $500 million, down a further $100 million on F ’19; and achieving a gross margin of excess of $3 billion and meeting our earnings guidance of $0.15 to $0.25 per share. This takes into account that we’ll not have earnings from the business we have sold and are planning to sell such as DFE.

Before I take questions, Marc will provide some more detail on the F ’20 lookout.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [6]

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Thank you, Miles. So the FY ’20 forecast overall has a similar milk price and collections to last year, but forecast earnings reflect the business reset and transition to the new strategy.

Milk collections are in line, 1,520 kgMS. And as expected, at this early stage of the season, we’ve got a fairly wide forecast milk price range of $6.25 to $7.25 with a midpoint of $6.75. Our earnings forecast of $0.15 to $0.25 per share for FY ’20 is built on a forecast EBIT range of $700 million to $800 million, which is down on last year, but the midpoint of the EPS range is up, reflecting lower interest and tax. Within Ingredients, we forecast our gross margin percent and our EBIT to be down on FY ’19. And the key changes between FY ’19 and FY ’20 are that we’re assuming that we no longer have the DFE earnings. It includes a reduction in regulated return allowance for milk price due to lower assumed cost of capital as interest rates decline. And the forecast also does not assume the same level of favorable price relativities as last year.

Within Consumer and Foodservice, we’re expecting similar gross margin percentages but improved EBIT with a range of $430 million to $530 million compared to $450 million last year. This assumes that disappointing areas of performance last year do not repeat, that is that Soprole returns to historical levels as we saw in Q4, and we do not repeat the slow start to the year in China and Asia. And finally, our group operating expenses continue to be a key area of focus, and we expect further improvements there.

So I think that about sums up the position for us, Miles. So…

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [7]

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Great. Thank you very much.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [8]

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Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question today comes from the line of Arie Dekker from Jarden.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [2]

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I guess the first question I have is around the noncore businesses. I mean, you’ve outlined strategically where the focus is going to be, some comments away from consumer, favoring New Zealand milk pools, et cetera. What does that mean — because obviously, you’ve done a lot of work over the last 12 months reviewing the assets. What does that mean for assets like Australian Ingredients, your interest in Lat Am, Australian Consumer? Have you made decisions there that you’re not sharing yet specifically? Or is there still a process to go through with some of those sorts of assets which, from the outside, I guess, look like they’re noncore within the new strategy?

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [3]

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Arie, Miles Hurrell here. Let me first kick off by just saying that, while not on strategy, does not signal any intent around those businesses. I mean we’re aware where the strategic direction is heading and what we’ve outlined today is around where we will continue to focus and where that incremental dollar, I guess, will be spent to grow long-term value. It doesn’t signal an end to those other businesses that may be outside of that. So they need to stand on their own 2 feet and return value back to our shareholders regardless, but I wouldn’t read any further into it.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [4]

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So yes, so decisions haven’t been made on them. I mean, I guess, if they have to stand on their own 2 feet and they’re not where they — because you’ve obviously outlined a pretty tight investment envelope and a focus on the core businesses. I guess, how do you sort of satisfy yourself that those businesses won’t kind of decline if they’re outside of focus and think about maximizing value from them if they’re not core?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [5]

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Arie, it’s Marc. And yes, no, it’s a great point. Of course, in all of this, it’s we’re always going to be looking at the whole portfolio of our businesses. And each one, again, has to pull its own weight and needs to have the focus. There’ll be clear ownership for each of the businesses and the like. Outside of what’s been executed around divestment, we’ve announced strategic review on Brazil and strategic review on China Farms, which you can read into that, but that’s obviously, you’ve got a range of choices when you do a review like that. And then you’ve got sort of the rest of the businesses, which when you lay that at what is core, what’s noncore. But if you look at like Australia, for example, which would sit somewhere in the middle of that, there, you take the Australia Ingredients business, as an example, where it’s hit quite some headwinds with the drought. We have less milk going through the factories. So that’s create an issue for us. You kind of look at that as a business and say, okay, what do we do? How do we improve that business, give it more focus? What kind of efficiencies and costs can we take out? And so, hence, the decision to take Dennington out, right? So overcapacity in the network, and we address that by the decision to shutter Dennington and look for other cost savings, things like that. So those business need to carry their own weight and get back to profitability. And we’ll just take kind of that approach business by business.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [6]

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Sure. Okay. On the capital structure, I mean, I presume the review sort of remains on the table there as you’re progressing through the strategy side of things. Could you just, I guess, comment on the status of that and what the parameters of any review that’s kicked off or might be kicking off is?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [7]

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Yes. I would say it’s just getting underway really. The first step was really to get clear on what is the strategy, which business do you want to focus on? What is the need of those businesses as we kind of make those choices, right, which categories we’re after, the organic growth opportunities, what are inorganic growth needs, what kind of CapEx and funding needs are those businesses going to need going down the road. And then we can start looking at structure. We’ve announced some org structure stuff from today which we’re certainly in the process of sorting through, but then capital structure falls right after that. So it’s really just underway. In principle, the signals have been, we’re prepared to look at everything. It’s, what structure do we need to bring this strategy now to life? And yes, so it’s probably early days still, but in principle, all things are on the table.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [8]

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Sure. And then just with regards to dividend policy, and I may have missed it, but that dividend policy is obviously a reasonable departure from the past. Is there a commitment for that to hold true on that dividend policy regardless of what the milk price payout is?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [9]

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Yes. So this was an important part of the strategy discussion that we had with the Board is just to look at the dividend policy and make sure it’s still fit-for-purpose and sort of in line with — part of the intent here is — we’re signaling is we want to have a conservative balance sheet. And obviously, the reasons for that are, a, to withstand volatility, which is always going to be part of the industry that we’re in, but then the other is to give ourselves optionality to go after opportunities as we see them. And so that’s sort of the — and we’ve signaled that in the 3-year and 5-year sort of metrics there of what you expect that we’re heading towards is kind of 2.5 to 3.5x debt to EBITDA. So the way we described — I think there’s actually a slide which describes the new dividend policy that’s deeper in the deck, which I think summarizes it pretty well, 40% to 60%, in principle, of NPAT, excluding abnormal gains, but then with some sort of caps around taking a look at what kind of debt levels we have. And we don’t want to be in a position where we’re paying dividends when we’re outside of those sort of targets. At the end of the day, of course, it’s always Board discretion. And I’m sure in all those circumstance it will be what is the circumstance we’re in. If there is a period of investment needed, of CapEx, the good thing with that policy is it really puts the pressure back on to management and Board to then justify, okay, we really believe in this investment and for these reasons and just hold us accountable, I think, in a more straightforward way, if that makes sense.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [10]

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Yes. And then just the last question is sort of around the operating cost base of the business. I mean there’s some helpful disclosure there in terms of the breakdown of unallocated and the like. I guess, if I’m sort of to take what you’ve sort of said in response to my questions upfront around the noncore businesses, the fact that at this point it’s China Farms and DFE that are subject to strategic review, does that mean that as it stands at the moment, and I accept your comments also about needing to be leaner and running each of the businesses better, but there’s not anticipated to be any sort of major restructuring of the operating cost base of the business for, I guess, a more significantly shrunk down Fonterra or would that be a fair comment at this point?

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [11]

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Arie, it’s Miles. I’m going to give you a view which is not — won’t answer your question, but I’ll just give you at least a flavor. So we’ve announced today the new operating model which you referred to. That will then kick off a process internally to say, what do the businesses need to support our strategy going forward? And I am on record already this morning with the media to say that will result in some changes to the size and scale of our business. We haven’t yet landed on what that looks like, and we’ll follow due process, but there are likely to be some changes through the next 3 months or thereabouts.

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Arie Dekker, Jarden Limited, Research Division – Head of Research [12]

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And will that largely be around sort of being more efficient, looking at where there’s potential to kind of group costs and those sorts of things as opposed to, I guess, getting out of shrinking it too because you’re reducing the footprint that kind of exists today?

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [13]

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Yes, so both. So if we’re exiting the business, clearly, that comes with cost savings as well, but both looking at the support structures that go to support our business into the future and what’s required.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [14]

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I think it will be, what we can try to do to make it clear is, there’ll be costs that disappear simply because we’ve divested and exited the business. And then there’s sort of all the supporting structure that goes behind, which should allow us to get some efficiencies. But even above and beyond that, we’re obviously wanting to continue to have more efficiencies and look for ways to improve.

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [15]

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I mean, Arie, in the video you’ve just listened to, there was a real simple example, but it’s the way we’re looking at the business unit there. That the Anlene specs or SKUs that we have 500 or 600 SKUs that currently exist, heading towards a number closer to 50. The cost and complexity to maintain those 600 is something that we shouldn’t underestimate. So you think about, if that’s the lens by which you view your business going forward, along with the new operating model, we believe there is efficiencies to come, but we haven’t landed on numbers at this point.

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Operator [16]

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Your next question comes from the line of Adrian Allbon from Craigs.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [17]

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I’ve got a couple of questions. Just maybe first one for you, Marc. Would you be able to like bridge for us, if possible, just what the key driver of how you’ve landed at sort of $0.17 on normalized EPS relative to, I guess, your $0.10 to $0.15 guidance?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [18]

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Yes, sure. So I would — frankly, the biggest driver of landing outside is a decision — well, is we announced the decision not to pay bonuses to staff for FY ’19. So that certainly had an impact there. That’s probably the main driver. But beyond that, we’ve had a pretty good second half to the year, good Q4. Again, within the operations, quite encouraging to see Soprole come back to a good level of performance in Q4. And core Ingredients, the core New Zealand Ingredients business continued to perform. Foodservice gross margin up 10%. All of those elements, it was a good ending to the year for us, so very pleasing to see that.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [19]

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Okay. And you mentioned those bonuses earlier where they’re of magnitude like $60 million. Is that the sort of number?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [20]

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Yes. That sort of scale impact on FY ’19 at the OpEx line.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [21]

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Okay. And then if I just go to your — If I think about your — the ambition or the healthy business slide, which is 21, and I guess if you’re looking at the 3- and 5-year plans, in particular, when you — like, can you just give us a picture of what are the key things that drive that? Like, for example, like if you adjusted the FY ’19 down for the sale of, say, DFE and Tip Top, you’d be probably $80 million of EBIT shorter than what you’ve described there. It’s actually quite a steep lift. Is the further divestments, are they cutting out loss-making businesses? And what’s the other 2 or 3 kind of key things that need to go right on that 3-year plan?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [22]

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Yes. So first, I think just to say is, in that 3-year, 5-year plan, we’ve been careful to have that reflect, in principle, only the announced sort of divestment. And so obviously, over that period of time, as we make decisions along the way, you might see different impacts here or there. But I think directionally, this gives you a good sense of it, which means that where that growth is going to come from is, I guess, from a few different areas.

One is, we’ve got the organic growth opportunity with Foodservice and with the functional nutrition units. So in the 3-year plan, the biggest impact is making progress on Foodservice, which continues to be on a good trend. And that’s within both the China market as we spread into lower-tiered cities. There’s still a significant opportunity in Southeast Asia and Asia for Foodservice, and so is continuing to do that.

Second part of the puzzle is in that near term is efficiencies on the OpEx side. So as we make some of those scoping decisions, narrow focus, leaner go-to-market models across the different business areas, the benefits of examples, like Miles had mentioned, around simplifying our portfolio and the number of SKUs that we have and the different parts of the businesses, those benefits will start to come through. And then, of course, on the CapEx side and on the — all those that we’ve got a lot of investments that we’ve made already in plant capacity. And so the strategy will help us to fill those plants over the coming years, and we’ll start to see the benefits of that come through. So that’s really the primary drivers.

Oh, sorry. Yes, one other piece, of course, down to NPAT level is, as debt levels come down, then interest expense will come down. That’s a pretty significant driver in the way we’ve modeled it here.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [23]

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And just to come back to the asset sales side of that, sorry, I get the other pieces. But just if we’re calibrating from start like, as you said, the FY ’19 actual. And am I right in saying that like if you roll that forward to today, the base would be kind of more like $750 million if you took out DFE and Tip Top? Because it’s clearly, those 2 assets are probably sitting in that FY ’19 number.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [24]

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Yes, something on that scale, I think, would be fair enough to say, think of it that way. Yes.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [25]

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Okay. And then if you roll forward to the 3-year plan, all the stuff that you’ve sort of — like, the DPA Brazil and the China Farms, if you sold those, would there — are they — how much on EBIT would they be contributing? Or are they actually loss-making in total?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [26]

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Well, you can see — yes, so China Farms, you can see spelled out pretty clearly. In that, we’ve got an end-to-end view which is a loss currently. Obviously, over time, we would expect that to improve. But yes, I would say that’s still a pretty good base. Brazil, you’ve got some, I guess we’ve got a certain amount of disclosure there on Brazil. But yes, it’s not — those would not be very large contributors to EBIT at the moment.

I guess the other dynamic in there as you go from ’19 and it’s embedded in our ’20 outlook and beyond is, yes, ’19 is certainly hit with things like Australia drought and with a pretty weak consumer performance in Latin America, especially Soprole. And so we certainly assume a normalization on those effects. So that probably accounts for another part of the gap there, the improvement that we’ve projected.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [27]

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Okay. And then maybe just like a question for Miles like, when I look at Slide 10, which is sort of entitled, “We’ve made some big choices.” And if you go 4 down, where you’re going from dairy only to supplement with nondairy, what is the supplement with nondairy? Can you just give us an example or some sort of lens that you’re looking through there?

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [28]

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Yes. So we had been using nondairy for probably at least a decade in some cases. There is milk powder with vegetable oils that we’ve been selling into Africa for quite some time to target a different price point consumer. So that’s an example that already is there. We’re just, I guess, bringing it out to suggest that, if this is where consumers are starting to head and some consumers are starting to think around nonbovine milks and other opportunities to bring both bovine and nonbovine dairy and plant-based together, there are potential opportunities out there. This is not a signal to — for our farmers to change their farming systems because the growth of bovine milks in the global context is still very strong, and we see that continuing into the future. This is just signaling, as we get close to customers, get close to consumers and understand their needs, we need to be flexible around choice.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [29]

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Okay. And then just final question for me. If I look at the farm gate milk price statement, and then can you just give us a bit more detail around what’s driving up the $0.10 lift in cash costs. I see the table sort of split between cost price, structural and one-off.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [30]

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Yes. So yes, I guess a couple of things are impacted. So one is, within the season, you have some higher conversion costs, which are driven by things like energy costs were higher. And we also, this season, we had quite a large peak milk season so we had some costs bringing milk across the straits and things. But the other part of the milk price construct is every 4 years there’s the overhead cost reset. And so that was done this year. And so that led to some more costs being folded into the milk price this year. And we’ll see that in FY ’20 as well, but those are the main drivers of that.

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Adrian Allbon, Craigs Investment Partners Limited, Research Division – Senior Research Analyst [31]

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And just on the FY ’20, is there further to go into the milk price in FY ’20? Or are you just saying the step-up in the ’19 might go into FY ’20?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [32]

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Well, a little bit of both on the overhead cost side of it, but there’s some other countervailing pieces. So we expect that to be fairly level ’20 versus ’19.

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Operator [33]

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(Operator Instructions) And your next question comes from Nick Mar from Macquarie.

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Nick Mar, Macquarie Research – Analyst [34]

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Just on the dividend, are you guys intending to apply that policy for the FY ’20 year?

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [35]

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Yes.

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Nick Mar, Macquarie Research – Analyst [36]

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Yes. No, that’s cool. And then in terms of those 5 key categories, can you just talk through what you haven’t been doing in those categories right to date which gives you confidence that you can actually capitalize on them from here forward and drive the improved earnings you’re looking for?

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [37]

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Well, I mean probably the other way, maybe the other way to ask the question or how I’ll respond to it is probably, we kicked off our sports and active, our healthy aging, medical nutrition units within the last 12 months and are seeing some great signs of life in those areas. We have a range of innovation and technologies that have been developed over a number of years that suit these categories quite well. So we have already kicked these businesses off and which that gives us confidence as opposed to our new businesses or haven’t performed, which gives us the confidence, which is, I think, the way you asked the question. So what you’re seeing here, I guess, and the entire strategy here is the businesses that have actually showed and to have performed previously is where our focus is going to be. And we’re going to double down and increase our spend in R&D on those areas because we’ve shown that we’ve got a competitive advantage and a right to win.

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Nick Mar, Macquarie Research – Analyst [38]

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Yes. That’s cool. And then just on the CapEx…

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [39]

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The Foodservice, to just expand on that as a case in point, from nothing 5-odd years ago to a very successful business, and again, this year, a 10% increase in gross margin year-on-year. So again, more focus on Foodservice in the years ahead and expanding beyond quite a heavy reliance on China at this point.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [40]

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We’ve been very deliberate in the strategy and the review was looking at, where are those growth opportunities, where are the trends that are going and matching that up against, where do we’ve got — where do we have advantages that we think we can play. And certainly, that Palmerston North R&D Centre has already played a key role and will continue to play a key role for us to be able to capitalize on that.

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Nick Mar, Macquarie Research – Analyst [41]

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Yes. And then just on the CapEx. Within that $500 million, do you just assume further reductions in growth CapEx and stay in businesses roughly the same or are there further savings to come from your general kind of maintenance bills per annum?

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [42]

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No. We’re comfortable with, I guess, our, call it, essential capital around right at depreciation. So we’re comfortable around that level of circa $400 million. So while the $600 million down to $500 million that we’re signaling this year would suggest a further reduction in growth capital, remember, there was quite a hefty carryover from F ’18 into F ’19. We’ve ended F ’19 in a pretty tidy state, and so not many projects are left with still capital to spend. So we’re still continuing to focus on growth parts of the business, aligned again to our strategy. And while today is the official launch, if you like, I mean we’ve been heading in this direction as a business for a number of months now so any capital projects that would be coming across the table that haven’t been aligned to where we are likely to head haven’t been given much airtime.

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Operator [43]

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(Operator Instructions) And your next question comes from Marcus Curley from UBS.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [44]

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A couple from me. Just following up on the CapEx answer. So if you’ve got a circa $100 million worth of growth CapEx, is that really enough to meet the aspirations of transforming this business over the next 5 years?

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [45]

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Yes. We are very confident of that, partly on the back of some quite significant investments in the last 3 to 4 years, if I’m honest, which play to our Foodservice story. So we have capacity that’s been built here in New Zealand at Darfield in Canterbury, which are well aligned to continue for growth. When you get into the sports and active lifestyles, healthy aging, pediatrics, medical nutrition, those, they’re not capital plays, they’re OpEx plays, if you like, and using the strength of our R&D pipeline. So we’re very confident in the $500 million put forward. That is more than enough to cater for the current plans. But we’re also very clear that if opportunities arise that are aligned to our strategy, we’ll have to think about those, but we’re also cognizant we need to earn that right. And so what you’re seeing here and our plans for that 3-year horizon at least is a signal that we need to earn the right to go and spend capital on that next wave of investment.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [46]

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I’ll just add one more point that, Marcus, to see in the strategy is, we want to sort of experiment with and find ways to partner without — in a capital-light sort of way. So it’s kind of a little bit different mindset. In the past, we might have brought our checkbook to go and do a partnership and contribute, sort of buy into partnerships with large amounts of CapEx. The reality is we’ve got a lot of know-how and expertise. And hence, we want to see how do we monetize that? How do we take advantage and use kind of an IP play to enter a partnership, which is actually what many partners are looking for from us. That’s our — that can be our contribution into an arrangement.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [47]

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Okay. Just on the dividend policy, could you provide some color on the debt metrics that need to be met? And secondly, when I look at the debt guidance for FY ’20, it doesn’t look to me like you’re assuming you’re going to pay a dividend in FY ’20. And so 2 questions on that front.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [48]

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Yes. So I guess for the debt metrics, sort of a point that we’re wanting to maintain is maintain that A band credit rating. And in order to maintain that, Simon, you can comment more in your discussions with the agencies as well, but to be well within the band so we want to be below 3.75x and below would be the sweet spot to get down to debt to EBITDA. And then as we implement the strategy, we’ve laid out the targets to get down to the range of 2.5 to 3.5x over time. But we’re confident we’ll be able to do that through the combination of all of those things that we’ve talked about, right, the greater focus, selective divestments of noncore stuff. So in FY ’20, the targets are kind of with all that in mind. And over that period, being in a position to be able to implement that dividend policy, even in FY ’20, obviously, subject to those are final Board decisions and shall be the circumstance of where we find ourselves at that time, but that’s the intent. And that’s what’s modeled.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [49]

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And sorry, the second question was, if I look at the slide with the debt guidance on it, it doesn’t look to me like a dividend is assumed. And I suppose, yes, is that the right assumption in the forecast as it stands on Slide 8?

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Simon Till, Fonterra Co-operative Group Limited – Director of Capital Markets [50]

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So Simon here. So yes, so the range that you’ve got there is for the $0.15 to $0.25 EPS range. So Marcus, at the lower end of that earnings range, then you’re correct. You’d be at the upper end of that. But in the cash flows that we’ve modeled, we have, as Marc said, we’ve actually included that provision in there. We have to make the earnings first, but it’s not — that wouldn’t be on top of this. So I guess the way to look at it is, if we meet our earnings range, then — and achieve the other assumptions in there, then that capacity is already included in that cash flow.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [51]

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Okay. So you’re not — at this stage, you’re not ruling out paying a dividend in FY ’20?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [52]

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Absolutely not. No. In fact, the opposite. The intent is to be in a position to be able to do that.

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Simon Till, Fonterra Co-operative Group Limited – Director of Capital Markets [53]

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Yes. By meeting basically the guidance and those key drivers and, for example, the lower CapEx that Marc and Miles have both talked about, that assumes the $500 million, we expect to be that’s the case. And if we reach that earnings range, then you would have that capacity to do it.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [54]

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Where there could be some conceptual discussions will be around, as you go down divestment path is, how to handle that from a dividend perspective. But the intention here with hitting these targets is to put ourselves in a position that we pay, and that’s what’s modeled.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [55]

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Is the change to the milk price structure off the table? Or is that being reviewed?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [56]

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Well, I guess, whenever you’re looking at — we’ve said capital structure is on the table for us to look at to ensure that that’s fit-for-purpose with the strategy. And so in a co-op, obviously, whenever you’re thinking of capital structure, you have to look at milk price. So in principle, all of that is being — it’s fair game to look at. Again, it’s about, is it fit-for-purpose given the circumstances of where we’re at? You’ve got kind of a flatter milk pool in New Zealand. You’re competing for milk, all of these elements. What the CapEx needs are for the co-op going forward. And there’s so many elements to take into consideration. Yes, but having a milk price regime, which we have, which is the intent behind it is somehow reflect what the commodity value of milk is, is going to be important in lots of different scenarios, I can imagine. So I think that will continue. And having an entry and exit and having a shared standard and all those elements, you start to get into a theoretical discussion on all those things. But in principle, all of those mechanisms have to make sense altogether.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [57]

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Okay. And then just on the result itself, can you just provide a little bit more perspective on why the nonreference product gross profit fell by 11%? Because when I read the document, you talk about better pricing, positive stream returns, yes, but I look at things on a like-for-like basis, volumes were relatively flat for nonreference. So I struggle to understand why the profitability was down 11%.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [58]

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Do you guys have some detail on that?

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Simon Till, Fonterra Co-operative Group Limited – Director of Capital Markets [59]

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Yes. So you’re looking at the slide in the Appendix there, Marcus?

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [60]

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Well, either that or in the report, yes, so nonreference products gross profit, 768 — sorry, wrong one, $701 million versus $791 million the previous year.

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Simon Till, Fonterra Co-operative Group Limited – Director of Capital Markets [61]

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Yes. So essentially, it’s largely driven up the cost line. So the comment there about it’s the increased cost of the protein that goes into the, effectively, the allocation of the milk price that gets put against the nonreference. So you’ve obviously made the adjustment just for the volume metric there that go through. So that has an impact. So if you look at the footnote there, there’s that as part of it, but it’s essentially at the cost line that’s impacting.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [62]

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That are going across, going in different directions.

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Simon Till, Fonterra Co-operative Group Limited – Director of Capital Markets [63]

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Correct. As to the point above, and as Marc said, there was a slight decline in the fat prices, so that’s slightly favorable on the reference and then increased cost of protein on the nonreference.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [64]

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And then just as you flow into your guidance in FY ’20 in Ingredient, can you actually call out what the DFE impact is in terms of the lost profitability?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [65]

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What was that? I couldn’t hear that.

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Simon Till, Fonterra Co-operative Group Limited – Director of Capital Markets [66]

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The DFE.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [67]

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Oh, DFE. Yes. So for DFE, at the, I guess, at the EBIT level, it’s around $40 million impact.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [68]

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And is that a full year? So is that mostly gone for the full year?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [69]

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That’s full year. Yes.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [70]

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And then you also mentioned you don’t expect pricing to be as good. Can you give a bit of color on that point?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [71]

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Are you talking specifically to DFE now? Or are you talking more broadly?

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [72]

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No, no, no. Within the Ingredients drop in profitability in FY ’20.

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [73]

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Oh, in Ingredients. Okay, yes. So I guess there, what’s meant there is just that from a — when we’re looking out in the forward year, it’s always hard to forecast out what kind of stream returns we can expect. And so we just assume a slightly positive stream returns in our bottoms-up, knowing that obviously there’s such a thing that can move around. I think we assume about, yes, $50 million positive stream returns is built into our bottoms-up, which is a slight decline on where we’ve landed for ’19.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [74]

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And what was ’19, sorry?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [75]

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We had more favorable stream returns within ’19.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [76]

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Yes. Can you provide the number?

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Marc Rivers, Fonterra Co-operative Group Limited – CFO [77]

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I don’t think we’ve got it broken out. Do we, Simon?

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Simon Till, Fonterra Co-operative Group Limited – Director of Capital Markets [78]

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No. Yes, the delta, though, just in terms to give you a sense of that budget, is what Marc’s really covered there as a base case. So in broad terms, if you take, say, $40 million to $50 million off from DFE, $50 million less on streams because we go from more neutral budget and then the milk price WAC has a negative impact as well of around $50 million.

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Marcus Curley, UBS Investment Bank, Research Division – Executive Director and Head of New Zealand Research [79]

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And finally, sorry, for the number of questions. But I was interested to see that you haven’t appointed a China CEO. Obviously, it’s 1 of the 3 major roles. I would have thought there would have been someone in the business. I can think of a couple maybe that would be good candidates for that. Are those people leaving or are you just looking to do a broader search, unhappy with their performance? Can you talk a little bit about that role?

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [80]

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So Marcus, like you, I also see a couple of good candidates for the role. So we’ve got a Head of Ingredients business that resides in China now reporting to Kelvin, and we have the Head of our Consumer and Foodservice, Christina Zhu, reporting to Judith. So both of those 2 will be up for discussion around heading up the entire China business, and we’ll go through that process relatively quickly. But they’re both in the business today, I might add.

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Operator [81]

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There are no further questions at this time. I will now hand back to Miles for any closing remarks.

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Miles Hurrell, Fonterra Co-operative Group Limited – CEO [82]

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Thank you very much for taking the time, everyone, today. Of course, this is not the last — the end of any responses from us, so feel free to reach out to any of the team if you have any further questions over the coming days. But again, thank you for your support and look forward to meeting you all again soon. Thank you very much.

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Simon Till, Fonterra Co-operative Group Limited – Director of Capital Markets [83]

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Thank you.

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