Fonterra Co-operative Group Ltd has released its revised strategy.
This new strategy will deepen the Co-op's focus on its high-performing Ingredients and food service businesses to grow value for farmer shareholders and unit holders.
This follows 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.
Chairman Peter McBride said the revised strategy has created 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 the 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.”
He added that they had increased the target average return on capital to 10 to 12 percent, up from 9 to 10 percent, and announced a new dividend policy of 60 to 80 percent of earnings, up from 40 to 60 percent,
“We remain committed to maintaining the maximum sustainable Farmgate Milk Price at all times.”
CEO 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,” 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, Fonterra can create greater value for farmer shareholders and unit holders, even if it divests its consumer businesses.
Looking out to the next decade and beyond, Fonterra has made six strategic choices.
1. Deliver the strongest farmer offering – work alongside farmers to enable on-farm profitability and productivity and support the strongest payout.
2. Unleash the Ingredients engine – deepen Fonterra’s position as a world-leading provider of sophisticated dairy ingredients and build trading capability to grow the Farmgate Milk Price and earnings.
3. Keep up the momentum in food service – expand the successful food service business in China and other key markets to grow earnings.
4. 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.
5. Build on the sustainability position – further improve the Co-op’s sustainability credentials and strengthen partnerships with customers who value this position.
6. Innovate to drive an advantage – use science and technology to solve the Co-op’s challenges and build on competitive advantages.
“As previously announced, we are exploring divestment options for our global Consumer businesses to free up capital and allow the Co-op to focus on what it does best.”
This process is ongoing and progressing well, and Fonterra will continue to seek shareholder approval before divesting into these businesses.
The Co-op’s improved returns will primarily be driven by increased earnings in Ingredients and Foodservice and operational efficiencies.
“We continue to have significant capital investment needs 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 annually provide farmers and the market with a rolling three-year forward-looking view of the financial assumptions underpinning its performance targets 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.”
Fonterra’s Board and Management have been looking forward to working alongside the Co-op’s farmers and employees to deliver on its vision of being the source of the world’s most valued dairy.
