Fonterra Co-operative Group Limited (FCG.NZ) Earnings Call Transcript & Summary

Ladies and gentlemen, my name is Peter McBride, Chairman of the Board of Fonterra Co-operative Group Limited. I have the pleasure of welcoming you to the 2025 Special Meeting of Shareholders of Fonterra to consider the divestment of our consumer and associated businesses. Thank you for your attendance online today. I now declare the meeting open, and I can confirm that voting has reopened and will remain open for the duration of this meeting. The notice of meeting was sent to all shareholders listed on the share register as at 1 October '25 and will be taken as read. We have the requisite quorum of 50 or more shareholders, and therefore, this meeting is properly constituted. The business for the meeting was set out in your notice of meeting booklet. I will kick off proceedings by providing the Chair's address, outlining the context for today's important meeting. Then our CEO, Miles Hurrell, will speak to the Co-op's strategic direction and the implications of today's resolution. Next, we'll welcome the Chair of the Fonterra Co-operative Council, John Stevenson, to address shareholders. We will then move the sole resolution for this meeting, which relates to the approval of the sale of all the shares in Mainland Group Holdings Limited, pursuant to the agreement we have reached with Lactalis. This represents the divestment of Fonterra's consumer and associated businesses and marks an important milestone in our divestment journey. There will be a chance to ask questions moving -- following the moving of the resolution. I'll provide a final reminder around voting before concluding the business of the meeting today. There will then be an additional 5-minute period for shareholders who have not voted to do so before the meeting closes. The official voting results announcement will be made shortly thereafter. You'll receive this result in the Chairman's e-mail, and it will also be released to the NZX. I would now like to introduce those in the room with me today. Sitting at the table with me, I have my fellow directors, Cathy Quinn; Brent Goldsack; and Bruce Hassall; and our senior management representatives, CEO, Miles Hurrell; and Company Secretary, Anya Wicks. Our CFO, Andrew Murray and Co-operative Council Chair, John Stevenson, have also joined us in the room today. Welcome. Our other non-Auckland and Waikato-based directors and members of the senior management team are joining us virtually. As well as Co-operative Council Chair, John Stevenson, I'd also like to acknowledge members of the Co-operative Council who have joined us online today and extend a warm welcome to Mary Jane Daly, Chair of the Fonterra Shareholders Fund; and representatives from our auditors, KPMG, who have joined the meeting virtually. I want to start off this morning by thanking farmers for their engagement in this discussion, especially over the last month or so when the full details have been available. We've had excellent numbers attend the webinars and a strong turnout at the 42 roadshow meetings held across the country. A number of farmers have also taken advantage of the director-led drop-in days at their local farm source store or had one-to-one conversations with the management team, directors or cooperative councilors. As you know, the Board has unanimously recommended you support the proposed sale to Lactalis. I appreciate that there's been a lot of information and opinions coming at you, and it's been quite a lot to take in. But it's been important you had all of the answers you needed to make an informed decision. The decision to divest consumer and associated businesses is significant and one the Board did not take lightly. We have examined the strategic context we operate in and our strengths and how we, as a co-op, we create value for our owners. By far, we do this best through our business-to-business ingredients and foodservice channels, which collectively generate the majority of our returns to shareholders through both the Farmgate Milk Price and dividends. In this context -- it is in this context that the Board commenced the process to explore divestment options for our global consumer and associated businesses. We have thoroughly tested the terms and value of both the trade sale and initial public offering as divestment options. Following a highly competitive sale process with multiple interested bidders, your Board is confident that a sale to Lactalis is the highest value option for the Co-operative, including over the long term. The $4.22 billion price now on the table from Lactalis exceeds all of the initial independent valuations and estimates. And I want to acknowledge management and our advisers for their hard work on behalf of shareholders. The sale allows for a full divestment of these assets, has lower risk and enables a faster return of capital to the Co-ops's owners. It is also significantly value accretive when compared with an IPO. I know many of you have an emotional connection to the brands and may be mourning the potential change of ownership. But it is a fantastic deal where our Co-op gains a lot more than just the $4.22 billion. And Lactalis will gain one of our most significant ingredients customers who we'll partner with through our long-term supply relationship. We also stand to gain a much deeper, more trusted relationship with our other large B2B customers that can now truly call us a partner and not a competitor. We expect that their consumer insights will be much deeper than what we ever had. Combined with our century of dairy science, I think together, we'll innovate much faster. Fonterra's own R&D spend will now be concentrated on ingredients and foodservice, accelerating our innovation pipeline. We will have a simplified, more focused business. The value of this cannot be overstated. Fonterra's relative success in recent years comes from understanding where we have a comparative advantage that can deliver real value back to our farmers through the milk price or earnings. The divestment will usher in an exciting new phase for the Co-op. We will be able to focus Fonterra's energy and efforts on where we do our best work and enabling the consumer brands to be fostered by a true global consumer giant for mutual gain. The deal is not without risk, and it's important that we acknowledge that. The ingredient supply agreement is not exclusive. There is a risk that in time, Lactalis may choose a different supplier for some ingredients. Customer loyalty cannot be written into a contract forever, it's earned. Lactalis is proud to partner with us for the long term. They will be investing significantly in brands that are founded on high-quality Fonterra milk from New Zealand. A number of you have also raised questions around the risk of less diversification. Our geographic diversification is materially unchanged following divestment. Through our Ingredients and Foodservice businesses, we will continue to sell products derived from New Zealand milk to more than 100 countries around the world. And lastly, given it utilizes less than 8% of our New Zealand milk, the consumer business is not, and never will be, an effective hedge against milk price volatility. The 2 most precious things in this Co-op are your milk and your capital. The far greater risk to our Co-op is continuing to put scarce farmer capital into lower-returning consumer products. Consumer is a riskier business. It requires much higher operational expenditure and is still well below our target return on capital. This whole process has been about strategy, what Fonterra can be the best in the world at, then having the focus and discipline to deliver on that. The hard work our farmers and global teams over many years has Fonterra in a position of real strength. This gives us choices. We choose to focus on B2B ingredients and foodservice because we have a proven competitive advantage and global reach. We are confident this is the best option for our farmers' futures and therefore, New Zealand. With that, I will now hand over to Miles to share his thoughts. Thanks, Miles.

Thank you. As Peter has set out, our decision to pursue this divestment is grounded in an understanding of how we best create value for farmers and New Zealand. Our strengths lie in our global ingredients business, NZMP and our global foodservice business, Anchor Food Professionals. These are world-leading brands known for the New Zealand provenance and high-quality innovative products. By focusing on these businesses, we will be a B2B provider of high-quality dairy to the world from a home base here in New Zealand. To support continued value growth for ingredients and foodservice, we're investing in new capacity to meet this growing demand. Construction is underway on an advanced protein plant in Studholme and new UHT cream capacity at Edendale with products expected to come online in the 2026 calendar year. Looking ahead, we have plans to invest up to a further $1 billion over the next 3 to 4 years in projects to generate further value. Last week, we announced a $75 million expansion to our butter plant at Clandeboye, the first of this next phase of strategic investments. We have a pipeline of further projects that we're assessing, and we'll share these details as soon as they are confirmed. As Peter has shared, the divestment of the Mainland Group unleashes the Co-op, allowing us to focus on what we do best. Through focused execution of our strategy, we know we can deliver value for our farmers while also maintaining the financial discipline that has got us in the strong position we are in today. Our business plans are designed to drive performance lift in ingredients and foodservice and generate operational cost efficiencies. We've set out the post-divestment financial shape of the Co-op and continue that these targets and policy settings we released alongside our strategy last year remain unchanged. Specifically, we are targeting an average return on capital of 10% to 12%, above our 5-year average, maintaining the highest sustainable Farmgate Milk Price; earnings to be back at the FY '25 levels within 3 years, offsetting the earnings impact of this divestment; and returning more of the Co-op's earnings to shareholders through a dividend policy of 60% to 80%. Please keep in mind, these numbers are targets, and they are subject to a number of risks and assumptions. Ultimately, post divestment, we will be a more focused business with a lower cost base, delivering a better return to farmers. We have a clear plan for the Co-op's future that will build end-to-end value for generations of farmers to come. If today's vote is successful, the next steps are to secure the regulatory approvals required for the divestment and to separate the Mainland Group from Fonterra. We're targeting a tax-free capital return of $2 per share to shareholders and unitholders, equivalent of $3.2 billion once the sale is complete. Another shareholder vote will be required for the payment of the capital return. The process for that capital return is expected to be by way of a scheme of arrangement under Part 15 of the Companies Act 1993. We plan to provide more detail on the timing of the capital return in early December. I'll now hand across to John Stevenson to speak on behalf of the Fonterra Co-operative Council.

Thank you, Peter and Miles, and [Foreign Language], everyone. As Peter mentioned, my name is John Stevenson, Co-operative Councilor from the Wairarapa and Chair of the Co-operative Council. I'd like to acknowledge the members of our Co-operative present, Peter and his Board and Miles and his management team. The decision whether Fonterra should divest Mainland to Lactalis is significant for Fonterra farmer shareholders. The proposal before us represents a substantial structural change for our Co-operative. Since the May 2024 announcement that our Board and management were exploring full or partial divestment options, Council has actively sought to understand and represent the interest of Fonterra Farmers. Based on your feedback, we strongly encourage Fonterra to undertake a significant engagement and consultation process with all Co-op members. In September 2024, we sent the Board a list of information that we believed was of interest to shareholders. We thought it was important that shareholders had a deep understanding on what we are now voting on and most importantly, what their co-operative looks like post any divestment. We shared that list with you as well. Since that time, I believe Fonterra has provided relevant information on all the issues we raised. Councilors have had many conversations with farmer shareholders on the divestment proposal since May 2024. We have passed a wide range of your views, feedback and questions about the proposal on to the Board. And more recently, following the announcement that Fonterra had agreed the sale of Mainland to Lactalis, councilors have attended the shareholder meetings hosted by directors and management. Council has discussed the divestment proposal summarized in the notice of this meeting with the Board. We commissioned our independent analysts, Northington Partners, to provide an independent assessment of the merits of the proposal. We then met with Northington Partners to discuss their assessment report. We also discussed and debated the proposal extensively among ourselves. And we shared Northington's Partners independent assessment with you late last month. Northington Partners are of the view that the divestment of Mainland is in the best interest of Fonterra shareholders. In their view, the price that will be received for Mainland is attractive and consistent with peer companies and transactions. They consider the commercial case for divestment is sound and that the sale will make Fonterra a better business. Northington Partners also assess that Fonterra has the balance sheet strength to fund the proposed capital return and its near-term investment plans. After consideration of feedback from farmers, consideration of the discussions with the Board, management and their advisers and consideration of the Northington Partners report, at our September Council meeting, Council determined its level of support for the proposal. I can advise that 26 of your 27 counselors supported the proposal to sell Mainland to Lactalis. However, the mandate to sell must come from supplying shareholders. This vote concerns the future of our co-operative, and deciding what that future looks like is a responsibility that we all share. Thank you, Peter. Thank you, Miles. And Council looks forward to continuing to represent all Co-op members' interests.

Thanks, John. Now on to the business of this meeting. The resolution to be considered has been set out in the notice of meeting and will be taken as read. This resolution will be by way of a poll. Postal and electronic voting was approved by the Board for this resolution, and electionz.com Limited were appointed to receive and count these votes, which will be included in the poll. The ordinary resolution must be agreed to by a majority of 50% of the votes of shareholders entitled to vote and actually voting on that resolution for it to be passed. I will move the resolution and will ask my fellow Farm-elected Director and Chair of the Strategic Review Committee, Cathy Quinn, to second the resolution. I will then invite comments and questions on the resolution. In the interest of fairness, I would ask shareholders to keep their comments as brief as possible and not repeat questions or comments that have already been made. [Operator Instructions] For questions to be put to the meeting, your full name and supply number must be included, please. We will not be showing the advanced voting result for this resolution. As a co-operative, I believe it's important that we have an open shareholder discussion on the resolution without the influence of an advanced voting result. This is particularly important with a virtual meeting where shareholders have the ability to vote online during the meeting. If you have not already voted, you may vote by clicking on the voting tab on the top menu bar and then click on the green Click Here to Vote button. You will need to have your PIN and password to hand. The scrutineers will treat noncompliant votes as invalid, so please take care to follow the instructions. I will share the result of the vote as soon as it is known in my Chairman's e-mail and on the NZX. Let's move to the resolution. Resolution 1, approval of the sale of all shares in Mainland Group Holdings Limited. The Fonterra -- the Board of Fonterra approves the sale of Fonterra's consumer and associated businesses to Lactalis. The specifics of the transaction are set out in detail in the notice of meeting and will be taken as read. The Board recommends that shareholders vote that the sale of all the shares in Mainland Group Holdings Limited pursuant to the sale and purchase agreement with BSA S.A.S. Lactalis dated 22 August 2025 as described in the explanatory notes of the notice of meeting is approved, including for the purposes of NZX Listing Rule 5.1.1(b). Accordingly, I move the resolution. I will now call on Cathy Quinn to second the motion.

Thank you, Mr. Chairman. I second the motion and fully support it.

Thanks, Cathy. I will now open the resolution for discussion. Anna, do we have any questions online?

No, Mr. Chairman, we do not have any questions online from farmers with supply numbers.

Okay. If there are no further questions, we will continue with the business of the meeting. This ordinary resolution requires more than 50% support. I will now put the resolution which has been moved and seconded. As previously mentioned, if you have not yet voted, do so by clicking on the voting button in the top menu bar on your screen and then clicking on the green Click Here to Vote button. If you have any difficulties with voting, please click on the Help button in the online meeting platform. Voting will remain open for a further 5 minutes. I would like to thank you all for attending the special meeting online with us today. That concludes the business of the special meeting of Fonterra, and you now have your last chance to vote before the meeting will officially close. I will share the results of the vote as soon as possible. Thank you.