Fonterra Co-operative Group Limited (FCG) 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 in welcoming you to the 2021 Special Meeting of Shareholders of Fonterra to consider the proposed constitution changes for the flexible shareholding capital structure. Thank you for your attendance. I now declare the meeting open. The Notice of Meeting was sent to all shareholders listed on the share register as at 11th of November 2021 and will be taken as read. We have the requisite quorum of 50 or more shareholders. And therefore, this meeting is properly constituted. The agenda for the meeting was set out, and you'll notice a meeting booklet. Shortly, I will address the meeting. The Chair of the Co-operative Council, James Barron, will then address shareholders as well. We will then move to the resolution 1, which relates to the approval of the capital structure related amendments to the constitution. We will then collect the voting papers. We expect to finish around 2:00 p.m., and I invite those of you who are in the room to please stay and join us for refreshments. I would now like to introduce my fellow directors and senior management. Here in Invercargill, we have Directors Andy Macfarlane, Donna Smit, John Nicholls, Leonie Guiney and Brent Goldsack. Unfortunately, due to the COVID-19 travel restrictions, our Auckland-based Directors and senior management team and our Australian-based Directors have been unable to travel and are joining us virtually. I would like to acknowledge the Co-operative Council Chairman, James Barron, and the members of the Co-operative Council who have joined us today. I would also like to welcome John Shewan, Chairman of the Fonterra Shareholders' Fund, and representatives from our auditors who have joined the meeting virtually. I'd like to start by thanking all of our farmers for the spirit in which you have engaged with us on the capital structure review. One of the strengths of this Co-op is the diverse thinking, experience and perspectives amongst members. We have embraced that diversity in this review. We've received input from thousands of farmers. Your feedback, ideas and constructive challenge have strengthened the recommendations. So I hope that you all felt genuinely consulted through the process. The Board, senior management and 92% of your Co-operative councilors are united in the belief that these changes are our best course of action. Our situation here in New Zealand is changing fundamentally and we need a capital structure that maintains a strong Co-op through these changes. Milk is the lifeblood of our Co-op. Our strategy focused on New Zealand milk and our future success relies on our ability to maintain a sustainable milk supply in an increasingly competitive environment. It is an environment that is rapidly changing due to factors such as environmental pressures, new regulations and alternative land uses. To be successful, Fonterra must be an attractive option to farmers, many of whom have a choice on where their milk goes. Farmers leave for different reasons, but one of the most influential ones is the high level of compulsory investment that's required to be part of our Co-op. A capital structure with flexible shareholding would help to level the playing field with competitors, many of whom are foreign backed and don't require farmers to invest capital. Stronger financial performance alone is not enough to retain milk. We need more of a level playing field. If we do nothing, we're likely to see around 12% to 20% decline by 2030 based on the scenarios that we've modeled. Staying stronger together is in all of our interests. Our scale efficiencies lead to better utilized factories, lower processing costs and our ability to pay the high sustainable milk price. Our recommended structure gives all farmers a level of flexible shareholding, which is critical to supporting farmers to join or stay with our Co-op. The key features of the recommendations are: a 33% minimum shareholding, where you would only need to hold 1 share for every 3 kilograms of milk solid supplied; a 4x share maximum, you could hold up to 4x your milk supply in shares. A farmer-only market for shares with a capped fund. Farmers would decide the prices at which they buy and sell shares without the traded price being influenced by external investors. The overall limit on the fund size would be reduced from 20% to 10%; a more inclusive pathway to becoming a Co-op member as sharemilkers, contract milkers and farm lessors can hold dry shares; on exit from the Co-op, existing shareholders would have up to 15 seasons to share down initially, reducing to 10 seasons. New suppliers would have up to 5 seasons. Associated shareholders would have up to 3 seasons; on entering the Co-op, farmers would have up to 6 seasons to reach the 33% share minimum; voting remains based on share-backed milk supply. There is no perfect answer, but we are confident that this structure will support the sustainable supply of New Zealand milk that our long-term strategy relies on. One enables the other. And together, they give our Co-op the potential to deliver the competitive returns that will continue to support our families' livelihoods from this generation to the next. If our recommendations are supported by the necessary 75% of voting farmers, the changes will take effect once the board is satisfied that any steps necessary for implementation have been or will be completed. Part of that is working with the government and what the changes might mean under the Dairy Industry Restructuring Act. I believe we are philosophically aligned with the government. We both want to see Fonterra continue to thrive as a New Zealand co-operative and deliver increasing value for the economy and for farmers. I've spoken to Minister O'Connor since receiving his letter that was included in the Notice of Meeting, and remain confident that we can find a regulatory framework that supports the flexible shareholding structure. If the recommendations don't receive the required level of support, the Board will consider the result of the vote and then engage with shareholders about next steps. I expect that the temporary cap on the fund will remain in effect until at least then. James, I'll now invite you to address the meeting.

Thank you, Peter. [Foreign Language] and good afternoon. The first dairy co-operative was founded in New Zealand over 150 years ago by a small group of dairy farmers with a collective sense of purpose and the belief in one another to achieve far beyond what they could each achieve individually. Since then, successive generations of New Zealand dairy farmers have evolved their farming businesses and the co-operatives that they have established and supplied, ultimately leading in 2001 to the formation of Fonterra. Over the last 3 years, our Co-operative has been evolving. It has gone through a cultural and strategic transformation and the Board has realigned Fonterra's financial settings to better reflect an enduring farmers' co-operative. The changes to Fonterra's capital structure that we're considering today at this special meeting are designed to support the sustainable milk supply that our Co-op's long-term strategy relies on while maintaining farmer ownership and control and ultimately to ensure that our Co-operative will be enduring. Through these changes, our Board has challenged us as owners to further evolve our Co-operative. And as I noted in my address during the annual meeting and as reported to you in November, since May, your council has spent a lot of time listening to your views, understanding your perspectives and discussing and debating the case for change and the proposals presented to us by the Board and management. We commissioned our independent adviser, Northington Partners, to provide their analysis of the possible restricted market and liquidity discounts, voting and ownership concentration and sell-side pressure impacting share price. We instructed our legal advisers, Anderson Lloyd, to review the technical changes proposed to the constitution. Our particular areas of focus included: the proposed changes alongside our Co-operative principles; ensuring Democratic control is maintained for supplying shareholders; understanding the impacts of moving the minimum and maximum shareholding requirements away from the share standard; understanding the likely market dynamics of the proposed farmer-only market considering the allocation of shares to associated shareholders and ensuring that we maintain appropriate limits on the level of investment in Fonterra shares by nonsupplying shareholders; the total number of Fonterra shares on issue compared to milk supply; and the overall limit on the fund size. If shareholders vote in favor of the flexible shareholding structure, our Co-operative principles should be reviewed for consistency with the constitution. Northington's overall assessment of the proposed solution was that it was in the best interest of Fonterra and its suppliers. They noted that the capital flexibility introduced by the flexible shareholding structure will allow Fonterra to compete with other processes based on its milk price and overall performance. They were of the view that given the governance structures in place and the fact that voting rights will continue to be based on share-backed milk supply, any ownership concentration arising from the changes will not adversely affect control of our Co-operative. There are some downsides to the proposal. Capping the size of the Fonterra shareholders fund and delinking it from the Fonterra shareholders market will likely result in a discounted price for our shares, when compared to a deep and liquid open market. It is also recognized that farmers looking to exit the Co-operative and realize their investment in Fonterra shares in the short term are those that are most exposed to any changes in our capital structure. As members of a co-operative, when making our individual decisions, we should also consider what is in the long-term best interest of our Co-operative. Ensuring a strong New Zealand farmer-owned co-operative of scale is in all of our best interests, along with those of the generations of dairy farmers that will follow us and the wider New Zealand communities that we live in. As the proposed amendments will alter Part A of Fonterra's constitution, the support of a majority of 50% or more of Co-operative councilors was required. On a vote conducted on the 1st of November 2021, 92% of councilors voted in support of the proposed changes. Ultimately, however, the mandate for change must come from all shareholders. It is our collective decision as owners of our Co-op and we can all take some ownership of the outcome. I would like to thank all farmers who actively participated in the capital structure review process. This couldn't have been done without you. And I also thank all of you who have taken the time to vote. Democratic control is critical to our Co-operative's enduring success. I'll now pass back to Peter.

Thanks, James. Before I ask Brent Goldsack to speak to the resolution, I'd just like to make some final comments. Changing our capital structure is one of the most profound decisions we will make as farmers. At its heart, this review has been about protecting the Co-operative that we have built together, building on what we've got today and handing it over in a stronger position from one generation of Kiwi farmers to the next. It's a conversation we need to have now when we have options open to us and when our Co-op is in a relatively strong financial position. The easy thing to do as a Board would have been to wait, kick the can down the road and leave it for the next set of governors to solve. That's not what good governance is about. Collectively, we will all need to show some leadership. At the heart of the conversation is a single decision, either we are a corporate or we're a co-operative. We have to decide what we are. The current model where we are trying to have a foot in both camps is not sustainable. If we're only interested in the value of our shares, then we should fully corporatize right now. If we want to be a strong and enduring co-operative, we believe the capital structure changes we're recommending are the best course of action available. I fully believe in the potential of this Co-operative. Fonterra hasn't always lived up to its promise. We can all agree on that. But the capital structure conversation isn't about past mistakes. It's about enabling the future of Fonterra. We need to look up and we need to look out, and we need to take a long-term view. Our aspiration for Fonterra's future is a Co-op that pays the highest sustainable milk price and a respectable return on your invested capital, where farmers decide the prices at which they buy and sell shares, where New Zealand's best dairy farmers choose to belong and commit their capital. Setting the benchmark for milk quality, ethical and environmentally sustainable farming practices that consumers pay a premium for. It's a Co-op that invests in research and development, creating new and interesting products for customers in response to changing consumer trends. It supports farmers' efforts to adapt to regulatory changes by being part of the search for solutions to methane, freshwater and access to skilled labor. It's one where the smartest minds in global dairy chose to work on behalf of its members. It's a Co-op owned and controlled by Kiwi farming families that had the courage and foresight to form an internationally competitors farmers' Co-op of scale. If that sounds like something you want to be part of, then I hope you can support the recommendations. Now on to the business of this meeting. Some of you will be familiar with the procedural points from the annual meeting this morning. But for those of you that have just joined the special meeting, I'll run through them again. The resolution to be considered has been sent out in the Notice of Meeting and will be taken as read. This resolution will be by way of poll. Postal and electronic voting was approved by the Board for this resolution and electionz.com Limited were appointed to receive and count those votes, which will be included in the poll. The special resolution must be agreed to by a majority of 75% of the votes of shareholders entitled to vote and actually voting on that resolution for it to be passed. The resolution will be moved and seconded by a Director who may speak briefly to it. 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 may have already been made. If you are here in the room, please wait for a microphone to be handed to you by one of the team before you speak and introduce yourself, please, when you're handed the microphone. Co-operative Councilor Simon Hopcroft will act as a timekeeper. As time for each question approaches 2 minutes, you will hear a bell. It would be appreciated if you could then conclude your comment or question. For those joining the meeting online, you can submit a question by clicking the Ask a question button in the top menu bar. For those questions to be put to the meeting, your supply number must be included, please. As mentioned in the annual meeting, we will not be showing the advanced voting result for the resolution. This is a change to our previous practice. 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 this year as we are holding the meeting as a hybrid virtual meeting, and shareholders will be -- will have the ability to vote online during the meeting. When you're asked to vote here in the room, please place a tick in either the for or against box alongside the resolution 1 on your voting paper. If you are attending the meeting online and have not already voted, you may vote by clicking the Click here to vote button on the top menu bar. The scrutineers will treat noncompliant votes as invalid, so please take care to follow the instructions. We will collect the voting papers following voting on the resolution. I will share the result of the vote here in Invercargill as soon as it is known, and also in my Chairman's e-mail and on the NZX. Let's move on to the resolution. I'd now like to call on Brent Goldsack to propose the motion and to speak to it. Once it has been seconded, I will then open the motion for discussion. Thanks, Brent.

Thank you, Peter. Maybe just before putting the motion, I do just want to say a huge thank you to the Farm Source team. To have over 5,000 farmers come and physically engage with us is very, very humbling. I'd also like to thank the council, the Co-operative Council. The challenge at times was challenging, maybe made us a little uncomfortable that it was totally appropriate and it was done in the full spirit of what is best for our Co-op. So earlier last month, on the 2nd of November to be exact, the Board, your Board approved the changes to the constitution that would give effect to this capital structure change, the flexible shareholding proposal, as Peter has already laid out. Those changes to the constitution are set out in a lot of detail in the Notice of Meeting, and we will take those as read. The Board recommends that the shareholders vote in support of the proposed amendment. As James has also noted, as this will alter Part A of our constitution, an approval of a majority of 50% of the Co-operative Council is required. And obviously, that was fulfilled when 92% of them voted in favor. So without further ado, it gives me pleasure to move this resolution. Thank you.

Thanks, Brent. I'll now call on Cathy Quinn to second the motion.

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

Thanks, Cathy. I now open resolution 1 for discussion. We'll first go to questions in the room and then take questions from online. Do we have any questions in the room or comments? Microphone 3, thanks.

[ Luke Termalton ], 35546. Mostly a comment to say thank you to the Board and Farm Source for actually really get out and working really, really hard on consultation, being iterative and doing a few steps and really listening and building the thing with the shareholders. Thank you very much.

Thanks, Luke. Appreciate it. Are there any other questions or comments? Anything online, Charles?

Not at this stage, Peter.

It's pretty quiet. I was hoping to refer a question to James Robertson. I'm going to put the motion. This special resolution requires 75% support. I will now put resolution 1, which has been moved and seconded. For those in the room, I ask you to complete your voting paper by placing a tick in the appropriate box for resolution 1. For those online, please vote by clicking on the Click here to vote button on the top menu bar. If you have any difficulties, please raise your hand and someone will assist you or click on the help button in the online meeting platform. [Voting]

Okay. Voting is now closed, I assume, once we gather them up. If you've got a piece of paper, you need someone to collect it, can you please put your hand up? That was a healthy debate. Yes, I think we refreshed ourselves. Is that the last? Okay. I'd like to thank you for attending the special meeting and invite those of you in the room to join us for refreshments and there will be cold refreshments in the hosting area behind the meeting space. I will share the results of the vote as soon as possible, hopefully within 20 or 30 minutes. That concludes the business of the Special Meeting of Fonterra. I'd like to ask Tiaki Hunia to now close our meeting with a karakia. Thank you, Tiaki.

[Foreign Language] In the same way that we started our first meeting in karakia, it's only right that we close off the special general meeting in the same way. Can I reiterate the warm words of thanks and appreciation from our Chairman and CEO to you all. We wish you all the very best. And for those who had traveled, a safe trip home to your family, friends and loved ones. [Foreign Language] Thank you.

Thanks, Tiaki. All right. Meeting's closed. And we'll sit at the back. Thank you.