Fonterra Shareholders Fund (FSF) Earnings Call Transcript & Summary

Well, good morning. My name is John Shewan, Chair of the FSF Management Company, the company which manages the Fonterra Shareholders Fund. A very warm welcome to the 2021 Annual Meeting of unitholders of the fund. We do appreciate your attendance online. The COVID-related restrictions on both travel and gatherings meant that it's best for us to proceed with a virtual-only event this year. I thank you for your understanding of that and your continued participation. The Board regrets not being able to engage with you in person, but we'd like you to take advantage of the other channels that are available, which I'll outline shortly, to ask questions and provide your feedback. 2021 has been a very eventful year for the Fonterra Shareholders Fund. Fonterra has progressed well in executing on its strategy. But running parallel with that, it's undertaken a far-reaching review of its capital structure. This has resulted in a significant drop in the value of the units in the fund. I'm well aware that unitholders are not happy with the financial performance of the fund over the year, which has been impacted very significantly by the drop in unit price. As Chair of the fund and as a unitholder myself, I share your frustration. And today is an opportunity for us to discuss these issues, to hear more about the year just gone and the future outlook and to ask questions. So I declare the meeting open. The Notice of Meeting was sent to unitholders on the 12th of November. Unitholders eligible to vote are those on the register at 5:00 p.m. on the 10th of December. We'll take the Notice of Meeting as read. We have the required quorum of 5 or more unitholders, and so the meeting is properly constituted. Today's meeting is being held online using the Computershare online meeting platform. And this allows unitholders, proxies and guests to attend the meeting virtually. All attendees can watch a live webcast of the meeting and read the associated documents. And unitholders and proxies can, of course, ask questions and submit votes. Online questions can be submitted at any time, and I encourage you to do so well in advance of the allotted question time. To ask a question, please select the Q&A tab on the right half of your screen at any time. Well, type your question into the field and press send. Your question will be submitted straightaway. Should you need assistance, type your query into the chat window and one of the Computershare team will help you through the chat function or you can call Computershare on 0800-650-034. While you can submit questions from now on, they'll be answered, of course, at the relevant time in the meeting. We may amalgamate questions with others if we receive multiple questions on the same topic. Voting today on the one resolution before the meeting will be conducted by a way of a poll and online voting will open shortly. If you are eligible to vote, you'll be able to cast your vote under the Vote tab. To do that, simply select one of the options, but no need to hit the submit or enter button. The vote will automatically be recorded. But you can change it up until the time the voting is declared closed. I now declare voting open on the resolution, and we will let you know before it closes. The agenda for the meeting was set out in the items of business in the Notice of Meeting. First item is my address or the management company. Then Peter McBride, Fonterra's Chair; and Chief Executive, Miles Hurrell, will address the meeting to speak about Fonterra's performance and the Co-operative's future plans. After that, we'll open up for questions on the 3 presentations. Mary-Jane Daly will then take you through the resolution to reelect myself as a Director of FSF management company. I'll take the opportunity to make a few remarks and the resolution will then be moved. And finally, we'll open up for the general business. So we'd expect the meeting to take about 1 hour to 1.5 hours. Let me now introduce my fellow directors of the management company and the senior representatives of Fonterra who are joining us today. From the management company, we have all the Directors present online. Mary-Jane Daly, joining us from Fonterra's offices in Auckland. Mary-Jane is an Independent Director appointed by unitholders. She joined the Board last year, and we welcome her to her first annual meeting of the fund. Joining us online is Kim Ellis, also an independent director appointed by unitholders; Donna Smit and Andy Macfarlane are joining us, they are Fonterra-appointed members of the Board. And from Fonterra, the Chairman, Peter McBride, joining us from the lower South Island; and at Auckland, we have Chief Executive, Miles Hurrell; and Chief Financial Officer, Marc Rivers, both in Auckland. Turning now to review the 2021 year. I'll start with a few comments on Fonterra's performance and then speak to the issue that's had most significant impact on the fund this year, being the capital structure review that Fonterra started in May. Against the backdrop of COVID-19, market uncertainty and supply chain disruption, Fonterra has built on last year's performance with a strong financial result. Peter and Miles will speak to that, but it's appropriate that I'll highlight a few aspects that are of particular relevance to the fund. Fonterra's reported profit after tax was $599 million. Normalized earnings per share came in at the top end of the forecast range of $0.34 per share. Fonterra declared a final dividend of $0.15 a share and unitholders received that distribution, the equivalent amount per unit, which was paid on the 15th of October. So this brought the total distributions for 2021 to $0.20 a share, a welcome improvement on the $0.05 per unit we received in 2020 and a 0 distribution in 2019. Fonterra's underlying performance improved $190 million on last year, with normalized profit after tax of $588 million. Strong operating earnings combined with $748 million in proceeds from asset sales enabled Fonterra to reduce debt by $872 million during the year. So its gearing ratio is now about 36%, well within its target range. When it released its annual results in September, Fonterra provided a detailed -- quite detailed guidance on where it wants to be by 2030. And we really welcome this increased visibility on the Co-operative's future plans. From a financial perspective, highlights include a 40% to 50% increase in target operating profit by 2030 relative to 2021. If that target is achieved, it will give the Fonterra the ability to steadily increase its dividends to around $0.40 to $0.45 per share by 2030 and also increase its return on capital from the current level of about 6.6% to between 9% and 10%. And through planned divestments and improved earnings, Fonterra also intends to return to shareholders and unitholders about $1 billion by FY '24. And at Thursday's annual meeting, Fonterra indicated this would amount to about $0.60 per share and $0.60 per unit. That would be in addition to the normal dividends and distributions. There's also a plan to generate another around $2 billion of additional capital that can be available for a mixture of investment in further growth and returns to shareholders and unitholders. Before I move on to talk about the performance of the fund, I'd like to briefly explain the role of the Board of the manager. We have statutory responsibilities for the activities of the management company and the fund. So that includes monitoring compliance with various regulatory requirements, ensuring that unitholders' interests are managed and protected in accordance with the constituent documents. We have no role in the performance or governance or operation of Fonterra. Although we have no decision-making role in these areas, we do think it's appropriate and important to actively represent unitholder interest, and we do that. And that representation role has been an important function of the Board during the consultation process that Fonterra has undertaken on its capital structure. The Board back in May, formed a subcommittee comprising of 3 independent directors to consider the implication to the capital structure review for the fund and for its unitholders. That subcommittee has met 13 times since the capital structure consultation period kicked off in May and we've had a number of meetings with senior management of Fonterra and Board members. The subcommittee has also engaged with expert external advisers where required. So let's now take a closer look at the performance of the fund over the past year. The graph currently up on your screen shows that over the course of the first half of 2021, there was a good growth in the unit price that rose 33% from the start of the financial year on 1 August to $5.08 at the time Fonterra released its interim results in March. There was some selling at this price level and the unit price leveled out at around $4.60 over late April and early May. On 5 May, Fonterra and the fund were put into a trading halt. And on 6 May, Fonterra announced that it was commencing a view and consultation process on its capital structure options. As part of the review process, farmers were no longer able to convert shares in Fonterra into units in the fund. So that had the practical effect of capping the size of the fund. At that early stage of the consultation process, Fonterra said that the fund could be retained, or alternatively an offer could be made to unitholders to buy it back. Fonterra explained that at that time, it had reached a preliminary view that the preferred option was to buy the fund back. There was an immediate downward impact on price of both the Fonterra shares and the units in the fund at that time. The unit price dropped 13% over the subsequent 3 days. Fonterra's capital structure consultations created a lot of uncertainty for unitholders and potential investors over both the future of the fund and its value. And this is shown very clearly by the drop in unit price from the 12-month high of $5.14 in early March and the recent low of $3.55. The unit price closed last Friday at $3.85 following a strong farmer yes vote in favor of the proposed new capital structure. 85% of farmers who voted, voted in favor. So that is a 30% -- a $0.30 uplift on the price of the units in the days leading up to the vote. I'm going to comment further on the capital structure review and the impact on the fund in a moment. But before doing that, let's have a quick look at the current makeup of unitholders on the register. So the various investor types have been pretty stable year-on-year. The most significant movement has been in units held by farmers which reduced from 12% to 9% of the total units on issue. That reduction is most likely related to the capping of the fund. Since May 6, no farmers have been able to move their shares to units because of the capping. They do have the ability to transfer units back to shares and some have chosen to do that. The continued increase in units being held by investors based in New Zealand is predominantly driven by increased retail holdings. But this year, we have also seen a small increase in holdings by New Zealand institutions. Moving on now to some of the key fund statistics. The fund's currently capped at 107.4 million units. At a closing price of $3.65 on 30 November, that put the market cap of the fund at about $392 million at that date. The number of units on issue was pretty flat during the year with no new shares issued by Fonterra. So the size of the fund as a percentage of Fonterra remained largely unchanged at 6.7%. But as I mentioned, the capital structure review had a significant adverse impact on unit price. So the market cap of the fund fell by some 16% or $75 million between 30 November last year and 30 November this year. It's increased by about about $20 million since then to about $513 million as of last Friday. But the unit price immediately prior to the trading halt in May was $4.60. And since that time, it dropped by about 21% based on the 30 November price. The Fonterra share price fell by 32% over the same period. Throughout this period, the subcommittee of independent directors of the management company has kept unitholders informed through releasing a series of market updates. The most comprehensive of these is the one you would have received on the 23rd of September, immediately following Fonterra's annual results announcement, when it also released details of the updated capital structure proposals. I'm not going to repeat the detail on those updates, but I do want to highlight a few key points. First, the subcommittee of independent directors of your fund understands and respects Fonterra's right to introduce the changes that it is making to its capital structure. We recognized the strongly held view of the Fonterra board, supported by the strong farmer vote last Thursday that the new flexible shareholding structure is critical to the future success of the Co-operative. Fonterra has concluded that the Co-operative's future success and execution on their strategy relies on their ability to maintain a sustainable milk supply in an increasingly competitive environment. And of course, in a market where New Zealand milk supply is likely to decline or remain flat. That said, we're very concerned at the impact of these changes on the funds unit price during the consultation period. And we remain firmly of the view that Fonterra should have proceeded with its initial preference to make an offer to unitholders to buy the fund back at fair price. For reasons that I'll detail in a moment, we think that was the fair, right and proper course of action to take, and we regret that it was not taken. Following initial consultation with stakeholders, Fonterra revised its proposal in September. Instead of buying the fund out, they proposed the alternative of it being retained but with its size being capped. Under this option, Fonterra farmers would no longer be able to exchange the economic rights relating to Fonterra shares into units. But the farmers holding units in the fund will continue to be able to exchange them for shares in Fonterra. In practical terms, that would mean that the fund may reduce further in size over time. As we said on our 23 September update, the Independent Directors were disappointed by Fonterra's revised proposal to the extent of the features relevant to the fund. In short, we felt that the reasoning Fonterra set out in support of this new flexible capital structure showed clearly that the key rationale for the fund being set up from the first place back in 2012, being the provision of a stable capital base through the removal of redemption risk, is no longer relevant because, of course, farmers can no longer redeem their shares. In short, the fund has run its course. The capital structure review provides a natural breakpoint in the life of the fund. And there's another key consideration that puts the fund in a difficult position. The information booklet issued by Fonterra in May, the subsequent updates and the explanations provided to farmers at last Thursday's annual meeting of the Co-operative, all attach significant weight to the critical importance to farmers of protection of farmer ownership and control. Even the small currently 6.7% non-voting interest held by your unit fund in Fonterra through the fund is a cause of significant concern. And this really goes to the heart of the issue of whether Fonterra is a Co-operative or a corporate. And Fonterra's Chair, Peter McBride, addressed this issue directly at last week's annual meeting. He says that the current model where Fonterra is trying to have a foot in both camps is not sustainable. I totally agree. And that's why I think the fund should be bought out. The challenge with this lingering issue not being dealt with is that it perpetuates the perception in the minds of investors of the potential conflicts between the interest of the farmers and the interest of unitholders. Buying the fund back is a logical and timely solution. At our 23 September update, we also expressed concern that the capping of the size of the fund at its current level would potentially limit its relevance to investors over time. We said retaining the fund but removing the key features that support growth and liquidity and relevance to investment markets could put downward pressure on the unit price. As I mentioned earlier, the subcommittee of independent directors has held numerous meetings with Fonterra, and we've conveyed these concerns. Those discussions have been respectful and constructive. Fonterra has outlined its counter arguments. But on the central issue of whether an offer should be made to buy the fund back, we agree to disagree. In the final capital structure proposal that was voted on last week, one of the changes made by Fonterra that we do to welcome is a modification of the proposal to cap the fund at its current size. Instead, the overall fund size will now be capped at 10% of the total Fonterra shares on issue rather than its current size of 6.7%. That change goes partway to addressing the size-related concerns outlined in the September update. Subject to approval by the Fonterra board, the amended proposal provides some scope for the fund to be increased in size at a suitable time in the future to address the liquidity and other size-related considerations outlined in our September update. The capital structure review has been lengthy and often challenging process. Throughout this time, we've had -- we've endeavored to promote the best interest of unitholders. Although our argument that the fund should be brought back has not, at least at this time, been accepted, and that's disappointing, I do want to draw attention to the positive aspects of the strategic plan and operating outlook outlined by Fonterra over the past few months. As I said earlier, Fonterra is changing its capital structure in the best interests of the Co-operative. In short, the Fonterra Board is confident that the dairy company will be much more successful with these changes than without them. If that proves to be correct, then all Fonterra shareholders and all unitholders will benefit. To that extent, there is an alignment of interests. Further, as a result of the reduced capital requirement on farmers, there will now be a much greater number of farmer and retiring farmer shareholders in Fonterra who, like unitholders will be focusing solely on dividends and share value. This is because whereas in the past, farmers were required to hold 1 share for every kilogram of milk solid. Now they'll only require 1 share for every 3 kilograms of milk solid. So over the period that farmers continue to hold their shares, a number of them, for some farmers, as many 3 out of 4 shares, will be held for investment purposes. So the financial return on those shares will be dividends and movements in the share price, which puts them in the same boat as unitholders. I'm also positive about the road map and associated earnings and outlook that Fonterra is aiming to achieve over the balance of the decade. If these targets are achieved, then the substantially subpar financial returns that unitholders have experienced should improve markedly. We have the opportunity now to hear from the Fonterra team on both the strategies and the operational plans that will deliver that value to shareholders and unitholders. I'd like to now invite Fonterra's Chair, Peter McBride, to address the meeting. Peter?

Thanks, John. Good morning, everyone. I look forward to taking your questions shortly, but first, I want to make a few comments about the Co-op's financial performance, the rationale for our capital structure changes, and what you as unitholders can expect from us in the future. From my perspective, our Co-op ends 2021 in a strong financial position and with a clear strategy out to 2030. Despite all the disruption here at home and out in our global markets, our Co-op has performed well over the past year, demonstrating the value of a New Zealand owned Co-operative of scale. Fonterra's scale give us a level of optionality that is unique in New Zealand dairy. It enables us to manage risk and uncertainty on behalf of our shareholders. We have benefited greatly from our ability to move our milk between the markets, categories and products that deliver the most value. Miles and his team did a great job of leveraging this strength to deliver a strong financial performance this financial year given the difficult COVID-19 operating environment. We've carried that momentum into the first quarter of the new financial year, which Miles will speak to in a moment. To a large extent, we're now seeing the benefits of changes we made to the Co-op's culture, which started more than 3 years ago. As we complete our business reset, we have turned our attention to the next phase of our strategy to focus on growing value. In September, we released our long-term strategy. If you haven't read the strategy booklet yet, I'd encourage you to do so. The strategic direction we have articulated is inherently based on sustainable access to New Zealand milk, which was the key driver of the change for our capital structure. At a time when New Zealand -- -- total New Zealand milk supply was flat and likely to decline, the world has come calling for more sustainably produced milk. So we're looking at a future where we have a highly sought-after product and an increasingly scarce supply. That smells like value to me. In line with the strategy, our future growth initiatives will look different to how the Co-op has operated in the past. Exercising a more conservative approach to risk, we will allocate capital with more rigor for a series of investments rather than betting the farm on 1 or 2 big plays. We believe innovation, research and development and collaborations with strategic partners are critical to implementing our strategy. Allocating funding and resources for those initiatives is a priority for the Board. Out to 2030, we aim to: invest $1 billion into moving milk into higher-value products within our core business of ingredients and foodservice; distribute $1 billion to shareholders and unitholders after asset sales and dependent on improved earnings. This is in addition to the normal dividends and equates to around $0.60 per unit; make $2 billion available for investment into a mix of further growth, including opportunities for nutrition science and potential returns to shareholders and unitholders. We also see a significant opportunity to develop and monetize our intellectual property and dairy know-how that is hugely valuable to our customers. As I said before, the strategic ambitions for 2030, which we set out in September, were predicated on successfully changing our capital structure. You'll have seen a strong mandate from the farmer owners last week with 85.16% of votes cast in favor of our recommendation. With a clear farmer mandate for change, we will continue working with the government on how this can be given effect under the Dairy Industry Restructuring Act, that's the legislation that enabled the formation of Fonterra back in 2001. I believe we are philosophically aligned with the government and remain confident that we can find a regulatory framework that supports the flexible shareholding structure. The flexible shareholding structure will come into effect once the Board is satisfied that any steps necessary for implementation have been or will be completed. We are aiming to implement the changes as soon as possible from the beginning of next season. Share compliance obligations will remain on hold until at least 6 months after the new structure is effective. The cap on the Fonterra Shareholders' Fund will remain in place as this cap is a feature of the flexible shareholding structure. So as unitholders, what can you expect from the Co-op under the new flexible shareholding structure? When you accept anyone's capital, it should be treated with respect, which includes paying a respectable return on capital over time. It's fair to say Fonterra's track record on that hasn't always met the expectations, regardless of whether you're a farmer or a unitholder. We all expect a competitive return on invested capital. In that regard, all of the Co-operative's owners are united. Under flexible shareholding, all farmers would have greater choice about their level of investment in Fonterra. Like unitholders, the decision will likely be based on Fonterra's financial performance. This will increase the constructive tension for the Co-operative to deliver a competitive return on invested capital as well as strong milk prices. The changes we are making to our capital structure will help us to retain our scale efficiencies that lead to better utilized factories, lower processing costs and increase our ability to pay competitive milk price and to generate earnings. Having made the decision to retain the fund, Fonterra's Board has committed to ensuring a strong performance. The fund and unitholders will remain a meaningful part of our Co-operative. As the fund is listed on the NZX and ASX, it will continue to provide a means by which nondairy farmers can invest in the future of the Co-operative. I'd like to finish by thanking you for your continued support. Since the fund was established in 2012, unitholders have been an important and integrated part of our Co-operative. We look forward to continuing the relationship in the future. Thank you.

Thank you, Peter. I now invite Miles Hurrell, who's Chief Executive Officer of Fonterra, to address the meeting. Miles?

[Foreign Language] Thank you. Thank you, John. Thank you, Peter. There are 3 important topics that I'd like to cover today: a summary of our performance in 2021; our long-term strategy; and how 2022 is shaping up. Firstly, we saw strong performance across all our key metrics last year, and this included people, environment and financial. From a people perspective, our engagement with employees, farmers and customers all improved. From an environmental perspective, we reduced our carbon emissions from coal by more than 11% as Te Awamutu completed its first season using renewable wood pellets. Our farmers have also done a lot on farm, and we thank them for that. From a financial perspective, we improved our earnings at the same time as delivering a milk price of $7.54 per kilogram. That showed to a point we can have solid earnings and a decent milk price. We also continued to reduce our debt and achieved our target debt-to-EBITDA ratio of 2.7x. It's a significant milestone for our Co-op and it shows that the focus on financial discipline is paying off. We still got the balance sheet back into a more healthy position. This allows us to look more toward the future. And as an intergenerational business, that's incredibly important to us. We leaned on a number of the Co-op's strengths to get us to this position last year. And it's these strengths that have been invaluable as we faced into the challenges and flow-on effects of COVID-19. The first strength I want to talk to you about is our New Zealand manufacturing network and the team that operates them. The network gives us a huge amount of optionality in terms of the products we can make and our people are focused on driving efficiency and improving performance of each of our plants. This continued improvement creates more value, which flows through the Farmgate Milk Price. What you can see on the slide are some of the ways we measure our efficiency at our sites. I won't dive into detail, but the point of this, in the last few years, these measures have all been trending in the right direction. Another huge asset in our Co-operative is the diversification across markets and channels. Last year, our volumes and EBIT were more or less evenly split across our 3 regions and channels. This diversification allows to allocate milk into products and market that generate the best overall return for the Co-operative. In 2021, this saw us allocate less milk to AMENA and more milk to Greater China and parts of Asia Pacific. And we did this because that's where demand was strongest. The third strength of our asset is our global supply chain, including Kotahi, which is our joint venture with Silver Fern Farms. It's because of our scale that Kotahi could partner with Maersk shipping line and the Port of Tauranga. And it's because of this partnership that our Co-operative could continue to get product to customers last year. With all the disruption to global supply chain, this was something our customers didn't take for granted, and we saw this reflected in both milk price and earnings. 2021 also saw our Co-operative make the most of what we've built over the many years. That's a New Zealand co-operative, which has scale and optionality that can compete internationally. We can now look out to the future and give clarity about what we want to be in 2030 and the kind of value growth we're going after. So let's have a look at that. The first thing I'd say is the future is the fundamentals of dairy, in particular, New Zealand dairy are strong. And you're seeing that play out this year. We know the world population is growing and living longer. Asia's middle class is increasing rapidly. They want more protein and more convenience in their lives. People are more aware than ever of the links between nutrition and health. Put simply, the world wants what we've got, sustainably produced high-quality nutritious milk. This comes at a time we see New Zealand milk supply likely to be flat or decline. On one hand, this requires the right capital structure to help ensure we don't lose the benefits of what generation of farmers have built before us. But on the other hand, it gives us options to be selective of what we do with the Co-op's milk. And in doing so, we are confident we can increase the value we generate over the next decade. To make this happen, we've made 3 strategic choices: continue to focus on New Zealand milk; be a leader in sustainability; and be a leader in dairy innovation and science. We've heavily stressed tested these choices and they can now give us the competitive edge, mitigate risks and position us to have a sustainable future well beyond 2030. We believe New Zealand milk is the most valuable milk in the world due to our grass-fed farming model, which means our milk has a carbon footprint around 70% lower than the global average. We have the opportunity to differentiate New Zealand milk further by focusing our capital here. That's why we've started a divestment process for Soprole and Prolesur, our businesses in Chile, and why we're also looking at various ownership options for Fonterra Australia. By successfully completing these processes and also continuing to hit our financial targets, we intend to return a significant portion of the net sale proceeds from these transactions to our shareholders and unitholders by F '24. We'll direct some of our capital towards improving our sustainability. And as I mentioned earlier, we have a unique low carbon position. When I was talking to CEOs and other industry leaders in Europe recently, it was very clear that sustainability is also the top of their lists. They all recognize that it's increasingly a ticket to the game and an important competitive advantage. Customers want to know where their food comes from and the environmental impact it leaves. That's why we have an aspiration for our Co-op to be net zero carbon by 2050. It's also why over the next decade, we'll invest around $1 billion in reducing carbon emissions and improving water efficiency and treatment at our manufacturing sites. We also want to maintain that carbon footprint advantage against the Northern Hemisphere, so we must be looking to solve the methane puzzle. Our investment in sustainability will allow us to tell a compelling New Zealand sustainability nutrition story through our brands. This will support growth in foodservice and momentum in our consumer channels across our key markets. It will also allow us to gain more value through ingredients channel by helping customers meet their own sustainability goals. Another area where we'll invest to differentiate our Co-op's milk is by carving that leadership position in dairy innovation and science. Our Co-operative has a long and proud heritage of dairy innovation. We're building on this by developing new solutions, which aim to solve problems our customers face in their operations and help people live healthier and longer lives. Being a leader in dairy innovation and science will require us to increase our investment in R&D. This would be used to develop more products to reach new customers and make the most of opportunities in active living. But we also believe that the next phase of a nutrition journey has just been discovered. Food has evolved over the many years from a simple energy source towards what consumers are today are looking for: taste, convenience and pleasure. We're now seeing that some types of food, in particular dairy could answer many of life's challenges such as immunity, cognition and even stress. And when you combine these benefits with data and technology, you've got something really powerful. It's an area we're calling nutrition science. We believe it can unlock more value from our specialty ingredients. And to help us narrow down and prioritize where we can build a competitive advantage, we've set up a small dedicated team to explore further. By taking this path and focusing on New Zealand milk, sustainability and dairy innovation, we're going after a number of key value targets at the same time as a sustainable milk price. We're aiming for 40% to 50% increase in operating profit from our F '21 base. With the reduced interest from having less debt, this should give us the ability to steadily increase dividends to around $0.40 a share by F '30. And by 2030, we also are targeting a group return on capital of between 9% and 10%. We're clear about the capital investment that's sitting behind these targets, which is about $1 billion invested in sustainability and $1 billion invested in moving milk to higher value products. I also want to highlight that through the planned divestments and improved earnings, we also intend to return about $1 billion or $0.60 a share to shareholders and unitholders by FY '24. We also continue to make available around $2 billion for a mix of investment in further growth and potential returns to you. Because these targets go out to 2030, we've had to make a number of assumptions, and as is always the case in the global market, there are risks and uncertainty, which means the actual results may differ. But these targets are what we're aiming for. Every year, we need to steadily put in place the building blocks to get us there. With this in mind, we've got 4 key priorities for this year. Firstly, we need to make the shift from a reset to growth. We'll make progress and work towards divesting our integrated businesses in Chile and prepare the process to deciding the most appropriate ownership structure for Fonterra Australia. We also need to narrow down and prioritize areas within nutrition science, where we can build a competitive advantage. And of course, we need to keep hitting our environmental, people and business targets. And we're off to a pretty good start. For example, we've formed a dairy science collaboration with VitaKey to further unlock the benefits of our probiotic strains. VitaKey specializes in delivering the right nutrients to the right part of the body at the right time. We've also made good progress in finding solutions to on-farm emissions. We've been working with Kowbucha, a probiotic strain, which helps switch off the bugs that create methane in cows. Initial lab results have been promising, showing a 50% reduction in methane and we're now taking these to farm trial. We are progressing the divestment of Chile and the ownership structure of Australia. And you would have seen, we delivered $190 million of EBIT in Q1. We have narrowed our forecast milk price range from -- to $8.40 to $9 a kilogram. This does increase the midpoint to $8.70 per kilogram. The higher milk price has seen the Co-op revise its earnings guidance, however, down to $0.25 to $0.35 per share as margins come under pressure. As we move through the year, we'll continue to be faced with the challenges of COVID-19, but the team and I will be focused on our 4 priorities, keeping an eye on today, but also looking out to the future. Thank you for your time. I'll now hand you back to John.

Thank you, Miles. We now move to questions or comments on Peter and Miles' presentations and my own comments. The questions are now open. So please use the functionality that's on the Computershare site. Depending on whether you're using a computer or a smartphone app, the layout might be slightly different. But to ask a question, simply select the Q&A tab, type your question into the box at the bottom of the screen and press send. And the questions will be coordinated by our Company Secretary, Andrew Cordner. We'll just pause now for 20 seconds to allow the audience to submit their questions. So Andrew, do we have any questions?

Yes, we have some questions, John. Here is the first question. "It seems unlikely that Fonterra will buy the fund back even though that is the preference of the fund's Independent Directors. So if this remains Fonterra's position, what do you do from here?"

Well, if the fund is retained, which is, of course, the current proposition, then it's important that the Independent Directors continue to hold Fonterra to account in terms of both strong performance, which we note that it's obviously been committed to and the respect the fund deserves as a meaningful part of the Co-operative. So the key, I think, is we need a competitive return on capital. And whereas farmers are also looking for that return on capital, the reality is that they have a portfolio interest in their farming business. They have their cars, they have their land, they have their shares. So I don't expect the supplying farmers are in all fours with the unitholders. History shows how this is going to be going forward. The returns to unitholders have been very poor, and we shouldn't shy away from that. And I think that's acknowledged. For those of us like myself that came in on day 1, we bought our shares $5.50 back in 2012, and they're now sitting at about $3.85. So it's a loss of $1.65. The dividends over that period have been in the order of $1.82. So broadly, that's a return of about 0.3% a year. So that's not on. Now on a positive note, the early results from the new strategy, as I said earlier, are positive. But we note that the strategic reset phase is going to be tough. It always is. When you go from a strategic reset to growth, that's a hard jack up. So for the fund to be successful going forward, I think there's 2 or 3 key things that have to happen. The investment proposition has to be clear for potential investors and current investors. I think there needs to be a key goal to secure a renewed interest in the fund. And that requires investors to have confidence in the earnings going forward. It needs them to be confident that there's going to be less volatility and stability of distributions. So that's the way I see the role of the directors going forward if the fund is retained. The next questions, Andrew.

Yes. Turning to the next question, John. "The Minister of Agriculture's current position is that the government cannot support the legislative amendments required to allow the new structure to go ahead because they create a risk of diverging shareholder interest between farmers. If government approval is not provided, do we go back to the old capital structure into the units and Fonterra shares being linked again?"

I'll invite Peter McBride to respond to that question. Peter?

Thanks, John. We remain confident that there's a regulatory framework that can support the flexible shareholding structure that we make. We do remain confident that there is a regulatory framework that can support the flexible shareholding structure. The strong mandate that we received just a few days ago has -- clearly puts us in a reasonably good position when it comes to conversations with the government on finding a mutually acceptable outcome. So we are confident.

Thank you, Peter. Next questions, Andrew?

Turning to the next question, John. "Why have the units dropped in value as much as they have this year? And why is there now a gap between the unit price and the Fonterra share price with the share price having dropped by a larger amount?"

So there are 2 parts to that question. I'll address the first part, which relates directly to the drop in unit price. And then I'll invite Marc Rivers, Fonterra's Chief Financial Officer, to comment on the gap and the reason why the Fonterra share prices dropped further. So I think there are several contributors to the value drop. Likely to be top of that list is the general uncertainty about the future of the fund and the overall investment proposition and concern in other volatility. Secondly, there's been a contagion effect. Contagion effect, in my view, arising from the drop in the price of the shares in the Co-operative. So the various materials that Fonterra issued for consultation in May spelled out some significant challenges for the dairy industry in New Zealand going forward and for Fonterra. And they made it clear that the price of the Co-op shares was expected to fall. I think that had an impact on the unit price. And linked to that, the materials that were issued made it clear that the Fonterra share price, the Co-operative share price, actually could well be higher than farmers would expect to pay because of non-farmer investors having a lower cost of capital and that caused a degree of confusion I think. The fourth factor I'd call out is the liquidity impact. So as a result of the farmer's shareholder market and the Fonterra Shareholders' Fund being separated, there was no longer the same level of liquidity in the 2 markets. And that, I think, probably had an effect on price. And I guess the final factor that may have contributed, particularly in recent weeks, has been the added concern arising from the rising milk price and the focus on maybe reaching $9 in this current season. So those are the factors that I think were directly relevant to the units. But to Marc, Marc Rivers, can you please comment on the gap that's emerged between the Co-op and the unit fund share price?

Yes. Sure, John. Yes, I think the gap was probably not completely unexpected in the sense that with the capping and the separation that we would expect some sort of discount to happen from just the fact that the farmer shares are traded amongst a smaller group of investors. So having that sort of liquidity discount would not be completely unexpected. I think the overall -- the degree of that gap and the share price performance itself, no doubt, some of the things that you mentioned, John, certainly would be relevant. The key for us really going forward is about performance. That's how we can best impact the price of both shares and units -- is through delivering on the strategy and executing and generating value, and that will be reflected in the shares.

Thank you, Marc. Andrew, any further questions?

Yes, John. "Do you feel that Fonterra has fulfilled its fiduciary duty to fund unitholders?"

I think it's important to recognize that the fiduciary duties are derived by the trust, the unit trust, that is the fund. And that those duties are the responsibility of the manager of the fund rather than of Fonterra. So the question really goes to has FSF management company as manager of the fund fulfilled its fiduciary obligations, which, in broad terms, are to act in good faith, to act in the best interest of unitholders and to ensure that there are no conflicts. And I can confirm that we have fulfilled those obligations. And in fact, I'm required as Chair to sign off quarterly on the fact that we have met those obligations, that sign offs are provided to New Zealand Guardian Trust as the trustee of the fund. And of course, I give the appropriate supporting evidence to be able to satisfy myself that I can sign that certification on behalf of the Board. Next -- are there further questions, Andrew?

Yes. Next question, John. "Going forward, do you think there will be a closer alignment between the price of the fund units and the value of parent Fonterra? If so, how will this closer alignment be facilitated?"

Again, I'd like to invite Marc Rivers to respond to that question.

Yes. Of course, it's very difficult to predict share price performance and even the degree of alignment. Again, I think the key thing to focus on is performance itself. And that -- to the extent that we're executing on the strategy, then that value would show up in the value of both shares and units.

Marc, can I just sneak one point of clarification there. I think part of the -- an important part of the question was, would we expect the share price to actually align as between the fund and the Co-operative. My perspective on that is over time, who knows, but the market will determine that. But based on the Fonterra reasoning that was put out with the consultation document, you would expect there to be an ongoing gap between the 2 prices with the Co-operative share price being lower. By what amount, of course, is ought to the market to decide, but is that something you would concur with?

Yes. I think all things being equal, one would expect to see -- continue to see a gap between the 2 financial instruments. But the underlying value has to be a reflection of the value that Fonterra itself is generating, right, which comes from execution.

Thank you.

Next question.

Yes, Andrew?

Next question, John. "Given the identified conflict of interest dynamics between milk price and dividend received by Fonterra shareholders, does the manager of the fund believe it is morally, ethically and legally tenable to continue with the fund?"

I think first, let me comment on the milk price setting mechanism because that's central to this question. And since the fund was launched in 2012, this has always been a cause of concern. So the fund, the Directors of the fund, all of us, all 5 of us, clearly take a very close interest in that. The mechanism is sophisticated. There are a number of checks and balances put in place with third-party reviews, including by the Commerce Commission. But actually, there's kind of an overall sense test. If Fonterra was paying a price more than market for milk, which is something which is sometimes put to me by unitholders, you'd expect that they would be successful in securing 100% of milk supply because why would farmers not move to a party that's paying more than market. Now that hasn't happened. In fact, the share of milk that Fonterra is processing has of course dropped. So there is that prediction. However, I accept there's always the perception, and I touched on this in my earlier remarks, as to whether it's morally or ethically acceptable for the fund to continue. But I don't think it's a question of morals or ethics. I think it is clear that when we as unitholders were invited into the tent in 2012, and we bought units, we did know that this was an issue. It's set out very clearly in the prospectus and the risks are set out. That's the risk that, with the benefit of hindsight, which is a great tool that could have had more focus -- it's a strategic risk because some of the impacts on the ensuing 9 years have been through strategic issues, such as the -- being make investment in China, et cetera. But as to morals and ethics, I don't think that's the right way to phrase this. I think though that with enough evidence now over the past 9 years, that I think it's an uncomfortable coexistence. And particularly now that the decision has been taken to delink the two, as I said earlier, the core rationale for the fund has gone. So my question and my challenge to Fonterra is what's its purpose. So I think the fund should be bought out, perhaps unusual for the Chair of an organization to say take us away, but I think that's an appropriate course of action to take. I'd be happy though to invite representatives of Fonterra to respond to those remarks.

I'm happy to comment, John. Yes, so I think it was really important to go through the consultation as part of the capital structure to understand the role of the fund. And the feedback that came back was that while there's certainly a range of views, the feedback was pretty strong that there was an important role for the fund. And in addition to providing capital, it's -- there's also the importance of that alignment on the need for performance. So the transparency that comes from having the fund, from the scrutiny that comes with that is clearly a positive for all investors, including the farmer shareholders. So I think with that sort of benefit that was what came out through the consultation. And so as you pointed out, there's now -- with the flexibility -- with the flexible shareholding structure, assuming that finally gets implemented, that actually even improves this alignment between the investors in farmer shares and unitholders.

Thank you, Marc. Andrew, are there other questions?

Yes, John. "Please reclarify the current fund value."

So the market capitalization of the fund as of Friday, based on my calculation, and I'm happy to -- Marc Rivers may have a comment on this. At a unit price of $3.85, which was the closing price on Friday, the market capitalization of the fund comes at about $413 million.

Yes, that's correct. That's what I have, John. Thank you.

Thank you.

I have another question, John.

Yes, Andrew?

"Does Fonterra's involvement in Kotahi include promoting use of the facility for imports to lower costs for Fonterra and provide shipping access to New Zealand importers?"

Could I invite Miles Hurrell, please, to respond to that question?

Yes, yes. Sure, John. So it does enable that. The predominant focus for Kotahi is an export play. But through Kotahi, we do have the ability to work with them for imports as well. And so that's a growing part of the business, but very much a smaller part with -- in so far as the exports are concerned.

Thank you, Miles. Andrew?

There are no further questions, John.

Thank you, and thank you for your questions. If there are no further questions, we will move on to the next item of business. I'd now like to invite Mary-Jane Daly, Independent Director of the management company, to take over as Chair of the meeting to cover the resolution.

[Foreign Language] We move now to the proposal to re-elect John Shewan as a Director of the Fonterra Shareholders' Fund Management Company, the manager of the fund. The resolution to be proposed has been set out in the Notice of Meeting and voting of the resolution will be by way of a poll. KPMG is the independent observer in the scrutineering process and will ensure the voting process is managed correctly. The proposed resolution is an ordinary resolution. And as such, it must be agreed to by a majority of the votes of unitholders entitled to vote and actually voting on that resolution for it to be passed. The resolution was set out in the Notice of Meeting and will be taken as read. The resolution proposed by the Board will be moved and seconded by a Director, and I will invite comments and questions on the resolution. After discussion on the resolution has been concluded, I will ask you to vote on that resolution. You'll be able to vote through the online platform as described earlier. We'll provide a reminder of how to vote online following discussion on the resolution. The results of the voting on the resolution will be released to the market when posted on the Fonterra website as soon as possible today. Resolution 1 seeks the reelection of John Shewan as a Director of the manager of the Fonterra Shareholder Fund. Mr. Shewan is an Independent Director for the purposes of the NZX listing rules. Mr. Shewan was last reelected at the company's 2018 Annual Meeting, and therefore, will retire from office at this year's annual meeting. Being eligible, John Shewan offers himself for reelection. As noted in the Notice of Meeting, John Shewan was appointed Chair of the Fonterra Shareholders' Fund Management Company Board in November 2012. He is an Independent Director. In addition to the manager, he chairs the Board of Munich Reinsurance Australasia and is a Director of China Construction Bank, New Zealand Limited. He's also an adjunct professor in the business school at Victoria University of Wellington. I now invite John to say a few words.

Thank you, Mary-Jane. As I explained in my chair letter in the Notice of Meeting, having sat on the Board of the manager over the past 9 years since the Board was launched in 2012, it was my clear intention to retire at this year's annual meeting. But as Fonterra released the capital structure of immaterial in May and consultation got underway, 2 things became clear to me. First, the proposed changes could have a significant impact on the fund and on the value of unitholders' investment in it. Secondly, the process would almost certainly not be complete by the time of this year's annual meeting and the associated director election process. Having been donkey deep with my Independent Director colleagues and working through the implications of the capital review, I reached the view that now is not the right time for the Chair of the fund to step down. A subcommittee of Independent Directors is working well together as a team and I think the loss of continuity, context and institutional knowledge at this particular time would not be in the best interest of the fund. So if I am reelected today, it's my intention to serve until the capital review has reached a stage where the subcommittee's work is largely complete or the project is sufficiently well advanced, that a change in director will not have an adverse impact, and I will retire at that time. An entirely fair question would be, is it not inconsistent for you to stand for reelection when earlier in this meeting, you've argued that Fonterra should take the fund out? I don't think so. There are 2 sets of issues to consider here. My efficacy for unitholders to be given the opportunity to consider an offer from Fonterra to buy the fund out is a keyfully considered position that's shared by my fellow independent directors. It's based on the key principles that I outlined in my remarks earlier in the meeting. If that position is not accepted, which, of course, is the situation that we currently face, the fund's problems do not go away. If the fund remains under Fonterra's new capital structure, there are a range of issues that need to be dealt with and the manager needs to attend to them. To use a COVID-19 analogy, you might argue strongly that the EMI key systems no longer fit for purpose and should be abolished. The fact that the government might not agree with your position does not mean that you stop trying to achieve a good result for people needing to cross the border. Finally, a word of thanks. A lot of the unitholders have been in touch over the last 7 months to convey their views, concerns and other matters relating to the fund and to ask questions. Your feedback is always listened to, it's always welcome. And if reelected, I'm happy to continue to engage. Thank you.

Thank you, John. I would now like to call on my fellow Independent Director, Kim Ellis, to move Resolution 1.

Sure. I move that the meeting resolved to reelect John Shewan, who retires by rotation and stands for reelection, as a Director of the manager of the fund.

Thank you, Kim. I'd now like to call on Donna Smit to second the motion.

Thank you, MJ. I would like to second the motion and fully support it.

Thank you, Donna. For the purposes of transparency, as at 10:00 a.m. on Saturday, the 11th of December, the following proxy votes have been received: for, 96.5%; against, 0.1%; discretionary, 3.4%. I now open the resolution for discussion. Are there any questions online?

There are no questions, Mary-Jane.

As there are no questions, we will move to the voting process. As previously mentioned, if you are eligible to vote at this meeting, you'll be able to cast your vote through the Computershare platform under the Vote tab. There is no need to hit a submit or enter button as the vote is automatically recorded. You do, however, have the ability to change your vote up until the time I declare voting closed. To cast your vote, simply select one of the options. I now put resolution 1 to vote. [Voting]

Thank you for taking the time to vote. Voting online will close in 1 minute. We will have the final results of the votes released to the NZX and available on fonterra.com as soon as possible. I will now hand back to John.

Thank you, Mary-Jane. At this point, I'd like to provide the opportunity for any items of general business to be received. Please submit your questions online. Once again, use the Computershare slide to do this by selecting the Q&A tab and typing the item that you wish to raise into the box at the bottom of the screen and then hitting send. Andrew, do we have any items of general business or questions that have come through?

We don't, John.

Just pause for a moment to allow -- in case any come in. If there are no further matters of general business, we'll bring the meeting to a close. Thank you very much for your attendance. It's greatly appreciated. And we wish you all the best for Christmas and the New Year. Thank you.