Fonterra Shareholders Fund (FSF) Earnings Call Transcript & Summary

Hi, my name is John Shewan. I'm Chair of the FSF Management Company, which is the company that manages the Fonterra Shareholders' Fund. A very warm welcome to you to the 2022 Annual Meeting. We really appreciate you coming along, either in person or online. We have quite a number online today. So Fonterra's business performance in 2022 has been strong, and we'll hear more about that shortly. But as we all know, it's been a very tough year for equity markets with heightened volatility, unprecedented macroeconomic and geopolitical events, and all these things have contributed to the performance of our unit price, as has the ongoing uncertainty associated with Fonterra's new flexible shareholding capital structure and how that might impact on unit price. So today is a great opportunity to talk about these issues and to hear more about last year and the future outlook and a forum for you to ask questions. So I declare the meeting open. And for those of us here at Fonterra's offices in Auckland, there's a few health and safety matters that I need to touch on briefly. If there is an emergency, an alarm will sound. Please exit the building through one of the doors with the green light over the top. [indiscernible] the behind and gather in the plaza are outside the doors out the back there and remain outside, please, until Fonterra staff invite you back in when it's safe to return. The bathrooms are over to your left behind the lift lobby. The Notice of Meeting was sent to unitholders on 14th October, and those unitholders eligible to both of those who were on the register at 5:00 on the 11th of November. And we'll take that Notice of Meeting as being read. We have the required forum of 5 or more unitholders, and so the meeting is properly constituted. So we've got the meeting in person at Fonterra's offices in Auckland and online using the Computershare meeting platform. And online attendees can watch a live webcast of the meeting and view all the slides. Unitholders and proxies can also ask questions and submit votes. Now in terms of submitting questions, you can submit them at any time, and we'll pick them up at the relevant time in the meeting. [Operator Instructions] And if you need assistance, please type an inquiry into the chat box, and one of the Computershare team will help you out or you can call them directly on 0800-650-034. Now we've got 2 resolutions that we're voting on today, and they'll be conducted by way of poll. The online voting is going to open shortly. And if you're eligible to vote, you'll be able to cast your vote under the vote tab. To cast your vote, just select one of the options. You don't have to hit submit or the enter button because it's automatically recorded. And you can change your vote up until the time the voting is declared closed. And I'll let you know when that is. So moving on now to the agenda for the meeting. It was set out in the items of business. The first item is an address from myself from the fund perspective. And I'm delighted to welcome Mr. Peter McBride, Fonterra's Chair; and Chris Rowe, the acting Chief Financial Officer, who will address the meeting to speak about Fonterra's performance and future plans. And then we'll open up for questions on the presentations. I'll then take you through the resolutions to elect Carlie Eve and Alastair Hercus as directors of the FSF management company. And they'll say a few words, and the resolutions will then be moved. The physical voting on the resolutions in the room today will take place after Carlie and Alastair have spoken and will then collect the voting papers. We'll then open the meeting for general business. And then finally, we'll recognize the contribution of retiring independent directors of the fund, and I'll make a few words in relation to my tenure as Chair. We expect the meeting to extend for about 1.5 hours, and we'd be pleased if you could join us afterwards for refreshments in the lobby at the conclusion of the meeting. Turning now to introduce the people up the front here. I'd like to introduce my fellow directors of the management company and then the senior representatives from Fonterra. So on my right are the Fonterra Shareholders' Fund management company directors. So Mary-Jane Daly, to my immediate right, who is taking over from me as chair at the end of this meeting; Kim Ellis, who is retiring from the Board today; Donna Smit, a Fonterra-appointed director who's joined us from [indiscernible] north of Bay of Plenty this morning; and Andy Macfarlane has been delayed due to flight issues in Christchurch this morning. In the front, we have John Nicholls. Welcome, John. John is going to take Donna Smit's place as one of the Fonterra-appointed directors on the Board because Fonterra -- sorry, Donna has retired from the Fonterra Board with effect from this year's annual meeting. And Donna, I'd just like to take this opportunity to thank you sincerely for your contribution as a Fonterra-appointed director. You've always been very open and willing to talk about a farm perspective and to listen to our perspective from a unitholder's lens, and we thank you very much for your contribution. It's much appreciated. On my left to the Fonterra representatives, Mr. Peter McBride, the Chair; Chris Rowe, who is the acting Chief Financial Officer; Miles Hurrell, the Chief Executive of Fonterra, is not able to be in Auckland today. Miles is joining us online, and he will be available to answer questions when we get into the question time. Simon Till, the Director of Capital Markets, sitting next to Chris; and then Andrew Cordner, who's Director, Legal, Fonterra and Company Secretary. Turning now to have a look at the 2022 year. So as mentioned, a good year for Fonterra from an operating perspective, and it's good to see progress being made in implementing the strategy and delivering a strong financial performance in the context of what are historically very high milk prices. Also, of course, we've had the combined impact of inflationary pressures in the geopolitical and supply chain disruptions or the trifecta of influences. And Peter and Chris will speak to these. But I'd like to just highlight quickly a few matters that are of particular relevance to the fund. So the Fonterra's reported result was $583 million after tax. Normalized earnings per share came in at the top end of the forecast range of $0.35 per share. As a result of that, the total dividend declared by Fonterra was $0.20 per share, which, of course, flows through to you as unitholders in the form of $0.20 per unit, comprising 2 elements, the $0.05 interim payment and the $0.15 per share that was paid on the 14th of October. Before I move on to discuss the fund itself, I just wanted to reiterate comments I've made at the earlier meetings about the role of the management company Board. We have statutory responsibilities in relation to the operation of the fund. These include monitoring compliance and regulatory requirements and also making sure unitholders' interests are appropriately managed and protected in accordance with the various constitutional documents. The directors of the fund have no role in the governance or management or operation of Fonterra, so although we have no decision-making role in these areas, we do endeavor to represent unitholders' interests and views to Fonterra, and we do that. And that representation role has been important in the last 12 months in relation to the consultation process that Fonterra has undertaken on capital structure. So let's now move to take a close look at the performance of the fund over the last year. The graph currently on the screen highlights that despite Fonterra's good financial performance in 2022, the unit price has declined quite markedly. It decreased 8.4% from $3.71 at the beginning of August last year to $3.40 at the time Fonterra Shareholders' Fund released or Fonterra released its own annual report on the 22nd of September. And regrettably, since then, there's been a further decline of 10.9%. So as of this morning, the units are trading at $3.03. So that's an overall drop of about 18% over the 15-month period. How the implementation of the new flexible capital structure might impact unit price clearly has played a part in subduing the price. It's also -- had been impacted by the impact of increased volatility in equity markets and the lower valuation of markets across the board in New Zealand and offshore. And that reflects the factors we touched on a minute ago, inflationary concern, geopolitical and recessionary worries. The NZX 50 index declined by about 12.7% over the same period. and the S&P 500 is down about 14 -- just over 14%. One thing that was a surprise last year was the sudden drop in the unit price at the end of April and into May. And some of you might recall that at that time, there was a report that came out from a financial and economic consulting firm, Castalia, which contain a number of assertions that Fonterra took issue with. And I just want to touch on the points Castalia made. They asserted that the protections for a fair milk price would be eroded under the new capital structure and would cause milk price to increase, which, of course, will be negative from a share price perspective. Castalia also estimated that Fonterra's future share price on the basis of future dividends, they quantified it on the basis of performance up to 2030, but somewhat puzzlingly then appeared to conclude that there'll be no value left within the co-operative at that point. Fonterra disagrees with those assertions very strongly, and the management company agrees with Fonterra's concerns. It was a puzzling conclusion. The unit price reached a low of $2.75 during this period, but it has recovered somewhat. But this new flexible capital structure continues to have an overhang effect of uncertainty and concern, and the unit price overall has declined from $4.60 immediately prior to Fonterra's capital structure review announcement, which was 5th of May last year, to last Friday's and this morning's price of $3.03. Now that uncertainty should reduce once the new structure gets put in place. The independent directors of the manager of the fund remain firmly of the view that Fonterra should have bought back the fund as part of the capital restructure process. And I think the sequence of events and adverse impact on our unit price since May 2021 when these announcements were made shows very clearly why our concerns were justified. Turning to look at the makeup of the current unit register. The various investor types have been pretty stable year-on-year. Of note, there is a reduction in the number of units being held by Fonterra farmer shareholders, dropped by 1% to 8%. Farmers held 12% of the units back in 2020 in total. And that overall reduction is likely to be related to the capping of the fund because farmers, of course, can no longer exchange their shares for units. Retail investors continue to be the dominant holdings on our register, but we are seeing pleasingly an increase in institutional interest. That's driven by a combination of both Australian and New Zealand institutions. Just moving on to look at some of the key statistics for the fund. So we've got -- currently, we're capped at 107.4 million units, closing price of $3.03, which makes us a $325 million entity in total market cap. The number of units on issue was flat year-on-year and of course, with no additional Fonterra shares issued, the fund size as a percentage of the total Fonterra shares is pretty much unchanged at a little under 7%, 6.7%. I've already mentioned that our price continues to be impacted by the overhang of the new capital structure, and that's driven a reduction of the market capitalization by some 22% relative to this time last year. So it dropped another $93 million, which is concerning. On the positive side, as I mentioned, we've got a stronger result coming through from Fonterra, and you will have seen that it revised -- the cooperative revised their earnings per share guidance from $0.30 to $0.45, which it was before, up to 40% to 60% (sic) [ $0.45 to $0.60% ], primarily driven by strong demand for cheese and protein products. Of relevance to unitholders, the Fonterra Board also reaffirmed its 2030 targets and the focus on the 3 strategic choices of focusing on New Zealand milk sustainability and being a lead in dairy innovation and science. So we now have the opportunity to hear from the Fonterra team on the strategic and operational plans that will deliver value to shareholders and unitholders. So a pleasure in inviting Fonterra's Chair, Peter McBride, to the podium. Peter?

Thanks, John. Good morning, everyone. Today, I'd like to make a few comments about the cooperative's financial performance over the past financial year and our strategy. And I want to talk about the work we're doing with our stakeholders to ensure that we retain a sustainable supply of New Zealand milk, which, as you know, is the foundation which we drive our earnings from. Overall, our co-operative has continued to make good progress towards becoming a more innovative and customer-led organization. The Board is very pleased with the team's progress implementing our strategy and this year's strong financial performance in the context of historically high milk prices, inflationary pressure, as John mentioned, and continued geopolitical disruption in a number of key regions. We will always push hard for performance. But when you consider the continued supply chain disruption resulting from COVID-19, the geopolitical and economic challenges we face in multiple markets, we believe Miles and his team have done an excellent job. We've made strong progress towards our 2030 strategic targets, which we set in September last year and remain committed to. However, volatility has and always will be a feature of global dairy. Tracking progress towards our 2030 targets will never be a straight line. You should expect some earnings volatility year-to-year as we move through to 2030. In the past few years, we have moved our Co-op's strategy away from a global volume play to a focus on deriving value from sustainable New Zealand milk. That strategy is starting to deliver for us as we demonstrated by this year's milk price and earnings performance. Our customers are at the heart of our strategy. We will achieve our performance targets by continuing to deliver products to market in a way that meets their expectations. Chris will speak to this in more detail in his address. But our high-value customers are asking us to support them in meeting the expectations of their stakeholders, especially the end consumer. Today, 73% of global consumers find sustainability pledges important when buying dairy products. It's great news for a co-op that strategy is focused on New Zealand milk and being a leader in sustainability. New Zealand dairy farmers already have the world's lowest carbon footprint. If we can maintain that advantage, we have an excellent opportunity to build mutually beneficial relationships with our premium customers. Maintaining a sustainable supply of [ that ] New Zealand milk in an environment where we expect the country's total milk volumes to decline has been a key priority for the Board and management over the past few years. Last Thursday, the Primary Production Select Committee released its report on the legislative changes to DIRA that are required to implement our flexible shareholding capital structure. It's another key milestone in the legislative process, and we remain hopeful that the government will reach a decision before the end of the year. After which, we will move to the flexible shareholding structure as fast as possible. Innovation, research and development and collaborations with strategic partners are also a focus for the Board. You will remember that as part of our '23 strategy, we were targeting investment of $1 billion in sustainability, $1 billion into moving milk into high-value products, the intention to increase current total annual R&D investment by over 50% to around $160 million per annum by 2030 and $2 billion available for investment and a mix of future growth, including opportunities for nutrition science and return to shareholders. We are still committed to our investment targets for sustainability, higher-value products and R&D. The return to shareholders and unitholders anticipated divestments, including Soprole and a stake in our Australian business. Even though we have since decided not to sell a stake in our Australian business, we are still committed to targeting a significant capital return to shareholders and unitholders. We need to be mindful that we retain the asset in Australia and the earnings associated with it. The amount of any capital return will be determined by the successful completion of the divestment program as well as the Co-op's financial position at the time. In terms of the outlook for the Co-op in New Zealand dairy, the Board does remain confident and excited by our future prospects. As you will be aware, the extent and rate of change our farmers have been asked to make on-farm is a real challenge. Our focus is on supporting them through the changes by signaling them early, seeking to provide the tools and resources needed to implement that change and delivering the highest possible sustainable returns to counter-balance their rising input costs. Before I hand back to John, I want to acknowledge that he is retiring as chair of the fund at the conclusion of today's meeting. Long-serving director, Kim Ellis, also retires today. Both have been on the Shareholder Fund Board since 2012. I know their fellow directors will speak to their contribution later in the meeting. But while I have the floor, I want to thank John and Kim for their contribution over many years. Thanks. And particularly, I want to thank John for staying on in the role longer than he had intended as a result of the changes the Co-op wants to make to our capital structure. I'd also like to acknowledge the contribution of Donna Smit, who retired from the Board of Fonterra last Thursday at its annual meeting. Donna has served as a Fonterra-appointed director of the shareholder fund since November 2018. Thanks, Donna. That's me, John. Thanks, everyone.

Thank you very much, Peter. I now have pleasure of inviting Chris Rowe, acting Chief Financial Officer of Fonterra, to speak in more detail about the operational results.

Thank you, John. Good morning, everyone. I want to echo Peter's words by acknowledging those directors retiring this year, Chair, John Shewan; and Directors Kim Ellis and Donna Smit. I want to spend a few minutes reflecting on the year just gone but also look ahead to what's on the horizon. F '22 was a year like no other. COVID-19 continued to test us. We saw new strains and regional lockdowns in New Zealand and ongoing restrictions in a number of our global markets. The war in Ukraine accelerated decisions about the future of our Russian business, and we also felt the impact of the Sri Lanka economic crisis. And of course, we started to feel the effects of rising inflation, which continues to be an issue for all of us. As an exporter, we're used to dealing with geopolitical and macroeconomic events. But FY '22 was exceptional in terms of the number and their impact. Despite this, we stuck to our strategy of maximizing the value of our precious milk and in the face of uncertainty, delivered an impressive set of results. We all know that a high milk price has the potential to squeeze margins, so it was good to see progress in our key metrics. Total group revenue, normalized profit after tax and group normalized EBIT were all up. Given the lower milk collections, it's good to see total group gross profit up $226 million due to significantly higher product prices across our ingredients channel. We delivered this result despite the significantly higher cost of milk, with the Farmgate Milk Price increasing from $7.54 per kilo of milk solids last year to $9.30 per kilo of milk solids this year. I know it won't have escaped your notice, however, that net debt was also up. As you know, a key aim of the strategic reset kicked off in 2019 was to shore up our foundations and strengthen our balance sheet. That strong balance sheet means we were able to hold greater inventory at the end of the financial year. The bulk of this was contracted, but shipping disruptions and stronger milk collections towards the end of the season meant we held more inventory than usual at year-end. The result was an increase in our working capital and in our net debt position. I'm pleased to say the team has made great progress in getting that inventory out the door, and we expect working capital and debt to return to normal levels over the course of this year. Despite the decision to hold more inventory, it's good to see that our improved performance has meant our return on capital has increased from 6.6% to 6.8%. The financial year saw continued strong demand for dairy across multiple markets and products at a time of constrained milk supply. We faced global supply chain challenges and a significantly higher cost of milk for our businesses. The increase in prices over the season did place pressure on margins in our food service and consumer channels, but this was more than offset by strong earnings in our ingredients channel. I want to turn now to our strategy. It's just over a year since we announced our strategy to 2030. The last year shows that there will be some bumps along the way but we remain committed to the goals we set ourselves 12 months ago. Demand for our sustainable nutritious dairy remains strong. We made 3 strategic choices: to focus on our New Zealand milk, to lead in innovation and science and to lead in sustainability. These are guiding our business and every single decision we are making. We're pleased with the progress to date. Success for us means allocating our scarce resource, those milk solids, where they will deliver the greatest value. You'll see from the slide how that played out last year with the growth in our Active Living business. The allocation of milk solids to our foodservice channel has also continued to grow, with innovation expanding the uses of our UHT cream range within our Anchor Food Professionals brand. We continue to make progress on the sale of our Soprole business, which, of course, underpins the capital return we've discussed previously. We've also completed the review of our Australian business and decided that, long term, it's in our best interest to maintain full ownership. Sustainability sits at the heart of our strategy, and we continue to make good progress. The public-private partnership between our sector and the government to address the methane challenge builds on some of the sustainability work we're already doing. Of course, we have a natural advantage in the sustainability stakes with a carbon footprint less than 1/3 of the global average. But we can't sit back. Customers and consumers expect more and doing nothing simply isn't an option. We need to maintain our advantage and keep pace with their expectations, which is why we signaled at last week's annual meeting that we're considering setting a target for Scope 3 emissions. We know that change is inevitable, but with change comes opportunity, and that's why we're excited about the future. Looking ahead to the current season, it's good to kick the year off with a strong earnings guidance of $0.45 to $0.60 per share, up from our initial forecast of $0.30 to $0.45 per share. As you would expect, we continue to monitor a number of global risks, but we do expect to see an easing in some of the geopolitical events which tested us last year, and you can see that also reflected in the strong earnings guidance and the forecast milk price. Longer term, we have our 2030 targets firmly in our sights. The changes we recently made to our organizational structure put us in the strongest possible shape to deliver, and it's good that we were able to do that by promoting some of our brightest internal talent. Emma Parsons heads up our strategy and optimization team, ensuring that in the context of our shrinking New Zealand milk pool, our milk solids are being allocated to the highest value product mix. Her team also ensures our strategy remains fit for purpose in the context of changing global trends and events. We have a proud heritage of dairy innovation, and our future success depends on our ability to double down to extract maximum value from our milk. Komal Mistry-Mehta leads our Innovation and Brand team, putting innovation at the heart of our Co-op. And Judith Swales heads up our expanded Global Markets team, bringing the customer voice front and center as we focus on our New Zealand milk pool. It's good to see the progress being made on our flexible shareholding, and we look forward to those changes being implemented as soon as we are able, so that our Co-op can continue to thrive. A strong, united Co-op is in everyone's best interests, delivering for you, our rural communities and New Zealand as a whole. Thank you for your ongoing support. I'll now pass back to John.

Thank you, Chris. We now move on to the opportunity to have questions and comments on the 3 presentations that you've heard. So Peter, Chris and myself. And we'll start by taking questions from the floor and then move to questions online. For those of you who are in the room, if you have a question on something that's going to be dealt with later in the meeting, the resolutions or general business, please wait until that time before the questions are put. While we take questions from the floor, I invite those of you attending online, please submit questions through the Q&A tab. [Operator Instructions] So if you'd like to ask a question, please raise your hand and we'll bring a microphone to you. And if you could introduce yourself, that would be great. So I invite questions from the floor. One down the front here. Thank you.

Thank you. Malcolm Tweed, New Zealand Shareholders' Association. If possible, I wonder if we could get a little bit more clarity on the reasons behind retaining the investment in Australia. We know that the Australian milk production is in a rather steady decline. And it would appear that at face value, Fonterra needs to look at how it's using its Australian solids, on the one hand, but it would also seem that Australia needs to retain some form of, let's call it, downstream distribution capability for dairy solids, given the fact that New Zealand has, is, and I guess, is going to continue to supplement and complement Australian dairy solids. But it'd be useful to hear that from the company rather than me speculating.

Thank you for your question. I'll invite Miles Hurrell, Fonterra's Chief Executive, who, as I indicated, is online. Miles, if you've picked up that question, could you please respond to that?

Yes, sure. Thanks, John. Look, I mean, a lot of work has gone in the last 12 months in reviewing the Australian business. And I think the point you touched on is an important one. It uses a lot of -- the Australian market uses a lot of milk solids from New Zealand now. So we have a secondary processing cheese operation in Australia that takes a lot of cheese from the New Zealand market and into the Australian market, both to the domestic market but also some actually comes back here once it's further processed. We also have quite a strong export market out of Australia and just some of our key Asian markets, which complements our New Zealand business as well. So that is also -- complements, as I say, our business here in New Zealand. So those are the two key reasons, and it's also performing very well at the same time. Thank you.

Thank you, Miles. Any other questions from the floor? One more?

I don't want to hog the microphone. There was reference made to ongoing restrictions in a number of markets over the last financial period. And I can appreciate that from a Sri Lankan and perhaps from a Russian union perspective. But the words were a number of rather than a couple of. I wonder whether there are other markets presenting restrictions or challenges to Fonterra.

Again, I'll invite Miles Hurrell to respond to that. Miles?

Yes. So we -- I mean the COVID restrictions that we're seeing in China is having an impact even as we speak in terms of our foodservice market. But you only have to go back sort of 6 or 8 months in the COVID lockdowns that we saw throughout Southeast Asia, in particular, were having an impact both on consumer and in foodservice. They're sort of -- they're the restrictions that we referred to in the slide pack. By and large, those restrictions have been lifted throughout our Asian markets and certainly Northern Hemisphere have been lifted. But as I say, we're still feeling the impacts, to an extent, in our foodservice business in China.

Thank you, Miles. Any other questions from the floor? I'll come back to you, sir. I think we might have a couple online. So we'll take those, if you don't mind, and then we'll come back to you.

We do, John. The first one is, in regard to potential capital return by 2024, wouldn't it be appropriate to look at a large buyback of FCG shares, given they are under valuation and/or further repayment of debt or a combination?

I invite Fonterra's Chair to respond to that.

Yes. So we have allocated $300 million to buy back cooperative group shares and cancel them. And we believe that's in the interest of shareholders. So we have been actively in the market this year, buying back a limited number of shares. It's quite a fun market. So that is our intention. And prior to any distribution of capital, we will be seriously considering the risks that are in front of us and our balance sheet at the time. So we'll take a balanced view of that.

I should also make the point that from a unitholder perspective, unitholders will benefit from a capital distribution, which is effectively a special dividend from the proceeds of divestments. So there's a positive element there that I think is relevant to that question that's been raised. Other questions online?

Another question, John. What are normal debt levels for 2023 as described by the CFO? Please give an indication of the debt-to-EBITDA figure and how that may be approached by the end of the 2023 financial year.

I'll ask Fonterra's acting CFO, Chris Rowe, to respond to that.

Normal, we would see, by the end of the year in the order of 2.5 to 3 is a debt-to-EBITDA level and gearing similar to what it's been historically. Thank you, Chris.

One more question online, John. Given the strong earnings forecast for 2023, can this give us some confidence that the Fonterra 2030 targets are rather very conservative?

I would like Peter McBride to comment on that.

Well, the first thing I'd say, targeting 10 years out isn't easy. So I just caution advice around them being too conservative. We don't know what the future holds really. But I think the target is really healthy because it provides discipline because if we're reporting against that 10-year target, and I think it's a really good discipline for us. And so I think I just caution using the word conservative.

Miles, would you like to comment on that from a Chief Executive perspective, given that you're the man in the hot seat?

Yes. I think the slides that Chris talked to -- talked about there'd be some bumps along the way and the current year that were forecast has shown -- is showing to be a positive year. But you only have to look back a few months, and we had a situation we had in Sri Lanka. So as the Chair talked to, it's nice to have a target here that we've more rally around and go after, but it won't be a linear move towards the 2030 target.

Thank you, Miles. We'll now come back to the question in the room in the second row here.

Just a quick one. There's reference made earlier, this morning, to declining New Zealand milk flow. And I wonder the -- if the underlying contributors to that are blurred at this point in time by adverse weather conditions that we've seen during the last couple of seasons. And if there is some blurring, what does Fonterra see as the, if you like, an underlying contributor to the decline in milk flow?

Miles? Peter?

The first time contributed to declining milk as land use change. So in New Zealand, New Zealand dairy farms are converting out of dairy at 1% per annum. So that's a reality. Now you could say, potentially, that could go fast and not slower. We're not sure. The other contributing factors, an aging demographic. Farms that need investment around effluent, new cow sheets compliance. So those farmers know if those farms can't be amalgamated into -- for the dairy, they're changing their land use. People are making lifestyle choices. So in terms of land use change, what we're seeing is dairy farmers going to solar panels, [ find near a ] substation, urbanization, horticulture. Avocados in the far north, that may slow down given market demand, yes; kiwifruit in the Bay of Plenty; hops in Nelson. So it's happening everywhere. And we're also seeing dairy farms converted to -- for grazing blocks, in winter grazing blocks. So that's one of the drivers of it. And I think the targets in terms of environmental around water quality and emissions are going to put further pressure on it.

And Peter, there's been recent controversy that the farmland being converted into forestry as part of a decarbonization and the carbon credit initiatives. Could you comment on the impact of that on dairy?

The impact is really on sheep and beef farms primarily, but it does impact dairy because it creates uncertainty around heifer grazing. So we are joined at the hip with our dry stock friends. That's why the solution we need for [indiscernible] needs to take consideration of all of us together.

Thank you. Are there any other questions either online or from the floor?

There are none online, John.

Okay. If there are no further questions, we'll then move to the next item of business, which is the proposal to elect Carlie Eve and Alastair Hercus as directors of the FSF Management Company, the manager of the fund. The resolutions have been set out in the Notice of Meeting, and we'll take them as read. And we've got voting on these resolutions by way of poll. We have KPMG representatives in the room. They are the independent observer and the scrutineer in process and will make sure the voting is managed directly. These are ordinary resolutions, and so as such, must be agreed to by a majority of the votes of unitholders who vote for them to be passed. So I'm going to invite each of Carlie and Alastair to say a few words before the resolution, for their election, as moved. And then we'll get it seconded by a director, and we'll then open the meeting up for questions and comments. And after discussion on the resolutions has been concluded, I'll ask you to vote, and we've been through the voting process for those online. And then the results of the voting will be released to the market later today and posted on the Fonterra website as soon as possible. I would just want to move -- before moving the resolution or moving to the resolutions, I want to talk briefly about the process that the Board has gone through in identifying potential candidates. I want to acknowledge the substantial assistance of Mary-Jane Daly in this process. So the skills required of a director of the management company of the fund include governance, preferably the listed entity; a strategic thinking; financial and capital markets knowledge and experience; and importantly, an appreciation for the way cooperatives work; and an interest in the primary sector; and also risk management experience. In total, we identified as a group 23 potential candidates. And after an initial screening, a shortlist was developed. Got down to, I think, 4 or 5 candidates. And Carlie Eve and Alastair Hercus were then identified has been particularly well-suited to the role. This, because of their knowledge of capital markets and familiarity with the dairy industry. And following a thorough process, the Board unanimously resolved that Carlie and Eve -- sorry, Carlie and Alastair be appointed to the Board. So resolution 1 seeks the election of Carlie Eve as a director of the manager of the Fonterra Shareholders' Fund. Carlie is an independent director for purposes of the NZX Listing Rules. She's been nominated to the Board to fill one of the 2 vacant positions created by Kim Ellis and myself retiring as independent directors today. Carlie has very significant experience in financial markets and the corporate sector. She's held executive roles across equity research, investment banking, investor relations, corporate strategy and funds management. She's currently a director of a trustee of the Diocesan School Heritage Foundation (sic) [ Diocesan Heritage Foundation ]. Carlie, I welcome you to the podium to say a few words.

Thanks, John, and good morning, everyone. I'm originally from Northland and have been mainly based in Auckland for the last 30 years. I attended a number of mostly small rural schools across New Zealand and in Rarotonga before studying at the University of Auckland. My link with Fonterra began with a university holiday job working in the lab at Fonterra's [indiscernible] dairy factory. My perspective was very different many years later when the Fonterra Shareholders' Fund was first listed on the stock exchange, and I was a potential institutional investor evaluating the investment opportunity. I have nearly 30 years' experience in financial markets and the corporate sector with executive roles, as John mentioned, across equity research, investment banking, investor relations, corporate strategy and funds management. I've recently pivoted my career focus towards governance. I'm currently a trustee of the Diocesan Heritage Foundation and was previously a director of Hobsonville Land Company. I have a deep understanding of the listed markets and what investors across the spectrum are seeking from their investments from a return, sustainability, governance and communication perspective. I am strategic and analytical with strong financial skills. I enjoy working with businesses that are constantly evolving and always seeking opportunities to improve their growth path in order to maximize the value creation for shareholders. I believe my skill set will be a valuable addition to Fonterra, and I am excited to be nominated for a position on the Board of the Fonterra Shareholders' Fund. Thank you.

Thank you, Carlie. I'd now like to call on Kim Ellis to move the resolution.

This is my big moment. I move that the meeting resolve to elect Carlie Eve, who stands for election, as a director of the manager of the fund.

Thank you, Kim. And I now call on Mary-Jane Daly to second the motion.

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

Thank you, Mary-Jane. So we now move on to resolution 2, which seeks the election of Alastair Hercus as a director of the manager of the fund. Alastair is an independent director for purposes of the listing rules and has been nominated by the Board to fill the other vacancy arising today. Alastair is an experienced director, particularly in the cooperative and mutual sector. He has been a partner in Buddle Findlay, a leading corporate law firm since 1995. And he's currently Chair of Co-operative Life Limited. I now ask Alastair to come to the podium and say a few words.

Thank you, John, and good morning, everybody. As you've heard, I'm a lawyer and company director. I grew up in Invercargill, and I moved to Wellington to join the Ministry of Foreign Affairs and Trade after leaving university in Dunedin. And it was there that I had my first experience of the dairy industry. Strangely enough, in the late 1980s. I was posted as a diplomat to the New Zealand embassy in Chile. At that time, the New Zealand Dairy Board was one of the very first major New Zealand corporates to invest in Chile and its big investment was Soprole. I met and worked with Board members and senior managers there at that time, helping them navigate Chile's economic and political situation. My next major experience with the dairy industry was when I became a lawyer working at Buddle Findlay in the '90s. I had a major role in cooperative company law reform. And the purpose of that project was to ensure continuation and modernization of a legal regime which supports the special characteristics of cooperatives despite the views of some at the time that, that was unnecessary. This involved working quite closely with many cooperative dairy companies existing at that time as well as the Dairy Board. I also led a major project to restructure and confirm the ownership of the Dairy Board -- by the Dairy Board of Anchor, Fernleaf and Mainland brands. My subsequent legal career has been heavily focused on the primary sector, exporters and cooperatives, large and small. This includes 25 years advising Zespri, and as Peter mentioned a moment ago, that we ran the last couple of years the hop industry. So one extreme to the other. I've gained in-depth knowledge of cooperative structures and dynamics and in particular, economic regulation and legal regulation of primary sector exporters such as Fonterra. I'm very familiar with the origin and purpose of the fund and the part it plays in the commercial and regulatory framework that applies to Fonterra. Separately, I've also developed a career in governance. I'm currently on the Board of Toka Tu Ake EQC. I'm on the Board of Invercargill Airport, my hometown, and Chair of Co-operative Life, which is a subsidiary of Co-op Bank. I am also a trustee of a charitable trust established by Market Gardeners Ltd, which is a major cooperative of produce grass. I was a Director of Medical Assurance Society, which is an insurance and fund manager and superannuation provider for 9 years, which included 5 as Deputy Chair. I think I bring a strategic approach to being a director and have strong analytical and communication skills. I really enjoy working with diverse and collaborative Boards. I think my experience and skills will enable me to make a valuable contribution to the Fonterra Shareholders' Fund management company. I'm very excited to have the opportunity to do that. Thank you.

Thank you, Alastair. Now we've been joined on the stage, you'll see, by Andy Macfarlane, who's the other Fonterra-appointed director. I going to ask Andy to move resolution 2. Before doing so, would you like to give us 5 minutes on the on-time performance of Air New Zealand, Andy?

[indiscernible] plane when the pilot's got COVID, unfortunately.

Could you please move the resolution?

Thank you, Chair. Look, I move that the meeting resolve to elect Alastair Hercus, who stands for election as a director of the fund. Thank you.

Thank you, Andy. Donna, would you like to second the motion?

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

Thank you. Now for the purpose of transparency, want to put up the results of the voting up to 10 a.m. on Saturday. So the following proxy voting has been received. You'll see the numbers up on the screen there. So I'd now like to open up the resolution for discussion. Are there any questions, first of all, from the room on the resolutions that have been moved and seconded? It appears not. Are there any online?

There are no questions online, John.

No questions online. Okay. So we'll now move on to the voting process. So for those voting online, as I've previously said, cast your vote through the Computershare platform. You don't need to hit the submit button, as I said earlier. So go ahead and do that now, please. [Voting]

So I've now formally put these 2 resolutions to the vote. For those of you in the room, the scrutineers are bringing the boxes around. If you could put your voting paper in there, please. Tick for or against, obviously, or abstain on the box and don't use any other markers. Noncompliant votes will be treated as invalid. So for those of you online, if you could spare with us for a few minutes, it should take us no more than a couple of minutes to get the boxes collected. Okay. Well, I think we are complete. Is it correct? Yes, we are. So I'd now like to open the -- well, just on the results, the final results should be released this afternoon to NZX, and as I said earlier, they'll be on the Fonterra website. Now at this point, I'd like to provide the opportunity for people to raise any items of general business. Is there any?

[Audio Gap] Also, why are there all these opposition brands of milk that are in dairies and the warehouse that are so much cheaper? And you look at the content, you look at the analysis of protein and sugars and all that sort of thing, and they are the same. Why can other companies do it so much cheaper?

So 2 questions there, which I'm going to ask Miles Hurrell to respond to. First, relating to volume, which appears to be reducing for some products, notwithstanding the price being the same or higher. And secondly, competing milk products or other dairy products being cheaper. Miles, would you mind picking that question up, please? Or both questions?

Yes, sure. So I mean the pack sizing is -- will come through demand from what consumers are looking for. So we are governed effectively by the international price of milk. And so if we are seeing the price of milk go up globally, which we have seen certainly in these last 12 months -- well, last couple of years, in particular, you then see consumers are looking for small pack sizes for a similar price point. So that's a key reflection of what you're seeing in that regard. And in terms of the retail pricing of what you referred to some of the retail outlets and the way that they price, I mean we don't get involved in that. That's simply a decision with the retailer themselves. And so we don't get involved in that pricing. As I say, our price linked to the international market price is how we will sell to the retailer and make our own calls on that.

So we just wait for the microphone to come back. Thank you, [ Phil ].

In regard to the flavored milk, I frequently buy flavored milk. And since the contents went down from 2 liters to 1.5, I have never ever bought Primo milk again ever. I always buy [indiscernible].

Well, thank you for your comments. I understand your concerns. And I'm sure, Miles, you've picked them up. Anything further you wanted to add to that second point made about [indiscernible]?

No, I can't comment on that specifically. Sorry, I don't have the detail that. But your comments would be known.

Thank you. Is there any other general business in the room? For the online, is there anything that's been submitted online, Andrew?

No further questions. No.

No further questions. Okay. I'm now going to move on to recognize the contribution of Kim Ellis, who retires today. Kim and I were, as we said earlier, appointed to the Shareholders' Fund Board same time back in 2012, 10 years ago. And Kim, I have thoroughly appreciated your contribution and support over the ensuing 10 years. You've got an incredibly dry sense of humor, comes with being a good golfer, I guess. And you've got a great way of cutting to the chase on issues and staffing matters as you see them. We never doubt what you're thinking. On occasions, this Board role has been like riding on the back of an elephant as it heads off into pastures unknown, and I've really welcomed you being there to provide guidance and support. Your deep knowledge and experience on the primary sector and the listed company environment has been valuable. You've always been a very strong advocate for unitholders. On a lighter note, you've also become famous for being the grammar king to a point where even our legal adviser, Roger Wallis from Chapman Tripp, who's in the front row, routinely qualifies his legal advice to us by starting off with, "Subject to Kim's comments on grammar, here's my opinion on XYZ." We'll miss that. And heaven help the external auditors when there are grammatical errors in their reports. They're soon sorted out. But thank you sincerely, Kim. Please accept this token of our appreciation.

Thank you, John. Thank you.

I'll now turn the podium over to our incoming chair. Mary-Jane Daly.

So I'd like to make a few comments about John's time on the Board. So John joined the Fonterra Shareholders' Fund Board in August 2012. And that was when the Fonterra Shareholders' Fund was in the final design stages, ahead of its launch in November of that year. The Fonterra Shareholders' Fund was the first of its kind, and it was very much traveling into unchartered waters. John's tax and commercial background and his business acumen were enormously valuable through the design and launch phase of the Fonterra Shareholders' Fund. In the following 10 years, there have been some significant challenges at time for the fund, and John, in your role as Chair of the manager, you have consistently focused on the protection of unitholder interests and ensuring there was an appropriate focus on the fund's value proposition from the perspective of those unitholders. And importantly, you have remained open and accessible to unitholders throughout this time. And I know that at times, there's been quite a lot of conversation and interaction with shareholders or with unitholders. And that's been especially true over the last 2 years as Fonterra initiated the consultation on its new flexible shareholding capital structure. This had a direct impact on the Fonterra Shareholders' Fund, and as you've talked about earlier today, the unit price. Your dedication to ensure unitholder interest were kept front of mind has been constant and strong. We are grateful for that dedication, for your vigilance and the insights that you have provided and also for your strong leadership as Chair. Your professionalism and your contribution to the Board culture have been outstanding. It was important, and it's very much appreciated. As a small token of our appreciation, we have a gift for you today. And that's on behalf of the Board of the Manager and Fonterra, we'd like to present you with a framed pounamu piece. It was carved by artist [ Alex Baines ], who is based in the heart of dairy country in the Waikato. It goes from us to you with our very grateful thanks for your many and important contributions over your time as Chair of the Board of the Manager.

Thank you very much, Mary-Jane. Your comments are appreciated, and thank you very much for the gift, which is wonderful. Just wanted to pass on some reflections 10 years down the track in my time as Chair of the Fonterra Shareholders' Fund. So it was formed exactly 10 years ago this month, and it was formed as a solution to a major problem that Fonterra had at that time with its capital structure. And that problem was a capital base at risk due to the obligations on Fonterra to redeem, in other words, buy back shares from farmers as they reduce supply or exited the Co-op. And the trading among farmer structure brought that to a halt by enabling farmers to trade shares both amongst themselves but also convert any dry shares into units that could be traded on the highly liquid unit fund market through the NZX Main Board. That liquidity being provided by external investors. If I assess the success of the fund against that primary objective, it scores well, probably 10 out of 10. Fonterra has achieved its objective. The fund and the associated trading among farmers arrangements have created a stable capital base, which has served Fonterra well. But has the funds served unitholders? For the large part, no. As the inaugural chair of the fund, I want to apologize for the fact that for most unitholders and certainly those that invested on day 1, the investment returns for the fund over the decade since its formation have been dismal. I find that outcome unacceptable and deeply disappointing both as chair and as a unitholder. So when we issued in 2012, the issue price was $5.50. Today, it's just over $3, as you've heard, a drop of 45%. Dividend payments have been modest and in some periods, nonexistent. Over the same 10-year period, the NZX 50 grew by 175%. So commenting on the share price, Fonterra has said, it's fair to say that Fonterra's track record on paying a respectable return on capital over time has not met expectations. With all due respect, in the context of a 45% loss over a decade where the market has delivered 175% gain, I consider that statement from Fonterra to be an understatement of truly remarkable proportions. So on reflecting on these last 10 years, I want to speak briefly just to 3 questions that I'm often asked by unitholders and others. Firstly, why has the unit price performed so badly? Secondly, isn't it the case that the milk price will always be set in a way that farmers favors farmers over shareholders? And thirdly, do unitholders today have reasons to be positive looking forward? So what's contributed to the fall in unit price? The way I look at these things, there are kind of 4 buckets of influence which have contributed to the -- or driven the unit price over the last decade. First is Fonterra's operating performance, which has been disappointed -- disappointing. Secondly, there have been some extraordinary left field influencers, in particular, the 2013 botulism scare and the associated litigation. Thirdly, there's been some major strategic investment decisions that have failed to deliver. And fourthly, there's the capital structure review. The first 3 buckets deal with factors that, in my view, face all investors. They're the risk that arise in business, and they're the risks that arise from investment. But the fourth bucket being the capital structure review, in my book, is very different. That structure change, which you've heard about, falls outside the boundaries of normal commercial investment risk. And the proposed changes have had a significant and sustained negative impact on the value of our units. As I said earlier in my chair's address to the meeting, I remain firmly of the view that Fonterra should have bought a fund out at fair price, the starting point for which I would argue was the $4.60, the units we're trading at, immediately prior to Fonterra initiating the capital review consultation on 6 May last year. Perhaps the most surprising point of my 10 years as chair was when Fonterra released the consultation documents relating to the capital structure review. That material and the statements Fonterra made in the associated media interviews argued that the Shareholders' Fund was causing Fonterra shares to be overvalued. The explanation was, and I quote, "Farmers think differently to investors." They have more risk from the concentration of capital, meaning, capital in their farming operation, and a higher expectation of yield. Or expressed more technically, farmers have a higher cost of capital than investors in the fund. And for this reason, I expect a higher yield. To achieve that, farmers need to pay less for these shares. That reasoning is highly debatable, and we had professional advice that it was simply wrong. But perhaps more importantly, were it to be true, were these proposition to be true, then it's clear to me the funds should never have been formed in the first place because the share price inflation impact that Fonterra complained so loudly about for the first time in 2021, if valid, was equally valid and relevant back in 2012. It was an aberration of Fonterra's own making. I was also thrown by the Fonterra statements, the effect of the fund's existence risked loss of farmer control of the cooperative. How that could possibly be so given that the fund has no voting rights of any kind and never has any prospect of getting them is a complete mystery. It does, however, reflect underlying disquiet by some farmers over the existence, presence of external investors, an issue that history shows was never, never adequately dealt with and resolved ahead of the fund's formation. So last May, we found ourselves in the extraordinary position as directors of the manager, where the fund had moved from being a solution to Fonterra's capital structure problems to being the cause of new and more profound capital structure problems. I want to use an analogy to illustrate a point. To me, it was like having been invited to a long-stay hotel in return for payment of a prepaid room rate and then being told 9 years later that you're causing problems for more important guests. So you get the impression that you might not be welcome any longer. The manager of the hotel complains loudly that because you're outsiders, you're prepared to pay a higher room rate than the more important guests, and you're having the undesirable effect of bumping the room rate and therefore, the value of the room is up. The manager explains that to solve this, all rooms are going to be reduced in size. The market value of rooms will drop as a result. The hotel might fall out of the top 50 hotel index, further dampening the market value of the rooms. And the house bar is going to be split into two, one for insiders and a separate one for outsiders because the combined bar has been causing too much liquidity and higher prices. In the media, Fonterra explained and I quote, "The current model is incongruous because if we are seeking to maximize the share price and have at the same time an intergenerational cooperative, these two things don't go together. It just doesn't work. Currently, there is a misalignment of investor profiles." I fully understand and respect Fonterra's right to reach that view and to act on. But having reached that view, the trading among farmers' structure, the structure they designed, must be dismantled because it just doesn't work. Well, I am no doubt, no doubt at all, that the proper course of action was to provide unitholders the right to be bought out at that time at fair price. In my book, that's the respect that unitholders deserve. Buying the fund out, which was Fonterra's stated preference when the first consultation documents were issued in May last year before subsequently changing their mind, was the only principal solution. And a further support for my view, I point to the various headlines in the Fonterra media releases over the last 18 months. These consistently refer to the proposed new capital structure being good for farmers. But I'd not ever see 1 headline saying that it would be good for unitholders because it's not. So to borrow a well-known Australian colloquialism, Fonterra, I put it to you that unitholders have not had a fair suck of the sav. The second question, I'll be much brief on this one, is milk price. Has it been inflated at the cost of unitholders' interests? I spent many hours debating this issue with unitholders, media commentators and others. And I remain satisfied that the milk price setting mechanism is transparent and achieved an arm's length price. I do not agree with the proposition that this mechanism is skewed against the interests of unitholders or that there's any form of manipulation of the outcome. I think that's [indiscernible]. But I think Fonterra might do a better job explaining to stakeholders exactly the way the milk price is set. But in my view, the governance framework around the setting of the milk price is both thorough and impressive. There's a range of checks and balances in place, including oversight under the Dairy Industry Restructuring Act, which includes a promised commission review. And the amendments before the Dairy Industry Restructuring Act currently before Parliament to accommodate the new structure further strengthen those checks and balances. Final question. Looking ahead, are there grounds for optimism? Well, despite my profound disappointment and fundamental disagreement with Fonterra over the treatment of unitholders, I acknowledge that the fund manager and unitholders have to play with the cards that have been dealt. So the fund will remain, at least for the foreseeable future. And although its role as a central component of the trading among farmers arrangements has fallen away, the fund -- and the fund now sits on fundamentally different foundations, it remains as holder of a little under 7% of the economic interest in New Zealand's largest and strategically most important company. You've heard this morning Fonterra say that it's making solid progress in implementing its strategy and is on track to meet its 2030 performance targets. We've got an increased forecast earnings range. These are good results in the context of the continuing high milk price. We've heard also that the cooperative has reaffirmed its intention to make a capital distribution when it completes its divestment program, subject to the Co-op's financial position at that time. Looking ahead, the market will determine if the fund is a good investment going forward. The primary driver would, of course, be Fonterra's performance. And the vastly more down to earth strategy being pursued by the current Board and management does seem to be translating into improved results. The two factors are going to be critical in gaining and embedding market confidence and support for investment in the fund, hopefully, including the return of institutional support. First, consistency in strategy and earnings, which will, in turn, translate into a decent dividend stream; and second, avoidance of the significant strategic potholes that undermine value so severely over the decade that I've been involved with the fund. In closing, I would wish my successor, Mary-Jane Daly, and the new Board of the management company all the very best in taking the fund forward. Thank you. That brings me to the end of my remarks. Before bringing the meeting to a close, I just want to pass on a couple of thank yous. To [ Phil van Poland ] and [ Sofie Helene ], who at the back, thank you so much, guys, for keeping the fund operating so smoothly on a daily basis, for tolerating chair's last-minute changes to scripts and so on and for all that you put in to making today's meeting work. Thank you also, Simon, Simon Till, the Director of Capital Markets, for your regular forecast 8 a.m. updates with more news and your support. That's appreciated. And Andrew, thank you for your time as Company Secretary over the period. That concludes the business of the 2022 Annual Meeting of the Fonterra Shareholders' Fund. Thank you for joining, and all the best for the future. Thank you.