Fonterra Shareholders Fund (FSF) Earnings Call Transcript & Summary

I am MJ Daly, Chair of the FSF Management Company, the Manager of the Fonterra Shareholders Fund. Welcome to the 2023 Annual Meeting of Unitholders of the Fund. We appreciate your attendance, both here in person today and also online. Today provides an opportunity to discuss the performance of the past year, the future outlook for Fonterra and the fund and any other questions that you may have. I formally declare this meeting open. For those that are here with us at Fonterra's offices in Auckland, there are a few health and safety items I need to cover. In the event of an emergency, an alarm will sound, and we will evacuate the building. Please leave your belongings and exit by the door with a green light over it, which is just over there, the way that you came in, and gather in the plaza outside in the main front doors. Remain outside of the building until advised by a Fonterra staff member that it's safe to return. Bathrooms are located out of the doors and behind the left lobby. The notice of meeting was sent to unitholders on the 12th of October. Unitholders eligible to vote are those that were on the unit registered as at 5:00 p.m. on the 10th of November 2023. The notice of meeting will be taken as read. We have the required quorum of 5 or more unitholders, and accordingly, the meeting is properly constituted. Today's meeting is being held in person at Fonterra's offices in Auckland and online using the Computershare online meeting platform. Online attendees can watch a live webcast of the meeting and view the associated slides. Unitholders and proxies can also ask questions and submit votes. Online questions can be submitted at any time. They will be answered at the relevant time in the meeting. [Operator Instructions] Voting today on the resolution before the meeting will be conducted by way of a poll. Online voting will open shortly. If you're eligible to vote, you'll be able to cast your vote under the Vote tab. To cast your vote, simply select one of the options. There's no need to hit the submit or enter button as the vote is automatically recorded. You can change your vote up until the time voting is declared closed. For those online, I now declare voting open on the resolution. I will let you know before online voting closes. The agenda for the meeting was set out in the items for business in the notice of meeting. And the first item is the Chair's address. Following that, Peter McBride, Fonterra's Chair; and Miles Hurrell, Chief Executive Officer, will then address the meeting to speak about Fonterra's performance and future plans. After that, we will open the meeting for questions on the 3 presentations. Alastair Hercus will then take you through the resolution to reelect myself as a director of the FSF management company. I will take the opportunity to say a few words and the resolution will then be moved. Finally, we will open up the meeting for general business. We expect the meeting to take just over an hour. And for those of you in the room today, we invite you to join us afterwards for light refreshments in the lobby at the conclusion of the meeting. Now I'd like to introduce my fellow directors of the FSF Management Company and the senior representatives of Fonterra joining us today. On my right are Carlie Eve and Alastair Hercus, who are the independent directors appointed by unitholders. We then have John Nicholls and Andy Macfarlane who are appointed to the Board by Fonterra. On my left are senior representatives of Fonterra, Peter McBride, the Fonterra Chair; the Chief Executive Officer, Miles Hurrell; the acting Chief Financial Officer, Simon Till; and then the Director Capital Markets and M&A, Selena Robb. And finally, at the end, we've got the Director Legal and FSF Company Secretary, Jackie Floyd. So moving to the second agenda item. I'd now like to take the opportunity to address the meeting as the Chair of the FSF management company and discuss the performance of the fund and some of the activities that FSF directors have undertaken this year. It's been a great year for Fonterra. They've delivered a record profit, implemented the new flexible shareholding capital structure and completed the sale of Soprole, which resulted in an $804 million capital return to shareholders and unitholders. Peter and Miles will speak further to this, but it's appropriate that I highlight a few aspects of particular relevance to the fund. Fonterra's reported profit after tax was $1.6 billion, and normalized earnings per share came in at the top end of the forecast range at $0.80 per share. Fonterra declared a total dividend of $0.50 per share, which flows through as a distribution of $0.50 per unit. Unitholders also received a 50% distribution in August following the successful sale of Soprole, and Fonterra undertaking a $0.50 per share capital return to Fonterra shareholders. This brought total cash distributions to $1 per unit in 2023. In December 2022, the Fonterra shareholders voted in favor of the flexible shareholding capital structure, and this was implemented in March 2023. Before I move on to discuss the performance of the fund in more detail, it's important to acknowledge the role of the Board of the manager. The Fonterra Shareholders' Fund Board has statutory responsibilities for the activities of the management company and the fund. These include monitoring compliance with regulatory requirements, ensuring that unitholders' interests are managed and protected in accordance with the constituent documents that relate to the fund. Directors of the fund have no role in the governance or operations of Fonterra. Although we have no decision-making role in these areas, we do consider it important to actively represent the interest and views of unitholders to Fonterra, and we do, do that. And speaking to this year's performance, I'm under no illusion that the performance of the fund since inception has not been satisfactory for unitholders. However, it is really pleasing to see Fonterra's continued focus on its strategy is delivering value. And this has been reflected in the total shareholder return since the last annual meeting in November 2022. The fund has returned 36.5%, while FCG and the NZX 50 for the same period have returned 23.6% and a negative 0.8%, respectively. The fund Board has seen several positive steps by Fonterra over the past 12 months that demonstrates the greater alignment between unitholders and shareholders' interest and the Fonterra's new flexible shareholding capital structure. Fonterra Chair, Peter McBride, is going to provide us thoughts on this greater alignment shortly. For the fund Board, a positive step in the alignment has been Fonterra's transparency on its resource allocation framework. This is focused on a disciplined allocation of its key resources, namely milk and financial resources. And as part of this, the Fonterra senior management team have been greater aligned to the delivery of value to shareholders and unitholders through the long-term incentives being linked to total shareholder return and farm profitability. As mentioned earlier, the fund Board before you is relatively new with the average tenure under 2 years. At the end of the 2022 AGM, I assumed the position of Chair, and Carlie Eve and Alastair Hercus, the other 2 independent directors, were appointed to the fund Board. Fonterra also appointed John Nicholls to the Board at the end of 2022. To this end, the fund Board has been proactively engaging with Fonterra Management to enhance and deepen its understanding of Fonterra. This year, the Board has engaged with Fonterra management to understand and provide feedback on Fonterra's equity strategy and fund strategy with a unitholders' lens. We've also requested Fonterra management provide regular education sessions on areas of particular interest to increase our understanding of the key drivers that can impact the fund, such as sustainability and its optimization function, namely the allocation of milk to various products. Finally, the independent directors formed a capital return subcommittee to make sure unitholders' interests were being considered fairly during the capital return process. So now looking at the current makeup of the fund's unit register because this is an area often of interest to unitholders, to provide a few more details. There's been a slight shift in the investor type since the last annual meeting with a small increase in units held by private wealth and institutions. This is both driven by New Zealand-based investors responding to the improved performance of Fonterra and the yield on offer. Units held by supplying farmer shareholders reduced from 9% to 7% of the register. This is not an unexpected outcome given that shares can no longer flow through to the fund. Retail investors reduced from 71% to 70% of the register. Of the 76 million units held by retail investors, around 45 million are held by former supplying farmers. When combined with the nearly 8 million units held by supplying shareholders, around 50% of the fund is held by current or former supplying farmers. The location of the fund's investor base remains New Zealand dominated and stable at 88% due to the increase in private wealth and institutions. This was offset by the decrease in supplying Fonterra farmer shareholders and ceased farmers that are reported as retail investors. Lastly from me, I will touch on some key fund statistics. With the cap on the fund a permanent feature of the new capital structure and the lower value of the Fonterra share relative to the fund unit, there has been no change in the 107 million units on issue. Fonterra's market capitalization is down $600 million in part due to the $804 million or $0.50 per share capital return. However, the fund's market capitalization has increased slightly relative to this time last year. The fund's $12 million increase in market cap to $337 million is due to an increase in the unit price from $3.03 this time last year to a closing unit price of $3.14 on Friday. Despite several Fonterra Co-operative Group share buyback programs taking place over the period, the fund size as a percentage of the total Fonterra shares remains largely unchanged year-on-year at 6.7%. We have the opportunity now to hear from the Fonterra team on the performance and outlook that will deliver value to shareholders and unitholders alike going forward. Accordingly, I invite Fonterra's Chair, Peter McBride, to address the meeting.

Thanks, MJ. Good morning, everyone. Thanks for turning up. I'd like to make a few short comments outlining the Board's perspective on the Co-op's performance this year, which Miles will then go into more detail after I speak. I also want to acknowledge the changes to the size and composition of the Fonterra Board, which were approved last week by our shareholders. Performance is always first and foremost so I'm going to start here today. Miles and the team delivered the third consecutive year of strong performance overall despite facing into difficult market conditions in a number of channels and regions. Top line, the team can be proud of delivering a reported record profit after tax of $1.58 billion, equivalent to $0.95 per share and up 170% on last year. Our final milk price for '22/'23 season was $8.22 per kilogram of milk solids, down from the high forecast midpoint of $9.50 in June '22. When we witnessed the impact of lower-than-anticipated demand for imported products particularly from China, the impact would have been greater if it weren't for the team's efforts to utilize the scale of the Co-op and shift milk into products and places that were delivering the most value at the time. While on the one hand, our milk price was negatively impacted by market forces; on the other, our earnings did benefit from favorable market conditions, including strong margins in our ingredients channel, in particular, the cheese and protein portfolios. In other words, the market presented us with an opportunity and the diversity of the co-ops's product mix mean our teams could go after it, where others may have struggled. There's one other key performance indicator that I'd like to call out. Improving the strength of our balance sheet and reducing debt has been a priority for us over recent years. As you can see from the slide, we have made significant progress over a number of years through a combination of improved performance and increased financial discipline. Our net debt is down $2.1 billion to $3.2 billion, reflecting a lift in the earnings, reduction in working capital and divestment proceeds. By reducing our overall debt position, we have been able to increase dividends, pay the capital return and make changes to our advanced rate schedule. An acknowledgment of the strength of Fonterra's balance sheet, the Board made the decision to pay a final dividend of $0.40 per share, which was slightly above our dividend policy. Combined with the interim dividend of $0.10 per share, it brought the full year dividend to $0.50 per share and per unit. Sitting behind these excellent numbers were some real challenges, particularly here in New Zealand. Our flexible shareholding capital structure has been in place since March this year and is working broadly as expected. One of the key principles of the flexible shareholding design was a desire to give all shareholders a degree of choice with the shareholding, rather than the old model which was one of compulsion. With farmers now having the flexibility at the top end to hold up to 4x their milk production, or at the bottom end hold as little as the equivalent of 33% of the milk supply, there is a significant level of discretion on the investment choices that come to the choice you have as unitholders. As you can see from the slide, the number of discretionary shares in the Co-op has increased from around $250 million under the previous trading amongst farmer structure to approximately 1.2 billion discretionary shares under our flexible shareholding structure. As a result, there is a greater degree of alignment between the commercial interest of the Co-op's farmer shareholders and unitholders. We know that Co-op needs to continue to perform and deliver strong earnings if it is to remain an attractive place to invest -- sorry, to invest your capital, regardless of whether you are a farmer or a unitholder. The last topic I want to cover off this morning is the changes to the Fonterra's Board size and composition. At last week's Fonterra Annual Meeting, 88.49% of votes cast were in support of the Board's proposal to reduce the size of the Fonterra Board from 11 down to 9. The current balance between farmer-elected and appointed directors will be maintained with the composition of 6 farmer-elected directors and 3 appointed directors. As is the case today, the Chairman will be selected from within the pool of farmer-elected directors. My personal experience leading or being part of leadership groups is that in smaller groups, people are more engaged and able to share their perspectives in a more meaningful way. Smaller groups encourage greater sharing of dissenting ideas, which in opinions, which is a good thing and are proven to support faster and more robust decision making. Having now been part of the Co-ops's Board for 5 years and the last 3 as Chair, I am confident that reducing the size of our Board will improve the dynamics within the group, encouraging greater participation from directors and maintaining access to the necessary skills and experience to govern the Co-op into the future. We are still anticipating a challenging operating environment for the year ahead, particularly for our farmers. However, we are forecasting a solid earnings performance this financial year. The Co-op is entirely focused on performance, and as our farmers will be on their own farms, reducing its cost to offset the impact of inflation over the coming years. Farming is a long-term gain. And as an exporter, we need to accept that we are impacted by demand and supply dynamics, commodity prices and geopolitical events. The Co-op does its best to try and smooth the edges and optimize value, but there will always be volatility. Ultimately, strong performance through the milk price and earnings is the best way we can support our farmers through this difficult period. That remains our focus for the year ahead. Despite the very real challenges the industry faces this season, the longer-term outlook for New Zealand dairy remains very positive. The world wants our sustainable milk. New Zealand -- Fonterra is in a strong position to meet this demand. Our current balance sheet gives us a lot more options to create more value, which is exciting for our future. MJ, I'll hand back to you. Thank you.

Thank you, Peter. I now invite Miles Hurrell, Chief Executive Officer, to address the meeting.

Kia ora. Good morning, everyone. Thank you, Mary-Jane. The Co-op delivered strong results for FY '23 and made good progress on its strategic initiatives. During the year, we implemented our new fixable shareholding structure, completed the divestment of our China farms and our Chilean Soprole business and launched our new nutrition science corporate ventures arm, Ki Tua. These milestones were several years in the making, and I'm proud of what the team delivered upon the commitments we made to you, our shareholders and unitholders. FY '23 financial performance was shaped by market dynamics, which we worked hard to make the most of. Our profit after tax was $1.6 billion, up 170% on the prior year, and our return on capital was 12.4%, up from 6.8%. This was driven primarily by higher protein prices, which we captured in our ingredient channel. Earnings performance put us in a position to pay a full year dividend of $0.50 per share, including the interim dividend of $0.10. In addition, we returned a tax-free $0.50 per share unit at year-end unit early in F '24 following the divestment of our Chilean Soprole business. However, these strong returns were against the backdrop of a Farmgate Milk Price, which did fall throughout the season. This was a result of reduced demand from whole milk powder, in particular from key importing regions. To optimize our Farmgate Milk Price, we moved milk into higher-performing reference products, such as skim milk powder and cream where possible, and ended the season with a final Farmgate Milk Price of $8.22. Fonterra's balance sheet metrics are better than targeted levels even after adjusting for the impact of the capital return, thanks to a dedicated focus on lowering debt and financial discipline. This has allowed us to introduce new advanced rate schedule, which gets cash to farmer sooner. It has also supported our ability to pay a full year dividend slightly above our targeted dividend policy range of 40% to 60% of earnings. At all times, we're focused on what's within our control to maximize the overall returns to our farmers, shareholders and unitholders. We are continuing this disciplined approach through 2 -- the interaction of 2 new efficiency measures and a new resource allocation framework. The new efficiency measures will assist us to stay on track for our long- and short-term targets by ensuring that our costs are managed relative to the value we can generate and the volumes of milk that we collect. The 2 new core metrics are 4% cash operating cost improvement per year, which will assist long-term discipline in our global operating expenses; and a 2% New Zealand cash manufacturing cost improvement every year. This is to support efficient New Zealand operations while ensuring we maintain laser focus on delivering value. We expect the application of these 2 measures to see us reduce our costs across the business by around $1 billion by 2030. We're also increasing the focus on our efficient allocation of our farmers milk and capital guided by a new resource allocation framework. Our first priority is safe and efficient operations. We then allocate our farmers milk towards either ingredient, foodservice or consumer channels according to where we believe we can see the highest returns. Following this, we allocate the cash generated from these channels to either dividend, capital return or paying down debt, growth capital, innovation or share buybacks, whichever has the best outcome for shareholders and unitholders over time. Looking at F '24, our current forecast Farmgate Milk Prices in the range of $6.50 to $8 per kilogram with a midpoint of $7.25. This reflects the ongoing reduced whole milk powder demand, although we have seen strengthening in prices recently as the supply and demand dynamics improve. New Zealand's milk collections are slightly -- forecast to be slightly lower than last season, while aggregated milk growth in the key export markets is also expected to be below average. On the demand side, it is not yet clear whether the stronger demand seen in recent GDT events will be sustained, so we are cautious in our outlook. Looking at our forecast earnings for FY '24, the favorable price relativities we experienced throughout F '23, which drove our ingredient channel performance, have reduced from their peaks. But we have forecasted an improvement in our consumer and foodservice channels as our markets capture improved margins. As such, our FY '24 forecast earnings range for continuing operations was $0.45 to $0.60 per share. Turning now to our strategy. Over the medium to long term, the New Zealand -- the outlook for New Zealand dairy remains positive. Demand for sustainable nutrition has continued to grow and implementing our strategic plans, we are well positioned to meet this demand. As we know, being a leader in sustainability is a fundamental part of our strategy. We already have a competitive advantage, thanks to our pasture-based farming model that produces some of the lowest carbon-producing milk in the world. But we also know we need to keep moving to maintain our competitive edge. This is why we have decided to introduce a target of a 30% reduction of our on-farm emissions intensity by 2030 from a 2018 baseline. Fonterra farmers have built a world-leading business on the back of innovation and hard work. And we know farmers will continue in this tradition and continue to lead the way when producing high-quality, sustainable dairy, which gives us confidence in meeting this target. It's important to note this target will be measured at the Co-op-wide level, not by farmer. But collectively, achieving it will be an action by all our farmers. Also, an intensity target means we're seeking to reduce the number of emissions produced per kilogram of milk solid, which is all about finding efficiencies on farm. We see a credible path to deliver a 30% reduction, which looks something like a 7% reduction through farming best practice, including feed quality and herd performance; a 7% reduction through the application of new technologies such as Kowbucha; an 8% reduction through carbon removals from existing and new vegetation; and an 8% reduction from historical land use change conversions from dairy. And while everyone had the opportunity for efficiency gains, the action plan will look different for each farm. Farm Insight Reports provided to our farmers by the Co-op identify opportunities on farm, and our farmer team is also providing tools and services to support them through this change. As our target will be measured from 2018 baseline, any change made since then has contributed to our 2030 goal. Progress has been made in the areas of sequestration and land-use change. More importantly, of the 7% we're looking to achieve through best on-farm practice, we've already achieved 2%. And during visits this year to Europe, U.S. and China, it's been clear to me that sustainability is at the top of the agenda for our customers and our competitors are also moving at pace. Having a target will assist us to retain and grow customer partnerships as well as export markets and finance -- excess finance. The target we have introduced is credible and internationally recognized. It will help future-proof both the corporate and our farmers businesses, supporting our ambition to be long-term sustainable Co-op for generations to come. Thank you for your time, and I'll hand back to MJ.

Thank you, Miles. We now move to questions or comments on Peter and Miles' presentations or on my own remarks. We're going to start with questions from the floor and then move to online questions. So for those of you in the room, if you have questions or comments on the resolution being dealt with later in the meeting or other matters of general business, please wait until the appropriate time during the meeting to put those questions. [Operator Instructions] If you'd like -- if you're in the room and you'd like to ask a question, please raise your hand and an usher will bring you a microphone, wait for the microphone and then please introduce yourself. I now open the meeting for questions.

[ Michael Schroff, ] shareholder. Interested in the Soprole purchase. When did you first purchase or buy into Soprole? And how did it go over the course of your investment?

Thank you. I'll pass that question to my left.

No, I don't know the specific date. I mean, someone in the room may have the date actually?

1980s.

There you go. See, the '80s, back in the durable days when we first acquired Soprole. We increased our share over time, and it performed very well over time. There were some times when milk price got put a bit of squeeze on the margins. But overall, it performed very well as a business.

Thank you. Got one here.

Question for Miles. Malcolm Tweed, New Zealand Shareholders Association. With the effort going into milk quality on the one hand and also the effort going into what we see today, for example, and what was declared last week for sustainability, to what extent is there an overlap starting to occur between your team and the effort, for example, of dairy in New Zealand.

Yes. So dairy in New Zealand, the levy body on behalf of the whole of the industry. We are taking a lens by what's important from a customer in the consumer lens, which actually drives value back into the cooperative. The levy funds, as I say, industry wide.

But are you actually starting to see some overlap?

No. If anything, the lines of separation would become clearer in more recent times. So I'm not consumed by that.

One over here. Thank you.

[ David Grieve. ] What a fantastic result, Miles, $0.80 a share. Just looking ahead, how conservative is this $0.45 to $0.60? When I look at the facts and the figures, as an accountant, I think about what you're paying for milk 12 months ago, how it's fallen, how the world freight rates have collapsed and suddenly, we're looking at -- plus we're as low as $0.45 from after $0.80. It seems a big reduction on top of the cost savings you're going to achieve this year. The other question I'd like to ask you. The consumer division lost $221 million. I've read your report and the Chairman's report at the meeting last Thursday. It wasn't mentioned, but that's an enormous loss. The only other company has losses like this [ which features as a ] surprise, but I would be -- like some comments how we could lose $221 million after achieving such a great result, and no one talks about it.

Sure. Okay. Well, I'll get Simon to carve off the impairments that we took to our consumer business last year. The underlying performance of that business is okay, but we took to noncash and payments, but I'll get Simon to cover that. So first, to answer your first question, have we taken a conservative approach? No, we can't take a conservative approach. Our job is to give the best estimate of where we believe the forecast for the year ahead is. We are forecasting the stream returns to the value that's derived from cheese and protein effectively above the milk price to mean regress over time effectively. So we're baking that into our forecast for the back end of the year. At the same time, we are forecasting higher returns for consumer and foodservice. As the milk prices come off, we can hold those margins for longer. So it's a bit of 2 sides of the coin on that one, if you like. But there's certainly no conservatism. As I say, we need to make sure we put our best foot forward. We are in a volatile world, that said. And so of an $8.22 milk price, came back into sort of that $6.50 range very quickly, and we're back up to $7.25. So our cost of goods plays a big part of this, of course, but we are in a volatile world at the same time. I'll get Simon to cover off the impairment piece, which is a big chunk of the...

Yes. Thanks for the question, David. So as Miles said, that was essentially an adjustment to the asset carrying value for those businesses. So it wasn't the operating performance. So that was still positive, what we had as a situation where we have to value those every year and has historically been a significant amount of goodwill that was in those carrying amounts when we acquired some of the businesses, especially the New Zealand ones. And so we have to value that at a point in time based on forward looking. So essentially, with the higher interest rate environment that we have, that does impact the valuation methodology and the discount rate. So it's essentially an adjustment to that carrying value. And we would, again, hope that those businesses will continue to still perform well, but it's just bringing it back to a current day value.

Okay. Any other questions in the room? Just stand -- just stand in here.

[ Cameron Stewart. ] I just want to have a brief overview on the a2 aspect. I know you were a bit slow in uptaking of that particular milk product. And what is actually the current situation with a2 Milk? I know there's some headwinds there, and what's your future? Okay. That's question number one. Question number two, in talking about futures. What's the future of a person like me? Should I sell my shares? Or are you going to buy them back? Simple as that. All right? Okay.

So a2, we don't have a strategy that supports a2. It's not part of our position. We have a very small partnership with them where we sell a2 and the Anchor brand together in the New Zealand domestic market, but certainly, we don't have a...

[indiscernible]

And same. We don't have any plans on that at the moment. I guess the question is around the fund. Maybe I'll get Peter to talk to that. I mean, my job is to deliver the performance. And you can see, hopefully, over the long term, a nice return, and therefore, hold it, but that's clearly a decision you will need to make yourself but...

Yes. I can't give you advice as a shareholder. But at this stage, we have no intention of acquiring the fund back. So we made that clear last year, and it's something we actually haven't discussed again, to be honest with you. So at this stage, we're holding. So that's our current view. Thanks.

My name is [ Mututa Paj, ] shareholder. First thing, the general question. How many farmers have increased? You're a cooperative and the shareholders are the farmers. Over the years, I want to know what are the strength of the farmers? I mean, first, if there were 100, 120, 150, what is the increase over the years of the farmer holders of your cooperative?

So the number of shareholders has come back to...

Number of farmers holding the shares of the cooperative. Have they increased? Or have they decreased? Or have they remained the same?

It's reduced slightly, I think, more as farms have consolidated, but it's just back a little bit. There is a -- I haven't got in front of me. But in the annual report, there is a table that does show that over the years.

Okay. There is another -- another question is that how do we compare with the other manufacturers of milk products and all that, like in other countries? I'm from India. The rate of return of the milk producers over there is far higher than what I am seeing in Fonterra. So have you made any analysis of how you compare your performance with the other countries? Is there any set of performance reports with you?

The simple answer to that is no. I mean every country and every market that operates work under a different situation. So we haven't done that analysis at all.

So we export 96% of our product. And a lot of those countries have support for their farmers so they have protection. And we can't access a lot of those markets that you talk about. So you're not comparing apples-to-apples when you compare a New Zealand milk price to say a U.S. farmer or a European farmer, in particular an Indian farmer. They're quite different. Yes. See, you got to be careful making that comparison.

And a slight variation of that, like you say, you are -- I have seen your prices fluctuate with the price of milk and all that. So if you take into account any diversification or something like some niche product or something like that, which will withstand all these fluctuations, are the -- is the Board contemplating that?

I'm sorry. I'm not sure...

[indiscernible]

No, I'm -- like you say, I [indiscernible] prices of our performance fluctuates with the price of the milk. So if you want to insulate from that, you should have something diversified in some other product or something -- some niche product or something like that, like cheese manufacturing or something like that. So to insulate from that particular variation, have we done that?

Yes. But -- yes, we have, but still more to do, I guess, is the answer. So a large portion of our milk still goes into milk price products, which, to your point, causes the variation and the earnings at the same time, and we'll continue to invest in value-add streams that do take out that volatility.

Thank you for your questions. Are there any more in the room? I'll now check with Jackie Floyd if she's got any questions online.

Yes. There is a question from [ Stephen of Arch Aero Rental Enterprises Limited. ] The question is, does the Board believe that Fonterra Shareholders' Fund is still appropriate and fit for purpose? Or should it be round up?

Yes, we do. And no. I've already answered that.

Well, yes. I will give you a chance to answer, Peter. I think if you're a short-term investor, you probably -- the fund has performed very well in the last 12 months. If you're a longer-term investor, your perspective will be slightly different. But the key thing, I think, is looking forward, and the Fonterra continues to perform well, then it will offer a good opportunity for an investor from a return perspective. The Board did advocate during the buyout for a buyer in the consultation period. And Fonterra, at that time, said that, that wasn't their preferred position. And one of the things I talked about in my presentation and was also talked about in the presentation from Fonterra management was the move to the resource allocation framework. And that does the move to the flexible structure has provided much more alignment between the interest of unitholders and shareholders. And another aspect that was also mentioned was the fact that Fonterra's management have incentives that are aligned more to a total shareholder return and how their performance is assessed. So I think those mechanisms have served to improve the position and have a greater alignment between unitholders and shareholders. But I will turn to Fonterra if there's anything further you would like to say.

[ I don't think it was for the question. ]

Jackie, have you got any other questions? No questions.

No further questions. No further questions.

Okay. No further questions. We'll turn to the next item of business, which is the resolution. And I've asked Alastair Hercus to speak about -- to this because it's about me.

Good morning, everyone. Thank you, MJ. We now move to the sole resolution for this meeting, which is a proposal to reelect Mary-Jane Daly, who retires by rotation and stands for reelection as a director of the manager of the fund. The resolution has been -- to be proposed has been sent out in the notice of meeting and will be taken as read. Voting on the resolution will be by way of a poll. Computershare will act as scrutineer for the process and will ensure that it is managed correctly. The proposed resolution is an ordinary resolution, and as such, must be agreed by a majority of the votes of unitholders entitled to vote and voting on the resolution for them to be passed. I'll shortly invite MJ to say a few words before the resolution for her reelection is moved and seconded by director. I will invite comments and questions on the resolution as well. After discussion on the resolution has been concluded, I will ask you to vote on the resolution. For those of you online, you will be able to vote through the online platform as set out earlier. The results of the voting on the resolution will be released to the market then posted on the Fonterra website as soon as possible today. So resolution 1 seeks the reelection of Mary-Jane Daly as a director of the manager of the Fonterra Shareholders Fund. MJ is an independent director for the purposes of the NZX listing rules. She is the Chair of AIG Insurance New Zealand Limited, an independent director of Kiwi Property Group Limited and Kiwibank Limited. She is also a member of the MBIE Risk and Advisory Committee. She serves on the Boards of Auckland Transport, Toka Tu Ake EQC, Cigna Life Insurance, Airways Corporation of New Zealand and the New Zealand Green Building Council. In her executive career, MJ worked mainly in banking and insurance in a variety of roles, both in New Zealand and the U.K. Her last executive role was executive general manager at State Insurance. Prior to this appointment, she was CFO for IAG in New Zealand. And MJ also spent 4 years with Fonterra as Group Treasurer and Risk Manager. Her early career was spent with BNZ National Australia Bank and the Toronto-Dominion Bank. I will now invite MJ to say a few words.

I'm delighted to offer myself for the reelection as a director of the manager of the fund. Fonterra has a critical role in the New Zealand economy. And I'm keen to continue to have an involvement in the success of this entity through my contribution with the Fonterra Shareholders Fund. I first joined the Board in November 2020, and served on the Independent director subcommittee in 2021 to consider the implications of the capital structure review for unitholders and advocate for their interests. In 2022, the Fonterra Shareholders Fund Board was refreshed, and I led the process to seek new independent directors for the Board, and at the end of 2022, I became Chair of the Board. I believe I'm a forward-thinking and diligent director with extensive governance experience, and I bring a determination to deliver value for unitholders. Accordingly, I am excited to have the opportunity to be considered for a further term on the board of the manager of the fund.

Thank you, MJ. I would now like to call on Carlie Eve to move resolution 1.

I move that the meeting resolve to reelect Mary-Jane Daly, who retires by rotation and stands for reelection as a director of the manager of the fund.

Thank you, Carlie. I would now like to call on John Nicholls to second the motion.

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

Thank you, John. For the purposes of transparency, as at 10 a.m. on Saturday, the 11th of November, the following proxy votes have been received. For, 93.9%; against, 0.7%; and discretionary, 5.4%. I will now open the resolution for discussion. We will start with questions in the room. Please raise your hand and an usher will bring a microphone to you. And could I just ask you again to please introduce yourself before asking your question. So are there any questions in the room?

Just a -- Malcolm Tweed, New Zealand Shareholders Association. Just as a point of record, my compliments on putting that data up. It's not always that an ASM does so, and it should be applauded.

Thank you. You're referring to the -- okay, yes, proxies. Yes. Thank you. Appreciate it. Any other comments or questions? Jackie, are there any questions online?

No online questions.

No online questions. Okay. As previously mentioned, if you are eligible to invite at this meeting, you will 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. To cast your vote, simply select one of the options. So I now put resolution 1 to the vote. In the room, each unitholder received a voting paper with their notice of meeting. Please tick -- place a tick in the for, against or abstain box alongside the resolution in your voting paper. Do not use any other marks or indications. The scrutineers will treat noncompliant votes as invalid, so please take care to follow the instructions. Collection boxes will -- for your voting papers will be passed around the room. If you need assistance or would like a pen, please raise your hand. A pen over here as well, please. Sorry? Sorted. For those of you who are online, please bear with us. It should take no longer than a couple of minutes to collect voting papers from people here in the room. [Voting]

Are there any other votes to be collected in the room? No? Thank you. I'll now hand back to MJ.

Thanks, Alastair, and thank you for taking the time to vote. Voting online will close in one minute. We will have the final results of the votes released to the NZX and available on fonterra.com as soon as possible. At this point, I'd like to provide an opportunity for any items of general business to be received. Once again, we will start with questions in the room. If you'd like to ask a question, please raise your hand and an usher will bring a microphone to you. Please wait for this microphone before your address, and I ask for you please that you introduce yourself. We will also address any online questions after addressing any questions in the room. [Operator Instructions] So are there any questions of general business in the room? I think there's none. Jackie, have you got anything online?

There are no online questions.

What was -- sorry. Got one there. Sorry, I missed you. That's a bit quick.

I was giving everybody else a chance.

That's all right.

So Malcolm Tweed from Shareholders' Association, again, sorry. In the last year, I asked you this same question, and I asked what do you see as being the trend in terms of supplying shareholders or supplying farms probably a better way of describing it. And you said, you expected around about 1% falloff per year. So in the year that's just been, we've actually seen a 2.5% fall off of numbers. Some of that is driven by shareholder supply, but there was a 28% decline in contract farm supply, right, which is a bit of an outlier. So I was just curious as to whether you had any insight in terms of what caused such a large lump of contracted farms to fall away.

So the contracted supply would have been under MyMilk framework and have now become -- becoming shareholders over time. So that was the difference there. That's the main difference.

Next question. Fonterra's share of New Zealand milk is now, for this current year, gone under 80% in each of the 4 months, which tends to suggest perhaps that for the balance of the year, you are going to be under 80%. Can we assume or reasonably predict that Fonterra is now hitting south of 80% on a permanent basis?

Yes. Look, I mean we have predicted that milk will come off, whether it be land use change, environmental pressures or farming land use change over time. Our job is to -- the flexible shareholding structure allows us to have different conversations with farmers that are either wanting to exit or new farmers joining. So it's a new tool in the talk that we haven't had previously. And we're starting to see some early signs that, that is as resonating, which is helpful. At the same time, performance is critical. So we're asking farmer shareholders to invest. We need to make sure they're getting a decent return on that investment. And we've started to show some consistent returns to that. So I'm confident we will see the market share plateau and if not, in some cases, grow as we start to take on some of these independents with a bit more vigor.

Okay. Next one, Australia. We spoke about Australia this time last year, Miles. And that was on this back of the decision not to divest. And you must have a pretty good crystal ball because Australia's milk flow that you collected increased quite significantly. But it's gone the opposite way over the last couple of months, so that the Fonterra rate of growth or decline has fallen below Australia's national numbers. Is there any particular reason why you're trending down versus the country's entire milk flow collections?

No, nothing systemic. I mean weather plays a big part. And of course, they have different weather patterns in different parts of the country. So weather played a part in the last few months, but nothing systemic. In fact, we're very comfortable with our Australian business as before.

Okay. I do want to say that the performance report that you've issued this year is illustrating a great sort of body of data that you can sift through and trawl through. Some of the data you've now given in terms of, for example, end-to-end P&L is, I think, is a great step forward as well as your new performance metric. Question there is, is the Australian milk solids part of the calculation? Or did you exclude it?

In terms of the New Zealand manufacturing, excluded, this New Zealand-based manufacturing. But overall, the...

So the operating costs...

The operating cost, OpEx, is included, but the New Zealand operation is excluded.

Okay. So the total OpEx includes Aussie milk solids in there?

Yes.

All right. Next one, there's been quite a lot of reporting and conversation regarding the performance of nonreference products in the year just been. Notably cheese and notably a recovery around a lot of the foodservice product, but not to the exclusion of [ China ] as well, which has seen a marked increase in exports. But the interesting one to me was lactose. Didn't really keep up with its contemporaries in the nonreference basket. And I thought that was interesting because lactose exports out of New Zealand are principally farmer grade, and yet the price actually went down for those products. Any particular reason for that?

Look, I haven't done the analysis on it. Of course, we're not involved in the farmer lactose business these days. We sold out of that a few years ago. But the only thing I could probably put my finger on is it's probably a bit of an overhang in lactose in the international market. As whole milk powder being the lowest return and that lactose standardization became less important, I suspect there's probably a bit of an overhang would be my assumption without doing the analysis.

Okay. Last question. Book price. In the milk price model, the return for -- well, the revenue, let's say, for sales ultimately to the customer of product that channels through subsidiaries is excluded from the model. So my question is if revenue through subsidiaries is excluded, does that mean that like products sold to other parties is included? And why would you really want to exclude like products that are going into the milk price model only because it goes through a subsidiary channel?

The -- probably the key point in your question was like products. And so there will be very little, if any, and we could probably do the analysis on this, true commodities that are sold to our subsidiaries. There will always be something added to it, very few base commodities that are sold to our subsidiaries, which is what the milk price model assumes.

I'll take the one offline.

Good.

Thanks. You still haven't got any questions online?

No.

Okay. As there are no further matters of general business, we'll bring the meeting to a close. That concludes the business of the 2023 Annual Meeting of the Fonterra Shareholders Fund. Thank you for joining us online, and thank you for coming in here in person. And we would ask that you join us for some refreshments afterwards. [Foreign Language]