Expert Says Fonterra Backing Current Strategy With New CEO Appointment
The appointment of Richard Allen as Fonterra's new chief executive signals execution, not strategy, according to agribusiness expert Dr Nic Lees.
At the same time, the co-op has confirmed plans to divest its consumer businesses in New Zealand and around the world.
The co-op has increased its target average return on capital to 10-12%, up from 9-10%, and announced a new dividend policy of 60-80% of earnings, up from 40-60%.
“At all times, we remain committed to maintaining the maximum sustainable Farmgate Milk Price,” it says.
Fonterra chairman Peter McBride says the revised strategy creates a pathway to greater value creation, allowing the co-op to announce enhanced financial targets and policy settings.
“The co-op exists to provide stability and manage risk on farmers’ behalf, while maximising the returns to farmers from their milk and the capital they have invested in Fonterra.
“Through implementation of our strategy, we can grow returns to our owners while continuing to invest in the co-op, maintaining the financial discipline and strong balance sheet we’ve worked hard to build over recent years.
CEO Miles Hurrell says Fonterra is in a strong position, delivering results well above its five-year average, which puts it in a position to think about the next evolution of its strategic delivery.
“The foundations of our strategy – our focus on New Zealand milk, sustainability, and dairy innovation and science – remain unchanged. What’s changed is how we play to these strengths.
“Following our recent strategic review, we are clear on the parts of the business that create the most value today and where there is further headroom for growth. These are our innovative Ingredients and Foodservice businesses, supported by efficient and flexible operations.
“By streamlining the co-op to focus on these areas, we can grow greater value for farmer shareholders and unit holders, even if we divest our Consumer businesses,” says Hurrell.
Fonterra’s revised targets
- Return on capital: 10-12% (FY18-23 average - 8.6%)
- Dividend policy: 60-80% ((FY18-23 average - 50%)
- Gearing Ratio: 30-40% (FY18-23 average - 35%)
- Debt to EBITDA: 2-3x (FY18-23 average - 2.5x)
- Capital investment requirements: $1 billion per annum in essential, sustainability and growth capital ((FY18-23 average - $650m)
- Emissions reductions by 2030 (from an FY18 base year) – Absolute Scope 1&2 emissions: 50%, on-farm emissions intensity Scope 3: 30%
