Half Year 2024 Fonterra Co-Operative Group Ltd Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Joshua Dale - Craigs Investment Partners Ltd - Analyst : Thanks very much. Just first question. Of the EPS from continuing operations figure of $0.43, how much of that was stream returns? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Joshua Dale - Craigs Investment Partners Ltd - Analyst : Okay, brilliant. And you mentioned on slide 11, your cheddar prices have adjusted down reflecting expectation of higher production volumes in the US. Do you have a read on how permanent you think that supply response is and whether the stream return opportunity is now diminished medium term? Or do you still think you might get good periods you can capitalize on?

Question: Joshua Dale - Craigs Investment Partners Ltd - Analyst : Okay. Brilliant. And I guess it ties into my next question. I was a little surprised not to see any update to your long-term aspirations. Are you still comfortable with what you issued in 2021 with regards to your forecasting to 2030, or targets rather?

Question: Joshua Dale - Craigs Investment Partners Ltd - Analyst : That's all from me. Thanks, guys.

Question: Matt Montgomerie - Forsyth Barr - Analyst : Thanks. Good afternoon. Well done on another solid result. Just taking on from Josh, could you just please comment on what you are factoring in for the full year with respect to stream returns? And I guess how locked in are the rates that you have outlined in one of your charts in the pack around the trajectory through the second half?

Question: Matt Montgomerie - Forsyth Barr - Analyst : And then how -- like how contracted are those? Like, if you were to see the next few options move materially as, I suppose, Wednesday night's one did a little bit, what's, I guess, the ability to swing around that?

Question: Matt Montgomerie - Forsyth Barr - Analyst : Yeah, perfect. And then maybe just on OpEx. There's a comment in the announcement around cost reductions coming through. Could you please expand on, I guess, where you see scope for cost reductions within the business? And then secondly, just talk to the scale efficiencies on merging the Australian Fonterra brands that you announced a month or so ago.

Question: Matt Montgomerie - Forsyth Barr - Analyst : And that upfront investment, is that -- you're going to continue in the second half, like I think it was $30-odd million in the first half?

Question: Matt Montgomerie - Forsyth Barr - Analyst : Okay. I suppose next question is just, more broadly, it feels like the base business is improving here when we take, I suppose, the cost comments in combination with stream returns. Yeah. Would you be able to steer us where you think maybe base EPS feels right now in light of, I guess, the change you're seeing in the business. $0.40, $0.45 or similar would be my feeling, but -- REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Matt Montgomerie - Forsyth Barr - Analyst : Thanks. I might live it there. Cheers.

Question: Arie Dekker - Jarden - Analyst : Afternoon. There's a comment just in the press release around a strong pipeline of farmers wanting to join the co-op, which is obviously positive, going against the flow, I guess, over the last wee while. Could you just -- what are your expectations, I guess, for the next season? Are we going to see a reasonably meaningful jump in the number of farmers? Or is it going to be over the next -- is your expectation that it will look over the next couple of years?

Question: Arie Dekker - Jarden - Analyst : Yeah, I was going to ask about the capacity. And then I guess more specifically, I mean, do you have good capacity around Dunsandel and Pokeno?

Question: Arie Dekker - Jarden - Analyst : Okay. No, that's good and, obviously, really encouraging. Just on the CapEx, I mean, it was -- wasn't particularly high in the first half against expectations for the full year. Should we expect it to be a bit below what you'd earlier guided to for FY24? And is that just timing related? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Arie Dekker - Jarden - Analyst : Yeah, okay. No, that's good. Well, great result, and that was all for me.

Question: Arie Dekker - Jarden - Analyst : Cool. Thank you.

Question: Nick Mar - Macquarie Research - Analyst : Afternoon, guys. Just on the guidance range that implied (technical difficulty) second half. Can you just talk about what the swing factors are still in there and I guess what you're most concerned about the (technical difficulty) still keep that bottom of the range, which would imply a (technical difficulty) low earnings for the second half?

Question: Nick Mar - Macquarie Research - Analyst : Yeah. So the bottom of the range would be in the second half. So I guess it's just -- is it all of those things going against you so the stream return gets worse?

Question: Nick Mar - Macquarie Research - Analyst : So it tightens more than you expect here.

Question: Nick Mar - Macquarie Research - Analyst : Now, apologies --

Question: Nick Mar - Macquarie Research - Analyst : Yes. That's great. And then just on -- it's a bit of a random question. But no mention of active living anywhere in the document. What's the sort of thinking behind that? Is that still a priority for you guys?

Question: Nick Mar - Macquarie Research - Analyst : Okay. No, that's great. And then just in terms of feedback you're getting from your farmers. The milk costs obviously come back up, which is positive. How are they feeling about the season? And on profitability, is it a breakeven again?

Question: Nick Mar - Macquarie Research - Analyst : That's great. Thank you.

Question: Marcus Curley - UBS Equities - Analyst : Good afternoon. Just a couple from me. In the presentation, there's, I suppose, a bullet point explanation around the margin pressure within ingredients in the half. The first one there is around the lactose price, and then you've got effectively a volume mix issue. I just wondered if you could call out the relative scale of these? Obviously, the change in the margin in the Ingredients business in the first half was pretty dramatic. I just -- so can you get a little bit more color in terms of those components?

Question: Marcus Curley - UBS Equities - Analyst : Okay. I just -- I suppose, having covered this stock for a while, yeah, it's the first time I've ever seen lactose price called out as a material impact on ingredients margins.

Question: Marcus Curley - UBS Equities - Analyst : And so within the ingredients business, do you have to hand what the average milk price was that was used in the calculation?

Question: Marcus Curley - UBS Equities - Analyst : Half, yes.

Question: Marcus Curley - UBS Equities - Analyst : Okay. And then I suppose the opposite is true in the foodservice and consumer business, where obviously you benefited from a lower milk price. From memory, there's a three-month lag in there. I just wondered if you could also call out what the average milk price was baked into those foodservice and consumer margins?

Question: Marcus Curley - UBS Equities - Analyst : I know. I just found it a little intriguing that you had, I suppose, the margin pressure in the ingredients business because of the milk cost going up. But you had margin benefits in the consumer business from a lower milk price. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Marcus Curley - UBS Equities - Analyst : And so -- and that, sorry, just leads on to my other question, which was in the guidance, you're referring to moving back to average margins in foodservice and consumer. Outside of milk costs, is there anything else that's working against you to get you down to those types of levels in the second half?

Question: Marcus Curley - UBS Equities - Analyst : Okay. And your competitors in foodservice in China being mainly the Europeans, how is that playing out at the moment? They're obviously absorbing a higher milk cost than you guys at the moment.

Question: Marcus Curley - UBS Equities - Analyst : Okay. Okay. And -- but your working assumption is pricing and market share broadly stable in the second half and you were higher milk costs and margins come down?

Question: Marcus Curley - UBS Equities - Analyst : Okay. And then just one small one for me. Just for the dividend in the half, obviously, you're expecting a smaller second-half profit. But can you give us any color in terms of what circa payout you're thinking about? Or what was your thought about at the Board level when you set the dividend $0.15?

Question: Marcus Curley - UBS Equities - Analyst : Okay. Thank you.

Question: Mark Topy - Select Equities - Analyst : Good afternoon. Just first question, just as a follow-on, just you read on some of those key global markets, particularly China, with the softness in demand and perhaps some suggestion they've worked through excess inventory levels they were holding. Can you give us some commentary around perhaps how you see the commodity pricing in the second half? And do you see it stabilizing around these sorts of levels? Or what do you see as a potential there?

Question: Mark Topy - Select Equities - Analyst : Right. Yes, because you do allude to demand fluctuating a little bit. What's your read on the global demand at the moment, putting aside China? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Mark Topy - Select Equities - Analyst : Very good. And just on retail pricing, perhaps in New Zealand and with the context in Australia, we're seeing prices starting to moderate here. And maybe you can come back a bit, but I'm just wondering how you see that price increase cycle and the consumers wanting this to where any sort of further price increases in New Zealand, particularly.

Question: Mark Topy - Select Equities - Analyst : Right. And just -- if you could expand on that Australia, New Zealand merger, the Oceanic creation of business. The references to product integrity, does it suggest that you'll be able to perhaps ship some products into Australia with Farmgate Milk in Australia versus New Zealand? Or do you see the business or structure continuing the way it is at the moment in terms of New Zealand versus Australia?

Question: Mark Topy - Select Equities - Analyst : Yeah, I should have been clearer there, of course. But so no increase? You don't see potential to increase the product that you're sending into Australia (inaudible) REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies.

Question: Mark Topy - Select Equities - Analyst : All right. Very good. Thank you for your time.

Question: Marcus Curley - UBS Equities - Analyst : Sorry, guys, just one follow-up. Just on that, Miles. Obviously, in the pack, you talk about -- in the ingredients part, you have put pressure on the Australian margins. I would assume that that's the export business struggling against the higher milk price? And if that's the right interpretation, is there any consideration for reducing your exposure to the export parts of the business in Australia?

Question: Marcus Curley - UBS Equities - Analyst : Okay, thanks.