Release Date: September 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Fonterra Co-operative Group Ltd (NZSE:FCG, Financial) has delivered on its promises and is in a strong position from a balance sheet perspective.
- The company is confident in passing on milk price increases in the foodservice and consumer channels, which should stabilize or slightly grow earnings in FY25.
- Growth projects such as Studholme and UHT are expected to be value accretive and align with the company's strategic direction.
- The digital transformation and ERP system upgrade are expected to bring efficiency gains and are necessary for the company's future operations.
- The company has a strong governance structure for its Ki Tua investment fund, targeting next-horizon innovations that complement its core business.
Negative Points
- Rising milk costs have impacted margins in the foodservice and consumer channels, and this trend is expected to continue into FY25.
- The IT transformation involves significant costs, peaking in FY25, which could pressure overall earnings.
- The effective tax rate is expected to be around 25%, which could impact net earnings.
- The company has not provided specific return on capital targets for its growth projects, which may concern some investors.
- There is uncertainty around the level of future investments in the Ki Tua fund, and the company has not assumed any earnings from these investments in its forecasts.
Q & A Highlights
Q: Can you talk through what gives you confidence that you can deliver stable to slightly growing earnings across the foodservice and consumer channels in FY25 despite rising milk costs?
A: As we move into the first quarter, we expect margins to strengthen as we pass on milk price increases. This confidence is based on our ability to adjust pricing in various markets, despite competition.
Q: What kind of incremental return on capital are you looking for across the new growth projects?
A: We have strict hurdle rates for business cases, ensuring value accretive investments. Projects like Studholme and UHT are expected to be value accretive, while Whareroa focuses on cost efficiencies and reducing third-party reliance.
Q: Can you discuss the duration and profile of the IT transformation spend and expected returns?
A: The peak spend will be in FY25, continuing for another 18 months. Efficiency gains and necessary ERP system upgrades are expected, with the spend being tightly governed.
Q: What will be the effective tax rate going forward, considering offshore earnings?
A: We expect the effective tax rate to be around 25%, with dividends being 100% imputed.
Q: Can you provide more details on the capital investment in the Ki Tua fund and its future outlook?
A: Investments target next-horizon innovations, particularly in specialty proteins. While tightly governed, future investments will be evaluated on their own merits, with no earnings assumed in forecasts.
Q: Should we expect an increase in the payout ratio given the strong balance sheet and capital plans?
A: While we are in a strong position, significant capital plans for decarbonization and water investments are upcoming. Dividend policy will be continually reviewed.
Q: Is a buyback still an option for capital allocation?
A: Yes, a buyback remains an option within our capital allocation framework, though unlikely until the consumer business review is completed.
Q: What are your assumptions for stream returns in the ingredients business for FY25?
A: We expect stable outlooks with decent spreads, despite narrower price relativities. Specific commodity price forecasts are not disclosed.
Q: Can you provide more details on the IT transformation spend and its risks?
A: The IT transformation involves upgrading our SAP system and adding digital functionalities. The project is well-governed and phased to mitigate risks.
Q: What is the outlook for China volume sales in FY25?
A: Despite a sluggish macro environment, we expect growth in our foodservice business in China, driven by New Zealand provenance and innovation.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
