Fonterra unveils strategy to focus on ingredients, foodservice

NEW ZEALAND – Fonterra Co-operative Group Ltd has unveiled a revised strategy to sharpen the Co-op’s focus on its high-performing Ingredients and Foodservice businesses. 

This follows a comprehensive review that confirmed Fonterra’s strength as a business-to-business (B2B) provider of dairy nutrition. 

Consequently, the Co-op will begin exploring divestment options for its global Consumer businesses, allowing it to concentrate resources on its most valuable segments.

Fonterra Chairman Peter McBride highlighted that the new strategy sets the foundation for enhanced financial outcomes. 

He explained that the Co-op’s primary mission remains managing risk and providing stability for its farmers while maximizing returns from their milk and capital investments in the Co-op.

In terms of performance metrics and policy settings, Fonterra has established specific targets to ensure robust shareholder returns. 

The return on capital is set at 10-12%, with an average return on capital of 8.6% anticipated for FY24-30. 

The new dividend policy aims for distributions of 60-80%, compared to an average of 50% in prior years. The Co-op seeks to maintain a gearing ratio of 30-40%, with the FY18-23 average recorded at 35%. 

Additionally, Fonterra’s debt-to-EBITDA ratio is projected at 2-3 times, with an average of 2.5 times over the same period. 

The Co-op’s capital investment requirements are estimated at around US$1 billion annually for essential, sustainability, and growth capital, a significant increase from the previous average of US$650 million.

Fonterra also revealed that it is committed to reducing its emissions by 2030, targeting a 50% reduction in absolute Scope 1 and 2 emissions and a 30% decrease in on-farm emissions intensity (Scope 3) from the FY18 base year. 

McBride emphasized the Co-op’s commitment to maintaining a sustainable Farmgate Milk Price while pursuing financial growth.

CEO Miles Hurrell noted that Fonterra is in a solid financial position, performing well above its five-year average. 

“This success gives us the confidence to embark on the next phase of our strategic delivery. While our core focus on New Zealand milk, sustainability, and dairy innovation remains unchanged,” he said. 

Hurrell explained that Fonterra will now prioritize the areas where the business generates the most value—its Ingredients and Foodservice divisions. 

Streamlining the Co-op around these areas is expected to increase shareholder returns, even as Fonterra explores divestment options for its global Consumer businesses.

Looking ahead, Fonterra’s strategy includes six strategic choices to guide its growth and operations. 

These pillars focus on delivering a strong farmer offering, maximizing the potential of the Ingredients business, expanding Foodservice, investing in efficient operations, enhancing sustainability, and leveraging innovation. 

Hurrell noted that divesting the Consumer businesses will free up capital, allowing Fonterra to focus more heavily on its core strengths in dairy nutrition and services.

The Co-op also introduced new financial targets as part of its strategic plan, including maintaining a gearing ratio of 30-40%, reducing emissions, and generating strong shareholder returns through operational efficiencies and focused investments. 

Fonterra expects its Ingredients and Foodservice divisions to drive these improvements while maintaining a stable balance sheet.

Hurrell concluded by emphasizing that this strategy is designed to unlock value at every stage of the Co-op’s supply chain.

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