Good day, and thank you for standing by. Welcome to Fonterra 2024 Interim Results Investor Briefings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during this session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, CEO Miles Hurrell. Please go ahead. Good afternoon, and thank you for joining. As mentioned, Miles Hurrell here, CEO, joined by Simon Till, Acting CFO, and Selena Robb, Director of Capital Markets and M&A. Hopefully, by now you have had a chance to see the results, maybe the briefing video that we put out early this morning. In summary, strong first half, lift in performance, lift in earnings across the organization. Profit after tax up 23% to NZD 674 million, and earnings per share NZD 0.40, up from NZD 0.33 last year. Of course, it's given the board the confidence to pay an interim dividend of NZD 0.15. So I'm really pleased with the performance, and how the organization is tracking. I'm happy to go straight to Q&A. Thank you. Thank you. We will now conduct the Q&A session. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by as we compile the Q&A roster. Our first question comes from Joshua Dale of Craigs Investment Partners. Please go ahead. Thanks very much. Just the first question: of the EPS from continuing operations, figure of NZD 0.43, how much of that was stream returns? Hi, Josh, Simon here. So if we look at that for the half year, it's around NZD 0.06. Okay, brilliant. And you mentioned on slide 11, European cheddar prices have adjusted down, reflecting expectation of higher production volumes in the U.S., d o you have a read on how permanent you think that supplier 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? Yeah, I mean, it's... So I guess how long is a piece of string is probably the simple response to that, if I can be honest. What we are predicting, this is back to the long, long-term averages or long-term, long-run averages around our stream returns for the foreseeable future. So there'll always be pockets where it may be up or down, but we are planning for long-run averages back on a stream return basis. Okay, brilliant. 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? Yeah, sure. So, so in terms of the targets we put out there a couple of years ago, two and a half years ago now, that, they are still remain valid, and of course, we'd be obliged to update the market should they change. So we see no change to that, and not at this point, anticipating putting out anything regarding an update to that until we see change. Okay, brilliant. That's all from me. Thanks, guys. Thanks, Joshua. Thanks, Josh. Thank you. Our next question comes from Matt Montgomerie of Forsyth Barr. Please go ahead. Thanks. Good afternoon. Well, on another solid result, just tagging 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, yeah, the trajectory through the second half? Yeah. Josh, I'm... sorry, Matt, Simon here. If we look at the full year, the underlying assumption is that they will probably sort of trend closer to zero. So we are. If you look at the outlook slide there, you can see them narrowing up. So, by the full year, we expect that to be pretty close to zero. And how, like, how contracted are those? Like, if you were to see the next few auctions move materially, as I suppose Wednesday night's one did a little bit, you know, what's, I guess, the ability to swing around that? At this stage, there's still a degree of variability, so hence why, you know, that's one of the factors that go into the, I guess, the relatively wide-ish range still at this time of the year. But in terms of contracted, that's, you know, in line with where we would be at this time of year. But yeah, I think a few more before we sort of tighten that up. Yeah, perfect. And then maybe just on OpEx. Yeah, there's a comment in the announcement around, you know, 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 Australia and Fonterra brands that you announced a month or so ago. Yeah. So you've sort of hit the nail on the head in terms of that's one of the efficiencies that we're looking at, and that we'll be looking at those things right across the organization. But, you know, I think we announced NZD 7 million, I think, for second half in terms of the Australian efficiencies. So call that the efficiency gains that we'd like to see through the merger of those two organizations. Where we'd like to see, where we plan to see a lot of the efficiency gains come over the next sort of, call it four, five, six years, a lot of it will be in our operations through technology, automation, simplification of our operations. So there's an upfront investment in that, and you'll see that show out in our OpEx slide that we talked to today. Part of that is an upfront investment around some of the technology that we need to invest in to enable that. But that's one clock, I mean, the intention is to look at our, you know, entire organization and assume we're fit for purpose. But yeah, a large chunk will come through operational efficiencies as well. That upfront investment, is that gonna continue in the second half? Like, I think it was NZD 30-odd million in- Yes. - in the first half. Yes, it will. Yep. Okay. I suppose next question is just more broadly, it sort of 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 like now in light of, I guess, the trends you're seeing in the business, NZD 0.40-NZD 0.45 or similar would be my feeling, but- Yeah, I think maybe the best way to answer that is the earlier comment on the LTA. If you look at that sort of trajectory over there, I think that's obviously, as we've always said, there'll be some pluses and minuses year-on-year, but I think those ranges are still the best guidance that we would offer on that. Yeah. Okay, thanks. I might leave it there. Cheers. Thank you. Thank you. Our next question comes from Arie Dekker of Jarden. Please go ahead. Afternoon. There was a comment just in the press release around strong pipeline of farmers wanting to join the co-op, which is obviously positive, you know, going against, you know, the flow, I guess, over the last wee while. Could you just sort of... What are your expectations, I guess, for this next season? Are we gonna see a reasonably meaningful jump in the number of farmers, or is it gonna be over the next, is your expectations that it'll look over the next couple of years? Yeah, it's Arie, Miles here. It's more over the next couple of years. I mean, some of our competitors have a contracting period of a couple of years plus a day. So, we are seeing, you know, a strong indication of them wanting to join, but a lot of them will come in the year following. I guess if your follow-on question is how we look for capacity, we have no concerns at a national level at all. We have no concerns around capacity to cater for that milk that may return. Of course, recognizing there is also a bit of land use change coming off the back end as farmers exit the industry. So there's a bit of... There, there's a net-net position here. But despite when we look through that, we see no concerns at a capacity level, with what we have. There may be a little bit of shuffling milk between regions, which is normal for us, but we feel comfortable at this point. Yeah, I was gonna ask about the capacity, and then I guess more specifically, I mean, do you have good capacity sort of around Dunsandel and Pōkeno? So North Island is certainly not a concern for us. We feel very comfortable North Island. South Island, there will be a bit of pressure around that Dunsandel area as you refer, but as we've done previously, you can just simply shuffle milk further north or south, and if we've got to go across the Cook Strait, that's what we'll do. Okay, now, that's good and obviously really encouraging. Just on the CapEx, I mean, it wasn't particularly high in the first half against sort of expectations for the full year. Should we expect it to be a bit below what you'd earlier guided to for FY 2024 and is that just timing sort of related? Hi, Arie, Simon here. I think that's the right sort of conclusion, but I guess just a couple of comments in terms of half year is not always the best indicator, just because a lot of it does happen towards the, you know, the latter part of the year. But I think overall, if we look at the number that was at full year, we do expect that to be back a bit, and some of that will be timing, and some of it clearly on some of them, they're estimates, and as you work through them, you know, clearly a key part of our whole efficiency is making sure we're getting best value there. So but a combination of timing and maybe just better outcomes. Yeah, okay. No, that, that's good. Well, yeah, great result, and that was all from me. Thanks. Yeah, thanks. Arie, just maybe before you go, maybe just probably one other point to call out here as we sort of went into that LTA, going back a couple of years. Of course, the change in accounting rules around software change probably that a little bit. So there might be a more of an uptick in OpEx and a down, and pulling back of CapEx when I look at that sort of plan between the two. Net-net, it's still cash, but maybe that's playing out a little bit as well. It's not material at this point, but it's probably worth just calling out. Cool. Thank you. Thank you. Our next question comes from Nick Mar of Macquarie. Please go ahead. Good afternoon, guys. Just on the guidance range that's implied in half, can you just talk about what the key swing factors are still in there, and I guess what you're most concerned about to sort of still keep that bottom of the range, which would imply, you know, pretty, pretty low earnings for enough? Hi, Nick, Simon here. Sorry, I think I got most of it. It It was a bit hard to hear. But in terms of the. So firstly, that's the continuing operations, so that's the 50-65 you're referring to. So I think there are two or three factors. The first one is there's always a seasonal element, so just in terms of timing of ingredients revenue versus cost. So that's always a factor that plays through between H1 and H2. And touch briefly on the stream returns, price relativities in terms of the what we're assuming there. I think the other couple of areas are, if we look at the first half performance, and you clearly can break that Q1, Q2, and if we look at the chart Miles referred to with the milk price profile, we are going to see increasing COGS in that second half, and there is, you know, built into that forecast, some tightening of margins in the food service and consumer. And, so I guess in terms of variance, if we're able to continue to have the really good pricing outcomes that we've had in the first half, then you could maybe expect some upside on that. But at the moment, we have assumed some tightening of margin over the second half and, you know, maybe Q3 more in line with Q2, and then a bit more tightening in Q4. Yes, so at the bottom of the range, which we've sort of been seeing in the second half. I guess it's just... Is it all of those things going against you, so the stream return gets worse, you know, the- Pretty much. More than you expect? Yeah. Okay. Yeah. No, that's, that's happened. That would be the key list of those, yeah. Yeah. No, that's great. And then just one, it's a bit of a random question, but, no mention of Active Living anywhere in any of the documents. What's the sort of thinking behind that? Is that still a priority for you guys? Sorry, just say that- Active Living, was it? Yeah, I couldn't quite hear that well. Yes, sorry. Sorry, the mic- Yes, it is. Yeah, no, no, it is. It's still on strategy for us and still an important part of our portfolio, so yes, it is. Okay. No, that's great. And then just in terms of feedback you're getting from your farmers, the milk prices obviously come back up, which is positive. How are they feeling about the season and, you know, on-farm profitability? Is it above breakeven again? Yes, a lot more positivity in farmer sentiment. And while I haven't seen the numbers from DairyNZ of late, I suspect NZD 7.80 is getting very close to, if not probably slightly above, the sort of the breakeven for the vast majority of farmers. So that's given some confidence. Obviously, we need to see where the next season goes to give them some long-term confidence, but at the same time, they're feeling good and. But also the change in advance rates we made today, by increasing the advance rate in the next two or three months, it's also gone down very well with them. Okay. That's great. Thank you. Thank you. Our next question comes from Marcus Curley of UBS. Please go ahead. Good afternoon. Just a couple from me. In the presentation, you know, there's a, I suppose, a bullet point explanation around the margin pressure within ingredients in the half. You know, 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, yeah, sort of call out, you know, the relative scale of these. Obviously, you know, the change in the margin in the ingredients business in the first half was pretty dramatic. So it'd be useful to get a little bit more color in terms of those components. Hi, Marcus. Yeah, in terms of if we look at, those total returns, by stream, there's, minimal impact at the, the revenue level, which is, probably what you're, you're tracing through. So most of it is coming at the margin. So there are sort of the three factors there, you, you, and you mentioned a couple of them. One is also kind of the allocation, intraseason between the milk, so how that gets allocated with the, the different components. So, I would sort of say it splits between, between those three factors, reasonably evenly. Okay, I just, I suppose, having covered the stock for a while, yeah, it's the first time I've ever seen, yeah, lactose price called out as a material impact on ingredients margins. Yeah, and the... I mean, the-- You're right, mainly 'cause the, it's a factor, as you know, because the, how that's assumed in the milk price versus, the actual, is a factor. And, you know, the, the price there is halved, you know, between the periods, so sort of $1,500 down to $700. So, just pulling-- I guess, calling that out, 'cause it, it's more of a factor than it historically has been period on period. ... and so within the ingredients business, do you have to hand, you know, what the average milk price was that was used in the calculation around the- You mean for the half? Uh, yes. Yeah. So it's around, I can give you the exact one of it, but it's around sort of the 7.30 or 7.40 range. Okay. And then I suppose the opposite is true in the food service and consumer business, where obviously you benefited, you know, you know, from a lower milk price. Yeah, from memory, there's a three-month lag in there. I I just wondered if you could also call out what, yeah, the average milk price, you know, what was baked into those food service and consumer margins? I don't, I don't have these. I'll have to get Phil maybe to come back to you on those. But I think the, I guess the key point you're saying is that there was both. I think there was two things going on in both of those, is consumer and food service. One was the lower COGS that you're referring to, and obviously the price. So I mean, the margin, you know, both of those were driving in, I guess, similar measure. But yeah, if you, I'm just trying to think what exactly what are you trying to get, though, from there in terms of the average input cost? Oh, no, I just found it a little intriguing that, you know, you know, you had, I suppose the margin pressure in the ingredients business, you know, because of the milk cost going up. But you had, you know, yeah, margin benefits in the consumer business from a lower milk price. So it was, you know, obviously there's some timing issues and and composition issues. But you know, it just would be useful to get what milk price went into both parts of the business. I know that there's timing differences, but it would be interesting to know what that was. Yeah. Yeah, I guess, Marcus, just be clear, it was largely the, you know, it's the, it's the relativity rather than the absolute on the stream. But yeah, the total milk cost will be similar between the two, but that's the period-on-period. I think the streams is different from the margin in the Consumer and Foodservice. Yeah, and probably maybe at a more holistic level, you've got, you know, COGS, reduced COGS year-on-year has played a part, but the delta year-on-year, if we look at Consumer as an example, is not simply a COGS game. It's, there's a whole lot of factors that have gone there. COGS has played a part, but certainly not the whole story. And that's— Sorry, just leads on to my other question, which was, you know, in the guidance you're referring, you know, to sort of moving back to average margins, you know, in food service and consumer, you know, outside of milk costs, is there anything else that's working against you, you know, to get you down to those types of levels in the second half? No, I think that that's gonna be the key driver there. Okay. And your competitors in food service in China being, you know, mainly the Europeans, aren't... You know, how's that playing out at the moment? They're obviously a bit absorbing a higher milk cost than you guys at the moment. Yeah, which is, which is why we've been able to gain a bit of share on the way through, share and higher margin. Okay. But your working assumption is, you know, pricing and market share broadly stable in the second half, and you bear higher milk costs and margins come down? That's usually it, yep. Okay. And then just, just one small one from me. You know, just for the dividend, you know, in the half, obviously you're expecting a smaller second half profit. But, you know, you know, can you give us any color in terms of what sort of circa payout you're, you're thinking about, or what, what was, you know, thought about at the board level, you know, when you set the dividend NZD 0.15? Well, a key component was, I guess, the strength of our balance sheet and the fact we'd earned it in the first half. So, you know, a policy of 40%-60% of NPAT at year-end still remains. But as you've seen for the last two or three years, given the strength of our balance sheet, we've pushed the boundaries on that. So certainly no color or, in fact, no conversation around where full year would land, but certainly confidence around the half. Okay. Thank you. Thank you. Our next question comes from Mark Topy of Select Equities. Please go ahead. Sorry, hello, can you hear me? Yes. Oh, sorry. Well, thank you. Yeah, sort of cut out there. Just first question, just as a follow-on, you read on some of those key global markets, particularly China, with the softness in the 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, as the potential there? Yeah, I mean, the response I'll give you is very much a milk price question, just so we're all clear, because the rest of our business in China, outside of the milk price and Fonterra products, is actually going very well. But we haven't seen China return to the demand levels that they have been previously. We would've liked to have seen them back by now. We are starting to see them work through that inventory overhang that we talked about last year, but we certainly haven't seen the demand rebound to the levels that we had. The futures have obviously come back. Next year's futures have come back a little bit from where they were, which suggests this may linger longer, but we won't be in a position to talk about our opening position for the 2025 season until May, but we'll watch that closely. But as I say, that's very much a GDT/milk price question, but 'cause outside of that, the rest of our businesses are actually going very, very well in China. Right. Yes, 'cause you do allude, allude to demand sort of fluctuating a little bit. What's your sort of read on- Mm-hmm ... on the global demand at the moment, putting aside China? Yeah, it is a little bit volatile. We've had a pretty good half from the likes of the Middle East, Africa, reemergence there. A stronger oil price obviously plays a part, which we've been the beneficiary of. And while we've got some concerns around the Red Sea and the Suez Canal, that's actually supported our position also from a milk price perspective, as we've been able to get product into the Middle East versus Europeans that have had the restrictions. So we're watching those things closely. There's obviously a few unders and overs through that, but you know, fair to say there's a few uncertainties as we look out into the international market over the next sort of twelve months or so. Nothing that would keep us awake any more than what we've done previously, given our exposure to the international trading environment. Very good. And just on retail pricing, perhaps in New Zealand and with context in Australia, we're seeing prices starting to moderate here and maybe even come back a bit, but I'm just wondering how you see that price increase cycle and the consumers' willingness to where any sort of further price increases in New Zealand, particularly? Yeah, it's probably not appropriate for us to comment on the retail segment here, I mean, that- the retailers will make that call. We have obviously seen a little bit of trading down in the last 12 months or so, as the cost of living crisis sort of bites in both markets. But, you know, generally, that's where your brand positioning plays its part, and that's actually done us very well, as you'll see from the results. Right. And just to, if you could expand on that, Australia-New Zealand merge of the Oceania creation of the business. The references to product integrity, does that suggest that you'll be able to perhaps ship some product in, into Australia, where there are 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? Well, we've actually always done that. I could be stand corrected, but I think that all the Mainland cheese in Australia has always been New Zealand cheese. So that hasn't changed, and the merger of our two organizations don't change in that regard. Where we see efficiency gains through that merger is dual overhead between those organizations- Mm-hmm. ... and can we, given our very, very similar markets from a consumer perspective, is there anything we can remove? And so that's where we're gonna be focusing. But, we've always sent product across, irrespective of the market price, in both... In the milk price, but rather in both those markets, and I don't see that changing anytime soon. Yeah, I should have been clearer there, of course. But, and so no increase, you don't see potential to increase, the product that you're sending into Australia? You know, there could be, and this year has, there's certainly been more product in recent times than there has done previously, but it's not an active part of our strategy, to be looking at that. We'll just work with the milk prices that we have in each of those markets. Right. Very good. Thank you for your time there. No problem. Thanks, Mark. Thank you. I see no further. My apologies. Our next question comes from Marcus Curley of UBS. Sorry, guys, just one follow-up. Just on that, Miles, well, obviously the pack you talk about in the ingredients part, yeah, pressure on the Australian margins. I would assume that that's, you know, the export business struggling, you know- Mm-hmm ... against, you know, their higher milk price. And if that's the right interpretation, is there any consideration for sort of, you know, reducing your exposure, you know, and to, yeah, to the export parts of the business in Australia? Yes, it is the right assumption that it is regarding the international market prices is below the domestic price in Australia, so that's where our exposure lies. Clearly, we try and limit that as much as we possibly can, but you know, product mix plays a part, our plant capacity plays a part. So, you know, to the extent you can, we remove that risk. But, you know, I guess in simple terms, you know, Australia is a fat market. They're the strong consumers of butter in the Australian market, which leaves you a little bit of a commodity skim that's gotta go somewhere. So you are at the whim, unfortunately, of the international market. But, yeah, I'm not sure how that gets reflected in the year ahead, because it's been a tough environment for all the dairy industry in that market in the last year or so. Okay. Thanks. Thank you. Thank you. I will now hand back for closing remarks. Great. Well, thank you very much for your time and the questions. Of course, the investor relations team are available at any time for follow-up questions. But I wish you a good day. Thank you. Thank you.