AN

ANALYSIS OF
FONTERRA’S FINANCIAL
SITUATION IN 2018 - 2021
THROUGH DEBT AND EQUITY FINANCING

A REPORT FROM THE MEMBERS OF GROUP 9

LÊ PHƯƠNG UYÊN | BÙI HẢI AN | NGUYỄN HƯƠNG CHI
TRẦN THỊ KIỀU OANH | NGÔ MINH PHƯƠNG | ĐOÀN THANH TÂM

PRINCIPLES OF FINANCE
FINANCE AND BANKING PROGRAM
FOREIGN TRADE UNIVERSITY
TABLE OF CONTENTS
INTRODUCTION ..............................................................................................................1

PART I. TERMS AND DEFINITIONS ............................................................................1

A. EQUITY FINANCING ................................................................................................................... 1

B. DEBT FINANCING......................................................................................................................... 2
1. Secured Debt................................................................................................................................... 2
2. Long-Term Leases .......................................................................................................................... 2
3. Pension Liabilities .......................................................................................................................... 3

PART II. CASE STUDY: FONTERRA 2018 - 2020 ........................................................4

A. BACKGROUND .............................................................................................................................. 4

B. CAPITAL STRUCTURE ................................................................................................................ 4

1. Overview of Capital Structure ........................................................................................................ 4
2. A Brief History of FONTERRA’s Capital Structure...................................................................... 4
3. Investment Options ......................................................................................................................... 6

C. FINANCIAL SITUATION 2018 - 2020 ......................................................................................... 8

D. PROPOSED SOLUTIONS FOR FONTERRA .......................................................................... 11

1. Proposals in 2021.......................................................................................................................... 11
2. Assessments towards proposals .................................................................................................... 14

REFERENCES: ...............................................................................................................16
INTRODUCTION
The reason why we chose a dairy cooperative is that we wanted to monitor a cooperative
structure development. The agriculture industry has been associating with uncertainties and
constraints at high frequency. This characteristic of the sector reveals the ability of agriculture
firms to comply with these damaging changes. Dairy defines a subsector inside agriculture. The
economic activity of the cooperatives is more similar than different agricultural cooperatives. The
dairy sector is competitive, dynamic, and labor-intensive. The possibility of unfavorable
conditions like unexpected climatic changes or occupational risk factors associated with injuries
and illnesses demands the availability of excess capital, markets, and manpower. Research and
development activities, the industrial processing of raw milk, marketing of the industrial products,
brand-building, consequently contribute to high capital investment. At the same time, producers
must have a vision of their long-range and short-range goals, their business strategy must prepare
firms to accommodate for the future. Therefore dairy is a subsector that could point out the
adaptation of cooperative financing to these needs. With an innovative structure, we believe
Fonterra is an example that merits a deep study.

PART I. TERMS AND DEFINITIONS

A. EQUITY FINANCING
Equity financing refers to the sale of ownership interest in order to raise capital. The
investors gain partial control of the company and a share of its profits in exchange for their
investment. There are several ways to obtain equity financing, such as Partnership, Venture Capital
or Crowd Investing, etc. (Vance, 2021)
There are three major types of equity claims: common stock, stock options, and preferred
stocks. Common stock confers on its holder the residual claim to the corporation’s assets. In other
words, after all other parties with a claim on the corporation have been paid, whatever is left goes
to the holders of the common stock.
Preferred stocks differ from common stock in that they carry a specified dividend that must
be paid before the firm can pay any dividends to the holders of the common stock. It is in this sense
that they are preferred over common stocks. However, preferred stocks receive only their promised
dividends and do not get to share in the residual value of the firm’s assets with the holders of the
common stock. Failure to pay preferred dividends doesn’t trigger a default.

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 Advantages Disadvantages
Well suited for startups in high-growth industries: Hard to obtain: Unlike debt financing, equity financing
Especially in the case of venture capitalists is hard to obtain for most businesses.

Rapid scaling: With the amount of capital a company Investor involvement in company operations: Since
can obtain through equity financing, rapid upscaling is your equity financiers invest their own money into your
far easier to achieve. company, they get a seat at your table for all operations.
That means less control over how your company is run
and the risk of removal from a management position

No repayment until the company is profitable: If

your company fails, you never need to repay your equity
financing, whereas debt financing will still require
repayment.

(Kuligowski, K., 2018)

B. DEBT FINANCING
Debt financing is the technical term for borrowing money from an outside source with the
promise to return the principal plus the agreed-upon percentage of interest. (Kabbage, 2021)
Corporate debt is a contractual obligation on the part of the corporation to make promised
future payments in return for the resources provided to it. Debt financing in its broadest sense
includes loans and debt securities, such as bonds and mortgages, as well as other promises of future
payment by the corporation, such as accounts payable, leases, and pensions.
1. Secured Debt
When a corporation borrows money, it promises to make a series of payments in the future.
In some cases, the corporation pledges a particular asset as security for that promise. The asset
pledged as security is called collateral and the debt is called secured. When a borrowing corporation
secures a loan by designating specific assets as collateral, the secured lender gets first priority on
those assets in the event of non-payment.
2. Long-Term Leases
Leasing an asset for a period of time that covers much of the asset's useful life is similar to
buying the asset and financing the purchase with debt secured by the leased asset. The main
difference between the secured bonds and the lease as a form of debt financing is in who bears the
risk associated with the residual market value of the leased asset at the end of the term of the lease.

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 3. Pension Liabilities
Pension plans are classified into two types: defined-contribution and defined benefit.
In a defined contribution pension plan, each employee has an account into which the
employer and usually the employee too, make regular contributions of a fixed amount or a
percentage of their paychecks. At retirement, the employee receives a benefit whose size depends
on the accumulated value of the funds in the retirement account. A defined contribution (DC) plan
is typically tax-deferred, there are restrictions that control when and how each employee can
withdraw from these accounts. (Hayes, A., 2019)
In a defined-benefit pension plan, the employee's pension benefit is determined by a
formula that takes into account years of service for the employer and, in most cases, wages or salary.
Defined-benefit (DB) pension plans, in contrast to DC plans, are professionally managed and
guarantee retirement income for life from the employer as an annuity.
Differences across countries incorporate pension-funding practices that produce different
patterns of corporate capital structure.

Advantages Disadvantages

Tax Deductibility of Interest Payments: The interest Repayment: If a business uses debt financing and borrows
payments on debt financing are counted as an expense money, it has to repay the principal and the promised interest
and are tax-deductible. regardless of their cash flow situation.

Management Control: Your only obligation is to make Cash Flow: Too much reliance on debt financing will cause
the promised payments on time. You retain the right to a business to have a lower cash flow since principal and
run your business however you choose without outside interest payments have to be made on the debt.
interference from private investors.

Lower Interest Rate: The interest rate you get on a Collateral: Many small businesses may have to put up
bank loan or other forms of debt financing will be less collateral in order to get debt financing. Many business
than the cost of equity due to the tax-deductibility of owners balk at collateral because they often have to use
interest payments. assets they own privately.

Business Credit Score: Businesses can actually Credit Rating: Each loan will be noted on your credit report
improve their business credit score by showing and will affect your credit rating. The more you borrow, the
creditworthiness in handling their debt. higher the risk becomes to the lender so you'll pay a higher
interest rate on each subsequent loan.

No Profit Sharing: If the business uses debt financing,

there is no profit sharing because there are no investors.

(Carlson, R., 2018)

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PART II. CASE STUDY: FONTERRA 2018 - 2020
A. BACKGROUND
Fonterra Co-operative Group Limited is a New Zealand multinational publicly traded dairy
cooperative owned by around 11,000 New Zealand farmers. The company was established in
October 2001 following the merger of the country's two largest dairy co-operatives, New Zealand
Dairy Group and Kiwi Cooperative Dairies.
Any individual or entity wishing to buy Fonterra milk products will do so by negotiating
with Fonterra itself rather than with individual farmers. This significantly reduces buyers’
bargaining power, giving Fonterra more control over the pricing and supply of dairy products
globally.

B. CAPITAL STRUCTURE
1. Overview of Capital Structure
Capital structure can be defined as the way a company manages the balance between its debt
and equity to finance its activities, assets, and growth.
Fonterra has a unique cooperative structure where every shareholder must be a farmer.
Fonterra buys raw milk from farmers at a rate per kilogram of milk solids, and then on-sells it after
it has been processed at one of its plants around the country. (Fonterra, 2021)
Though the company has recently been partially listed on the New Zealand Stock Exchange
(NZX), public investors can buy only the economic rights linked to Fonterra’s financial
performance through the Fonterra Shareholders’ Fund. This means the company remains 100%
controlled and owned by farmers.
2. A Brief History of FONTERRA’s Capital Structure
When Fonterra was formed in 2001, Cooperative shares were issued to farmer-owners in
proportion to supply. Their Co-op redeemed the shares of existing farmers and those who reduced
supply for cash at a value that was set annually. When a large number of farmers exited or reduced
supply (e.g., during periods of drought), Fonterra’s Co-op had to redeem those shares and payout
the value – known as “redemption risk”. (Fonterra, 2021)
In 2012, the company implemented the current Trading Among Farmers (TAF) structure,
primarily to manage redemption risk. There are two key parts to TAF, which are illustrated below.

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 a. The Fonterra Shareholders’ Market (FSM)
This is the farmer-only market where farmers trade shares in our Co-op between themselves.
b. The Fonterra Shareholders’ Fund (FSF or Fund)
This is a managed investment scheme under the Financial Markets Conduct Act. It is listed
on the NZX Main Board and on the ASX, and units in the FSF can be bought and sold by the public
in the same way as any other listed security.
Units in the FSF give the holder access to the economic rights in a share (such as distributions
or dividends). Like any member of the public, farmer-owners can also trade units in the FSF.
c. How the TAF Structure Works
Shares are issued to a restricted market, where most holders had a financial limit to acquiring
a large number of shares. If Fonterra financed redemption by taking on more debts or selling its
assets, it would result in lower profitability and shareholder-farmer return. Fonterra is therefore less
exposed to redemption risk when a farmer decides to leave the cooperative.

The real value of TAF is demonstrated during an environment where Fonterra’s milk supply
is falling and likely to continue to trend that way over time. A good example of this is that after the
extremely high capital expenditure year of 2014/15 where Fonterraspent over $2.2 billion in capital,
they were then still able to make capital expenditure amounts of$944 million (2015/16) and$851
million (2016/17). This was all carried out with milk supply losses of 48 million liters (2015/16)
and 40 million liters (2016/17). Before the implementation of TAF, this would have meant between
$250-300 million of capital leaving the balance sheet each year. In general, It has done very little
to provide Fonterrawith extra capital for growth opportunities, however, the permanence of capital
in the balance sheet has allowed them to invest with more confidence. (Courtman, J., 2018)

d. FONTERRA’s Financial Situation in comparison to NESTLÉ

In the 2018 - 2020 phase, Fonterra witnessed their shares value decrease drastically while
one of their prime competitors, Nestle, experienced steady growth in market capitalization
and increased the amount of cash returned to shareholders thanks to their dividend and share
buyback program. At the same time, while both cooperatives invested in the China market, Fonterra
ended up selling their assets to make up for poor investment decisions whereas Nestle saw reviving
growth. This had shown the drawbacks in Fonterra TAF structure and capital allocation.

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3. Investment Options
a. Co-operative Shares (Shares)
The number of shares held by the members is according to the level of transactions with the
cooperative, exactly: “Each shareholder supplying milk to the Company in a season is required to
hold one Co-operative share (share) for each kilogram of milk solids obtainable from milk supplied
to the Company by that shareholder, excluding milk supplied by that shareholder under contract
supply or as unshared supply, in that season” (Fonterra, 2012).
Each shareholder is able to hold further shares up to 20% of the share standard. The rights
attaching to shares include:
• Voting rights of one vote per 1,000 kilograms of milk solids obtainable from milk supplied
to the Company by a shareholder during the preceding season
• Rights to any dividends declared by the Board
• Rights to share in any surplus on liquidation of the Company

b. Redeemable Preference Shares

Fonterra may issue Redeemable Preference Shares to shareholders as consideration for a
proportion of the Surrender Value of Shares and the redemption of Peak Notes only if permitted by
the DIRA and the Constitution. The requirements include that the Board considers that paying cash
and issuing Capital Notes would materially and adversely affect Fonterra’s ability to implement its
business plan.
Redeemable Preference Shares rank in preference to all other Shares issued by Fonterra but
rank behind all other indebtedness of Fonterra (including, without limitation, Peak Notes and
Capital Notes).
• Do not have voting rights except the right to vote on actions that affect the rights attached
to them
• Pays accumulated dividends

c. Peak Notes
Peak Notes are unsecured, subordinated, non-interest-bearing obligations of Fonterra which
rank equally and without priority or preference amongst themselves. (Fonterra, 2012)
In addition to holding Shares, shareholders are required to hold the number of Peak Notes
required to be held by the Peak Note standard, determined in accordance with the Constitution.

6
There are no Peak Notes currently on issue and no Peak Notes will be issued in a Season for which
the Peak Note standard is set as zero.
Peak Note is a means by which suppliers contribute to peak processing capacity costs.
Suppliers with high peak production profiles are asked to contribute more to the business by being
required to hold more Peak Notes. The issue price of each Peak Note is fixed at $30.
If the supplier holds fewer Peak Notes than required by the standard in that Season (based
on their milk supply profile during the preceding Season), Fonterra must issue them the additional
number of Peak Notes they are required to hold. Because Peak Notes are issued to the supplier
based on their peak milk supply profile (not their total production levels), their requirement to hold
Peak Notes in any Season may change and they may be required to hold additional Peak Notes even
though their total supply has decreased.
If the supplier holds more Peak Notes than required by the standard in that Season (based on
their milk supply profile during the preceding Season), Fonterra may redeem those excess Peak
Notes.
If Fonterra is liquidated for whatever reason, Peak Notes will rank behind and subordinate
to all outstanding obligations of Fonterra (including Capital Notes). In all other respects, Peak Notes
will rank ahead of Redeemable Preference Shares and obligations to shareholders in their capacity
as shareholders. Each Peak Note will become repayable by Fonterra at the start of liquidation of
Fonterra.

d. Capital Notes
Capital Notes are unsecured, subordinated, debt investments which bear interest payable on
a quarterly basis. (Fonterra, 2012)
Fonterra may issue Capital Notes to shareholders who are redeeming Shares, Peak Notes, or
Redeemable Preference Shares, instead of paying cash. Fonterra may also redeem Capital Notes
from shareholders in satisfaction of the issue price of Shares and Peak Notes.
Capital Notes have no fixed maturity date and continue to exist until redeemed by Fonterra
on an Election Date or are otherwise purchased by Fonterra with agreement from the holder. They
can also be redeemed or repurchased by Fonterra from its shareholders in accordance with the
Constitution and the Dairy Industry Restructuring Act (DIRA).

7
 Capital Notes rank in point of priority and right of payment, and in all other respects, equally
amongst themselves. If Fonterra is liquidated, no payment will be made to holders in respect of
Capital Notes until Senior Debt has been paid in full.
Capital Notes rank ahead of Peak Notes, Redeemable Preference Shares, Shares, and
obligations to shareholders in their capacity as shareholders.
The supplier can sell or transfer their Capital Notes to another person or organization at any
time, using the form commonly used for security transfers, in multiples of $1,000 and subject to the
requirement that any Capital Note holder must have a minimum holding of $5,000.

e. Retail Bonds
Fonterra currently has 3 types of Retail Bonds listed on the New Zealand Stock Exchange Debt
Market (NZDX).

C. FINANCIAL SITUATION 2018 - 2020

A massive loss in the 2018/2019 term for Fonterra was well-flagged. The loss was long in
the making and raises serious questions of the organisation, its strategy, its auditors, its board and
its shareholder council. Fonterra's share price has halved in the last five years. Meanwhile its global
competitors, such as Danone and Nestle, rose by 50 percent and the New Zealand sharemarket by
more than 100 percent. Fonterra has destroyed over $10 billion of shareholder value.
The loss was mainly writing off bad businesses. They bought many global businesses with
loads of debt in recent years. Many of them turned out to be ineffective in China, Brazil, and
Australia to name a few. Fonterra's ambition to become a global milk producer and processor did
not work. The writedowns mainly reflect those investments. It turns out they paid too much and
could not force a New Zealand model to make them work. It's become clear some of its assets are
overvalued in relation to what they will earn going forward. The problem areas are mainly overseas
but also include its New Zealand consumer business.
It has written down the value of its Brazilian business by $200 million due to the economic
conditions there. Next door in Venezuela it had to sell its consumer business and close down its
ingredients operation due to economic and political instability, costing it $135 million. Fonterra has
also had to write down the value of its China Farms business by $200 million. Meanwhile its
Australian arm is adapting to "the new norm of continued drought, reduced domestic milk supply
and aggressive competition," Hurrell - Fonterra’s CEO says. Fonterra has closed a Victorian dairy
factory and written off goodwill in the business at a cost of $70 million.
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 On the other hand, Fonterra’s business model is wrong and has been for a long time. On one
side we have farmers who rightly want the maximum return for their milk so they can invest in their
own farm infrastructure. On the other side we have Fonterra wanting to pay the least for its milk
raw product so it can make a greater margin on its products and invest in more value-adding
infrastructure so it can compete with the likes of Nestle and Danone in branded goods. It’s a classic
business paradox with clear commercial conflicts. Because of this diametrically opposed dynamic
Fonterra also finds itself capital constrained.
Overall, in the 2018-2019 period, Fonterra went through a 13.83% decrease in the market
capitalization and this showed that Fonterra was required to deal with unfavourable situations.
The table below illustrates financial performance of Fonterra Group in the period of 3 years
(2018-2020)
Table 1: Fonterra’s Finances in 2018-2020

2018 2019 2020

Loss/Profit $ -196 million $ -605 million $659 million

Total borrowings $ 6,349 million $ 6,555 million $6,041 million

Total Equity $ 6,738 million $ 5,834 million $6,703 million

During the year ended 31 July 2019, Fonterra announced a financial strategy review update
in which it began the implementation of a Group-wide campaign. The corporation eventually
recovered significantly from 2019 and its value witnessed an increasing trend in the following year.
The organization bounced back in 2020 with a remarkable profit of $659 million.
In 2019, Fonterra sold Tip Top for $380 million and its share of DFE Pharma for $633
million. They also wound back their relationship with Beingmate and are now looking at options to
reduce its financial stake in the company. The Group’s holdings of Beingmate shares continue to
be held for trading with an active sales process in place.
On 31 July 2019, Fonterra was in the process of investigating a range of options for the
Brazilian and Chinese markets. No decision had been made on the option to be formally progressed.
Fortunately, in 2020, the strategic reviews of the China Farms and Brazil consumer and foodservice
business have advanced such that the businesses meet the requirements to be classified as held for
sale. However, challenges still remain with the operational performance of the China market led to
the reassessment of the carrying value of the investment

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 Consequently, the current expectation of long-term sustainable milk production has been the
most significant factor in the recoverable amount of China Farms and Brazil market assets to the
prior years, (Fonterra, 2020)
Fonterra's future is not certain. In the coming years, it will need to seriously earn back the
trust of its farmers and the community. The chairman with the help of the Boards also bears the
question of how to maintain its profit in the future. It is predicted that, in September or October
2021, the company will provide further details on its long-term strategy, including the types of
activities it will invest in and the returns it is aiming for.
Table 2: Dividend per share (cents)

Year ended Year ended Year ended Year ended Year ended Year ended
31 July 31 July 31 July 31 July 31 July 31 July
2021 2020 2019 2018 2017 2016

Interim dividend 5 0 0 10 20 20

Final dividend 15 5 0 0 20 20*

Total annual 20 5 0 10 40 40
dividend

This table shows Fonterra’s dividend changes from 2016 to 2021. (Fonterra, 2021). The
Board would expect over time to distribute half of our net earnings, excluding abnormal gains.
The payout ratio is 40-60% of Reported Net Profit After Tax but excluding abnormal gains. The
distribution of any abnormal gains, such as an asset sale, will be considered separately. An interim
dividend will not be more than 40% of the forecast total dividend and no more than net earnings at
half-year. The co-op recently announced a dividend of 15c a share, taking the total to 20c,
compared with last year’s total of just 5c.

Gearing Ratio (%)

Half year Full year
60 52,7
48,5 47,1
50 45,2
41,4
40
30
20
10
0
2019 2020 2021

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 The gearing ratio is an indicator of the financial risk associated with a company. In 2019,
Fonterra's gearing ratio was higher than 50%, which was typically considered a significant rate. As
a result, the company would be at greater financial risk when during times of lower profits and
higher interest rates, the company would be more susceptible to loan default and bankruptcy.
However, this ratio from 2020 experienced a slight decrease and reached 45.2% in 2021. (Fonterra,
2021) The gearing ratio between 25% and 50% is virtually regarded as optimal for well-established
companies. (Boyte-White, C. 2020)

D. PROPOSED SOLUTIONS FOR FONTERRA

1. Proposals in 2021
With the first phase of Fonterra’s capital structure consultation, the Co-op is drawing up a
revised proposal that aims to reflect farmers’ views. A number of changes are being considered to
the preferred option initially put forward in the Consultation Booklet in May.
The number of shares held by the members is according to the level of transactions with the
cooperative. In 2012, each shareholder supplying milk to the company in a season was required to
hold one cooperative share for each kilogram of milk solids obtainable from milk supplied to the
company by that shareholder, excluding milk supplied by that shareholder under contract supply or
as unshared supply, in that season.
However, Fonterra’s preferred option at this stage is for a Reduced Share Standard, with
either No Fund or a Capped Fund. This involves reducing the share standard so that the minimum
requirement for farmer owners would be one share for every four kgMS supplied to the cooperative
(1:4), rather than the previous share standard ratio of 1:1. The difference in share standard ratio
increases flexibility by raising the maximum shareholding of 2x supply to 4x supply.
Reducing the share standard would make it easier for new farmers to join our Co-op and
give more flexibility to existing farmer owners who may want to free up capital or who are working
through succession.
To compare the preferred option to Fonterra’s current structure for farmers, four hypothetical
scenarios are taken into account to present a high-level indication of how things could change at
different stages of business life cycle: First farm owner, growing farm owner, established farm
owner looking to invest capital, retiring farm owner looking to release capital. With the preferred
option, the minimum shareholding requirement is reduced to only a quarter (number of shares).
However, the maximum shareholding doubles.
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 Fonterra also reached a preliminary view that having No Fund would be preferable to a
Capped Fund because it simplifies our Co-Op. However, if Fonterra cannot reach an acceptable
arrangement to buy back the Fund that 75% of voting unit holders support, then a Capped Fund
would also work. In other words, Fonterra would only seek to remove the Fund at a reasonable price
that was acceptable to unit holders, fair to farmer owners and made sense to the Co-op compared
to the Capped Fund alternative. Recently, the company had also placed a temporary cap on the
shareholders' fund, which had contributed to about $2.2 billion wiped off its market
capitalization.

Minimum shareholding requirement Maximum shareholding

(shares) requirement (shares)
Current structure Preferred option Current structure Preferred option

250.000 900.000
800.000
200.000 700.000
600.000
150.000 500.000
100.000 400.000
300.000
50.000 200.000
100.000
- -
First farm owner Growing farm Established farm Retiring farm First farm owner Growing farm Established farm Retiring farm
owner owner looking to owner looking to owner owner looking to owner looking to
invest capital release capital invest capital release capital

Fonterra will also consider keeping the maximum number of shares at four times milk
supply to support liquidity, allowing share milkers and contract milkers to hold shares if the
cooperative moves to a farmer-only market, as well as extending the entry period to six years
from five years. The biggest implication of trading in a farmer-only market is that farmers will set
the price for shares through trading amongst themselves. This is likely to be different to how outside
investors value units in the Fund today.
Talking about the Fonterra Shareholders’ Fund, the FSF provides investors an opportunity
to invest in the performance of Fonterra Cooperative Group. Units are listed on the NZX Main
Board and on the ASX, and can be freely bought and sold in the same way as any other listed
security. Outside investors who are not allowed to hold shares in Fonterra can invest in units in the
Fund which gives them access to economic rights (such as distributions and capital movements),
similar to those of a share.
Debt and other liabilities become risky for a business when it arduously fulfills those
obligations, either with free cash flow or by raising capital at an attractive price. Therefore, Fonterra

12
orients to be a low-risk company by introducing multiple strategies to either sustain or reduce the
total debt reasonably.
Fonterra turns its focus to its core New Zealand milk business. This New Zealand Dairy
group sells overseas assets and underperforming projects leading to a reduction in costs and debt
to improve its earnings. (Fonterra, 2021). The company sold Chinese dairy farms, which are Ying
and Yutian farming hubs, for $552m as it pulled back from global expansion. (Morrison T., 2021).
The sale, which followed two years of losses, included the sale of two farming hubs in Ying and
Yutian in northern China to Inner Mongolia Natural Dairy Co, a subsidiary of Chinese milk giant
China Youran Dairy Group, for $NZ513 million. (Fernyhough J., 2021). This business announced
that it had encountered antitrust and other regulatory approvals. "Fonterra has contributed to the
development of the Chinese dairy industry by establishing these farms and we’re pleased to now
hand ownership over to Youran for the next phase of development", Hurrell said. Under the
leadership of chief executive Miles Hurrell, the cooperative concentrated on paying down the debt
and focusing on domestic producers.
Fonterra aims to reduce and maintain the gearing ratio to be between 36% and 40% at
the end of the year 2021. As the gearing ratio has been mentioned above, Fonterra has perceived
their situation and attempted to sustain this rate. If a company has too much debt, it can fall into
financial distress. Both lenders and investors scrutinize a company's gearing ratios because they
reflect the levels of risk involved with the company. Therefore, Fonterra's proposal to control the
gearing ratio between 36% and 40% promotes their business activities, not to mention attracting
potential investors. (Fonterra, 2021)
As can be seen from the below graph, the net debt experienced a decline due to proposed
procedures from Fonterra. The Dairy Cooperation has been maintaining these figures to cut down
the debt and balance between debt and equity.

Net debt ($ billion)

8 7,2 7,4
7
5,8 5,6
6
5
4
3
2
1
0
2018 2019 2020 2021

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 Fonterra shifts its focus to high-value products, especially cream cheese, to maximize its
profit. Due to the high global demand for cream cheese, the Darfield site of Fonterra in Canterbury
has expanded to ramp up production. Their team notices the record monthly sales for cream cheese.
Demand is predominately coming from China as they continue to see an increased interest in
pasture-fed milk from New Zealand. The cream cheese produces different products, from cheese
lollipops to traditional Chinese pastry like moon cakes. “We have great flexibility here at the plant
that enables us to dial-up or down the firmness and consistency of cream cheese to meet customer
preference and the great job our farmers are doing in delivering top quality milk,'' Blake says. She
also states that with COVID-19 bringing uncertainty to the job market, it is outstanding that Fonterra
virtually offers new opportunities for workers. (Fonterra, 2020)

2. Assessments towards proposals

Fonterra Co-operative Group Limited on 23 September announced a remarkable set of
results for the 2021 financial year. This reflected in a final Farmgate Milk Price of $7.54, normalized
earnings per share of 34 cents, and a final dividend of 15 cents, taking the total dividend for the
year to 20 cents per share. To achieve these figures, Fonterra has walked through its business reset
and switched into a new phase of its business.. They stuck to their strategy of maximizing the value
of our New Zealand milk, advanced to a customer-led operating model, and strengthened their
balance sheet.
“The results and total pay-out we have announced today show what we can achieve when
we focus on quality execution and an aligned Co-op", he states. Although the higher milk price and
tightening margins put pressure on earnings in the final quarter, this was notable overall business
performance, allowing them to deliver $11.6 billion to New Zealand. This Dairy Cooperation has
continued to reshape their business and the sales of our joint venture farms and wholly-owned
farming hubs in China. They persevered in providing their New Zealand milk to the world.
Total Group normalized EBIT, which reflected underlying business performance, was up
8% to $952 million, with Total Group normalized operating expenditure down 3% to $2.2 billion.
Mr. Hurrell assumes a focus on financial discipline has paid off. Net debt was down by $872
million to $3.8 billion, while the cash flow had recovered at 2.7x. Fonterra is now within its long-
term target Debt/EBITDA ratio.
Fonterra received $599 million in reported profit after tax. While down on last year, the 2020
financial year benefited significantly from the divestments of DFE Pharma and foodspring®.

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Normalized profit after tax grew by $190 million to $588 million, driven by improved earnings and
lower interest expense.
They propose that their sales are well-balanced across the regions and a number of their
markets have performed well. COVID-19 has changed consumer behavior in multiple sectors that
purchasers choose to cook at home. The Dairy Corporation acknowledged that this situation would
benefit their consumer brands and support upward momentum in our Consumer channel
performance, particularly in New Zealand and Australia.
In the Asia Pacific, significant improvements in Foodservice and Consumer channels have
pushed normalized EBIT up 28% to $305 million. They have expanded their Foodservice footprint
in the region due to recognizing the benefits.
Greater China continued to be a potential market, with normalized EBIT up 10% to $403
million. This figure spoke to the strength of their Foodservice channel as long as the Chinese
economy.
AMENA normalized EBIT was down 28% to $336 million, reflecting their strategies of
redirecting products into higher-margin markets.
Their total dividend for the year is 20 cents per share, which includes an interim dividend of
5 cents per share and a final dividend of 15 cents per share. Three cents of the 15 cents per share
reflects the reversal of the previous impairment of our China Farms. For a 100% share-backed farm,
this meant a total pay-out of $7.74 per kgMS. (Fonterra, 2021)
In conclusion, Fonterra’s proposals are to maximize and sustain their profit by
accommodating the equity-debt financing and shifting their focus on appropriate markets and
products. The Dairy Co-operative Group, with the strategies to increase equity and reduce debt,
formulates manifold impacts on the business performance.

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