Saturday, December 2, 2023

Fonterra vows reformation

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Fonterra’s new strategy will match its unique strengths to the needs of customers, creating sustainable value from New Zealand milk.
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It will focus on innovation, sustainability and efficiency while unlocking greater value from its large research and development division.

Gone or on the way out are major cash investments internationally, the offshore milk pools, a 30 billion litre annual milk volume target and trying to be all things to all people in all dairy segments.

As demonstrated by the sale of Tip Top, Fonterra now has no ambition to be a fast-moving consumer goods company in, for example, confectionery, alongside dairy cabinet foods.

It might not want to be the Nestle of NZ with volume-based objectives but believes it can still be the nation’s champion, chief executive Miles Hurrell said.

It will stay in the consumer markets of NZ, Australia and Chile but most of its revenue will come from business-to-business, not business-to-consumer, sales.

The new strategy cannot be summed up in a slogan but its transformative power has already been considerable over the 12-month development phase during which Hurrell has been chief executive.

To put structure into the strategy he will downsize Fonterra’s Auckland headquarters and change the go-to-market model in favour of more feet on the ground alongside the customers.

The giant ingredients and consumer-food service divisions will be split into target sales categories of core dairy, food service, paediatrics, sports and active, medical and gaining.

“We will divest non-core businesses and focus where we can win,” he said.

“We are not going to subsidise off-shore activities – each needs to pay its own way.”

Chief among those is China Farms, where Fonterra no longer needs to own 35,000 cows to demonstrate its credentials and it is actively looking for partners.

“Fonterra does not need to own and control its offshore investments but instead make partnerships with our intellectual property, skills and research and development.”

Milk supply growth in NZ and Australia cannot be expected in future and so the focus has switched to product and market optionality to drive premium prices through innovation, Fonterra’s strategy head Chris Greenough said.

It must return more value to shareholders so as to retain milk market share at 80%.

Among the realities of its position are increasing competition for milk, constrained capital, high debt, lack of trust and confidence at home, increased environmental costs and recent under-performance.

Among its strengths are 20,000-plus employees, 10,000-plus farming families, 400 researchers, pasture-based milk, low greenhouse gas footprint, the global supply chain, customer relationships and food safety and traceability.

Greenough drew attention to what he called cross-over products like butter, cheeses and milk powders that can be sold in bulk for further processing and in portions with high end-user margins.

Chief financial officer Marc Rivers said Fonterra will report on triple bottom line measurements in future; healthy people, healthy environment and healthy business.

He credited the Sustainability Advisory Panel under chairman Sir Rob Fenwick with that change.

The objectives will have targets in areas like community relationships, zero waste and nature restoration.

The business targets will include a sustainable farmgate milk payout, reliable dividends and adequate return on capital.

Rivers defines capital as the dollar investment into the company, not the fluctuating valuations of brands and market shares that gave rise to hundreds of millions of dollars of impairments recently announced.

There will be three-year and five-year targets for gross margins, earnings before tax and interest, net profit after tax, capital expenditure, free cashflow, debt versus EBITDA, return on capital and earnings per share.

Fonterra will have a conservative balance sheet and will aim to retain its A-band credit ratings.

Hurrell said performance payments for high-level executives, including himself, will in future be based on key measures like return on capital.

Fonterra will continue to champion the NZ model of pasture-based dairying, unique provenance, its family ownership and the health values and complexity of milk.

“We are going to talk to the people of NZ differently,” he said.

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