News
FARMERS WEEKLY – farmersweekly.co.nz – July 15, 2019
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Suggestions definitely off agenda
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Fonterra’s future Neal Wallace neal.wallace@globalhq.co.nz
FONTERRA will not retain earnings or change the way it sets the milk price as part of its business reset, chief financial officer Marc Rivers says. It is confident it can address its debt issue and strengthen its balance sheet without those measures. The reset is on track to meet its target of $800m this year while reduced spending will boost its profitability. “We’re both tightening our belts and looking for savings but also looking at our investment portfolio,” Rivers said. He is unequivocal in rejecting commentators’ suggestions it retain money from the milk payout and change the setting mechanism. “Categorially no. We are in very different circumstances to Westland.” Rivers describes the milk pricesetting process as sound. It is independently monitored by the Commerce Commission and must be sacrosanct. He accepts Fonterra is over-
NO, NO, NO: Fonterra’s reset will not include retaining money from the milk payout, changing the milk price mechanism nor immediately revising the coop’s structure, chief financial officer Marc Rivers says.
extended with debt and therefore its performance needs to improve but the level of debt is not a consequence of it being a cooperative. There is confidence balance
sheet strength can be restored with the current ownership structure. Being a co-operative offers much that is positive through connections with the owners and suppliers.
“Absolutely, the co-operative model is a strength and not a weakness.” Rivers says lessons have been learnt. “We have to treat our capital a lot more preciously and that is definitely the mindset going forward.” How the $800m in proceeds from asset sales will be spent is up to the board but Rivers says some will be needed to retire debt and some could be reinvested. There has, in recent months, been a shift in the co-op’s mindset to no longer aspire to dominate the world trade in dairy products. Rather, it is targeting dairy product categories it believes it can compete in and, importantly, where it thinks it can win. Once the strategy is reviewed and agreed to the next focus will be Fonterra’s structure. “The first step is the strategy, what strategy do we need based on the business and operations and then what structure do we need to be successful?” Fonterra has access to sufficient capital and assets and a strong, well executed strategy will provide access to any extra capital needed. “It comes back to performance.” Operational expenses have been reduced to 2017 levels
and capital expenditure cut from $861m last year to $650m, helped in part by no short- term requirement for new processing capacity. Fonterra believes a valueadded strategy is still relevant, even with the associated cost and commitment.
Categorically no. We are in very different circumstances to Westland. Marc Rivers Fonterra While Tip Top is a value-adding company it was Fonterra’s only ice cream business and it used more sugar than milk. Tip Top will remain a Fonterra customer. Fonterra Shareholder’s Fund shares have fallen from $4.78 on January 9 to $3.75 on July 9, having started 2018 at $6.40. Rivers said that is a concern for shareholders, putting pressure on their balance sheets but does not directly affect Fonterra’s ability to pay its bills. “We think we have got a turnaround plan and strategy and that value will be reflected in the share price.”
Management not model to blame Richard Rennie richard.rennie@globalhq.co.nz THE slump in Westland Milk Products fortunes and possible risks to Fonterra relate to management decisions not the cooperative model the companies were founded on, Co-operative Business New Zealand chief executive Craig Presland says. He moved quickly to defend the co-operative model amid dismay at Westland’s offshore sale and increasing scrutiny of Fonterra as it tries to reduce its heavy debt. Presland shied from any direct criticism of Westland’s unwinding. Instead he pointed to Keith Woodford’s analysis earlier this year that highlighted management decisions at the co-operative including not pursuing A2 milk, expanding into Canterbury and a cheap-in, cheap-out share price of $1.50 a kilogram of milksolids. Woodford cited those as key planks of the co-operative’s demise. “And history shows that with competent management the cooperative model has stood the test of time. “Here in NZ, of the top 10
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Fonterra’s future
co-operatives eight are directly involved in agriculture and horticultural sectors,” Presland said. He acknowledged the higher capital demands that accompany dairy and meat processors compared to co-operative retail outlets like Mitre 10 and Foodstuffs. “The challenge is to balance capital retentions with annual payouts appropriately. “It is simpler with retail outlets where members receive a pro-rata dividend at the end of the year based on turnover contributed. “Retail facilities are also cheaper to construct than dairy plants and there is more complexity in balancing against milk prices.” He agreed with the growing chorus of analysts calling for Fonterra to increase its retentions to reduce debt. “But any poor performance
But any poor performance from co-operatives due to capital investments made, abandonment of retained earnings policies and poor market investment decisions has no relationship with the co-op business model. Craig Presland Co-operative Business NZ
MODEL FINE: Craig Presland maintains it is management not the model that trips up co-operatives.
from co-operatives due to capital investments made, abandonment of retained earnings policies and poor market investment decisions has no relationship with the co-op business model. “It’s more to do with wise decision making, good governance and effective leadership.” He pointed to Tatua Dairy Cooperative as an example of how the model, with all those factors
in play, can be outstandingly successful. Presland also said more than 1000 NZ businesses have been delisted since 2001 because of receiverships, administration or closures. “Fewer than five of these were co-operatives, mutuals or societies.” Presland maintained a large, single, co-operative model in NZ’s dairy sector remains vital
to give farmers price strength for products overseas. “I think Fonterra’s focus on core business is pretty key to the future and selling Tip Top is a good move. “They have a new strategy plan paper due out in September. It will be interesting to see what is in that.” He said it was a shame there was no way for Fonterra to buy Westland Milk Products to retain 100% co-operative ownership.