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Fonterra's under-performance since creation 'unambiguous': Shareholders' Council

Thursday 8th November 2018

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Independent financial analysis of Fonterra since its creation in 2001 shows an "unambiguous" pattern of commercial under-performance, says Fonterra Shareholders' Council chairman Duncan Coull. The council lodged a report at today's annual general meeting of farmer-shareholders in the dairy cooperative at Lichfield, in the Waikato.

"The assessment clearly shows that Fonterra's performance since inception has been unsatisfactory," says Coull in opening remarks to the analysis, undertaken by investment firm Northington Partners.

Its returns on capital employed, return on shareholders' funds and the performance of the value-add part of the business were all "lower than relevant benchmarks".

Over the 17 years since the cooperative was created in an attempt to create scale to help New Zealand's dairy industry compete in global markets, total shareholder returns had averaged 6.3 percent a year; and return on capital employed was 6 percent - against a benchmark of between 6.9 percent and 7.7 percent a year, the analysis shows.

The value-add business's return was just 0.2 percent a year higher than funds employed in the lower-margin manufacturing of ingredients.  

That was "significantly below the 1.3 percent per annum needed to justify the increased risk" of pursuing higher value products, says the Northington report, which homed in on those three key metrics.

"The results are unambiguous," said Coull. A range of other alternative measures made little difference to the conclusion that Fonterra had failed to meet its goals.

In slides prepared for the annual meeting, newly appointed chair John Monaghan and acting chief executive Miles Hurrell emphasised the co-op's current strategic review. Monaghan said the review was likely to lead to asset sales and capital reallocation, along with an immediate focus on reducing corporate debt by $800 million in the current financial year. 

Hurrell's slides were notable for the bald statement: "We have dropped our volume-based ambition."

The AGM comes at a critical time for Fonterra, which reported a loss for the first time in the last financial year, saw its chief executive of the last eight years, Theo Spierings, step down and its chairman, John Wilson, resign for health reasons. Earlier this week, farmer-shareholders delivered a sharp message to the Fonterra board by failing to re-elect one of the few commercial directors, Ashleigh Waugh, re-electing a dissident ex-director, Leonie Guiney, to the board, and failing to fill one board vacancy because other board-backed and independent candidates failed to capture the required 50 percent minimum support.

The government also last week released an options paper for reform of the Dairy Industry Restructuring Act which indicated little enthusiasm for Fonterra's desire to be relieved of the regulatory requirement to collect all milk that is offered to it. Instead, the paper suggests Fonterra can control milk supply by the price it offers for milk, as farmers have proven highly sensitive to price signals.

With its Chinese investments among the most heavily criticised, and with investment analysts urging Fonterra to concentrate on its domestic operations rather than international activity, Hurrell's notes also say: "We are maximising New Zealand milk."

Both Hurrell's and Monaghan's slide presentation packs are notable for their brevity, compared with the usual approach by corporate leadership to briefing shareholders.

The Shareholders' Council report does acknowledge that the co-op's investments in China had always been expected to be loss-making in their early years and that higher returns from these investments may yet be realised.

It also contended that Fonterra's 8.3 percent return on capital employed over the last 10 years was stronger than that of its most comparable domestic competitor, Open Country Dairy, which achieved a 7 percent annual return over that time.

The report compares Fonterra's performance with international competitors Arla and Friesland Campina It showed Arla and Fonterra earned roughly similar returns on capital over the last 17 years, at 8.4 percent and 8.1 percent respectively, but both significantly under-performed compared to Spierings's previous employer, Friesland Campina, which produced a 13.2 percent return over that period. The report notes the Europeans operate under very different regulatory structures than Fonterra.


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