Fonterra defends $72m spent on consultants

By Hugh Stringleman

Friday 20th September 2002

What was repeatedly called a "culture of extravagance" at Fonterra Co-operative Group's annual meeting has been defended by the group as the costs of the megamerger and doing business in overseas markets.

More than 1500 of Fonterra's 13,000 shareholders gathered at seven venues for the annual meeting, with questions arising from the group's first annual report.

Cambridge-based shareholder Gary Reymer said corporate costs had exceeded those identified in the merger business case by $80 million and were $34 million over budget.

Outgoing chairman John Roadley said he could not see any extravagance in the modest and now probably inadequate Auckland Airport head office.

Other leases of space around Auckland were short-term and cheaper than had been paid in Wellington, chief executive Craig Norgate said.

Wanganui-based shareholder David Hopkins, on an audiovisual link, roundly criticised the levels of salaries and bonuses and $72 million in consultants' fees.

"If salaries and bonuses would fluctuate in future, like our milk payouts, that would be great," he said.

Mr Roadley said large numbers of consultants were required during the merger investigation and establishment. Now Fonterra was fully staffed, expenditure on consultants would go right down.

Another shareholder collated 428 salaries over $100,000 as identified in the last annual reports of the New Zealand Dairy Group, Kiwi Co-operative Dairies and the Dairy Board.

"That figure has more than doubled for Fonterra to 974, so how much of that was due to redundancies and how much to new ventures offshore?"

Mr Roadley replied that all offshore employees earning over $100,000 were now included, which was not the case in previous Dairy Board reports.

"Inside of New Zealand, there are actually 40 less people in that category compared with the legacy companies.

"And you have to remember that the average wage in the US, not just Fonterra's average, equates to over $NZ100,000. I would like to think Fonterra's people are above the average," he said. Waikato shareholder Hillary Webber said the 38% equity-to-assets ratio was too low for comfort, especially when one-third of equity is brand valuations.

"You and I are lenders of last resort," she said, addressing shareholders. The capital structure was flawed and needed to recognise differences between the South and North Islands, she said.

Geoff Mathis, from Tirau, pointed out that most of the capital expenditure was taking place in the South Island, where the milk supply was increasing quickly.

He suggested peak notes (the right to increase supply) for the South Island only.

Mr Roadley replied that the peak note structure was under review.

After acknowledging local issues such as overly complicated peak notes and milk collection scheduling problems, Mr Norgate tried to get shareholders to see the global perspective in Fonterra's draft strategic plan.

Seven themes in the plan are to:

* produce dairy products at the lowest possible cost;

* be the smartest player in globally traded dairy products;

* form partnerships with large customers;

* develop innovative specialty dairy products;

* exploit the health and nutritional benefits of milk;

* push further into the global foodservice sector; and

* emphasise emerging markets in China, India, eastern Europe and Latin America.

"The rewards for focusing our people and management efforts in those areas, where we can become a clear world leader, will be higher sustainable returns to you," he said.

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