Fonterra to exit milk pools outside of NZ, but no plans to leave Australia

Fonterra to exit milk pools out of NZ, but no plans to leave Australia

Dairy
CHANGE OF DIRECTION: Fonterra is re-positioning itself as a New Zealand company not a global dairy giant.

CHANGE OF DIRECTION: Fonterra is re-positioning itself as a New Zealand company not a global dairy giant.

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UPDATED: Fonterra will start exiting milk pools outside of New Zealand - but not Australia - in the wake of big losses in the past two years.

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UPDATED: Fonterra will start exiting milk pools outside of New Zealand, in the wake of big losses in the past two years.

But the company's chief executive officer Miles Hurrell said after the results announcement, there were no plans at this stage to exit its Australian operation.

"The strategic direction we have chosen brings New Zealand to the fore but that doesn't mean that's going to be the extent of our business," he said.

"The strategy for us is around where you put your incremental - last dollar, if you like - and where you will be spending your time and effort to grow into the future.

"That simply doesn't mean an exit of our existing businesses.

"We will continue to look at places like Australia to ensure that they can stand on their own two feet as an operation.

"We have no plans at this point to exit the Australian operation."

Another loss

On Thursday, Fonterra reported a $NZ605 million loss for 2018-19 - following on from a $NZ196 million loss last year.

The company also announced it would pay a final milk price of $NZ6.35 a kilogram milk solids but would pay no dividend.

Other results included normalised earnings before interest and tax (EBIT) at $NZ819 million, down 9 per cent; free cashflow at $NZ1095 million, up 83pc, and return on capital at 5.8pc, down from 6.3pc.

Mr Hurrell said the loss was mainly due to significant one-off adverse items, including the $NZ826 million reduction in asset values.

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Fonterra had delayed the announcement of its 2018-19 results as it grappled with sorting the $NZ820 million-$NZ860 million asset write down it announced in August.

Chairman John Monaghan said the performance this year was not what it should have been.

"It is not the result we said we would deliver for our owners, however, I am positive about the changes we've made and the outlook for the next few years," he said.

Mr Hurrell said while the New Zealand ingredients and food service businesses had improved on last year, they were offset by challenges in some markets.

"But we can't ignore that we had a number of challenges across the year - these included Australia Ingredients, our businesses in Latin America and the consumer businesses in Sri Lanka, Hong Kong and New Zealand," he said.

New Zealand first

Fonterra announced a new strategy putting its New Zealand farmers firmly at its core.

This included prioritising New Zealand milk, complemented by milk components sourced offshore only when required.

"As a result, we plan to start exiting our off-shore milk pools," chairman John Monaghan said in announcing the new direction.

Mr Monaghan said that 18 months ago the company saw itself as a global dairy giant.

"Today we stand for value," he said.

"We're a New Zealand dairy farmers' co-op, doing smart, innovative things with New Zealand milk to create value for our owners, customers and communities in which we work and live.

"This simple change in how we see ourselves leads us to make fundamentally different decisions.

"We have the best milk in the world here at home.

"By championing it, we believe people will continue to seek out and pay a premium for products backed by our unique provenance story - our co-op heritage, grass-fed New Zealand milk, backed by ethical and sustainable farming practices."

Mr Hurrell said the new strategy matched the company's strengths to its customers' needs.

"I want to be straight about the starting point for the new strategic review, which is very much ground in the fact that when you go through tough times, you ask yourself the tough questions," he said.

"At our heart we are a co-operative doing amazing things with new Zealand milk to enhance people's lives and create value for our customers and our farmer owners."

Mr Hurrell said the new strategy would prioritise three things:

  • Innovation - where it created value for the co-op and its customers.
  • Sustainability - to do what's right and what's expected of the company.
  • Efficiency - to create value from Fonterra's unique scale and position in New Zealand.

The company would focus on five key product categories: core dairy, paediatrics, sports and active lifestyles, food service, medical and healthy ageing.

"These are categories where we know we have strength," he said.

"We will still be in consumer and we will focus on markets throughout Asia Pacific.

"The products we sell in these particular markets are made from New Zealand milk and similar to those where we sell in our ingredients business."

Mr Hurrell said Fonterra would be prioritising new Zealand milk and would only make consumer products where they created superior value.

In response to questions about whether this changed strategy was an admission that Fonterra had overstepped the mark in its global approach, Mr Hurrell said he wouldn't say that.

"Going into the international market, playing in milk pools that you may not have the experience that we do here in New Zealand, that potentially undermines the value of what you have here, not that you've failed externally, but that you have undermined your position here.

"So to have the focus and direction back here will give us what we need."

Leaner focus

Fonterra is promising a leaner focus - flagging further job losses at an executive level.

"We will be a leaner, more focused business clear about who we are, where we are going and where we can win," Mr Hurrell said.

"We need to become a leaner organisation given our strategic direction; we haven't landed on what that looks like yet but we will be going through that process soon.

"It is likely there will be job losses."

The company also announced on Thursday the closure of a small cheese plant in New Zealand with half the workforce to be deployed in another plant.

Organisational restructure

Fonterra also announced a major overhaul of its current divisions.

It will move away from two large, central businesses - ingredients, and consumer and foodservice - to three in-market customer-facing sales and marketing business units - Asia Pacific (APAC), Greater China (GC), and Africa, Middle East, Europe, North Asia, Americas (AMENA).

Judith Swales will head the APAC division and Kelvin Wickham the AMENA with a chief of the GC division to be announced.

The company will also move to triple bottom line reporting, outlining targets for a healthy business, healthy people and healthy environment.

Debt reduction

On Wednesday, Fonterra announced the sale of its 50 per cent stake in drug company DFE Pharma for $NZ633 million.

This on top of its other asset sales in the past year had enabled it to generate $NZ1 billion for debt reduction.

Mr Hurrell said Fonterra was pleased with the progress it was making in achieving its "tough initial target" for debt reduction.

"A year ago, we started a full portfolio review to re-evaluate every investment, major asset and partnership, to make sure they were still right for the co-op," Mr Hurrell said.

Fonterra sold its stake in the pharma company to CVC Strategic Opportunities II, a fund managed by CVC Capital Partners, a private equity firm.

In March, Fonterra announced it was reviewing the share in the company, a 50pc joint venture with Royal Friesland Campina, due to the substantial capital required for future growth.

"This milestone, along with the significant inroads made in our capital and operational expenditure during FY19, makes for a good initial chapter in our business turn-around," Mr Hurrell said.

"It puts us on the right footing to deliver our new strategy and a sustainable lift in our performance."

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The story Fonterra to exit milk pools outside of NZ, but no plans to leave Australia first appeared on Farm Online.

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