Fonterra chief executive Miles Hurrell is turning the dairy giant around after a big global expansion failed to deliver.
Fonterra chief executive Miles Hurrell faced a daunting task when he was asked to take the helm of the country’s largest company in 2018, but he is getting the dairy giant in shape.
The co-operative owned by its 10,000 farmer suppliers and supporting some 20,000 employees was heading for its first annual loss since its creation in 2001 after a period of big expansion failed to deliver the promised profits and left it saddled with too much debt.
Hurrell, an 18-year veteran of Fonterra and head of the Farm Source unit that worked with farmers, talked with his wife and a few close friends who backed him to take on the challenge of what was looking like a tough couple of years.
“I was under no illusion at that point in time about what needed to be done,” he says. “Clearly we needed to go about doing things differently.”
Hurrell says he was confronted with an overwhelming sense of responsibility to do the right thing for the company’s farmers, staff, and ultimately New Zealand.
Not only is Fonterra New Zealand’s largest company by revenue and employees, it’s also hugely important to the country’s export earnings, bringing in about $18 billion a year, 20 per cent of the country’s total.
His solution was to get back to basics, focusing on the core of New Zealand and New Zealand milk.
The company had failed to deliver on its promises in the past and Hurrell undertook to improve the accuracy of its forecasts and told staff they needed to do what they said they would do in the future.
The Detail analyses the recent growth in dairy farming, which China is mainly responsible for.
In the short term, Fonterra also needed to get its balance sheet in order and asset sales loomed.
“I won’t say it’s been smooth sailing the whole way,” Hurrell says.
One of the first out of the block in 2019 was the sale of the iconic Tip Top ice-cream company to British dairy giant Froneri for $380 million.
Famous for propelling aspiring 15-year old model Rachel Hunter into the limelight in 1985, Tip Top had been a part of Fonterra since 2001 and New Zealand First leader and deputy prime minister Winston Peters told a press conference at the time that the sale to an overseas owner was “a sad day”.
While it was an emotional decision, it was the right strategic move for the business because Tip Top was largely a confectionery company which did not use a lot of dairy products, Hurrell says.
More tough decisions would follow.
As part of its previous global strategy, Fonterra had expanded its milk pools and investments overseas but they had not generated the promised returns and were not compatible with its new focus.
“When you look through that and say we need to move out of these, that’s an easy decision,” Hurrell says.
“However when you look at the impact from a financial perspective and recognise our farmers have invested quite heavily over a number of years, that’s a tough decision. But we know again, strategically, that’s the right thing to do.”
Fonterra sold its half share in European company DFE Pharma, closed its Dennington factory in Australia, sold its Chinese farms, is selling down its stake in Chinese infant formula maker Beingmate, and has put its Brazilian joint venture with Nestle on the block.
The asset sales and a pullback in spending has helped Fonterra repair its balance sheet, earning praise from credit ratings agency S&P Global Ratings.
S&P analyst Sam Playfair says Fonterra’s balance sheet had become “quite stretched”.
“What was presented to us through the new management team was a very credible and clear path to repair that balance sheet and they have executed on that strategy thus far. We are really happy with where the balance sheet is sitting,” Playfair says.
Hurrell says farmers support the new strategy.
“When you announce in the first month in the job the first loss, followed up by a second loss a year later as we went through a significant re-set, farmers rightly so had every reason to be disappointed around some of the decisions that had been made earlier,” he says.
The mood now is “significantly different”, he says.
That’s a sentiment backed up by Federated Farmers Dairy Industry Group chairman Wayne Langford.
“We are now more aligned around what we are doing and why we are doing it,” Langford says from his farm in Golden Bay.
“Miles has front-footed that. He has worn his heart on his sleeve a bit and been very open and honest, not only with shareholders, but with the New Zealand public, and done very well.”
Langford says under previous management the ambition to be the biggest and best in the world saw the size and scale of Fonterra get “a little bit out of control”.
Still, Langford says Fonterra remains a work in progress and it will likely take years before farmers see improved returns.
“It does take a while to turn around a big ship like that,” he says. “It’s a bit of a slow grind.”
The improvements gave Fonterra enough headroom to resume dividends, paying a 5 cent final dividend in 2020 and a 5c interim dividend this year, having not paid a dividend since the first half of its 2018 year. Still, the payments lag behind previous years, with 40c dividends paid for the 2016 and 2017 years.
“In the short term, that’s taking a bit of getting used to,” Langford says.
“What is actually coming back to farmers is probably quite a lot less than what they were thinking they were going to get or hoping they were going to get.
“I wouldn’t say that farmers are ecstatic yet, and the returns haven’t been anything for them to get ecstatic about. We are quietly optimistic that things are on the turn, but we are also aware of where we’ve been, so we’re not getting too excited just yet.”
To be sure, Fonterra’s milk payments to farmers this year are forecast to be amongst the highest it has ever paid as demand for dairy continues to grow.
To get more from the country’s “white gold” in the future, Hurrell is focused on innovation, sustainability and efficiency.
He wants to invest heavily in innovation to identify the next evolution of dairy products, which may be in areas of functional nutrition with specialised products for healthy ageing, sports and active lifestyles, and paediatrics.
Still, any value-added products will have to pass a higher threshold than in the past, ensuring they improve profitability, not just revenue, he says.
That doesn’t mean shunning bulk milk powders which he says give a very good return on the company’s investment in its factories.
Hurrell says its farmers are the lowest carbon producing dairy producers in the world, which is a huge opportunity when consumers around the world want more environmental products and they will be looking for customers who want to pay for that.
He says farmers are aware that the rapid expansion of the dairy industry since the 1990s has impacted the environment and that cow numbers are not going to increase.
“A lot of research and development is going on to try and solve some of these issues,” he says. “We need to recognise that there has been an impact on the environment and our job is to recognise how we go forward from here.”
Hurrell says he is confident that innovative solutions will be found that will allow dairy farming to continue.
Fonterra also faces constraints from both tariff and non-tariff barriers in many international markets, which limits its ability to diversify.
New Zealand has access to about 12 per cent of global dairy consumption at tariffs of less than 10 per cent. That means markets with wealthier consumers like the United States and Europe are largely uneconomic.
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Free-trade talks are underway with the European Union and the United Kingdom and Hurrell says access to those markets would give the company more choice and opportunity even though Asia-Pacific is likely to remain the co-operative’s home base due to its closer proximity.
Fonterra is increasingly exposed to China at a time when geopolitical tensions are rising between China and the West.
While Fonterra is an important export earner for New Zealand, it’s also an important source of high-quality dairy products for China where local supply can’t keep up with demand.
The company’s strategic importance to both countries was evident at the China Business Summit in Auckland last week, with Hurrell sitting in prime position between Prime Minister Jacinda Ardern and Chinese ambassador Wu Xi, who were both keynote speakers.
Hurrell says given Fonterra’s size and scale, there isn’t a day goes by without something of significance that needs to be dealt with, but it helps to know he has the support of the co-operative’s staff and its farmer shareholders.
Langford concurs. He says earlier suggestions that Fonterra needed an international chief executive of “massive calibre” to replace Dutchman Theo Spierings were misplaced.
“He’s doing a great job,” Langford says. “I’m right in behind him, so carry on.”
Source:stuff.co.nz
