The Spierings-Wilson era at Fonterra was no great success

Chairman John Wilson (right) and CEO Theo Spierings (left) present another Fonterra result side by side. Photo by Getty Images.

Chairman John Wilson and CEO Theo Spierings have been the double act governing Fonterra since 2012. Following Spierings' resignation, Bernard Hickey assesses their legacy as no great success, but also no great failure. It could have been worse, or so much better.

Comment: The announcement of Theo Spierings' departure as CEO dominated the coverage of Fonterra's results yesterday. It over-powered the bad news about Fonterra's $403 million writedown of its Beingmate stake and no doubt helped dampen down growing calls for a fuller cleanout of Fonterra's leadership.

But John Wilson's position as chairman is still under pressure, particularly as he faces a re-election vote at the annual meeting later this year. Fonterra is due to announce who will stand in September and it is no fait accompli that Wilson stays. Spierings and Wilson were very much the package deal. Previous chairman Henry van der Heyden hired Spierings in 2011 and then handed over seamlessly in 2012 to his protege Wilson, who has been a director since 2003.

Federated Farmers vice chairman for dairy Wayne Langford was quoted today by Andrea Fox as saying only that Wilson had "some potential life left." Hardly a ringing endorsement.

"The big question is whether or not he stands and then the board have got some big decisions to make about whether or not he will continue as their chairman," Langford said.

Meanwhile, now is a good time to consider the Spierings-Wilson legacy over the last seven years, in particular that of Spierings, who came to Fonterra with a perfect background and talked a big game about transforming Fonterra into a global value-driven powerhouse. He arrived as the former CEO of Dutch dairy giant and cooperative Royal Friesland Campina, which is similar in size to Fonterra. He had worked in the industry around the world, and knew the key market of China well.

He created Fonterra's 'V3' strategy of growing milk volume to higher values at high velocity. He leaves with 43 percent of Fonterra's milk volumes globally being sold as consumer products, in food service or in advanced ingredients (so-called high value-add products). The rest (57 percent) are sold directly to Fonterra's customers as base ingredients (33 percent) or on GlobalDairytrade and to competitors as a commodity. Back in 2011, 57 percent of Fonterra's milk in New Zealand was processed into whole milk powder and skim milk powder.

These figures are not directly comparable and Fonterra has never made it easy to measure the commodity vs value add components of its business, but it suggests Spierings did not dramatically increase the value-add part of the business in New Zealand.

Payouts rose due to commodity prices, not dividends

Shareholder equity listed in the 2011 annual report was $6.5 billion. Fonterra reported shareholder equity at January 31 this year was $6.6 billion. Fonterra paid out dividends of 30 cents per share in the year to July 31, 2011. It forecast yesterday it would pay dividends of 25 to 35 cents per share in the current year. So equity and return on equity have stagnated during the Spierings-Wilson era, although cash returns through milk payouts have been higher.

Cash payouts from milk and dividends averaged $6.20 during the last seven years, up from $5.75 in the previous seven years. However, that 45 cents improvement was due purely to an increase in the milk payout from $5.44/kg on average to $5.90kg. Dividends averaged 30 cents per share, which was unchanged. Farmers did better because commodity prices rose, not necessarily because their capital invested in Fonterra performed better.

Wilson defended Spierings' performance yesterday, saying he had been fantastic for the cooperative over the last seven years.

Spierings told Newsroom in an interview later in the day that Fonterra's return on capital employed had improved from seven percent to 12 percent on his watch. He also argued the businesses Fonterra now had in China had an enterprise value (which combines equity and debt) of $4.7 billion. That's because the value of the farms and the consumer, foodservice and ingredients businesses there were worth more. Beingmate was obviously worth over $400 million less.

'We had to buy into Beingmate'

Spierings also argued during the news conference and the interview that Fonterra was told by the Chinese Government in 2013 after the botulism scare that it would need to fix its food safety issues, build new dairy farms in China and partner with a local company if it wanted to stay in China.

Fonterra went on to expand its farms and plans to be producing one billion litres of milk a year in China by the end of this year. Fonterra's farmers in New Zealand produce 18 billion litres each year. It also bought the 18.8 percent stake in Beingmate in 2014, but was not allowed a controlling stake. This is normal practice for foreign companies, who are often forced to have minority stakes in companies the Government deems to be national champions.

Spierings said Fonterra could not unpick any one of these three prongs of its China strategy without being effectively being shut out of China, which was a real risk in the wake of the botulism scare. He argued Beingmate was caught on the hop when the market in China changed to an e-commerce market from a bricks and mortar strategy. He said it was about to go back to a bricks and mortar market, citing Alibaba boss Jack Ma's plans to build stores in China.

It could be argued that without the ability to tap into the Chinese market, Fonterra's payouts for commodity products over the last seven years and into the future would have been lower.

Synlait and A2Milk did so much better

But can holding a steady state and not destroying shareholder value be seen as a success for Spierings and Wilson?

Perhaps not when Fonterra is compared with its fast-growing rivals in New Zealand and the experience in China of most of its foreign rivals.

A2 Milk, which has successfully tapped into the Australian and Chinese infant formula markets through E-commerce, is now worth $10.2 billion and its shares are worth $14.20. Seven years ago it was worth a tiny fraction of that when its shares were worth 14 cents a share. Synlait Milk's market capitalisation has also risen sharply over the last seven years. It is currently worth $1.7 billion, quadruple what it was five years ago when it listed.

Small and young companies often grow much faster and add more value than large mature ones, but they grew their value by at least $11 billion while Fonterra's stagnated.

In summary, the legacy of the Spierings-Wilson era is of preserving Fonterra's value and presiding over a 45c/kg increase in average cash returns to farmer/shareholders because of a 45c/kg increase in commodity prices. It could have been worse if Fonterra had been locked out of China and farmers had not be able to take advantage of China's increase in demand. But Fonterra also failed to capture the surge in value as Chinese consumers bought brands online that used A2 and Synlait ingredients and brands. It could have been much better.

Farmer/shareholders now face a choice about whether to have a complete cleanout when (or if) Wilson is up for re-election later this year (probably November).