2. Oram: Fonterra changing chair, but not strategy

Fonterra Chairman John Wilson in happier and healthier days down on the farm. Photo supplied.

John Wilson’s resignation as chairman of Fonterra is a first step towards New Zealand’s largest business and exporter finally achieving its full potential, Rod Oram writes.

To deliver that goal, it urgently needs a new chair with strong leadership skills, a revitalised and broadened board, a more disciplined and collaborative board culture, a new CEO who can deliver change, a new value add strategy, a new auditor and a Shareholders’ Council that retrains itself from lapdog to watchdog.

Such change is needed because the co-op has failed to shift much away from commodity products, its payout has risen only modestly over the past seven years and its dividend and shareholder equity have flatlined and it is losing milk supplies to other processors.

Worse, it has squandered the best part of a billion dollars on its ill-advised investment in Beingmate, the Chinese infant formula company, a factor in the imminent departure of Theo Spierings, the current Fonterra CEO.

However, the existing board has severely compromised such a rebuild of Fonterra by appointing John Monaghan as Wilson’s replacement. A director since 2008, Monaghan is a loyal but limited protege of Wilson and his predecessor and mentor Sir Henry van der Heyden, in the opinion of many of Monaghan’s fellow farmer-shareholders.

Thus, farmer-shareholders seeking real change in their co-op will be focusing intently on this year’s board election. Three directors are up for re-election: Wilson, who says he is not standing; Ashley Waugh, a farmer and chair of Moa Brewing; and Nicola Shadbolt, a farmer and professor of farm and agribusiness management at Massey University.

Shadbolt and Waugh attract good shareholder support, so the real contest is for the seat vacated by Wilson. Nominations for the board closed on Monday, which likely will have been a factor in determining the timing of Wilson’s resignation announcement on Friday.

However, that was for candidates seeing approval in the board’s vetting process. Self-nominating candidates have the window September 10-20 to formally declare they’re running. They could begin campaigning before then. The election process, first board meeting and selection of a chair will be done and dusted by the co-op’s AGM in November.

Colin Armer, Pete McBride and Leonie Guiney?

Among farmer-shareholders seeking change, a handful of capable candidates are frequently mentioned. A likely front runner, should he choose to stand, is Colin Armer, one of the country’s largest dairy farmers and a former Fonterra director. Likewise, Pete McBride, CEO of a major dairy company and chair of Zespri, is highly respected and experienced. Another potential candidate is Leonie Guiney, a former Fonterra director highly critical of the Wilson regime. A large-scale farmer with her husband, she was also a fierce critic of the co-op’s change in capital structure under van der Heyden which has diluted farmer-shareholders’ interests. That alone would guarantee her a chunk of votes.

Fonterra has delivered some of the potential its backers promised when it was created in 2001. It is a much bigger and more sophisticated processor than its predecessor co-ops and more international and capable in sales and marketing than the Dairy Board was.

Wilson and Spierings deserve credit for the progress achieved on their watch. Yet, despite some successes in ingredients, consumer and other higher value products, commodities such as whole and skim milk powders still account for some 57 percent of its volume, roughly the same as seven years ago. Coping with the surge in milk supply has been the main factor in its failure to shift more of its production mix to higher value products.

But the fact remains, while Fonterra is the second largest dairy processor in the world, just behind Dairy Farmers of America it is still heavily a commodity player. Fonterra ranks 18th in the 20 largest dairy companies by sales revenue per kilogram of milk. This is the key measure of value-add, IFCN, an international dairy consultant, says.

Commodities still dominate

Fonterra generates only 60 US cents of revenue per kg, way below the top five dairy companies. Danone is best at US$2.40, Nestlé US$1.90, Mengnui and Yili, China’s two largest dairy companies, US$1.40, and Groupe Lactalis of France US$1.30.

As a result, Fonterra’s financial performance has failed to deliver on its backers’ promises. Its milk payout averaged $5.90 per kilogram of milk solids over the past seven years. This was up 45 cents per kg over the previous seven, but that mainly reflected international commodity prices rather than Fonterra factors.

Likewise, its dividend which is paid out of the profits it makes from non-commodity products, averaged 30 cents a share. The fact it was unchanged over the average of the previous seven years shows the serious short-comings of Fonterra’s value add strategy.

Consequently, Fonterra has underperformed its small processing competitors. Its return on assets in recent years has averaged 7 percent, while Synlait earned 9 percent from having a higher proportion of ingredients and consumer products than Fonterra, Open Country earned 11 percent from being a pure commodity player, and Tatua, a small co-op with the most specialised product mix in the sector, earned 18 percent, according to TDB Advisory.

Fonterra’s balance sheet tells an equally disappointing story to its shareholders. Despite raising substantial capital in the five years to 2012, thanks to booming milk supply, its gearing remains at the upper end of its self-imposed range, and its shareholders equity was virtually unchanged 2011-2018.

'An inbred and ill-disciplined board culture'

This evidence of the weakness of the Wilson-Spierings strategy, the inbred and ill-disciplined board culture, its under-performance and the growing disaster of the Beingmate investment have been accumulating for some time. But it was the reporting of the 2016-17 year-end results last September that finally began to put the skids under Spierings and Wilson. Spierings announced his resignation at the half-year results in March, and Wilson today.

Over the past 10 months, Newsroom has delved deeply into these problems besetting Fonterra, shedding light on its failure of strategy and culture, and its investment in China. These are the main articles we have published: