Tuesday, 27 September 2016 06:55

Revamp puts co-op in ‘pole position’

Written by  Pam Tipa
Fonterra chief executive Theo Spierings. Fonterra chief executive Theo Spierings.

Fonterra is in “pole position” compared to its competitors after a tremendous transformation, says chief executive Theo Spierings.

It has been a defining year for the cooperative, with a very strong result, he said last week at the release of the annual result.

The co-op announced a 65% increase in net profit after tax to $834 million for the financial year ended July 31.

“We fundamentally believe in a very strong future for dairy,” Spierings said.

But very low prices for a long time had placed a lot of stress on farmers in “an unstable world, and our farmers have adapted with efficient and innovative systems in a tremendous way”.

“We in the business have also adapted, and we drove this transformation which brought back good results and also proves the strategy is working. It was really hard work for the whole team... because it was not an easy market to operate in.

“We are in a pole position vis a vis our competitors after this transformation, which makes me very proud.”

Chairman John Wilson says Fonterra sets out every day to maximise the total payout to its farmers, intending this year to return every cent possible to them in an environment of very low global dairy prices.

“We have stayed on course and strategy, with significant discipline financially and operationally across the business, chasing value wherever we could and supporting our farmers.

“At the same time we have strengthened our balance sheet so we are a stronger cooperative.”

Wilson says unsustainably low prices are still being seen in the global dairy market; they will need to increase to get a milk supply response which the dairy market will need over the next 12 months or so.

The cooperative will make a cash payout of $4.30/kgMS for the 2016 season to a 100% share-backed farmer -- a farmgate milk price of $3.90/kgMS and a dividend of 40 cents per share, of a total available for payout of $4.41/kgMS.

Wilson says the 2015-16 season has been incredibly difficult for farmers, their families and rural communities, with global dairy prices at unsustainable levels.

The business strategy is serving the cooperative well, he says.

“We are moving more milk into higher-returning consumer and foodservice products while securing sustainable ingredients margins over the GlobalDairyTrade benchmarks, especially through speciality ingredients and service offerings.

“Through increased earnings and continuing financial discipline we have increased the return on capital and strengthened our balance sheet by significantly reducing debt.

“We have done what we can to support our farmers with the co-operative support loan and early payment of dividends.”

Keeping the value-add promise

Chief executive Theo Spierings says more milk sold at higher value is at the heart of Fonterra’s strategy.

“For our farmers, our promise is we will make the most of their milk; we’re keeping that promise,” he says.

“We’ve seen the real strength of our ingredients business this year. The money... invested in stainless steel is giving us more choice, and we have matched production to the highest-value customer demand.

In a difficult market, we increased ingredients normalised EBIT this year by 24% to $1204 million.

“In consumer and foodservice we converted an additional 380 million litres of liquid milk equivalents (LME) into higher returning products, bringing our total volumes in this business up from 4.5 billion LME to 4.9b. Increasing our consumer and foodservice volumes -- especially foodservice -- meant we increased our normalised EBIT in this business by 42% to $580m.

“Our results show [us doing] what we said we would do across the co-op.

"We are single-minded about transforming our business to get the best results. We have cut our operating expenses, increased our free cashflow, reduced our working capital days, driven debt down and reduced our capital expenditure and gearing.

“All this effort, combined with higher earnings and margins, meant our measure of return on capital has increased from 8.9% to 12.4%.

“Our results show how our strategy is creating value for our shareholders. We are driving more volume into higher value products, and we are achieving results with increasing efficiency."

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