Ingredients business vital to Fonterra’s future success

 He told the recent Fonterra Shareholders Fund annual meeting that ingredients make up half of earnings before income tax (EBIT) but the importance of the ingredients business is sometimes downplayed.

“I strongly disagree; it is the aircraft carrier for us to go to the world in an efficient way. If we don’t have our ingredients – our highly efficient operations around the country doing commodities – we don’t have the scale to go from New Zealand to those faraway markets where we can make money.

“Should we put beautiful planes on the aircraft carrier, with food service products Anmum and Anlene? I think we should. But if we leave the aircraft carrier behind, our planes have nowhere to land and that won’t be a beautiful picture in the market.”

In the 2013-14 financial year Fonterra’s total revenues reached $23.3 billion; ingredients brought in $16b. Of the total normalised EBIT of $503m, ingredients made up $269m.

Outside investors barred from holding shares in Fonterra are able to invest in units in the Fonterra Shareholders Fund that gives them access to the economic rights they would have received if they were allowed to own a share; dividend to unit holders is based on the co-op’s net profit.

Last year the co-op’s earnings per share was 10c, compared to 44c the year before.

Spierings says this was disappointing but explained that high milk prices impacted earnings. While Fonterra raised prices and cut costs, these measures failed to fully offset the high milk costs.

Fonterra is continuing to streamline brands and focus on key markets to lift returns, he adds. “We cannot go everywhere; we are in 93 countries with 60 brands. We have to focus to win; we have decided to focus on eight markets and five brands.”

Fonterra remains a company with corporate social responsibility and sustainability. The five major brands are NZMP, Anchor, Anlene, Anmum and Farm Source.

Fonterra’s main markets are New Zealand, Chile, Sri Lanka and Malaysia, totalling 100 million.

Spierings says these four markets won’t help the co-op reach its target of 2 billion customers. The co-op has added four markets: China, Indonesia, Brazil and Australia.