5 New Zespri boss talks tactics Vol 16 No 38, October 2, 2017
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Wilson: Co-op strategy delivers Hugh Stringleman hugh.stringleman@nzx.com
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ITH its 2017 financial results Fonterra demonstrated a high milk price and good dividend were not antagonistic. But delivering both at the same time required a whole-ofcompany commitment. Chairman John Wilson hailed the $6.52/kg milksolids payout for last season as the fourthlargest in the co-operative’s 16year history, comprised of $6.12/ kg farmgate price and 40c/share dividend. It was $2/kg better than the payouts of the two preceding years, during which all farmers suffered and many went deep into debt. The higher milk price put $3 billion more into farmers’ payments compared with the previous season. Fonterra’s milk payments totalled $9.4b and dividend payments $642 million. “We have demonstrated our ability to deal with variability in world markets and in New Zealand dairy farming conditions and deliver on our strategy,” he said. NZ dairy farmers had again become some of the highest paid in the world, equal to or better than European farmers on the doorstep of the wealthiest consumer markets. Wilson called the company’s performance in maintaining net profit at $745 million extraordinary, as the milk price rose 57% during the financial year. The co-operative held a 40c
DO BOTH: Fonterra chairman John Wilson says the co-op has been able to deliver both a high milk and a good dividend.
dividend, some 87% of the 46c earnings a share, despite negative stream returns and much higher milk input costs for its valueadded products. Whole milk powder prices increased 38% and butter prices 109% over the financial year, to July 31. High prices for the reference products compared with the non-reference products produced a negative $180 million impact for stream returns on earnings compared with the previous year (about 11c/share). Nine cents a kilogram had moved from earnings to milk price – 6c from revenue effects and 3c in company costs, because of lower interest rates and changes to the Milk Price Model (MPM). “Yet we still delivered 46c/ share earnings relative to 51c the previous year, which testifies to the transformation of Fonterra. “The business was able to
respond (to higher milk costs) far quicker and use its capital more effectively than it was able to in the past.” The Transformation delivered $2b worth of working capital improvement in two years instead of the planned three. The velocity incentive payments had substantially boosted pay for a group of senior executives, including chief executive Theo Spierings who received $8.3m in the 2017 financial year. New revenue streams had contributed to profitability, including those in a new reporting category called advanced ingredients – functional proteins, hydrolysate, pharmaceutical lactose, higher-specification milk powder and extra-stretch cheese. They grew by 473m litres or 9%, to 4.35b litres to be 19% of total external sales. Return on capital for those products was greater than 20%
compared with 11.1% for the whole company. Consumer and food service volume grew by 576m litres to almost 5.5b litres, to be 10% and 12% respectively of total sales. The combination of 1b litres more milk going into added-value products last year was ample evidence of Fonterra’s strategy and execution, Wilson said. Responsible and robust reporting on advanced ingredients was consistent with Fonterra’s message to NZ about innovation, adding value, sustainability and environmental responsibility. Fonterra’s loss of milk market share in NZ over the year was lower than for some time and its supplier and sharemilker numbers were down 300-plus to 10,267 and 2722 respectively because of farm consolidation. “We have to continue to provide flexibility for farmers and earn the right to their capital,” Wilson said,
after observing that farms had on average nearly $900,000 invested in Fonterra shares. At any milk price dictated by world prices, Fonterra continued to deliver higher and higher earnings, even though MPM adjustments had taken 45c/kg out of earnings since 2009. “At the start of the financial year we provided an earnings guidance of 50-60c and we delivered 46c.” The 40c dividend was a 6.7% yield (for the third year in a row) on the average share price during the financial year of $5.96. The new earnings guidance was 45-55c for the 2018 financial year, even though milk price was expected to go higher. “This business would not have been able to do that three or four years ago. “The success of Trading Among Farmers is shown in a strong balance sheet and subsequent company innovation and investment, which would not have been possible if we had been concerned about permanent capital.” The net finance cost was $355m compared with $499m the previous year and year-end net debt was $5.6b. “Fonterra has a conservative balance sheet and the directors are very comfortable with the gearing ratio,” Wilson said. The final milk price of $5.12, or $5.13 with winter milk and organic premiums added, was lower than the previous forecast of $5.15, mainly because of the stronger NZ dollar towards the end of the year. Although Fonterra’s milk collection fell 3% to 1.526b kg and its market share dropped to 82%, Wilson said the company strategy was to turn more volume into value, on which it had demonstrated success.
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