In the turnaround of Fonterra, 2024 Deloitte Top 200 Company of the Year, it’s hard to know what’s been the secret sauce - simplification or transformation.
Chief executive Miles Hurrell says it’s probably both.
“We couldn’t go and transform the organisation for the long-term and look at growth without first going through a simplification to get back to what we know we’re good at.”
Thanks to both strategies New Zealand’s biggest business is almost unrecognisable from 2018 when the board hurried in Hurrell as interim chief executive ahead of the farmer-owned co-operative declaring its first-ever loss - of $196 million.
Suddenly gone from New Zealand was Theo Spierings, whose pay that year was $8m. The late John Wilson had stepped down as chairman during the year for health reasons.
The company went on to post a $605m loss the following year.
The grim results, after failed and struggling forays into China and global milk supply building, coupled with a public perception of lacklustre performance since Fonterra’s creation from an industry mega-merger in 2001, helps explain why the Deloitte award judges said, “it hasn’t been plain sailing for our country’s biggest company over the years”.
Hurrell, appointed permanent chief executive in 2019, says in 2018 “things had got away on the company a little bit”.
“Debt was at $6.6 billion, we needed to get back to a situation where we knew what we were good at, where we were focused and could show our shareholders and our staff and the New Zealand public that we could actually deliver on what we said we would. That was about simplification.”
In 2018, the year Fonterra posted a historic first loss, corporate advisory firm TDB calculated that the mega-merger had delivered dairy farmers less than 2.5% annual compound growth in revenue.
The industry architects of the merger, which saw Fonterra emerge with 96% of New Zealand milk production, had pitched 15% in their argument to allow the-then near-monopoly. Today its milk market share is 78%.
Hurrell says he saw very quickly that Fonterra needed to change its path and make “tough calls”.
“Our balance sheet was very much stretched and we were losing the support of our shareholder base very quickly. Now we have our balance sheet in order we can actually start to focus on the things that are going to transform our organisation and take it to the next level.”
So began the journey by Hurrell and the board under 2020-elected chairman Peter McBride to steer Fonterra “back to basics”, focusing on the world-valued provenance of New Zealand milk, stoking what Hurrell calls its “ingredients engine”, and winning back the confidence of its 8000 farmer-shareholders with steadily improving financial results and dividends.
In FY24 the company reported earnings before interest and tax (ebit) of $1.56b, 11% down on the previous year but a solid follow up to FY23’s performance and reassuring for shareholders and observers calling for consistency of results.
Group net profit after tax was $1.1b, also down on FY23’s $1.5b but again a solid outcome. Revenue was $22.8b ($24.5b). Earnings of 70/share were at the top end of guidance and only marginally down on FY23’s record 75c/share. The total dividend for the year was 55c/share, which included a special dividend of 15c/share. Debt reduced to $2.6b, a drop of $602m or 19% on FY23.
Fonterra’s revenue last year of $24b represents about 10% of the total revenue of all the Top 200 companies.
The strength of the balance sheet has now emboldened Fonterra to, as Hurrell puts it, “lift its horizons to transform us even further ... to the next generation of the company” with a plan to exit the capital-hungry and highly competitive consumer products and brands world of business. The new strategy is to focus on what it calls its core strengths, providing the world with high-quality “functional” ingredients and food service products.
As a farmer-owned co-operative, with the associated cost of capital that comes with the model, Fonterra is not a natural owner of a consumer business, its leaders say.
It has struggled to do it well, despite some of its inherited brands such as Anchor and Anlene being national icons for years.
The business had one of its best years in 2024, but its return on capital was just 6.8%, up from 3.9% in 2023 and 0.2% in 2022.
The judges said they had recognised the big improvement in Fonterra’s performance since it refined its strategic focus on core operations.
“Fonterra has been disciplined on cost management, exited non-core businesses and generated good returns even amidst challenging global conditions,” they said.
“Profits have improved markedly. Strong cashflow has driven down debt and supported payment this year of a 50c special dividend to its shareholders – helping to drive a 71% increase in the Fonterra shareholder fund unit price.
“By concentrating resources on areas with the highest potential, Fonterra is well-positioned for sustainable earnings growth, despite tough international markets.
“Fonterra’s commitment to sustainability initiatives, dairy innovation, and developing future leaders reflects a long-term vision that goes beyond just financial success.”
Hurrell says the opportunities in ingredients and food service products provision are ”endless”. This area includes advanced, adult and medical nutrition. Notably, he says, Fonterra has global scale in which to maximise the opportunities.
He agrees the world has changed a lot since 2018 when Fonterra set about a turnaround, but notes, as New Zealand has long exported 95% of its dairy production, it has always had to play in a globally volatile paddock.
Today geopolitics is front and centre, he says.
“Free trade is a thing of the past in some countries’ minds. Access to capital is no longer free and easy. Markets like China are slowing. So yes, our world is different.
“Which again only reinforces the point to focus on areas in which you can be world-class and overachieve.”
Fonterra was pitched by its architects back in 2001 to be “a national champion”.
Can it claim to be one at last?
Yes, says Hurrell, you only need to look at Fonterra’s balance sheet.
While it’s true that up until 2018 there were concerns that Fonterra wasn’t delivering, he says, it needs to be remembered the co-op is an extension of its farmers’ businesses.
“It’s important to look at the frontier of the P & L and the balance sheet but it’s also important to look at the balance sheets of the dairy industry in New Zealand. And that is something I think we can stand behind and say we are a national champion.”
Fonterra’s now showing its potential, but “there’s a heck of a lot of runway still to go”.
For now, the wars in Ukraine and Gaza and the United States presidential election occupy his mind.
While the conflict regions are not important markets for Fonterra the ripple effect on other markets is something to watch, he says.
“We’ve always had to navigate these sorts of things, albeit at a lesser level, and I think we’ve been quite nimble in the past to be successful in that regard. I have no reason to doubt we won’t be successful going forward.
“[But] you can never rest on your laurels … again it comes back to being an extension of our farmers’ farms and they have a perishable product.
“If you don’t collect it every day, it will go off.”
COMPANY OF THE YEAR FINALISTS
Port of Auckland
Just two years ago, the Port of Auckland was offside with every one of the stakeholders vital for its functioning as New Zealand’s main import gateway.
It had adversarial relationships with its owner the Auckland Council, with the unions which represented its front-line workers, with its cargo and freight customers, with Auckland ratepayers, who believed they were carrying a company whose dividends should have been easing some of their rates burden.
Its health and safety record was a horror. It was secretive, particularly about suspected big spending on a clearly failing container terminal automation project. Its productivity was scorned within the industry and its financial performance was weak. The public was more than ready to entertain political suggestions it should be shut down and its operations relocated.
Today as the port celebrates recognition for outstanding performance as a company of the year finalist in the prestigious 2024 Deloitte Top 200 awards, the scenario seems bizarre.
One of the first remedies by chief executive Roger Gray, brought in during 2022 with a largely new board of directors, was to institute a strategy called ‘regaining our mana’. A three-year plan, its goals were reached by the end of FY24 and the next phase ‘strengthening our mana’ is under way.
The strategy is underpinned by the port’s vision to be: “safely and sustainably profitable, delivering a fair return to Auckland Council and remaining the preferred port of our customers and our people”.
In FY24 the port group exceeded its forecasts for underlying net profit after tax, growing it to $55.2 million from $45.2m in FY23.
The company declared a $40m dividend to the council, up $10m on the previous year, and $5m more than committed to in the port’s statement of corporate intent to the council.
In a tough economic climate for the supply chain, the port’s revenue rose to $339m from $320m the previous year with “modestly” increasing operating costs, reflecting inflation and increased wage costs and a lift in stevedore numbers to meet demand.
The port’s target for FY25 is $65m underlying net profit after tax and by FY27, $100m.
In the FY24 annual report, chair Jan Dawson and Gray write: “The speed at which we have turned the port’s results around demonstrates the team’s commitment to safety, lifting performance, delivering returns to our owner Auckland Council, and rebuilding the trust of our people and Aucklanders”.
Gray says the port is now working on three areas of improvement.
“[We’re] becoming very, very customer-centric. How can we improve our delivery of what our customers want and are prepared to pay for?
“We’re continuing our whanaungatanga, the cultural transformation of the port. The absolute foundation of that is safety – we’ll never stop on our journey of safety. This is our partnership with the union movement, we see the unions as our partners, not as our enemies.
“The third element is a once-in-a-generational investment in infrastructure. We have a very large infrastructure programme that’s going to reset the port over the next three to four years for the next 40 years.”
Gray believes the spectre of the port’s relocation has been put to bed by the council’s decision to agree to a long-term plan for the port and to commit to a tripartite agreement between the council, unions and the port company.
Listening has been a major contributor to the turnaround, he says.
“We had to actually listen to our customers and deliver what they wanted, which is a safe exchange of cargo.”
The critical decision there, says Gray, was the board’s decision to cancel the terminal automation project, which quickly followed his appointment.
The project, which booked a loss of $65m, made the port “very self-focused”.
“In regards to the cultural perspective and the workforce, it was about our commitment to [health and safety and wellbeing] and our focus on really moving from an adversarial to a partnering relationship with the unions … it was transparency, open honest transparency, and our preparedness to be open with that.
“For the community, it was about actually starting to deliver cargo, starting to deliver a fair commercial result.”
As for productivity, Gray says “there’s more to do” but he’s chuffed that for October the port recorded the highest container throughput in five years.
The FY24 annual review says the port has bucked economic trends with strong container import volumes and revenue growth.
“We’ve stopped gifting volume to other ports by getting ourselves very self-focused on automation and [offside] with our unions. We probably dropped the ball on just doing the fundamental core business and as a result, customers made a choice to go by other ports,” Gray says.
“The real innovation ... is our partnership with the unions and our preparedness to bring them into the decision-making and also to bring workers into solving problems.
“Lifting boxes on and off ships is not a particularly complicated task.
“It’s how you work with your workforce, how you engage with them and engage in the partnership is the real secret sauce.”
Turners Automotive Group
“Diversification” is the quick but underdone answer to how used car retailer and financier Turners Automotive outdrove the consumer economic slump to a finalist spot in the 2024 Deloitte Top 200 Company of the Year award.
A chat with chief executive Todd Hunter reveals layers of reasons behind the NZX-listed group’s recognition and record FY24 earnings.
Such is its strategy of being the country’s “supermarket” for used cars, sacrificing margin to meet demand from car owners for cheaper vehicles and thereby keeping up sales, ensuring it has a “quality” loan book, being a leader in vehicle sourcing, and yes, having a diversified business, even expanding its investments in a tough economy.
But Hunter, CEO since 2016, says the momentum that’s got Turners to where it is today has been building for a decade, though the economy of the past 36 months has certainly put its transformation strategies to the test.
A household name for 60 years as New Zealand’s largest used vehicle auctioneer and an offshoot of the fruit and vegetable company Turners and Growers, Turners has sold more cars this year than last year, assisted, but not entirely due to, adding branches to its national network.
Hunter says the used car market is “generally quite resilient”.
“It’s quite difficult to run your life efficiently without a vehicle. Yes, there are ups and downs but they’re nowhere near as pronounced as with new cars. We’ve seen people shifting out of more expensive cars into less expensive cars and we’ve very deliberately positioned stock for where the demand is.
“We’ve certainly sacrificed the margin to keep those sales at these levels.”
Retail sales account for around 75% of Turners’ annual income. After tax net profit rose by 1.5% in FY24 to $33 million. Before tax, profit was up 8% to $49.1m on the previous year, while ebit gained 12% to $58.6m. It says it’s well-placed to beat its 2025 net profit before tax target of $50m, and has announced a new medium-term target of $65m net profit before tax in 2028.
Turners is “the supermarket” of used cars in a market that’s a corner shop and highly fragmented, Hunter says.
“We bring the supermarket strategy to that market with a low margin, high volume approach, but with a trusted experience. And trust is not normally a word you’d associate with the used car sector.”
The group’s financing and credit management and insurance activities have been “natural stabilisers”.
“Six years ago we started repositioning the quality of our loan book and have been progressively improving the quality.”
Industry data shows 6.5% of all used car loans are behind in their payments – but Turners’ books show only 3% of its customers are late payers, Hunter says.
“Your first objective is to lend to people who can pay you back, and have a buffer to withstand unforeseen events … we’re essentially running a prime, and super prime, loan book.
“If you go back 10 years we were very much a wholesale kind of auction business. The transition has been into a consumer-focused business. We still have a wholesale business, we still run auctions, but we are absolutely optimising our business for the person who’s going to sit in the car. You get better and better at that over time and work out where the opportunities are.
“The used car segment is one where scale is going to win out in the end.”
Hunter says success in this business is all about being able to source vehicles.
“You’re only as good as your ability to source. I would say that’s our biggest competitive advantage.
“We get about 40% of our cars from consignment vendors of leased cars and government cars, and 60% from people we buy cars off. We import a few cars from Japan but it’s like a tap we turn on and off to get the inventory we need – 5% or less is imported.”
Turners this year took a 50% stake in mobile vehicle service platform My Auto Shop and invested $1m in insurance comparison site Quashed.
It had been contemplating a foray into the vehicle servicing and repair sector for some time, Hunter says, but didn’t want to own “a whole bunch of mechanics workshops”.
“Vehicle repairs and servicing is like used cars, very fragmented, lots of small players. These guys [My Auto Shop] are bringing quite a disruptive customer experience. They’re very digitally orientated and bring a trusted and transparent approach.”
“It’s a $3 billion industry in New Zealand. If we got a third market share in the used car market, that’d be a $100m business for us.
“Strategically, it makes so much sense. We can buy and sell used cars, we can finance and insure them. But we’ve never been able to offer people servicing and repairs through the lifetime ownership of their car. It generates a lifetime revenue opportunity for us.”
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the $26b dairy industry, agribusiness, exporting and the logistics sector and supply chains.
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