Miles Hurrell. Photo / Dean Purcell
Fonterra, more than many, has to weather prevailing global market conditions — the outlook for next year is soft — but the dairy giant isn’t worried as it continues to roll out a resilient and sustainable growth strategy.
As part of its 2030 plan, Fonterra is focusing on the value of New Zealand milk, achieving net zero carbon emissions in 2050, leading dairy innovation and science, including new products, and returning about $1 billion to farmer shareholders.
Fonterra operates three divisions — consumer (milk), ingredients and food service — and it is expanding its cream cheese range. It has developed the MinION genome sequencing device which provides dairy DNA faster and cheaper, and the Whey Protein Concentrate used to create different textures in yoghurt.
Chief executive Miles Hurrell said “we continue to believe that New Zealand milk is the highest quality and most sought-after in the world. Our milk’s carbon footprint is one third the global average for milk production due to our grass-fed farming model.
“Just over a year ago in the midst of Covid-19 we reset out our ambitions where we’d strengthened our balance sheet and shored up our foundations. We believe the fundamentals of New Zealand dairy are strong.
“We see total milk supply here likely to decline and flat at best. This gives us the opportunity to maximise the value of our milk through three strategic choices — focus on the milk pool, lead in innovation and science, and lead in sustainability.
“While our operating environment has significantly changed, we have shifted from reset to growth and we are delivering for our customers, farmer shareholders and New Zealand as a whole by driving greater value and meeting the increasing demand for sustainable dairying.
“This is testament to the resilience and the focus of our people. I am really proud of what we’ve been able to achieve together.”
The Deloitte Top 200 Awards judges thought so as well, naming Fonterra winner of the Most Improved Performance category ahead of fellow primary producer and global exporter Silver Fern Farms and 70-year-old Steel & Tube.
Judge Ross George said as a $20b company owned by 10,000 farmers, Fonterra plays an important role in the economy, “particularly for many rural communities”.
Fonterra paid close to $14b to its dairy farmer suppliers this year. The judges noted positive improvements across the business driven by a refreshed, local management team.
“Fonterra sometimes faces vocal opposition to their industry. But it has made moves to become more sustainable and has recently introduced a bovine emissions reduction plan along with trialling seaweed as a supplement feed for dairy cows, and working with Government on reducing permanent agricultural emissions,” said George, managing director of Direct Capital.
For the year ending June, Fonterra delivered revenue of $23.4b, up 11 per cent, mainly due to higher product prices; earnings before interest of $991m, up 4 per cent; and normalised profit of $591m, an increase of 1 per cent. Milk collection was down 4 per cent to 1.478b kg of milk solids (MS).
The biggest market of Africa, Middle East, Europe, North Asia and Americas (AMENA) took $8.6b of the sales, Asia-Pacific, including New Zealand and Australia, $7.87b, and Greater China $6.6b.
The co-operative returned $13.7b to the economy through a record farmgate pay-out of $9.30/kgMS and a dividend of 20c a share — making a total payment of $9.50/kg for milk supplied. Fonterra’s earnings per share was 35c, up 1c, and it has estimated 45-60c for the present financial year — with a farmgate mid-point price of $9.25/kgMS.
Its 2030 forecasts are earnings before interest and tax of $1.325b, earnings per share 55-65c, and dividend of 30-35c a share.
Up to 2030, Fonterra is planning to invest $1b in sustainability, $1b moving more milk to higher-value products, $160m a year in research and development, and distributing $1b to shareholders after asset sales.
That may come sooner than later. Last month Fonterra announced the sale of its Chilean business Soprole to Gloria Foods for $1.055b. “We are now at the end of the divestment process after deciding not to sell our Australian business,” said Hurrell.
On the sustainability front, water use by manufacturing sites in water-constrained regions have reduced and are now below the 2018 baseline, and 71 per cent of shareholders have a farm environment plan.
Fonterra is transitioning away from coal and is continuing to reduce greenhouse gas emissions.
Some people are still saying Fonterra is the wrong industry in the wrong country, with dairy operations around the world being in-market and close to the consumer. If that’s the case, Fonterra has bridged the distance through singled-mindedness, innovation and quality, and has done pretty well — being a very important ingredient of the economy.
Finalist: Silver Fern Farms
Leading meat processor Silver Fern Farms has mastered the art of adaptation in the face of Covid and supply chain challenges — the result is a record financial year.
“We’ve got all three parts of the business acting cohesively — the sales and marketing, operations (14 plants and 7000 staff) and 13,000 farmers who supply us. This hasn’t really happened in the past,” said Simon Limmer, Silver Fern chief executive.
“The three parts are working well together — cohesion and capability are the keys to our success.
“We have managed to find pathways to market in a volatile, disruptive environment and changing demand in China and United States. We are getting good market returns.
“We will keep adapting to what Covid throws at us in terms of labour and supply chain challenges.
“We will continue our farmer-facing, market-led strategy, keep investing in our brand (grass-fed New Zealand meat) and get closer to our customers offshore,” Limmer said.
Last year Dunedin-based Silver Fern increased revenue 10 per cent to $2.75 billion and net profit rose to $103m, from $65m. This time around — Silver Fern’s reporting is the calendar year — revenue is expected to surge well over $3b and profit to double. It is one of the top 10 companies in the country.
The judges said Silver Fern has performed really well in what could have been a difficult ownership structure — split 50/50 across its farmer co-operative and Chinese firm Shanghai Maling.
“Silver Fern has been working on the branding and strategic positioning of its venison, lamb and beef products and focusing on its environmental positions. Sustainability is becoming a core part of its decision-making with a clear goal of transitioning the company to a nature-positive meat brand,” the judges said.
Lately, capital expenditure reached $250m with investment in infrastructure (such as automated processing lines), farmer and marketing relationships, new products (premium net zero beef, a first, recently launched in New York), and digital technology.
“Three years ago we didn’t have anyone in China; now there are 30 sales and marketing people operating out of our Shanghai office,” said Limmer. “It’s important to have direct connections with customers — they don’t want to just eat the meat; they want to know where it’s grown and what is the environmental impact.”
Silver Fern is part of a joint venture with Fonterra, Ravensdown and others to develop new technology to reduce methane emissions and improve farming practices.
It has been making reward payments to farmers for offsetting carbon on their farms. “We set procurement prices every two months ahead and when we’ve had better market returns, we’ve sent a signal to our suppliers that we are prepared to share the risk and reward,” said Limmer.
Finalist: Steel & Tube
The turnaround for Steel & Tube is complete and now the 70-year-old company can continue to concentrate on growth and reinforcing customer relationships.
“We’ve had some great few years driving the transformation of the business with a very good team and seasoned directors,” said chief executive Mark Malpass. “It’s all about people and we have built a strong culture with high engagement.
“We’ve strengthened the balance sheet, made some acquisitions, introduced digital technology, made sure our operations are lean and efficient, and got under the bonnet to clearly understand our customer base and what they need,” he said.
A decade ago Steel & Tube, which listed on the NZX in 1967, fell off the radar under Australian ownership and “became corporatised”. The company racked up $140m in debt while new players entered the market.
“Steel & Tube had to do a lot of financial restructuring and raise capital under pressure,” said Malpass. “Everyone was out for us, and it took a year or two to get up and pumping again. Over the last three years we have been building the customer value proposition.”
Steel and Tube’s return is impressive. For the year ending June the steel processor and distributor reported revenue of $599.1m, up 24.6 per cent; operating earnings (ebitda) 66.9m, up 77.9 per cent; net profit $30.2m, up 96.4 per cent; and earnings per share 18.3c, up 96.8 per cent. Its annual volume lifted 5.7 per cent to 167,000 tonnes, up from 158,000 tonnes.
Steel & Tube is a long-time player and the public face in an important industry for New Zealand, the judges said. Over the past 12 months in challenging economic circumstances, it has been among the highest performing stocks with a total shareholder return of 48 per cent.
“Steel & Tube’s board and management inherited a tough situation but have managed to transform the business, and have communicated well throughout that process. They’ve also responded strongly to both Australian and imported competition, managing to hold their own in an incredibly competitive industry,” said the judges.
Steel & Tube, with staff of 850, reduced its operating plants around the country from 50 to 27 and saved 20 per cent in costs. It invested in new equipment to expand its plate processing, and it bought two companies to increase its offering — Fasteners NZ and Kiwi Pipe and Fittings, now contributing to the group’s increased earnings.
Steel & Tube has processed coil for the composite deck flooring in the Auckland Commercial Bay shopping centre, and its stainless steel cladding is a feature of the new Christchurch Convention Centre.
The company has 12,000 customers on its book and it has “built a tight relationship” with the top 800 making up two-thirds of the revenue. “We’ve developed a digital platform so they can order efficiently and receive the (testing and quality) certification quickly,” said Malpass.
“We run a warehouse system where we forecast six months ahead on the customer demand and make sure we have the right products positioned for the profit margins.”
Steel & Tube has a market capitalisation of $215m and is about the 60th biggest stock on the sharemarket. Malpass’ ambition is to climb above nine or 10 companies and enter the NZX top 50.
“That will give the stock more liquidity and analyst coverage. Liquidity is important and we need another $100m in market cap.”
Air NZ engine problems mean just over half of flights are departing on time.