Straight talking: Steering Fonterra into a new direction
Fonterra chairman John Monaghan explains to Andrea Fox why he’s ditching the spin and gloss to get the beleaguered cooperative back on track.
❛ WE’RE taking the shine off,’’ says new Fonterra chairman John Monaghan on the way to his office, apparently the only one in the dairy company’s very shiny headquarters on Auckland’s Fanshawe St.
Everyone else — including new chief executive Miles Hurrell — free ranges on the open floors, and Monaghan was heading for a meeting space among them until the Herald asked for a tape recorderfriendly talking spot.
Maybe Monaghan was thinking there was safety in numbers. Or maybe giving his office a swerve was in the spirit of the promised new culture of glasnost at New Zealand’s biggest but beleaguered company. Whatever, Monaghan’s comment suggests he won’t be mincing words.
Clearly there’s nothing shiny about Fonterra’s 2018 financial performance. It posted a historic net annual loss of $196 million and debt of $6.2 billion. The share price has slumped by more than 27% and $1.5 billion was wiped off the balance sheets of its dairy farmer owners.
Monaghan’s saying that under Fonterra’s new leadership the big cooperative’s reputation for spin and gloss is on the way out.
‘‘We are trying to speak very directly, and part of that is doing a bit more listening,’’ he says.
‘‘Our board is new, it hasn’t got the depth of governance experience maybe, but it has got a lot of capability and there is noone on there who is not contributing.’’
Is he agreeing that straight talking has been missing in action as shareholders and market commentators have long complained?
‘‘There’s room for us to improve in that regard. I am very respectful of the past but I use words like breathing fresh air into the coop, so we will be subtly different.
‘‘But that will be really demonstrated by actions and I think you will see that culture right across the business and you’ll see it in our key management and how they engage.’’
Background
The farmerowned cooperative was created in 2001 from a huge industry merger via special enabling legislation which allowed it to bypass Commerce Commission approval.
Eighteen years on it is the gorilla of the raw milk market, collecting 80% of all milk, but annual revenue is barely nudging $20 billion, muchhyped and costly valueadd business strategies have largely failed to fire and wealth destruction from overseas investments has plunged its 10,000 farmershareholders into a crisis of confidence.
In the 2018 financial year more than $1.5 billion was written off their balance sheets, the effect of a 27.6% fall in the share price and a constrained dividend.
It was the sixth consecutive year the listed Fonterra Shareholder Fund had underperformed in the NZX. The share price started the year at $6.08 and finished it at $5.12.
Since late 2012 when dividendcarrying, nonvoting units in Fonterra farmer shares were listed, the cooperative’s market value has declined from $10.3 billion to $7.5 billion, ensuring unit holders are grumpy too.
Stir in big management salaries – former chief executive Theo Spierings took home $8 million in 2017 – stiff prices at the supermarket dairy chiller and public antagonism over dairying’s impact on the environment, and Fonterra is feeling unloved right now.
Spierings exited in August, fol lowed closely by chairman John Wilson, for health reasons.
Enter Eketahuna dairy farmer John Monaghan, today Fonterra’s most experienced director with 10 years at the top table, and Hurrell, a longtime Kiwi employee as interim chief executive (and, according to Monaghan, paid ‘‘substantially less’’ than Spierings).
New direction
With Fonterra under fire from all sides, the new leaders swiftly promised a thorough review of the company’s strategic direction, assets, partnerships and joint ventures, and a ‘‘back to basics’’ style of doing business.
Four months on, how are they doing?
Monaghan says Hurrell is ‘‘smashing through some of the bureaucracy which is welcome’’.
A decision on the permanency of Hurrell’s job can be expected very soon, he says. Consultants are not being used in the review.
‘‘That’s quite a cultural change,’’ Monaghan says.
‘‘We’ve been very transparent about reducing our debt by $800 million, reducing our capex from $850 million to $650 million and getting our gearing ratio back into policy (between 40% and 45%) and probably at the conservative end of that policy.
‘‘We’ve committed to do that by the end of the 2019 calendar year, when hopefully it’s done and if not it should be wellplanned and under way.’’
He says the board, which has three new farmer directors this year, will meet later this month for a twoday strategy decision and will start making decisions on the results of the internal portfolio analysis soon.
That Fonterra is considering asset sales to relieve the pressure on its balance sheet instead of milk price payout retentions has been criticised by some shareholders, and the public didn’t like news the iconic Tip Top icecream business could go on the block.
Monaghan says the public upset was expected but emotion has no place in the decisions ahead.
‘‘I’m very serious, there are no sacred cows. We’ll have more announcements in the first half or first quarter of [2019] but work is well under way.’’
Interestingly, when asked why Fonterra doesn’t stick to what it is very good at — which is manufacturing and exporting high quality ingredient commodities instead of chasing valueadd consumer business for which it doesn’t have the capital — Monaghan says the backtobasics review means ‘‘you might want to go a lot harder in food service and ingredients’’.
He won’t say if he, as a director, supported Fonterra’s disastrous $750 million investment in Chinese child nutrition company Beingmate, on which it has lost $439 million so far.
The 18% stake must be one of the least sacred cows in the current review along with the company’s big investment in its consistently lossmaking China dairy farms.
Were the farms a mistake? ‘‘No, there is debate around the size and scale of the investment. There’s always been an intention at some point to sell down some of the investment, and the main prize is to get further use for the milk downstream, get it into Starbucks, McDonalds, Alibaba etc,’’ Monaghan says.
With Chilean processing business Prolesur losing suppliers, Fonterra’s South American operations including Soprole will also be under close scrutiny.
‘‘You can take it there’s not an asset we are not looking at. We have nearly $2 billion of capital in Australia – we have quality choices around the globe.’’
But the joint China farming venture with US pharmaceutical company Abbott will not be for sale.
Monaghan acknowledges some overseas investments have been ‘‘disappointing’’ but he doesn’t agree with claims Fonterra doesn’t have the capability and skill to pick winners.
‘‘I get the focus on our problem child Beingmate but I’d like another sentence on the end of that for context – that we’ve built a $4 billion revenue business in China in a timeframe noone else has and we wouldn’t have seen the milk prices [to farmers] we have if not for that.’’
Monaghan says the next job for the board after the portfolio analysis will be to look at what capital is required.
‘‘We have started a discussion about flexibility and setting the coop up for the future.
‘‘We will have the discussion with our farmershareholders in the first instance about what capital requirements are and what structural changes are needed.
‘‘We are not talking about in three or four years, we are talking about this discussion taking place in the next 12 months to provide the [market] clarity you quite rightly challenge me on.’’
But a debate about Fonterra’s capital structure is not on the horizon, Monaghan says.
‘‘Two things are always on the coop’s agenda – evolving governance and capital structure but to be quite clear we are not going into a capital structure debate [in 2019].
‘‘We just don’t need that distraction at the moment.’’
Director election
One issue Monaghan does want to see debated soon is the Fonterra director election process.
It sees aspiring farmerdirectors, who dominate the board, nominated for election by either the board or by a group of backing farmers. All nominees can opt to go before Fonterra’s ‘‘independent selection panel’’.
A shareholder backlash in elections last year saw one sitting boardrecommended director voted off and three new farmer directors voted in – two of whom were nominated by farmers and chose to bypass the panel.
Clearly smarting from that outcome, Monaghan wants a review begun in the new year.
Past chairmen of Fonterra have been accused of meddling in daily management – having ‘‘their hands in the gearbox’’, as critics put it.
Monaghan says that won’t be his style.
The board will meet less often this year, a number of work groups have been axed and subcommittees refined to put a strong focus on issues affecting profitability, he says.
‘‘It’s very important to me that I have management speaking for the business. I believe in utilising bench strength and I believe you’ll see that demonstrated.
‘‘I look where the share price is for our farmerowners and unit holders and I’m very aware of the effect of the lower share price on their investments. We are very focused on doing something about that and with some urgency.’’ — NZME