Why there’s still Miles of work ahead for Fonterra
Here’s what Miles Hurrell’s first 90-day report as chief executive of New Zealand’s largest company should say: Goodbye to Theo Spiering’s ‘V3’ mantra (Volume, Value and Velocity).
Has abandoned Fonterra’s aspirational ambition and strategy to achieve $35 billion revenue from 30 billion LME (liquid milk equivalents) by 2025 in favour of a singular emphasis on value.
Has set powerful new targets, scoped surplus portfolio assets, including in China, doubled down on debt reduction, prepared for an international trade shock and begun repositioning Fonterra as the national champion it should be.
Hurrell, still in the invidious position of being a caretaker CEO, is careful not to position his approach as a major new strategy. “By removing this ambition statement it gives the business a very clear platform around what is the baseline,” he told me in a too quick interview at Fonterra HQ this week.
He’ll then come up with a value plan and start a strategic process with the board from February.
Fonterra is up against environmental constraints. But says Hurrell: “We don’t want to be dictated to by legislation. We actually need to get ahead of that and, by and large, our farmers this year want to be ahead of it. They want to use science to help make decisions and we want to support them in making those decisions.
“But the environmental piece of this will be certainly a key part of the strategic decisions we make going forward.”
It was less than a year ago that Fonterra was spruiking its ambition to achieve $35b revenue from 30 billion LME by 2025.
That $35b target was clearly a big ask given the company’s revenue was still only about $20b after 17 years in operation.
The strategy outlined at a December 2017 Investor Day was demand-led and relied on optimising New Zealand milk with support from global milk pools.
Hurrell says Fonterra is now pulling away from that ambition to set a clear platform for the business as a value play.
Another key focus is to make sure any milk brought through the business elsewhere is complementary with the “fantastic raw material” produced in New Zealand — particularly with attributes that “go along with the New Zealand pasture-based system”.
This clearly suggests Fonterra wants out of using milk from cows which are not pasture fed, like from its China farms.
Hurrell won’t directly answer questions on this other than to underline the China farms are lossmaking.
Nor does he directly answer questions on the future of Fonterra’s unfortunate Beingmate stake expect to note that it has taken back distribution of Anmum in China.
With the company facing clear capital constraints, Hurrell has reemphasised getting closer to customers to better understand the full-demand picture and make the right products. It is also exploring how to work in partnerships using the intellectual property Fonterra has through its own manufacturing, inmarket capabilities and customer-consumer connections, as opposed to what Hurrell calls “milk offshore for milk offshore sake”.
Hurrell has directed his team to focus on operating expenditure, not simply the return on capital and EBIT, which were outlined at the recent annual financial results. “While we’ve made decisions last year, which supported the increase of 7.6 per cent in our Opex numbers, that was on the back of the high earnings that were predicted throughout most of the year until you got into that last quarter.
“Those earnings didn’t come through. So stake in the ground, we’re going to get back to 2017 Opex levels.”
The company has set a target of debt reduction of $800m which Hurrell acknowledges may not be fully implemented in the current financial year. It is is using new technology to improve forecasting.
The CEO’s job fell into his lap when the preferred international candidate bailed around the time former Fonterra chairman John Wilson stood down.
Says Hurrell: “I got into this is because I’m deeply passionate about this business . . . a proud Kiwi and making sure that we’ve got a really strong national champion.”
He obviously would like to be confirmed as chief executive. “I know what I have got to get done now and set the business up and I’m sure John (Monaghan) and I and the board will have some discussions early in the New Year.”
“If there’s someone else they want in that role I’d back down.”
The board will clearly be involved in the key strategic decisions.
Previous decisions to expand into new growth areas around the ingredients business and advanced medical nutrition are likely to stand.
But the company is likely to exit some businesses which have got to the end of their natural life cycles and reallocate resource elsewhere.
Hurrell is coy about the China position except to suggest Fonterra needs to be prepared if consumer appetite for high value dairy products turns down if the Chinese economy is impacted by the trade war.
“We don’t see any winners out of that long term so it’s really important we keep an eye on those,” he says. “At the highest level incomes flow through and you tighten your belts a bit, so that’s something we’re watching very closely.
“And then at the same time you’ve got weather situations — we’ve seen that in Europe, the heat out there — what does that do to suppliers’ demand positions? But in terms of consumers and demand, we’re still fairly good about what we see around the world.
“And while the high oil price has an impact for consumers, some of those oil-dominant economies haven’t been big players for us in the last few years so it might give them another opportunity to come back and talk about the Middle East, in particular.”
Consultations on the DIRA review are progressing. Fonterra is waiting for the ministerial consultation document to drop. Hurrell says consultations with the Beehive are focused on how to create a more sustainable, wealthy New Zealand. “How we do that is going to be in the detail with the minister to recognise that some parts of the legislation are perhaps past its use-by date.
“We all want the same thing here and to make New Zealand more prosperous and the last thing we need is surplus capacity. The last thing we need is the same milk from the same farm as potentially competing in the same offshore markets, and eroding value and that profit being taken offshore by offshore entities.
“You know, our view is let’s make New Zealand more prosperous and we’re starting to see some of that discussion come through which we see as a positive.”
While Hurrell does not want to get too far get ahead of himself, he does have to lift the company’s tempo and reputation which took a pounding after it posted its first loss this year since its inception in 2001.
“We’re not seen to be making any knee-jerk reactions. I want to make sure that we can actually get the business back to focus on some of these basics, but recognise that this is a long hard graft that we’ll be doing every day, day in, day out, for a long time, not coming into make some snappy decisions and then to pay for the price for those later.
“We want to make sure that when we set up the foundations for the business it is for the long term.”