CEO: I knew what I was getting into

CEO explains Fonterra’s reset and fends off critics of its showy city headquarters, writes Andrea Fox

Financial results media scrum over and a swag of interviews with journalists scheduled, Fonterra chief executive Miles Hurrell’s baby face is starting to take on some harder edges.

It’s been a marathon couple of months leading to Thursday’s formal presentation of the dairy cooperative’s grim annual result, tempered only slightly by the simultaneous unveiling of a bright and shiny new business strategy.

There are only so many times a man can smile while saying “mea culpa New Zealand”.

That could be why Hurrell’s friendly Kiwi bloke image slips a bit when the Herald’s first question is why, if you’re dropping all pretensions of being a global dairy giant and carving into the management staff, do you still need this big show-off building in Auckland?

Fonterra doesn’t own its headquarters, but for many infuriated Kiwis it speaks to the company’s perceived culture of excess. With the co-op declaring a massive $605 million net loss for the 2019 full year, calls have intensified for it to retreat to some dairy heartland where it really belongs.

A bit huffily, Hurrell responds that he’s heard the criticism and it’s from people who “don’t understand what goes on here”.

“We operate ‘Understand your coop’ and two or three times a year, bring busloads of people (farmers-hareholders) in . . . and show them what we do. After, they are overwhelmingly positive about what they see here — the passion that exists in the business.

“They’re the ones I’m worried about. I’m not concerned if other stakeholders or politicians have a view on our premises . . .” (Cabinet Minister Shane Jones calls it the Star Wars building.)

Hurrell says moving office is not part of his thinking right now. Delivering “value” to customers and shareholders is.

So far, so Fonterra. Defensive and jargony, again overlooking the fact that New Zealanders feel entitled to an opinion on the conduct of a company that demanded special enabling legislation in order to become “a national champion”.

But perhaps Hurrell, in the job 12 months, is just showing the strain of answering how on earth New Zealand’s biggest company got into a situation where in 2018 it had more than $6 billion in debt, mostly from illjudged overseas investments, and in 2019 over-valued its assets to the tune of $826m.

Hurrell is a long-time Fonterra executive, but was a good way down the guilty party ladder when he was asked to replace $8m-a-year man Theo Spierings.

He was interim chief executive first and then, according to the 2019 annual report, was paid $600,000 to make it official. Hurrell was paid a total of $2.2m in the 2019 year.

Did he realise the extent of the financial issues?

“I knew 100 per cent what I was getting myself into. People ask me, if I had known then what I know now, would I have taken it on? My answer to that is simply yes.

“I knew we had to do things differently and to be given this opportunity to step up and take on this role is exactly the reason

I did take it on.

“I was under no illusion the work we needed to do, and having a strong leadership team around me to help me deliver that has been fantastic. We are getting on with the reset and its pleasing to see some green shoots coming through.”

The “reset” is Fonterra’s new business direction: Gone is the aim

— and claim — to be one of the world’s biggest dairy exporters, collecting more and more milk from other countries.

Gone is the sloganised ambition of “making a difference to the lives of two billion people”.

Gone is the Fonterra DNA trait of wanting to own everything in its orbit.

The “dairy giant” handle is dead. It will run a “conservative” balance sheet that ensures, among other things, it retains its currently endangered “A” credit rating.

It will “show respect for capital” —

We can look back and overanalyse, but clearly some [decisions] were wrong.

Miles Hurrell, left

something sorely lacking for a while, say Fonterra’s farmer-owners, who have witnessed $4b of wealth destruction in the past two years.

New Zealand milk will be king. Fonterra has said it will still complement New Zealand milk with offshore supplies when required, but will start “rationalising offshore milk pools over time”.

The consumer product business is being shrunk and the organisational structure of Fonterra changed in a back-to-basics approach. It will focus on providing ingredients to the paediatric, medical and ageing, sport and active sectors and “core dairy”. Debt is down by $469m, capital expenditure has reduced by $200m and operating expenses should be trimmed by $160m in the 2020 fullyear, which includes the impact of not paying performance bonuses in 2019.

We expected to hear at this week’s results that the lossmaking and written-down China Farms business was on the block. We didn’t. But Hurrell later reveals the company is “in discussions now with a number of parties”.

It might sell the businesses outright, hold them, “or anything on the way”, he says. The decision is yet to be made.

Also up in the air is the disastrous investment stake in Chinese infant food company Beingmate, which now wants to reinvent itself as a property company.

Fonterra paid $750m for an 18 per cent stake in Beingmate and so far has lost more than $450m. Hurrell says Beingmate was “quite heavily integrated into decisions we were making in China — but no longer”. Fonterra wants out, but so far there are no takers for the whole stake.

However Hurrell reveals some Beingmate shares have been sold. He won’t say how many but it is a limited number because of Chinese stock exchange rules about how much can be sold in a 90-day period.

Shareholders are nervous about Chile subsidiaries Soprole and Prolesur. There’s stiff competition for milk in that country and Fonterra has lost significant milk supply, particularly in the south where ingredients business Prolesur operates.

Margins on Soprole consumer products have been hit by a “buy local” campaign. But Hurrell says the consumer market is growing in Chile and Soprole is in a “great place” to benefit. No decisions have been made on Chile.

“We are really proud of the businesses we’ve developed in Chile and continue to be so.”

The Australian ingredients business was written down by $70m, but Hurrell says with consumer sales volumes up 1 per cent in the 2019 full year, Fonterra has no plans to downsize there.

Fonterra has developed a reputation for sloppy due diligence — think Beingmate, and before that SanLu in China. Does Hurrell agree this needs work?

“Management and the board have to assess the information they have at the time and make decisions. We can look back and over-analyse, but clearly some were wrong. There were some good learnings and as chief executive in this organisation I’ll make sure we do.”

Asked when he wants to see significant improvement in the books, Hurrell says the announcement of the new business strategy doesn’t mean change starts from now.

He says incremental changes have been made since he took on the job (1400 people out of Fonterra’s 21,000-strong workforce have been quietly shed, according to the annual report.)

“We are 12 months through a twoto three-year reset of our business. We have put our earnings guidance out for next year (earnings before interest and tax of $600m-$700m), which signals we are making progress on that. I want to see this strategy come to life very quickly.”