Ex-Fonterra boss in line for another payout
Comment Fonterra’s losses are rising but its former boss is due for another big payout, writes Duncan Bridgeman
Fonterra’s former chief executive Theo Spierings is in line for another payout under an historic incentive scheme, despite the co-operative racking up huge financial losses since his departure.
This is another dollop of salt into the wound for shareholders who have witnessed billions of dollars of their capital wasted over the past decade.
According to Fonterra’s last annual report there’s still a portion outstanding from a scheme tied to
a transformation programme called Velocity that covered Fonterra’s 2016 and 2017 financial years when Spierings was at the helm.
Dutch-born Spierings left Fonterra in late 2018 after a sevenyear stint that saw the dairy giant embark on an investment strategy many see as responsible for the poor financial performance of the last two years.
During his time Spierings collected around $38 million in remuneration, including incentives and bonus payments. Fonterra is now forecasting a loss of between $590m to $675m in the financial year just ended on the back of asset writedowns totalling up to $860m.
That follows a $196m loss for the year to July 2018 on a 25 per cent decline in operating earnings and a $433m loss on an investment in Chinese company Beingmate. Spierings collected $8m in 2018, adding to the $8.3m received in 2017, and looks set to be back for more this year. Of last year’s payment, some $4.2m related to Velocity. The previous year it was $3.855m.
Fonterra’s annual report notes there is a further final payment of 25 per cent of the 2017 Velocity Incentive (VTI) scheme due in 2019. However, it also notes the board retains overall discretion in relation to all aspects of the VTI.
A Fonterra spokeswoman confirmed to the Herald there’s still a deferred payment of 25 per cent but could not disclose the figure. Full details would be revealed in the 2019 annual report to be released in September, she said. In my view Fonterra’s board, led by chairman John Monaghan, should have no hesitation in exercising its discretion and withhold payment. The board should also take the axe to the co-operative’s flawed executive remuneration system.
This has long been a bone of contention for Fonterra’s dairy farmer suppliers and more recently investors in the Shareholders Fund. Spierings’ predecessor, Canadian born Andrew Ferrier, took home around $40m from his eight year stint at the top of New Zealand’s largest company.
Fonterra’s last annual report states in 2017 Velocity delivered “significant benefits“across the farmgate milk price, earnings and working capital in 2016 and 2017.
While the farm gate milk price has maintained a relatively high level, Fonterra’s own financial position and balance sheet has imploded. Miles Hurrell, the new chief executive, has embarked on an asset review programme to reduce debt and is leaving “no stone unturned” in an effort to turn Fonterra’s performance around.
The bulk of the accounting adjustments relate to non-cash impairment charges on four specific assets and the divestments already made this year.
In other words, the investments that management have been heavily incentivised for since Fonterra was established have turned out to cost the dairy giant billions.
It’s interesting to note that some of Fonterra’s executive incentive targets, while until recently not specified, relate to surveys developed by consulting firms McKinsey and Gallup.
For example, Velocity apparently delivered a material uplift in Fonterra’s organisational health and employee engagement as measured by those two firms.
Fonterra has since moved to a “more traditional” incentive programme directly aligned to the co-operative’s performance and returns to farmer shareholders, according to its annual report.
So, by its own admission, Fonterra’s payouts to its former CEO were not directly tied to performance and shareholder return.
Little wonder Fonterra is in the perilous position its now in.
It’s asset sale programme has been described as a fire sale while even the performance of its New Zealand consumer business and Australian ingredients businesses — held up as value-orientated businesses — have deteriorated.
In Hurrell Fonterra finally has a chief executive willing to dig in and do the hard yards.
But in order to address the deep-seated issues affecting Fonterra, the board should start with the absurd incentive schemes that reward poor performance over shareholder
capital return.
S&P Global Ratings has warned Fonterra it could be in for a credit rating downgrade if does not make swift progress in reducing debt as the co-op heads towards its its biggest-ever loss.
Fonterra said $820 million to $860m in writedowns — mostly of offshore businesses — would take it to a bottom line loss of up to $675m for the year just finished.
It would be only the second time the co-op has turned in a loss since it was formed in 2001. Its first loss — last year — came to $196m.
The co-op said it would not pay a dividend for the year to July 31 so that it could pay off debt, but said its $6.30-$6.40 per kg milk price for the 2018/19 season would remain in place, as would the current forecast for 2019/20 of $6.25 to $7.25 kg.
Chief executive Miles Hurrell said the co-op had made important accounting adjustments.
“Our cashflow remains strong, our debt has reduced, and the underlying business that has reduced is in line with our earnings guidance of 10 to 15 cents per share.”
S&P said any wavering of Fonterra’s commitment to restore its financial health would put the co-op’s A minus credit rating under immediate downward pressure.
The agency said Fonterra’s move to write down assets and suspend its dividend was a “painful but necessary” part of the co-operative’s turnaround plan.
The impairment charges were “noteworthy” but were non-cash and did not affect Fonterra’s fundamental risk profile.
S&P noted the group’s underlying earnings for the year ended July 31 to be materially below the prior year.
It said the dividend suspension indicated the group is willing to actively protect the interest of creditors.
“We believe Fonterra’s portfolio
and strategic reviews will result in a more disciplined approach to capital allocation and more versatile operational performance,” S&P said.
“In our opinion, this should result in a more stable earnings profile.
“That said, we are mindful of execution risks and any wavering of the co-operative’s commitment to restoring its financial health would put the rating under immediate downward pressure.”
Chief financial officer Marc Rivers said it will take Fonterra a couple of seasons to get the balance sheet back to where it needs to be “but we are a good path in that regard”.
Fonterra has since September been been re-evaluating all investments, major assets and partnerships.
As a result, it wrote down its investment in DPA Brazil by $200m, mainly due to the economic conditions there. The previously announced sale of its Venezuelan business involved a $135m adjustment.
The carrying value for China Farms will be impaired $200m due to the slower-than-expected operating performance.
The New Zealand consumer business, the compounding effect of operational challenges, along with a slower than planned recovery in market share, meant a writedown of $200m.
The Australian Ingredients business incurred a $70m write off of goodwill.
The price of Fonterra’s NZX-listed units, which give outside investors access to Fonterra’s dividend flow, have been under heavy downward pressure. They closed yesterday at $3.57, down 19c or 5 per cent from Friday’s close.
They have lost more than a quarter of their value over the 12 months.
Harbour Asset Management senior research analyst Oyvinn Rimer said the writedowns were “not entirely surprising” and that withdrawal of the dividend was another blow to those external investors who own the NZXlisted units.
“Strategically, they are doing the right thing, but is disappointing nonetheless,” Rimer said.
“The question is: Is this the end of it, or is there more to come?”