Fonterra chairman John Wilson says grumpy farmers at the post-half year results round of shareholder meetings asked the sort of questions he himself would ask.
Given Wilson’s idea of answering a question is to ask a whole bunch of rhetorical questions of himself and then answer his own queries, the frustration level at some of those meetings can only have escalated.
Maybe farmers don’t let him away with the tactic. But for a journalist questioning the chairman of New Zealand’s biggest company, it often means having to wait until Wilson’s finished his question-and-answer session with himself and then putting the original question again. It makes for some very long volleys.
An example followed the suggestion to Wilson that some of Fonterra’s 10,000 farmer-owners consider its profitability to be below par, latest result aside. The co-operative after all dominates the $17 billion dairy industry, collecting 87 per cent of the country’s milk and has been in training to achieve great things for 14 years now (it was created from an industry merger in 2001).
NZ Farmer asked: Farmers want to know how much-smaller dairy companies can match or better your milk price in a low payout year?
Wilson: «Are we comfortable with where our results are? An emphatic no.
«Is it because our strategy is wrong? No, we don’t believe so.
«Is it because we are not wielding a big enough stick and taken enough costs out? No. Costs have come out for the last five years, particularly over the last three years.»
There’s no doubt Wilson took a bruising at those shareholder meetings when explaining a weak half-year financial performance with net profit and revenue down and the forecast full-year dividend cut when the market expected it would be fattened because of the low milk price forecast.
He doesn’t dispute that farmers are antsy and his self-interviewing habit seems to be his way of acknowledging he and his team may have a big bold global business strategy but need to sweat the smaller stuff first.
The gist of Wilson’s message is that Fonterra is weathering «extreme and unprecedented» price volatility – there can be big market movements within two weeks, he says.
On top of this he says, it has been unable to profitably process a surge in New Zealand peak season milk growth because it has not had enough stainless steel. Obliged by industry legislation to accept all milk offered to it, Fonterra has been grappling with 15 million extra litres of milk at the season’s peak while the peak itself has expanded from 14 days to up to 70 days.
The latter factor has had «a huge impact» on Fonterra’s profit and should not be underestimated, Wilson says. Half-year milk collection was 1.1 billion kg of milksolids, up 3 per cent on the same period last year.
A $1.6b new plants programme should start dealing to the processing problem next spring, he says. It has helped swell half-year net interest rate costs, but will provide farmers with a «significant return on investment because it shifts us again to efficiency».
Meanwhile, all the milk now sloshing around the world in response to previous high prices has lifted Fonterra’s costs of goods in its global business units.
For example, to meet the market, the company is forecasting a $6.64 a kg of milksolids payment to its Chilean suppliers this year while its Kiwi owners languish at $4.70.
Wilson: «Does that mean we throw away Latam [Latin America] or Australia because the milk price is higher than New Zealand? Does that mean the [value-add] strategy is wrong? Of course not.
«But it lowers our return on invested capital for those markets.»
And while Fonterra has increased volumes and the value of the product sold into its value-add consumer and food service businesses, it has not been able to hold margins as high as hoped because of the world milk surplus, he says.
«We need to be far more agile as we change this business from its history to what it needs to be…»
«So am I saying we are not aggressive enough and do we have our cost base right? We always have to look at that but the big factor here is there is too much milk in the world and it has impacted our profitability more than we expected six to seven months ago.
«Do we have to think about what that means for our business going forward? Absolutely.
«Does it mean we have to address that? Absolutely.
«But does it mean we have a major problem? We don’t believe so.
«But we are having a very, very good look.»
Fonterra leaders promised in the half-year report that «tough decisions» would be made.
Wilson won’t say what they are. Pressed, he says there will be no more restructuring.
The business needs to work out how to lessen the impact of the volatility, and Wilson promises «another very sharp look at our cost base across the organisation.
«I’m not going to be any more specific. You talk about it once you are doing it.»
Asked if the board is holding senior management to account, and if any executives have been put on notice, Wilson expresses confidence in the senior team.
«Do we have the right structure? We are saying yes.
«Are we comfortable with the performance? No.
«Is there a glaring fault somewhere? The answer is we believe not at all.
«Is there an absolute spotlight on it? Yes.»
Wilson says half-year results are «always difficult» for Fonterra because of significant inventory impacts and the seasonality of the milk production curve.
Other dairy companies, in New Zealand and overseas, are having similar problems because of price volatility and surplus milk, he says.
Wilson dismisses concerns about Fonterra’s half-year balance sheet that showed sizeable lifts in debt and finance costs. Net profit after tax was $183 million and total group revenue $9.7b.
The balance sheet is in a good position, he says.
Fonterra’s financial statements for the six months to January 31 show its total borrowings increased $2.6b to $7.5b from $4.8b at July 31, the end of its financial year.
Net finance or interest rate costs for the first half rose $156m on the same period last year.
Wilson says $107m of this increase was due to lower unrealised fair valuations of long-dated interest rate swaps used for hedging purposes.
Fonterra’s first half gearing ratio or debt to debt plus equity ratio was up at 51 per cent. At the first half last year it was 44.6 per cent.
The increase was a result of lower equity retentions, higher capital expenditure and increased business funding requirements compared to the first half of last year and was in line with expectations, the interim report said.
Wilson says it was also due to putting more money than usual for that time of the year into farmers’ hands.
«Normally our advance rate to farmers would be about 70 per cent of the forecast final milk price. We are currently at 87 per cent. That has a significant impact for our farmers and it’s a positive impact, though of course off a very low base. But it had an impact of a couple of per cent on our debt-to-debt-plus-equity [ratio]. That is just a reality of the co-operative at this stage.»
«It is well in control. Fonterra’s balance sheet is in very good shape. There are always these half-year challenges and it is one of the challenges of explaining where we are – not just because of seasonality but because of volatility.»
Wilson notes that at July 31 (Fonterra’s financial year end) powder prices were about US$3000 a tonne. Fonterra valued its inventory accordingly. By December, prices had fallen to US$2200.
«That’s about $184 million of negative impact for this reporting period. It’s unprecedented.»
Wilson says it’s important to look forward to the full-year result. He believes it will be increasingly necessary to «look through the [financial] year» given market volatility.
Forecasting farmgate returns for next season is «really difficult», he says. Fonterra will as usual update farmers in May.
«There is a lag impact. The financial year in Europe ended on December 31 and we of course are July 31. We are starting to see [global] production come back, though it’s a bit slower in the US.
«I’m worried about our farmers having this anxiousness and this concern. It’s front of mind for me personally and for our board and our management team.»
Source: Stuff
