Friday, March 29, 2024

First principles in strategy reset

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Fonterra is refocusing on the principles of co-operative farmer ownership, efficient milk collection and processing and exports of dairy ingredients for premium prices.
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The details of the strategy reset and sales of assets to raise $800 million for the balance sheet will be announced with the full-year financial results in September.

Chairman John Monaghan was resolute and defensive when updating farmer-shareholders on the full review of business strategy during his presentation of the interim results.

He said the co-operative’s job of picking up milk, processing and selling the products for the highest possible milk prices for farmers will never change.

And he took issue with commentators and competitors who say Fonterra consistently pays too much for milk at the farmgate.

“I am bemused by that criticism – our primary intention every day is to deliver the maximum milk price and that has not changed.”

The review is not tinkering around the edges – there will be fundamental change to business strategies designed to secure the highest possible returns.

“Where we can win in the world and the products where we have a real competitive advantage.

“Premium prices will be earned from the co-operative heritage and provenance.”

Chief executive Miles Hurrell said farmers want to see Fonterra extract the returns available from their milk’s unique qualities and the New Zealand story.

Along with the 2019 interim results Fonterra said the third asset identified in the portfolio review was its half share in DFE Pharma, the joint venture with FrieslandCampina.

DFE Pharma is one of the largest suppliers of pharmaceutical excipients, which are used as carriers in medicines such as tablets and powder inhalers.

It employs 360 people and has a head office in Germany.

Fonterra has told its partner it has begun a sales process but also renewed the pharmaceutical grade lactose supply deal to Pharma from the Kapuni plant in Taranaki.

Last financial year DFE Pharma had sales of $346m and EBIT of $100m.

Fonterra’s leaders said they are confident the $800m debt reduction will be delivered this year from asset sales – Beingmate, Tip Top and DFE Pharma.

The proceeds will be booked in the full-year accounts and result in the debt gearing ratio returning to 40-45%, they said.

The strategic review of the Beingmate stake is now a financial matter of buy, sell or hold, chief financial officer Marc Rivers said.

All commercial activities between Beingmate and Fonterra have now ceased except the infant formula base powder supply agreement from Fonterra’s Darnum plant in Victoria.

Fonterra is finding buyer interest in its 18.8% stake in Beingmate and the share price is rising, Rivers said.

The Beingmate part-ownership is now valued by Fonterra at just over $200m but the market value is about $280m.

Having been through the worst with Beingmate, it is now possible Fonterra might be convinced to stay as a cornerstone shareholder as the Chinese dairy company recovers.

Tip Top has received strong interest from several parties interested in all of the NZ ice cream business, Hurrell said.

Fonterra will announce any material transactions when they occur, as required by the stock exchange.

Fonterra bought its 60% share of Corporacion Inlaca, Venezuela, in 2014, from Nestle for $1 and is now selling that share of the consumer business for $16m to Mirona.

Inlaca was on Fonterra’s books as an asset but it was exposed to hyper-inflation in Venezuela, eroding value in NZ dollar terms.

Therefore the impact would be negative $126m this financial year, Rivers said. 

The asset changes announced so far have been neutral (Darnum) or negative (Inlaca) for the balance sheet.

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