Why NZ should get behind Miles Hurrell as he aims to broaden Fonterra’s product range

As  New Zealand moves  towards  reconnecting with the world,  62%  of  the   business  leaders  surveyed  in the  NZ  Herald’s “Mood  of the  Boardroom”  say  they are not  satisfied with the government’s  plan  for  reopening the country.  International business is  being  lost due to border difficulties.

So  the  NZ economy  again looks likely to be propped  up by the primary  sector. On  that  front, the  news  is  positive.  International markets  are  exhibiting  strong  demand  for our products,  with the  result  that export  prices  are even more  buoyant  than  seemed  likely   just  three  months ago.

Lamb is  fetching   record  prices   and  dairy,  despite  some  earlier predictions that global production  would  push  down prices, has  moved  in  the  other  direction,  to  the  extent   that Westpac senior  agri-economist  Nathan  Penny   this  week  raised  his  forecast  for  Fonterra’s farmgate  milk price this  season  by  75c  to $8.50kg/MS.  That would surpass the co-operative’s previous record high of $8.40kg/MS paid in the 2013/14 season.

Fonterra’s own forecast is for a  payout  between  $7.25 and $8.75kg/MS,  with  a  mid-point of  $8. That’s ahead of its $7.54  last season.

Penny said he lifted his forecast after downgrading his expectation for milk production. He now expects NZ production to fall 1%, compared with his previous expectation for a lift of  1%.

Fonterra   itself  is  in  good  shape, after achieving  a  strong set of results for the 2021 financial year.  These are reflected in normalised earnings per share of 34c and a final dividend of 15c, taking the total dividend for the year to 20c per share.

The results come as Fonterra moves through its business reset and into a new phase of growing the value of its business.

The  question  here  is  whether  Fonterra,  after three  years  of re-setting its  business and  cutting debt, can  find   new  ways  to  maximise the value  of  NZ milk.

Miles  Hurrell   has  gone  about the  job of shoring  up  the  co-op  since  he took  over as CEO, despite the challenges of operating in a COVID-19 world.

Although the higher milk price and tightening margins put pressure on earnings in the final quarter, this is a strong overall business performance, allowing us to deliver $11.6bn to the NZ economy through the total pay-out to farmers.

Hurrell  will  be  striving   to  improve this  season the group normalised EBIT (which reflects underlying business performance)  of $952m, up  8%.

What  was  significant  over  the past 12  months has  been the outcome of  the drive  to lower  debt:  net debt was down $872m to $3.8bn.  Cashflow  improved again and at 2.7x (improved from 3.3x), Fonterra  is now within its long-term target Debt/EBITDA ratio.

While  a  high milk price is good for farmers and for the NZ economy, it  does have the potential to squeeze sales margins and impact earnings.

What  Hurrell   has  to  do  now   is find new  ways  to  achieve value  growth.  Since  its  foundation the  co-op  has  talked  up   how  it aims to broaden  its  product range   and produce  better  returns  for its  milk,  but  has never  succeeded  in  doing  so.

Now  Hurrell  and  his  team  plan to spend more on product innovation and science to move its milk into higher value specialty nutrition products as it looks for ways to increase profit in an environment where milk volumes are no longer increasing. They  will  outlay $1bn to make higher value products, and  may look to partner with others to blend and pack them.

The co-op in effect  has had to rethink how it grows profits as the rapid expansion of dairy farming comes to an end, with the Climate Change Commission suggesting dairy cattle numbers could fall 13% from 2019 levels by 2030 due to environmental constraints.

The  idea of  reducing  cow  numbers  is a dubious strategy   but  given   the Ardern government’s  apparent  indifference to encouraging  the farming  industries the Climate  Commission’s  proposal to  cut  cow  numbers may be  enforced.

In that  context  the  Hurrell   strategy  of  driving  more  value  from  milk  makes   sense.  Hurrell  says  Fonterra is aiming to increase its  total annual R&D investment by over 50% to around $160m a  year, with about $60m  a  year specifically targeted at growth in Active Living, to develop new innovative products

“As we move more milk into Foodservice and Consumer, we will direct less through our Ingredients channel and aim to shift more towards higher value ingredients such as in our Active Living business.”

Hurrell says  the co-op aims to play more boldly in nutrition science solutions, which underpin a $500bn slice of the global health and wellness category.

He and the team around  him may have  more   success  diversifying  the product  range than  some of his predecessors.  The  country—and his farmer-shareholders—certainly  need it.

One thought on “Why NZ should get behind Miles Hurrell as he aims to broaden Fonterra’s product range

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.