'Big bang' not Fonterra's style

Andrew Ferrier says it's time to reap benefits from existing groundwork. Picture / Martin Sykes

Despite the pressure to deliver more payout to farmers, Fonterra chief executive Andrew Ferrier warns against expecting some sort of "big bang" to create a new universe of profit.

He's not about to unveil any giant new acquisitions and despite it being no secret that large-scale restructuring is under way he steadfastly declines to put a figure on potential job cuts or the cost-savings being sought.

Any shedding of staff would be announced on an ongoing basis rather than as one big number, he said.

It would be "unfair" to make predictions publicly before consultations with staff finished. Some of the consultations would be over within weeks but others would take longer.

"We really value our people and we don't want to be out there saying Fonterra's cutting X numbers of jobs. Fonterra is driving efficiencies and sometimes, unfortunately, it impacts on people's positions." The company's headcount is already down by several thousand since it formed in 2001.

"When you're a $12 billion business, as we are, big bangs are probably overcooked. One big bang isn't going to make or break Fonterra."

No new big buys were looming but "we know where all the major acquisition opportunities exist - in many if not most cases they're not within our control in terms of timing of when they might become available".

Fonterra was keen to expand across the Tasman but none of the dairy sector players it might be interested in was publicly listed. "If somebody is available at the right price and it makes strategic sense we'll do it."

But he also noted Fonterra had spent more than $1 billion recently on deals such as NZ Dairy Foods, Kapiti Cheese, Chinese firm San Lu and a joint venture with Dutch rival Campina. "We're running at a point where we've spent a lot of shareholder money and I think our shareholders want to make sure that we're getting good solid results from that.

Ferrier sees the new financial year as a time to reap significant benefits from a groundwork already in place.

He is forecasting profit growth of more than $120 million this year from value-added activities such as sales of branded products like Anlene and Anchor.

"There's a lot more money going into advertising and support for our brands."

Ferrier was buoyed by last week's news of a record production season and a record number of applications to become new co-op suppliers.

And softening commodity prices were this season expected to be offset by a lower dollar, the higher value-added profits and cost-savings.

That combination has helped keep this season's initial forecast payout at $4.05/kg of milksolids - 20c/kg more than last season's first forecast - and just 2c/kg down on the expected $4.07/kg final payout for last season.

The co-op has also announced a 6 per cent rise in the value of shares for this season.

Asked whether 6 per cent represents a good return for the capital farmers have to have invested in Fonterra, Ferrier said total shareholder return over the longer term should be considered.

For a corporate, this would be dividends plus share-price growth.

For Fonterra it was share-price growth plus the portion of farmer payout directly attributable to value-added activities. On this basis, in 2004/05, Fonterra's total return to shareholders was 17.2 per cent, and 11 per cent and 16.7 per cent in the two preceding years - a three-year average of just under 15 per cent.

"We've consistently had a good solid total shareholder return."

By contrast, stock exchange figures put the average NZX50 company gross shareholder return - dividends and share-price growth - for the year to last month at 7.21 per cent, with 9.9 per cent and 25 per cent in the two years before that.

"What we're really trying to do is get our value-added activities less vulnerable to price fluctuations so they're more consistent."