Farmer-owned Fonterra is New Zealand's biggest business.
Farmer-owned Fonterra is New Zealand's biggest business.
Fonterra’s planned spend on “growth” projects - estimated to be more than $250 million a year - is likely to come under significant scrutiny.
That’s according to the first independent analysis of the dairy heavyweight’s financial performance under a new industry law requirement.
The analysis by Northington Partners, commissioned byshareholder watchdog the Fonterra Co-operative Council to satisfy a Labour Government change to the Dairy Industry Restructuring Act (DIRA), said the average annual spend by Fonterra between FY24 and FY30 would exceed $1 billion.
Fonterra in its FY23 financial result forecast around $800m of capex a year to support operations and sustainability targets, with around another $250m a year on other yet-to-be-identified growth investments.
However, Northington estimated the additional investment earmarked for “growth” would average $300m a year.
”Any investment in growth projects is likely to face significant scrutiny and will have to satisfy Fonterra’s internal return requirements (9-10 per cent on capital employed), which will contribute to future earnings growth. Maintaining this investment discipline will clearly be important,” its report said.
“While the nature of this growth capital expenditure has not been detailed, it includes investment in plant upgrades, extensions and investment in new product lines, such as the FY23 investment in string cheese processing capacity in Malaysia.”
The projected capital expenditure represented a $500m increase in average investment over the FY20-FY22 period, and at least twice the current depreciated charge of $480m, said Northington.
Sustaining capital expenditure was necessary to meet Fonterra’s new asset health targets and followed a period of relative under-investment, the Northington report said.
“This capital expenditure is unlikely to contribute to earnings growth but is fundamental to maintaining plant and meeting Fonterra’s customer expectations.”
A catch-up on plant maintenance is included in Fonterra's planned big capital spend.
A material increase in decarbonisation and regulatory capex was essential to meet Fonterra’s own sustainability targets and the increased environment, social and governance demands of customers, it added.
“While it is hard to determine the earnings of premium contribution from this investment, without it, Fonterra could lose the increasing number of customers who are seeking sustainably-sourced milk,” the Northington report said, adding that any investment in growth projects would likely come in for close scrutiny.
Fonterra’s forecast average $800m spend a year included a catch-up on existing plant maintenance in New Zealand and Australian operations and increased capex to meet the farmer-owned co-operative’s sustainability goals, made up of decarbonisation and regulatory demands.
This included investment in key projects such as conversions from coal to electric and biomass boilers, and improved refrigerants and wastewater collection and treatment, expected to be around $1b in the next decade, Northington’s report said.
The former Labour Government required Fonterra to seek annual independent analysis of its financial performance as part of Beehive support last year for a Fonterra capital restructure, which required changes to the DIRA.
The capital restructure was implemented earlier this year.
John Stevenson, chairman of the Fonterra Co-operative Council.
Fonterra Co-operative Council chairman John Stevenson said the farmer watchdog commissioned the Northington analysis on behalf of Fonterra.
The council traditionally uses Northington to help it mine Fonterra’s performance for the benefit of the co-operative’s 8000 farmer-shareholders.
Stevenson said the company had “big chunks” of investment ahead to meet its sustainability and emissions reduction targets and the council planned to monitor the spending closely.
“Understanding exactly where that will be spent and understanding the returns from that expenditure will be a key part of our analysis,” he told the Herald.
“It is shareholders’ money and a big chunk of it and shareholders will want to understand the rationale and the return.”
Asked what the council understood by “growth” projects, Stevenson said it wasn’t appropriate for the council to determine those projects.
“But if we look at what’s happened since the change in the [business] strategy, we’ve seen a period of consolidation. We’ve seen Fonterra significantly improve its balance sheet and obviously, part of that has been by selling some of Fonterra off [recent overseas asset sales].
“[Now] we are increasingly hearing that farmers are interested to see how they plan to grow the business and create further wealth.
“Fonterra is in a good space now with a strong balance sheet, but if you stand still you go backwards.
“Farmers want to know where innovation is going to come from and where are the opportunities to push more milk into higher-value products.”
Andrea Fox joined the Herald as a senior business journalist in 2018 and specialises in writing about the dairy industry, agribusiness, exporting and the logistics sector and supply chains.
