Fonterra has disproportionately invested in R&D to deliver innovation at scale, as opposed to smaller ideas that can be scaled up if successful. Photo / File
Fonterra has disproportionately invested in R&D to deliver innovation at scale, as opposed to smaller ideas that can be scaled up if successful. Photo / File
COMMENT:
What can $100 million in research and development do for shareholders? Well, it depends on the company.
Fisher & Paykel Healthcare shareholders look to be reaping the benefits as annual revenue pushed past $1 billion for and profit climbed 10 per cent to $209.2m.
The shares are up 240per cent over the past five years and shareholders saw their annual dividend up 9 per cent at 23.25 cents.
Not bad on its own, but the company says there is more to come, tipping a profit of $240m to $250m for the current financial year.
Contrast that with another $100m R&D spender – Fonterra.
The country's biggest milk processor reported its first annual loss in July 2018, the first in its 17-year history, and is undertaking a wide-ranging review of the business as it looks to shed $800m of debt by the end of July this year.
While it's on track to meet that target, it recently sliced about a third from this year's earnings guidance and is likely to deliver $161.2-241.8m in profit. That's on $20b of revenue.
For external investors hoping to capture the value-add earnings from the dairy giant, it hasn't been good news.
Fonterra Shareholders' Fund units have lost 44 per cent over the past five years and hit a record low last week on a weak milk collection in April.
F&P Healthcare is one of the leading R&D spenders in New Zealand. Photo / File
Going back to F&P, chief financial officer Lyndal York says innovation is critical.
"The fact that we have the margins and the returns that we do is really the benefit that shareholders get through our R&D."
The 50-year old company started out with three people in one city and a prototype made from a fruit preserving jar.
Last year its products – from sleep apnea masks to neonatal care products - were used by 14 million people in 120 countries. To achieve that kind of success, it's spent more than $750m on R&D since 2001 – all of it in New Zealand.
Revenues have increased from around $200m and it's gone from paying about $75m of dividends to $115m.
The government has been leaning on businesses to stump up more for R&D in a bid to improve productivity as New Zealand lags its peers.
F&P Healthcare is one of the leading R&D spenders in New Zealand, accounting for about 5 per cent of the $2.1b investment across all businesses last year.
While New Zealand's overall R&D spending lifted to 1.37 per cent of GDP in 2018 from 1.23 per cent in 2016, it still lags behind Australia's 1.88 per cent and the US, at 2.74 per cent.
Does it matter?
The government seems to think so, reiterating its goal of raising New Zealand's R&D investment to 2 per cent of GDP in last week's well-being budget.
And New Zealand's GDP per capita - a key measure of productivity - has dropped down from around 125 per cent of the OECD average in the 1950s, to nearer 60 per cent today.
F&P's York says its investment – 9 per cent of revenue – is typical, and should track revenue growth. The company seeks to double revenue every five or six years.
Previous support has come from a Callaghan Innovation grant, but this year the government's R&D tax incentive kicked in on April 1.
The change is worth around $8m to F&P's bottom line if three quarters of its spend is eligible. That alone helps shore up its forecast for "further gains" this financial year.
York says R&D is a must have for the company.
Fonterra is undertaking a wide-ranging review of the business as it looks to shed $800m of debt by the end of July this year. Photo / Getty Images
"We have to keep developing, we have to keep at the front of technology in our markets and have such a long-time frame with projects that it does take significant investment to get products out to market."
Comparing milk and breathing masks isn't a like-for-like, but Fonterra says it would like to spend more on R&D than the 0.5 per cent of revenue it's currently doing.
However, it needs to do something better, because $1.3b since 2002 just hasn't generated a return for its farmer shareholders, who are often more fixated on the farmgate price than the extra cream from value-add.
Fonterra's reason for being is to deliver the highest possible return through both the milk price and the dividend.
However, the current open entry system of the sector's governing legislation, is one of the factors behind its paltry R&D by forcing it to be production led and narrowing its realistic R&D opportunities.
Fonterra has disproportionately invested in R&D to deliver innovation at scale, as opposed to smaller ideas that can be scaled up if successful.
In its defence, Fonterra has a lot of irons in the fire and has to spend millions on new plants just to keep up with a growing milk supply as it juggles the demands of its farmer shareholders and its unit holders.
Both would appreciate a better return on investment, and casting an eye at F&P on how to do it wouldn't hurt.
