Fonterra in expansive mood

By LIAM DANN primary industries editor

New Zealand's biggest company is about to get bigger.

Chief executive Andrew Ferrier makes no secret of the fact that Fonterra is looking to buy some of its international competition this year.

"I am interested in the possibility of a good acquisition in the consumer products side this year," he says. "I think that the business is ready to grow."

The target areas are Australia, Asia and - through the Nestle joint venture Dairy Partners of America - South America.

The target companies will be those that offer product line extensions or growth in market share in businesses that Fonterra already knows, Ferrier says.

"We will not grow just for the sake of growing," he says.

That, he believes, is where bankrupt Italian dairy giant Parmalat got itself into trouble.

"Parmalat is an example where a company grew with more of a focus on the top line than the bottom line and as a result is paying the price today," he says. "You have to be very careful with your shareholders' money. It's not just what you buy, but how you buy and how you subsequently manage things."

There has been a great deal of speculation across the Tasman about a potential fire sale of Parmalat Australia.

Australia's largest dairy company, National Foods - in which Fonterra has an 18 per cent stake - has already expressed an interest, as has number-two player Dairy Farmers.

Ferrier says it is too early to say if Fonterra will be directly interested in Parmalat assets - either in Australia or South America.

"We are evaluating the situation but it's going to be a long time before we know exactly what Parmalat's going to do," he says.

"A number of analysts speculate that they are going to be forced to sell off assets outside their core European base and so there are vultures all over the world circling and looking for opportunities."

There is no hurry, he says. If Parmalat do divest it is likely to be done in an orderly fashion and Fonterra will make its judgments then.

Responding to opportunities such as the Parmalat collapse is inherently reactive. Ferrier says he is more interested in taking a proactive approach and seeking out the targets that suit Fonterra best.

To that end Fonterra's analysts have been watching the Australian industry very closely for some time, he says.

Regardless of Parmalat, Fonterra is looking to expand across the Tasman.

There have been suggestions that further Australian purchases by Fonterra - which also owns 50 per cent of the fourth largest player, Bonlac - might trigger the concerns of the competition watchdog across the Tasman.

But Ferrier doesn't believe Fonterra is in danger of getting too big in Australia just yet.

Fonterra will also look to expand in Asia, Ferrier says.

The company recently put in place a significant partnership with Chinese company Sanlu.

That is a long-term project, Ferrier says.

It won't add anything substantial to the bottom line in the short term but provides a great platform to develop the Chinese business, he says.

"The combination of our expertise and Sanlu's reach in the market will allow us to grow that business and find new opportunities in China," he says. If there is one key thing driving plans for rapid expansion it is the high kiwi dollar.

"We know that it is impacting on our revenues down the road in a very substantial way," he says.

Because Fonterra buys its US currency 15 months in advance, it has some time up its sleeve before the impact of recent rises starts to bite.

Basically the payout to farmers this year will be based on what the dollar did last year and the payout next year will be based on what the dollar does this year, Ferrier says.

But there is still a very real sense of urgency about the currency.

Fonterra has a limited time in which to offset the impact of the strong kiwi dollar and minimise the drop in future farmer payouts.

Developing the value-added part of the business to boost profits is one part of the strategy.

The other is to reduce costs.

Fonterra's biggest cost saving operation is called Project Jedi.

"That is essentially taking our ingredient business and turning it into a single global entity," Ferrier says.

"There are some very substantial gains expected."

While some of the savings were included in the projected merger benefits of $300 million, Ferrier says he expects them to go much further than that.

The ingredients business is now focused on numerous Jedi projects and delivering those on time so costs savings flow to shareholders when things get more difficult as we role into next year, he says.

One example is the creation of a global customer service centre.

"So rather than have 40 customer service centres around the world there we will have just one - based in Auckland."

The new centre will be staffed 24 hours a day, seven days a week by multilingual team.

"Customer service should actually improve because rather than go through multiple steps, a customer should be able to pick up the phone and get directly to the plant that will be responsible for shipping the product," Ferrier says.

The global back office - handling transaction processing, accounts payable and receivable - for the ingredients business is also going to be centralised in Hamilton.

Then there is the local restructuring process announced before Christmas.

At a senior level a global search is under way for a new head of NZ Milk, a new chief financial officer and a new head of human resources.