Real test ahead after Fonterra's year from hell

By PHILIPPA STEVENSON

Fonterra chief executive Craig Norgate has gone for the relaxed look in a black polo shirt. But the company logo emblazoned on the garment's front gives the game away.

The head of New Zealand's biggest company is definitely in business mode for a meet and greet session at the Business Herald, his first interview with the paper since it broke the "Powdergate" scandal in September.

The $50 million illegal exporting saga threatened to derail the merger of New Zealand Dairy Group, Kiwi Dairies and the Dairy Board which formed the $12 billion Fonterra in October, and it dogged Norgate, who previously headed Kiwi, the company at the scandal's heart.

Despite ongoing scrutiny by the Ministry of Agriculture and Forestry, the company is keen that its own investigation and actions, announced as last year closed, should lay Powdergate to rest.

It took a lot to upset him, Norgate said, and he was moving on.

A summer break also spelled the end of the merger phase.

"We made a conscious decision at the corporate centre to really get out of merger mode at Christmas.

"All the consultants were sent away, people were told to have a decent break - because most of them needed it - and come back and run the business as a normal organisation, with no excuses.

"When you are going through change, you always accept a few excuses," he said.

"We've still got a few key appointments to be made - maybe five out of 50 - and the tail-end of appointments in [subsidiary] NZMP, but most of that will be through in the next six to eight weeks as well."

Norgate is pleased to have added an international flavour to head office, with appointments like German Alexander Toldte as chief development officer and Mexican Robert Le Brun as corporate strategic initiatives director. But he admits staff are still heavily white, male and middle-class New Zealanders.

Gender and nationality may be the least of worries for those Fonterra staff judged under-performers.

Norgate said he was "unashamedly" making it clear that Fonterra would be profit-driven, and as part of that, the company would shed the bottom 5 per cent of its 20,000 worldwide workforce every year.

There would be processes to ensure people were treated fairly, "but at the end of the day, if they're not up to it they're just holding the organisation back [and] then the thing to do is to acknowledge that and exit them in a manner that doesn't destroy their careers."

This "performance ethic" would not go into effect throughout the organisation immediately, but it would apply "to the top couple of hundred people in the next 12 months", he said.

"The buck isn't going to stop anywhere. It will go right to the top," he said, describing the principle as one of the disciplines required to run such a large organisation.

"Too often we can be accused of just moving people around to avoid the problem, and all that does, for those people who really do make a difference, is frustrate them and get in their way."

Massey agribusiness Professor Bill Bailey described the measure as "arbitrary and capricious". He queried the use of a set figure of 5 per cent.

Such a culture was unlikely to be motivating and could instead lead to staff being overly concerned about preserving their jobs. They might concentrate on the measurable parts of their performance to the exclusion of activity potentially of greater benefit to the company.

Bailey said Norgate's stand appeared to be that of a new executive keen to stamp his mark on the organisation, rather than an attempt to create a workable corporate culture.

Fonterra now spans the New Zealand commercial landscape like the Colossus gazing across the ancient harbour at Rhodes, but Norgate is reluctant to accept an accolade on its achievements on the world scene.

A series of business deals announced last year, including the still-to-be-completed venture with Nestle in Latin America, rocketed Fonterra up the table of world dairy companies from ninth to fourth in the estimation of Rabobank dairy specialist Dr Adrie Zwanenberg.

Norgate was mildly deprecating at the time, and still insists that the company be hailed only as one of the world's 10 biggest dairy companies.

The coyness stems from a wariness of the numbers, said Norgate the accountant, and the likelihood of them changing with a single deal. With no alteration to the underlying business, Fonterra could drop down the table and risk the perception that it had declined in some way.

"We're at the top and it's the quality of our business that we're focusing on," he said.

The widely touted single deal with Nestle has not been sealed, despite expectations that it, too, would be sown up by Christmas.

Norgate said the timetable had been "reasonably arbitrary" and extensive due diligence among multiple parties meant it was just now getting to the end of the process. The deal was "not too far" from being confirmed one way or other, he said.

Fonterra's long-awaited next move in Australia has been the subject of much conjecture as well, but, said Norgate, "we've had other priorities".

"We don't want to be sitting doing nothing for too long, but at the same time Australia might look a bit like New Zealand and [Australians might] sound a bit like New Zealanders but the business environment there is far different to over here. It is not something you can step into boots and all."

The Asian and Latin American markets were more important for the long-term future of the company, which is already in quite a strong position across the Tasman.

Last year's run of joint-venture announcements, including deals in India, Brazil, Britain and America, would not necessarily continue. The focus would be more on "deepening" existing relationships, Norgate said.

At home, the goal was to deliver the first of the $300 million annual savings into shareholders' pockets. But with the payoff from previous dairy company mergers arguably going to offset declining market returns, will farmers notice any benefit?

Yes, said Norgate, because of the new measures of company profitability such as the Standard & Poor's valuation, the share price, milk price and company earnings.

"It will be absolutely transparent, which is just wonderful, because I've been through so many mergers and you spend years just trying to convince farmers that you delivered just what you said you were going to. You always had this problem of it being lumped in with everything else."

Fonterra began the New Year the way it ended the old one - rattled by controversy.

Just when it hoped to be working from a clean slate, independent director Mike Smith dropped his resignation bombshell in January, citing governance problems on the Fonterra board.

And somebody at Fonterra got upset enough to send its lawyers into newspaper Rural News after it published a front-page story suggesting Norgate's influence in the company was among Smith's concerns.

Since then things have been relatively quiet, barring last month's revelations that Maf used search warrants to seize documents related to Powdergate from company premises, and the ministry also had to do damage control in the sensitive European market after the Clandeboye factory in Canterbury exported listeria-laced gouda cheese to the Netherlands in December.

The boardroom ruckus also died down after directors attended a two-day workshop - which chairman John Roadley emphasised was planned before Smith quit - and directors and executives split up to cover the country in a series of 35 meetings with shareholders.

Norgate earned Brownie points by fronting with Roadley where the heat from farmers was expected to be most intense - Pukekohe, Te Awamutu and Matamata.

And director Mark Townshend, who threatened to follow Smith out the door unless some changes were made on such issues as board size and composition, has settled back in his seat happier that the blowtorch, lit by Smith and held in place by shareholders and other New Zealand business, has brought progress.

The company is still involved in a low-key but important tussle with the two dairy co-operatives it could not win with its mega concept, Tatua and Westland, over the valuation of shares in the Dairy Board.

Fonterra said the valuation had been "overcooked" and Tatua and Westland, which stand to gain more than their respective $26 million and $84 million at the present valuation, believe the industry has been shortchanged.

An arbitration panel is still being formed and a decision is not expected for months.

Last week, Fonterra produced some figures that were not only acceptable but downright impressive: a half-year operating profit to November of $2.9 billion on revenue of more than $7 billion.

It drew praise, albeit understated, from Tatua chairman Dr Alan Frampton, who said the result was "not too bad." The former Dairy Board director rejected suggestions the figure could not be analysed, and said that by his estimations Fonterra had probably met its objectives in its first six months.

"I just wouldn't be too critical at the moment of where they've got to," Frampton said.

Any disruption from the merger was likely to have been mitigated by the continued operation of the former Dairy Board's international marketing effort by NZMP's Chris Moller and NZ Milk's David Pilkington.

"I think that's been an essential part [of the company's performance]," said Frampton.

"Most of the problems have been in New Zealand, not overseas, though they are going to have to deal with a price decline."

He predicted the next six months would be Fonterra's real test as it handled the impact of sharp international price falls and sought to get the best from factories operating below capacity as milk supply dropped.

As the global dairy market waxes and wanes and analysts speculate about an appreciating New Zealand dollar, Fonterra has delivered forecasts of the payout shareholders can expect at the end of the year in May - ranging from $5.20 to $5.40 a kilo of milksolids, settling most recently on $5.30.

A 10c change in the payout causes farmer incomes to swing by thousands of dollars, so the forecast, on which many farm decisions are made, is a key management tool.

Farmers have been used to the conservative approach of the Dairy Board, which preferred to announce only payout increases.

But Fonterra, which argues it is sending more honest signals, forecasts on the equal probability of upside and downside in market fluctuations.

Frampton, though, said the new method created more confusion than clarity.

"When farmers are budgeting a season ahead, I think they need to be given a more conservative outlook [stating] 'We don't expect it to go down below this, but it could go higher'."

Norgate acknowledged the need for Fonterra to communicate better in general. He recognised a lack of familiarity with Fonterra's business units, NZMP and NZ Milk, and proposed to say more about them to both shareholders and other businesses.

The mega co-op was now better understood by the business community, he said.

"I think it is early days. There is much more we can do ... but there is no reason for them to view this business, from a commercial point of view, as any different to any other."