NEW ZEALAND – In September this year, New Zealand dairy co-operative, Fonterra unveiled a new operating model and organization strategy introducing a new customer-led operating model in a bid to drive profitability.
After nearly three months since company took the new direction, CEO Miles Hurrell says that the co-operative has made good progress moving to its new strategy, having have posted a strong first quarter.
Fonterra strategy involves an increased focus on people while making a positive impact on society, working together to achieve a healthy environment for farming and society and delivering sustainable business results (Healthy Business).
According to the Hurrell, the company is “making good progress across all three areas.” He added: “From a Healthy Business perspective, we are clear on the steps we need to take this year to hit our medium and long-term targets.”
The dairy co-operative is focusing on reducing its debt ensuring that it is not more than 3.75 times the earnings.
Hurrell says that this will require Fonterra to achieve a gross margin of NZD3 billion, ($1.97bn) further reduce operating expenditure, lower capital expenditure by NZD100 million ($65.59m) to NZD500 million ($328m), and also divest some more assets.
So far this year, the Fonterra boss noted that the company has improved the underlying financial performance of the business, delivering a gross margin of NZD740 million ($485.37m), up from NZD646 million ($423.71m).
The company has also continued to focus on financial discipline, reducing operating expenditure by NZD104m ($68.21m) and generating a normalised Earnings Before Interest and Tax (EBIT) of NZD171m ($112.16m), up by NZD145 million.
“I’m pleased to see this level of improvement. Our people are doing a great job at putting our strategy into action. There’s more to do but the wheels are definitely in motion,” Hurerell affirmed.
“When we look out across the year at our financial performance, the biggest pressure on our earnings is going to be the rising milk price.
“Stronger than forecasted performance from our Foodservice business has helped offset the higher milk price to date and we will need to be very focused around making improvements in other areas too.
Strong quarter performance
During Q1, Fonterra’s Ingredients business increased its EBIT by NZD32m ($21m) to NZD139m ($91.17m) while EBIT from the Consumer and Foodservice business was NZD118m ($77.4m) up by NZD56m ($36.7m) compared to the same period last year.
Mr Hurrell noted that the New Zealand Ingredients business continued to contribute a large proportion of the Co-op’s earnings and most of the earnings from the Ingredients business, which very much validates the focus on New Zealand milk in the new strategy.
The Co-operative’s early priority in the 2020 financial year has been to get itself in shape to best deliver the strategy.
Mr Hurrell says that during the first quarter, Fonterra moved to a new customer-led organisational structure which allows it to be closer to its customers but also to live within its means.
Fonterra’s expects to achieve normalised earnings for the 2020 financial year of 15-25 cents per share.