Fonterra & Australia - Roadley Speech

“Fonterra & Australia”

John Roadley
Chairman

Annual General Meeting
Bonlac Foods Ltd

Caulfield Racecourse
Melbourne
Australia

2.05 pm
Wednesday 28 November 2001
(New Zealand Time)

EMBARGOED UNTIL DELIVERY

Noel Campbell, Chairman; Directors; Shareholders; Ladies & Gentlemen: Thank you for the opportunity to speak today, to once again confirm Fonterra’s commitment to Bonlac – and to Australia – for the long haul. It’s good to be in Melbourne.

In New Zealand, we’re very clear about the importance of scale to our business. It was the rationale behind our merger. We look overseas, and we see our customers – the major retailers – consolidating rapidly. It’s predicted that eventually there will be just ten of them. That’s contributing to consolidation among suppliers. Every two and a half days, we read of another major merger, acquisition or joint venture on the global dairy market.

In New Zealand, we benefited from the unity and scale that the New Zealand Dairy Board gave us. It enabled us to build a multinational marketing business that was recognised as one of the global dairy industry’s leaders. But we recognised, by the mid-1990s, that our regulated industry structure was unsustainable. There was a barrier between our manufacturing and marketing operations that was slowing us down, and preventing us from taking maximum advantage from opportunities that arose in the market. Our two big manufacturing co-ops were seeking to branch out on their own.

The decision we made was to bring our industry together into one co-op. The process we followed to get there was industry-led and government-facilitated. The two big co-ops signed a merger agreement at the end of last year. Their agreement was to bring the two companies together, along with the marketing arm, the New Zealand Dairy Board. It was supported by the Government, the Opposition and our farmers.

The company we have formed is New Zealand’s largest, by far. We account for over 20 percent of New Zealand’s exports and over seven percent of our GDP.

We are a co-operative, owned exclusively by our suppliers. Fonterra has a focus that spans from the cow to the customer, including research at every level. We can manage every link in the value chain to respond to the needs of the market. That’s a major advantage. And our product – milk – is only just beginning to be unlocked in terms of its potential value to a world market seeking healthy nutrition. What we also have, is the scale to embark on our joint venture and growth strategy.

The scale we have is the launching pad. Since our farmers voted for our merger, we have been able to finalise five important initiatives. In North America, our skimmilk export arrangement with Dairy America makes us the biggest exporter of that product out of the United States. In Mexico, we have purchased two companies, to make us the number one player in its cheese market and number three in spreads. The Mexican dairy market is bigger than China’s. Throughout the Americas – North and South – we have announced our planned alliance with Nestle to establish joint ventures for products including liquid milk, and chilled and shelf-stable dairy products. We are currently in due diligence on that proposal. In the UK and EU, our planned joint venture with Arla will see the Anchor and Lurpak brands brought together, under one entity, to give them a sounder-footing in the highly-competitive yellow fats market. And, most recently, we’ve announced our first step into India, with our planned joint venture with Britannia.

The merger, the bringing-together of manufacturing and marketing, and these recent initiatives, have had an impact on how our shareholders view their industry and the company they own. The focus continues to be on demanding the highest standards of supplier services – that milk is collected, efficiently, on time, every day. The focus is, of course, on the milk price, where it ultimately should be. But, more than ever before, our shareholders are seeing themselves as part of – and more importantly investors in and owners of – a multinational business. Questions at farmer meetings held to explain the details of the alliance with Nestle were about the weighted cost of capital, the risks we might be taking on, and forecast returns. We’ve moved away from the value-destroying competitiveness – the focus on which company got what share of the pie. Farmers’ eyes are now firmly focussed on how to grow the pie. That psychological change in some ways rivals the importance of the structural changes.

With the New Zealand market being so small, we are increasingly defining our domestic market as including Australia – and also South East Asia. That’s how we see our investments here, across the Tasman. Australia and New Zealand are both key consumer markets for Fonterra. They are high income by world standards. They are open to us. And we know them well. But, of course, they are also small markets by world standards – 1 ¼ percent of world dairy consumption – and forecast to grow by less than one percent a year over the next five years. Of more interest to farmers than the domestic market, is how Australian and New Zealand dairy farmers might benefit from working together to take on that increasingly competitive world market I have spoken of.

The media asks us at least a couple of times every week to outline our long-term intentions for Australia. We reply that they are indeed long-term. We are in Australia for the long haul. Most of the rest of the speculation has been false – “all smoke and no fire” is how we describe it. Our relationship will develop over time, and I am confident it will deliver gains on both sides of the Tasman. Our focus at the present time is on the important assets we have here in Australia, on maximising their value, and cementing our relationship for the future. I would like to think that the competitive milk price Bonlac farmers are receiving this year has been due – at least in part – to our involvement with the company.

We believe we have much to offer the Australian industry. We look forward to working with you for the long haul.

END

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