What Would Synlait Be Worth to Fonterra or a2 Milk?
Speculation of a possible joint move by Fonterra and a2 Milk to buy Synlait raises a much bigger strategic question, says agribusiness expert Dr Nic Lees.
The cost cutting exercise will lead to job losses. The co-operative has also announced two new efficiency metrics that it will report on to shareholders every six months.
In an email to farmer shareholders this morning, Fonterra chief executive Miles Hurrell says the co-op had delivered good earnings through the 2023 financial year and had a strong balance sheet.
But he says, looking out to 2030, achieving the co-op’s long-term targets depends on “rigorous focus on where we allocate your milk and where we invest your cash”.
“We also know this means reducing our costs to assist us to hit our short-term and long-term targets,” he told shareholders.
“For these reasons, since late last year we have been developing plans with an aim to reduce costs across the co-op by about $1 billion over the 7 years to 2030.
“This goal will help offset higher inflation expectations and we intend to achieve it through a range of projects that will streamline how we operate.
“These projects include operational efficiencies, reducing cash costs across the business, and digitisation of business processes.”
Hurrell says the co-op plans to front load as much of this activity as possible over the next few years.
This work has been underway for some time, with cost reduction and business simplification activities already delivered or in progress through the FY23 and FY24 business plans.
To track its progress, Fonterra will report to shareholders on two new efficiency metrics: operational expenditure/kgMS (opex), targeting a 4% cash operating cost improvement per year; and gross profit per kgMS – targeting a 2% New Zealand cash manufacturing cost improvement every year.
Hurrell says while this focus on efficiencies will have implications for staff numbers, the co-op doesn’t want this to be at the expense of driving value growth.
“This is about enhancing our culture of continuous improvement and maintaining progress towards our long-term targets by being very deliberate about where we focus our people and your cash,” he says.
Fonterra will release its annual results in three weeks. Following that, directors and management will hold roadshow meetings with shareholders.
