Fonterra chief to resign as China woes erase profits

Fonterra is to part ways with chief executive Theo Spierings after the world’s biggest dairy exporter slumped to a NZ$348m first-half loss due to problems at its Chinese partner.

The New Zealand conglomerate said on Wednesday that Mr Spierings would step down before the end of the year. His departure follows criticism of governance at Fonterra by some of its 10,500 farmer shareholders, who have become increasingly concerned about the poor performance of Beingmate, a Shenzhen-listed infant formula maker.

In 2015 Fonterra paid NZ$756m for an 18.8 per cent stake in Beingmate, which at the time was the market leader in the Chinese infant formula business. But Beingmate’s market share has shrunk 70 per cent over the past five years to 2.5 per cent, and the company has reported two consecutive years of financial losses.

That prompted Fonterra to write down the value of its stake in Beingmate, which it now values at NZ$244m (US$175m).

John Wilson, Fonterra chairman, said shareholders were rightfully disappointed with the writedown. “Beingmate’s continued under-performance is unacceptable. The turnaround of the investment is a key priority for our senior management team,” he said.

However, he said the strategic rationale of its partnership with Beingmate remained sound.

Beingmate’s continued under-performance is unacceptable. The turnaround of the investment is a key priority
John Wilson, Fonterra chairman

Oyvinn Rimer, director at Harbour Asset Management, said Mr Spierings’ departure was a little surprising, as the Fonterra chief has created a very strong food service business in China and turned round Fonterra’s Australian business.

“Mr Spierings has had some very public failures, such as Beingmate, as well as some not very public successes,” said Mr Rimer.

Fonterra’s difficulties with Beingmate mark the New Zealand conglomerate’s second problematic investment in China in the past decade. In 2008, Sanlu, in which Fonterra held a 43 per cent stake, was at the centre of a scandal involving milk powder tainted with the chemical melamine, which led to the deaths of six babies and the hospitalisation of tens of thousands more.

Beingmate last week reinstalled founder Xie Hong as chief executive in an effort to turn round its fortunes. “The distributors will regain some trust in Beingmate. But that won’t allow them to turn their whole business around in a short time. Consumers have gradually forgotten them. That’s the biggest problem,” said Chinese food industry analyst Zhu Danpeng.

On Wednesday Fonterra reported a NZ$348m after-tax loss in the six months to the end of January, reversing from a profit of NZ$418m in the same period a year earlier. Its financial performance was dented by a NZ$405m writedown on the value of its Beingmate stake, and payment of NZ$183m in damages to French food giant Danone following a false botulism scare in 2013.

In recent months farmer shareholders have begun questioning the Beingmate partnership and governance at Fonterra, which is one of New Zealand’s biggest companies. One former director, Colin Armour, said Fonterra’s board was “too big and unwieldy”.

Mr Spierings told reporters on Wednesday that he would remain chief executive until later this year and that he looked forward to addressing some of the group’s challenges, especially in China.

“These are always awkward moments,” he said. “This is normal succession planning — yes, it is maybe a bit earlier and a bit awkward as well, of course, for myself.”

Mr Wilson said Fonterra began an executive search late last year and had brought forward the announcement of Mr Spierings’ departure “to avoid speculation”. An announcement had been planned for April, he added.

By: Jamie Smyth in Sydney and Tom Hancock in Shanghai

Source: The Financial Times

Link: https://www.ft.com/content/82805356-2c9c-11e8-9b4b-bc4b9f08f381

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