Roadley Speech - Dairy Industry Assn

What a week it’s been for the New Zealand dairy industry! We started the week announcing the record payout. The Dairy Board’s final payout will be $4.60 per kilogram of milk solids. In 1999/2000, the payout was $3.35 per kilogram of milk solids. We’re up $1.25 – or 37 percent – over last year. We’re putting an extra $1.5 billion into the New Zealand economy. It’s a tremendous performance.

Our milk production last year was also a record – over a billion kilograms of milk solids. That’s equivalent to 1.5 million tonnes of dairy products. Strong production, a low dollar, high international prices and world-class manufacturing and marketing have delivered for us. I know we have our critics. But I ask them: you name another industry that has performed as well as we have – as well as you people here today have. Everyone in the industry has contributed to this fantastic performance.

We’ve achieved it because we’re unified and we have scale. We’re able to deliver the benefits back to the New Zealand economy because our industry is owned by New Zealand dairy farmers.

When we were thinking about how to announce the result, we were concerned that it risked being seen as an argument for the status quo, in terms of our industry structure. Well, let me make it crystal clear: if we want to build on this performance, we need a new industry structure that integrates our manufacturing and marketing arms – and which maintains our unity and scale under the ownership of New Zealand dairy farmers. The merger must happen.

Warren Larsen put it well in an article this week: “The industry’s strategic plan is exciting, ambitious and achievable. But to succeed, it must have the merger.” Warren went on: “The business we have painstakingly built beyond the farmgate to add value to milk, and then to capture that value for farmers, has now come of age. It is poised to reach its potential. Without the merger, that simply won’t be possible.” Warren Larsen described the merger as “essential”. I agree with him.

That is why yesterday’s announcement that farmers will vote on the merger on 18 June is – in the long-run – even more important than this year’s payout. You all know why the merger has to happen. Globalisation is a fact of life. It creates winners and losers. With globalisation, both our customers and our competitors are getting bigger.

At the retail end, the rate of mergers has raced ahead in the last decade. Back in 1995, there was just one major acquisition involving a top-25 food retailer. Now the top 25 retailers are involved in a dozen or more acquisitions annually. The Economist predicts there will ultimately be just ten major food retailers in the world. Wal-Mart is tipped to be the first retailer to turn over a trillion US dollars a year – and that will happen this decade.

Customers like that want to deal with suppliers of similar scale. We, the suppliers, must have scale to have leverage with such huge customers. As a result, our competitors – the other top dairy companies – are gobbling up expansion opportunities as fast as they can. The revenues of the world’s top 25 dairy companies leapt by 30 percent in the last five years.

We have to be part of this, or else our future is bleak. Standing still is not an option. For us, doing nothing would be like the successful corner store standing still when the new supermarket opened in town. We have to bank our past successes and keep moving. We have to get bigger to maintain our position.

The 1990s were a decade of dairy company mergers in New Zealand. More recently, offshore, there have been the initiatives with Bonlac, National Foods and Peters & Brownes in Australia, and with Dairy Farmers of America in the USA. They are all about a search for scale.

With Australia, the synergies are compelling. Among you are the world’s leaders in whey, casein and protein research. The Australians have good businesses in fat-based products. But they aren’t getting maximum value for their protein. By working with them, our intellectual property can be applied to Australian protein, without us having to find new markets for their fat. There could also be new opportunities for our products on the Australian market. And, on the world milk-powder market, working together strengthens the relative position of both countries internationally. It’s all win/win.

But what we’ve seen so far is only a beginning. To grow – to get the scale we need – we need to launch a much more aggressive and co-ordinated programme of international acquisitions and joint ventures. If we don’t do it soon, all the best international opportunities will be taken up by competitors such as Parmalat and Danone. Do we want to be left with the crumbs? Instead of using our strength to become one of the winners of globalisation, we would be one of the losers. We would put at risk all that we have built over the last twenty or even fifty years.

The status quo is not an option, and nor is the so-called two-company model. Global Dairy Company would be the ninth largest dairy company in the world. From there, we would have an opportunity to climb up the ladder. Two smaller companies simply wouldn’t cut it against the global giants. At least one of them would become vulnerable to outside control. Our strengths are our unity and scale, under the ownership of New Zealand dairy farmers. The merger will preserve those strengths, while giving us the ability to act much more strategically – in manufacturing, marketing and with our JV and acquisition strategy.

The gains for farmers are estimated to be over $300 million by the third year. I believe they will be higher. The forecast benefits are already moving up, as we understand more about the strategic benefits we will get from our Australian relationships. The benefits to New Zealand go beyond the benefits to farmers, or even to the industry as a whole. Every nation needs at least one company of global scale. We can play that role for New Zealand - we relish it.

The process we have followed to get to this point has been tortuous. The whole industry has felt it - you’ve felt it. The previous Government tried to force the pace of change. The previous MergeCo proposal failed because the industry was not united or committed. Our industry was left without a clear sense of direction.

The signing of the Merger Proposal in December was therefore historic. It was tough getting there. But directors representing 98 percent of the industry’s supply were finally unanimous in approving the deal. Since then, the path has been no less difficult.

We had to go to Ministers and Officials with our case for the merger. The Government established a Joint Working Party to consider all the issues associated with the merger. In the event the Government worked very co-operatively with us, but it was still a very real hurdle we had to cross.

The next priority was the valuation of the two companies. It was the first time outside experts – Arthur Andersen – had independently-valued the two companies. It was no easy task. The two companies are co-operatives and gain most of their revenue from a common source, the New Zealand Dairy Board.

After valuation, the CEOs of the two companies had to finalise a Business Case for the merger. It suggested the $300-odd million in gains.

We have then had to deal with the full range of issues associated with the merger – from approving the company constitution, to establishing the capital structure, to finalising every last detail of the milk supply contract. We have had to work with Tatua and Westland and give them opportunities to decide their destinies.

None of this was easy. Every issue created tough, robust debate and negotiation – as you’d expect for a merger of this importance.

By April, the Government approved the tough new Regulatory Package for the industry. It requires us to sell the Dairy Group’s 50 percent shareholding in Dairy Foods. We have to supply our competitors with milk – with in excess of the entire domestic market for dairy products. Our suppliers can supply 20 percent of their milk to a competitor – and we aren’t allowed to do anything about it. And our suppliers can leave us, taking the Fair Value of their investment with them.

We are going to see very tough competition on the domestic market. It only takes around 170 average-sized farms to create a monopoly in the Auckland market for dairy products. Competing exporters are likely to emerge. We intend to be a successful competitor.

The issue that attracted most attention in the media was the appointment of a CEO. For many of you, it’s the issue of most interest to you too. It was reported in the media that the Global Dairy board was having difficulty settling on a choice. The general thrust of the media reports was correct. Board debates over the appointment caused a setback to our timelines of around six weeks, as we sought to meet our commitment in the Merger Agreement.

As Chairman of Global Dairy Company, I take responsibility for that delay. The unity of our industry is our greatest strength. We are a co-operative, and so I have sought unanimous board decisions.

It has not been possible to achieve a decision on the CEO appointment prior to the vote. Instead, we have agreed on a process to appoint a CEO as soon as possible after the shareholder vote. We have also agreed unanimously to appoint three independent directors, two of whom will play a key role in the CEO appointment.

A subcommittee of the board will be established to work on the appointment. The subcommittee will consist of me, Greg Gent, Henry van der Heyden and two independent directors – Graeme Hawkins, a former CEO of DB, and Dr John Hood, Vice Chancellor of Auckland University.

We will first agree on a set of criteria for selecting a CEO. We’ll then appoint an internationally-recognised firm, with experience in multinational CEO recruitment, to follow that criteria. When it has finished its work, the subcommittee will make a recommendation to the board. We plan for this process to be completed by the end of June. Obviously, the first couple of days in July would be OK too. But we are determined the get the industry a CEO as soon as possible.

We know you want to know the identity of this crucial leader as soon as possible. The candidates are Chris Moller, Craig Norgate and David Pilkington. All three know the industry and have proven track records. We will have a successful candidate in about a month.

Everything hinges on the shareholder vote. We ask the industry to be patient as shareholders work through the most important business decision they will ever make. Do we want to maintain the unity of our industry? Do we want to maintain the scale of our industry, and grow as we operate more strategically around the world? And do we want to maintain New Zealand ownership? As a farmer, I am proud to say “yes” to all three questions. As Chairman, I am proud to promote the merger.

I’m looking forward to spending the next 18 days on the road, telling farmers why I believe they must vote “yes”. The alternative does not bear thinking about. It has been so difficult to get to this point. If we miss this opportunity, we will not be here again.

If the merger proposal were to fail, there will not be another one. The status quo won’t work much longer. It has passed its use-by date. All the key players in the industry know that. If the merger fails, most likely there will be two companies. going their separate ways, inevitably getting into costly competition for milk, attempting to break up the assets of the New Zealand Dairy Board – an impossible task without huge value destruction – and without the scale to compete successfully globally. They would be vulnerable commercially, and extremely vulnerable to outside control.

We have work to do with our farmer shareholders over the next 18 days. My goal is to deliver you an industry structure in which your talents can deliver the greatest possible return to New Zealand. You’ve delivered us a record payout this year. I’m very proud of that. In my view, it’s just the start. Everything that has gone before is practice for the real game. All the best.

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