New Zealand Dairy Board
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Transcript of New Zealand Dairy Board
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New Zealand Dairy BoardNew Zealand Dairy Board
Presentation to Select CommitteePresentation to Select Committee
27 July 199927 July 1999
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Introduction & OverviewIntroduction & Overview
John StoreyJohn Storey
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• Process • Consultation• International Market Situation• Strategy• Co-operatives• Structure• Interface with Dairy Companies
Overview
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Machinery & Mechanical
Equipment + Electrical
Equipment & Machineryy
Aluminium
Forestry
Meat
Dairy Exports
$5 billion
Dairy contributes22.2% of New Zealand's export earnings
Importance of Dairy to NZ
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ProcessProcessJohn StoreyJohn Storey
Process to DateProcess to Date Process Going ForwardProcess Going Forward
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• Industry Strategic Plan August 1998 - Feb 1999• Rigorous process• Top consultants employed• Full Industry involvement On Farm to Off Shore
Marketing
• Industry Structure Project March -May 1999• How best to deliver the Strategy
• Implementation Project• Dealing with legislation & high level
implementation issues
Process To Date
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• Legislation passed
• Commerce Commission approval
• Merger Proposal Agreed
• 75% Merger Vote
• Integrate merging companies into MergeCo
Process Going Forward
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ConsultationConsultationJohn StoreyJohn Storey
Consultation to DateConsultation to Date Future ConsultationFuture Consultation
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•1998 October - November 15 response
•1999 March - Strategy
•1999 May - Structure
Overwhelming support for proposals
In excess of 10,000 at meetings (70% of farmers)
Consultation to Date
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•Videos (Farming with Pictures)
•Written Material - bi-monthly
•E Mail
•Information via Extension Services
Other Communications
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• July/August - Company-Supplier Accounts Meetings
• September - Formal merger proposal to shareholders
• September - Shareholder vote
• Farmer final vote on proposal
Future Consultation
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International Market SituationInternational Market Situation
Milk Production
Market Share
Access,Tariffs & Subsidies
Market Trends
NZDB Performance
Warren Larsen
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Milk ProductionMilk Production
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World New Zealand
Consumed
Domestically 95%Exported 95%
Traded Internationally 5% ConsumedDomestically
5%3% Freely Traded
2% Quota Business
Milk Production
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Major Dairy Producers
0
20
40
60
80
100
120
NZ Australia EU US India Russia Brazil
1992 1997
Cow's milk production (million tonnes)
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WHO ARE THE MAJOR EXPORTERS?
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Major Dairy Exporters
0
2
4
6
8
10
12
14
16
NZ Australia EU US Other
1992 1997
Cow's milk equivalents (million tonnes)
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European Community 51%
Other 14%
Australia 6%
USA 4%
New Zealand 19%
European Union
38%
New Zealand31%
USA 5%
Australia12%
Other 20%
1988-90 1997
Share of International Trade
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DYNAMICS OF THE WORLD DAIRY MARKET
IMPORT PROTECTION
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Access All Products/Low Tariffs (0-30%)Product Specific Access/Medium Tariffs (30-70%)Product Specific Access/Medium-High Tariffs (70-220%)Only Butter/Cheese/Protein Quota Access/High Tariffs (>220%)
World Dairy Access & Tariffs
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Protection From Imports
Tariff Rate Ad. Val Equiv
$NZ/MT %
USASMP 1644 59
WMP 2075 74
Butter 2927 120
Cheese 2365 168
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Protection From Imports
Tariff Rate Ad. Val Equiv
$NZ/MT %
European UnionSMP 2539 95
WMP 3173 119
Butter 4200 175
Cheese 3700 115
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EXPORT SUBSIDIES
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Subsidy Rate %Export
$NZ/MT Price
European UnionSMP 1291 48
WMP 1949 73
Butter 3428 147
Cheese 1931 58
Export Subsidies: Rates
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Subsidy Rate %Export
$NZ/MT Price
USASMP 2050 87
WMP 2760 100
Butter 2120 87
Cheese (cheddar) 2339 67
Export Subsidies: Rates
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Protectionism
Source OECD Secretariat
Producer SubsidyEquivalent
Milk All PSECommodities
Milk All CSECommodities
Australia 31 10 -31 -7EU 61 49 -51 -38Japan 90 74 -74 -50New Zealand 2 3 0 -5United States 52 20 -46 -10
Consumer SubsidyEquivalent
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0
50
100
150
200
250
300
350
400
450
500
Butter & butteroil SMP
000
MT
Export Limits 1998 Exports
EU has plenty of scope to expand
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A EU guaranteed minimum price US$3072 Underpins milk price to farmers
of NZ$9.00kg milksolids
Cost of butter to EU exporter
B Export subsidy US$1768 Cash payment to export companies
(not farmers) paid at time of export ___________
C European export price (A-B) US$1304 The price we confront in the market
European Butter Pricing (USD/tonne)
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A EU guaranteed minimum price US$2137 Underpins milk price to farmers
of NZ$9.00kg milksolids
Cost of SMP to EU exporter
B Export subsidy US$ 936 Cash payment to export companies
(not farmers) paid at time of export ___________
C European export price (A-B) US$1201 The price we confront in the market
European SMP Pricing (USD/tonne)
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NZ EXPORT MARKETS
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NZ's Dairy Export Markets
United States
Other
European Union
China (incl Hong Kong)
Australia
Taiwan
Philippines
Mexico
Russia
Malaysia
Japan
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0
100
200
300
400
500
1995 1996 1997 1998
$M
Tariffs
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IMPACT OF SUBSIDIES ON WORLD PRICE
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The impact of EU subsidy changes between 1997 - 1999 for Cheddar, SWMP and SSMP =
NZ$498 million lost sales revenue to NZDB
European Union Subsidy Change
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NZ PRODUCT VOLUMES
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0
200
400
600
800
1000
1200
1400
MT
('0
00)
Total
NZ
40% 30%
16%20%
60%
Share of Accessible International Market
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WHAT DOES ALL THIS MEAN FOR NZ DAIRY FARMERS?
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USA - 2+% milk growth- low milk prices- feed to milk price ratio lowest in recent history
LATAM - 3-5% increase in Argentina- small increases in Brazil/Chile
Australia - 4-5% milk growth
EU - no growth
NZ - 4-5% forecast milk growth
Forecast World Production
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0
5
10
15
20
25
0 50 100 150 200 250
Milk Cost
$NZ/kg Milk Solids
Milk Production
Million Tonnes
NZ
Australia
Poland
Argentina
USA France
Germany
Brazil Netherlands
AustriaItaly
Global Dairy Industry Curve
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Globalisation TrendsGlobalisation Trends
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Chart Title
-
200
400
600
800
1,000
1,200
Jan-80 Sep-82 Jun-85 Mar-88 Dec-90 Sep-93 Jun-96 Mar-99 Nov-01
c/k
gm
s (
19
97
$N
Z)
Milk shortage in EU, USSR/Afghanistan war EU relaxes
domestic subsidies
GATT round
EU introduces milk production quotas
Collapse of USSR
Real Commodity Revenue (1997 NZD)
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Company Dairy Revenues - 1996(US$b)
13.5
6.65.8 5.7 5.5
4.64.0 3.8 3.8 3.7
3.2
Nestlé
Kraft
Snow
Danon
eFC
DF
Besni
erM
orin
aga
Mei
ji
Campi
na M
elku
nie
NZDB
MD F
oods
Sodia
al
1 2
3.6
5.0
Parm
alat
7.5
D Far
mer
s of
Am
eric
a
Selected dairy companies = 25%Top 20 dairy companies = 35%
Leading Dairy Companies
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Global dairy market continues to consolidate
•Nestle acquisition of Bordens Klim
•Friesland Coberco Dairy Foods merger
•Formation of Dairy Farmers of America
•Suiza Foods (US) 1998 acquisitions US$1 billion
•Dean Foods (US) 1998 US$1.1 billion in acquisitions
•Parmalat acquisitions continue 1998 US$ 625 million
Mergers & Acquisitions
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Recent global retailer activities continue to consolidatebuying power for example...
•Tesco (UK) acquires Lotus Thailand and targeting Korea, Taiwan
•Carrefour (France) expanding in SEA and Latin America with 150 new stores by 2002
•Ahold (Dutch) active in 17 countries up 62% since 1994
•Auchan (France) active in 10 countries up 19% vs 94
•Dairy Farm (HK) focus on Asia post UK divestments
Global Retailers
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MarketShare %of foodmarket
Time
30%Stage 1 Stage 2 Stage 3 Stage 4
Medium sizefood companies
Global food companies players Pharmaceutical
companies
1994 2001 2010
Source: Promar International
Entry of pharmaceutical players will drive functional foodsto 30% of total European foods market
Nestle
Unilever
Danone
Novartis
Mead Johnson
J &J
MD Foods
ValioNZDB
Functional Foods
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Growth to DateGrowth to Date
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0
500
1000
1500
2000
2500
3000
1989/90 1999/00
1836+50%
2747
NZ$M
Payment for Milk
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0
50
100
150
200
250
300
350
1989/90 1999/00
333310
Current
250
CurrentPricing
C/kg MS
Under common assumptions B/E milk price around 60c higher 10 years later
Payout
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250
270
290
310
330
350
370
1994 1995 1996 1997 1998 1999(F)
2000(B)
Payout/ Retentions
CMP
Note 1 CMP for 1994/1997 sourced from BCG Performance and Efficiency Audit 2 CMP for 1998-2000 sourced from Boards EBIT Reporting Systems
Estimated CMP/Payout Spread
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23%
77%NZMP
New Zealand Milk
Business Unit Volume (NZ Milk only) - 1998/99
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0
50
100
150
200
250
300
New Zealand Milk NZMP
NZ
D (
m)
Business Unit EBIT 1998/99
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0
1000
2000
3000
4000
5000
6000
7000
8000
NEWZEALAND
MILK
NZMP TotalNZDB
Telecom CHH LionNathan
NZ
D (
m)
Comparative Revenue 1998/99
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STRATEGIC RESPONSE
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Industry Strategic Plan Industry Strategic Plan Warren Larsen
Key Messages
Key Strategies
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To create the world’s pre-eminent dairy business which builds and leverages truly distinctive capabilities to
capture opportunities on a global stage
1 Defend and exploit our core position as the world’s lowest-cost producer and seller of basic dairy products. This is our top priority
2 Take urgent steps to earn the right to grow outside the core
3 Pursue growth options outside the core (at the right time) by leveraging our unique skills to capture attractive opportunities
4 Consider options to tailor the structure of the NZDI to deliver the strategy
Key Messages
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Global revenues
NZ$30 billion
Revenue growth 15% pa
ROTGA 15% pa
10 Year Financial Aspiration
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Time
Profit
Horizon 1
Horizon 2
Horizon 3
Extend and defend core businesses
Build emerging businesses
Create viable options
• Defend and exploit core low cost position• Earn the right to grow
• Industry Milks strategy• ‘Global slivers’ in specialised ingredients• Leverage our ingredients network beyond NZ
Dairy
• Industry biotechnology agenda
• Risk management services
Growth Horizons
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0.0
5.0
10.0
15.0
20.0
25.0
30.0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
$19 billion Horizon 2 & 3 ‘Non-core’ growth
$ Billions
$11 billion Horizon 1 ‘core’ business
Industry Strategic Plan Revenue Growth 1998 - 2008
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Industry StructureIndustry StructureTim Gibson
Current Structure Issues
Co-operatives
Options Considered
Recommended Option
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The current industry
organisation design will not
realise full value from the strategy
Industry configuration complex and politicised
Traditional emphasis is on placement of NZ milk
Dramatic reduction in interactions cost driven by IT/communications revolution
The success of the strategy demands fast, consistent,
commercial decision making
Many of the growth opportunities require
sourcing of non-NZ milk
Current organisation design does not leverage dramatic
reductions in interaction costs
The Problem With the Current Design
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Why Co-operatives in Dairy
Farmer
Milk Vat
Milk- Un-pasteurised- Perishable- Worthless after
48 hours
Processing Company
Factory- $100-150m- Worth scrap
without milk
Farmers• Require a secure outlet
for milk• Require a fair price• Have little choice today• Have highly seasonal
supply
Processor• Requires milk to
recover capital• Want to receive it on a
fair price• Highly seasonal supply
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International Co-operatives
• Co-operative Structures are used around the world to overcome bargaining problems in Dairying
Co-operative US$ Bn (Revenue, 1996)
Dairy Farmers of America 7.5
Friesland Dairy Foods 5.5
Campina Melkunie 3.8
MD Foods 3.6
Land O’ Lakes 3.49
MergeCo 4.8*
*Estimate
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Current situationOrganisational trends
External equity Internal equity
Corporate gover-nance structure
Co-operative governance structure
Differentiated farmer payouts across NZ
Uniform farmer payouts across NZ
Ownership linked to supply
Ownership delinked from supply
Ca
pit
al/O
wn
ers
hip
De
sig
n C
ho
ice
s
Four Capital/ Ownership Design Choices
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Atomised organisation
Centralised organisation
Vertically aligned Horizontally aligned
Multiple manufacturers
Single manufacturer
Multiple marketers Single Marketer
Current situationOrganisational trends
Org
an
isa
tio
nD
es
ign
Ch
oic
es
Four Organisation Design Choices
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SingleManufacturer
MultipleManufacturers
SingleMarketer
SpecialisedMarketers
CommodityCompetitors
Fully CompetingMarketers
No integration
Merchant withProcessor
Ingredients withMerchant
Consumer withMerchant
Thirty-Two Options
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Single company for processing, merchanting and ingredients. Consumer separate subsidiary
P
M
IC
Preferred Option
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• Fair Value
• Governance
• Local Market Competition
Key Issues for the Commerce Commission
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TradabilityShare Supply Link Eligibility
A 80-120% Amongst FarmersQ no linkage Amongst Farmers
Fair Value
A Shares Q Shares
MergeCo
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• Elected using ward system
Governance
Shareholders’ Council (30-100)
Board of Directors (9-11) • Farmer Directors nominated by Shareholders and/or Shareholders’ Council
• Independent Directors nominated by Board
2-3 Independents 7-8 Farmer Directors
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Issue: Dominance of Domestic Dairy Market
DivestCo
Solution: Establish Independent Company by Divestment
• 40% Market share in all key segments• Arms length, non-exclusive milk supply contract
and established brands• Full manufacturing & marketing facilities
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Interface with dairy companiesInterface with dairy companies
NZDINZDI Milk SupplyMilk Supply
Payment ProcessPayment Process Product MixProduct Mix
Interface InefficienciesInterface Inefficiencies GovernanceGovernance
David Pilkington
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SoleExporter
NZDB
14,700 Farmers
More than 11 billionlitres of milk
8 Co-op ManufacturingDairy Companies
More than 1.3 milliontonnes of product
NZ DairyResearch Institute
LivestockImprovement
800 Specifications
1700 Products
More than 80Offshore Companies
Trading to over 115Countries Worldwide
New Zealand Dairy Industry
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0
40
80
120
160
Jun Jul Aug Sept Oct Nov Dec Jan Feb Mar April May
Million Kg 1995/96 1996/97 1997/98
NZ Seasonal Milksolids Supply
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NZDB purchases all export product from dairy companies on the 20th of month following manufacture
NZDB manages inland transport, storage, ocean freight and export documentation
Basis for payment to dairy companies has just been reviewed (BDP - Business Development Project)
Product Acquisition Process
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Prior to BDP companies were paid: a single pooled milk price (NZDB Base
Price) Modelled standard manufacturing costs Capital cost or return on capital payment Grade penalties or premiums Differential payments to influence preferred
product
Payment Process
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Dairy Companies paid to farmers: NZDB base price, plus Dairy company margin
Farmers judged NZDB performance through the NZDB base and dairy companies the margin
Dairy company executives focused on maximising their margin versus others
Payment Process
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BDP introduced Commercial Pricing Model. As a result dairy companies will be paid: Commodity product price Additional incremental manufacturing costs
for non standard products For speciality products a share of the NVA
(Profit) A distribution of NZDB margin over
commodity
Payment Process
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Changes were introduced to: more closely reflect commercial reality into
the payment system, and; to allow farmers to more transparently
judge the performance of the NZDB
Payment Process
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NZDB collates market demand information and advises commodity price data to dairy companies
Dairy Companies decide their preferred mix of products to NZDB
Iterative process required to fine tune mix to match market demand
Product Mix Process
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Individual dairy companies make their own product mix decisions based on their analysis
Several iterative steps needed to match combined result to market demand
Allocation of new products to plants debated widely
Dairy companies are drawn into non productive equity debates
Interface Inefficiencies
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Current Ownership
14,700 Farmers
New Zealand Dairy Board
NZCDC Kiwi Northland Westland Tatua Tasman Kaikoura Marlborough
58.2% 27.3% 8.7% 2.7% 0.8% 1.5% 0.3% 0.5%
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NZCDC Kiwi Northland
NZDB
Current NZDB Governance
Electing Group* Govt Appointed
* NZ Electing Group comprises Kaikoura, Marlborough, Tasman, Westland, Tatua
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Wrap Up Wrap Up John Storey
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• Complex Industry
• Huge benefit
• Industry committed to make it happen
• Co-operation assured
Summary