Fonterra dairy co-op predicts possible $675m loss – and no dividend

The New Zealand giant faces problems with its overseas expansion, drought in Australia and competition at home

New Zealand dairy co-op Fonterra says it will report a loss of as much as NZ$675m next month, citing adjustments for its South American businesses, drought in Australia and increased competition at home.

Chief executive Miles Hurrell said a full review of the business across the year, and work on the financial report for the year to 31 July, had made it clear that Fonterra needs to reduce the carrying value of several of its assets and take account of other one-off accounting adjustments, which total approximately $820-860m.

He added: “While the Co-op’s FY19 underlying earnings range is within the current guidance of 10-15 cents per share, when you take into consideration these likely write-downs, we expect to make a reported loss of $590-675m this year, which is a 37 to 42 cent loss per share.”

No dividend will be paid for the financial year, which chair John Monaghan said was “part of our stated intention to reduce the co-op’s debt, which is in everybody’s long-term interests”.

Mr Hurrel said: “Since September 2018 we’ve been re-evaluating all investments, major assets and partnerships to ensure they still meet the co-operative’s needs. We are leaving no stone unturned in the work to turn our performance around.

“We have taken a hard look at our end-to-end business, including selling and reviewing the future of a number of assets that are no longer core to our strategy. The review process has also identified a small number of assets that we believe are overvalued, based on the outlook for their expected future returns.”

He added that farmers and unit holders would be updated with new information as it became available, and that the numbers still need to be finalised and audited.

Most of the one-off accounting adjustments relate to non-cash impairment charges on four specific assets and the divestments that Fonterra has made this year as part of the portfolio review.

“DPA Brazil, the New Zealand consumer business, China Farms and Australian Ingredients’ performance have been improving, but slower than expected and not at the level we had based our previous carrying values on,” said Mr Hurrell.

“Our accounting valuation for DPA Brazil will be impaired by approximately $200m. This change is mainly due to the economic conditions in Brazil. While they are improving, consumer confidence and employment rates are not at the level required to support the sales volumes and price points our forecast cashflows were based on.

“As a result of the previously announced sale of our Venezuelan consumer business, and the closing of our small Venezuelan Ingredients business, due to the country’s economic and political instability, we have made an accounting adjustment of approximately $135m relating primarily to the release of the adverse accumulated foreign currency translation reserve.

“Our carrying value for China Farms will be impaired by approximately $200m due to the slower than expected operating performance. While the extent in which we participate is under strategic review, the fresh milk category in China continues to look promising and is growing.

“In our New Zealand consumer business, the compounding effect of operational challenges, along with a slower than planned recovery in our market share has resulted in us reassessing its future earnings. We are now rebuilding this business and, as part of this, have sold Tip Top which allows the team to focus on its core business. The combined impact is a write-down of approximately $200m.

“Our Australian Ingredients business is adapting to the new norm of continued drought, reduced domestic milk supply and aggressive competition in the Australian dairy industry. This includes closing our Dennington factory, which combined with writing off the goodwill in Australia Ingredients, results in a one-off impact of approximately $70m.”

Mr Hurrell added that “these are tough but necessary decisions we need to make to reflect today’s realities”, and accepted that “farmers and unit holders will be rightly frustrated by these write-downs”.

“I want to reassure them that they do not, in any way, impact our ability to continue to operate,” he said. “Our cashflow remains strong, our debt has reduced and the underlying performance of the business for FY19 is in-line with our latest earnings guidance of 10-15 cents per share. We remain on track with our other targets relating to reducing capital expenditure and operating expenses.”

There has been some negative reaction from members. South Otago dairy farmer and Federated Farmers dairy chairman Mat Korteweg told the New Zealand Herald: “Last year we were told to expect a turnaround. For an average farmer with 200,000 shares, no expectation of a dividend is significant, as would have been money that was reinvested either into operations or reducing debt.”