Fonterra to review ‘all major assets’ after first-ever loss

The New Zealand dairy co-operative has posted a $129m loss as it writes down $289m on a Chinese investment.

New Zealand’s Fonterra Co-operative Group has reported a net loss after tax of NZ$196 million ($129 million; €110 million) in FY18, the organization’s first-ever annual loss after posting profits of NZ$745 million last year.

Fonterra put the loss down to several large asset writedowns and a squeeze on margins due to an increased farmgate milk price and higher operating expenses.

The firm was last year forced to pay French food group Danone NZ$232 million in damages relating to a 2013 product recall and then wrote down NZ$439 million on its investment in Chinese infant formula supplier Beingmate, with chairman John Monaghan describing the performance of the latter as “unacceptable.”

Chief executive Mike Hurrell said butter prices did not come down as the firm anticipated, harming sales volumes and margins, and that an increase in the forecast farmgate milk price, while good for farmers, had put pressure on margins. Operating expenses rose in some parts of the business as planned, he said, but this had been based on higher earnings than were achieved.

Even allowing for the payment to Danone and the write-down on Beingmate, performance would still have been down 3 percent year-on-year, he said.

“There’s no two ways about it, these results don’t meet the standards we need to live up to. In FY18, we did not meet the promises we made to farmers and unitholders,” Hurrell said.

“At our interim results, we expected our performance to be weighted to the second half of the year. We needed to deliver an outstanding third and fourth quarter, after an extremely strong second quarter for sales and earnings – but that didn’t happen.

“Forecasting is never easy but ours proved to be too optimistic,” he added.

Fonterra will now re-evaluate all major assets, investments and partnerships beginning with a strategic review of Beingmate, which could lead to asset sales in time.

“We are taking a close look at the co-operative’s current portfolio and direction to see where change is needed to do things faster, reduce costs and deliver higher returns on our capital investments,” Hurrell said.

“This includes an assessment of all of the co-operative’s investments, major assets and partnerships against our strategy and target return on capital. You can expect to see strict discipline around cost control and respect for farmers’ and unitholders’ invested capital. That’s our priority.”

Fonterra’s normalised EBIT was also down year-on-year, falling 22 percent to NZ$902 million, with return on capital falling to 6.3 percent from 8.3 percent. The total cash payout for FY18 was NZ$6.79, comprising a farmgate milk price of NZ$6.69 per kilogram of milk solid and a dividend of 10 cents per share.

The firm forecast a higher farmgate milk price in FY19 of NZ$6.75 per kgMS and an earnings per share range of 25-35 cents.