Fonterra records a net loss after tax of US$196m in 2018 annual results

NEW ZEALAND – Fonterra, a New Zealand multinational dairy co-operative, has announced a Net Loss After Tax of US$196 million in its FY18 annual results, with a plan to improve its business performance and the outlook for FY19.

According to the company, the normalised EBIT was US$902 million, down 22%, the Co-operative’s gearing ratio was up from 44.3% last year to 48.4% and return on capital was 6.3%, down from 8.3%.

Fonterra CEO Miles Hurrell said the Co-operative’s business performance must improve.

“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,” said Mr Hurrell.

“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.”

Mr Hurrell added that in addition to the previously reported US$232 million payment to Danone relating to the arbitration, and US$439 million write down on Fonterra’s Beingmate investment, there were four main reasons for the Co-operative’s poor earnings performance.

“First, forecasting is never easy but ours proved to be too optimistic. Second, butter prices didn’t come down as we anticipated, which impacted our sales volumes and margins.

Third, the increase in the forecast Farmgate Milk Price late in the season, while good for farmers, put pressure on our margins.

And fourth, operating expenses were up in some parts of the business and, while this was planned, it was also based on delivering higher earnings than we achieved.

Even allowing for the payment to Danone and the write down on Beingmate, which collectively account for 3.2% of the increase in the gearing ratio, our performance is still down on last year.”

Mr Hurrell also said that when looking at the underlying performance of the business, which you can see in the normalised EBIT of US$902 million, progress has been made in moving more milk into higher value products.

“While sales volumes were down 3% in FY18, a larger proportion of milk was sold through Consumer and Foodservice and Advanced Ingredients. In fact, 45% of our sales volumes were through these businesses and this is up from 42% in FY17, despite the higher input-price environment.

Our Consumer and Foodservice business grew in all regions, except Oceania, with our strongest growth in Greater China.

Of particular note, our Consumer business in China broke even this year, two years ahead of schedule.”

A big contributor to the company’s success is the popularity of Anchor, which is now the number one brand of imported UHT milk in both online and offline sales in China.

“Despite this progress, performance across the Co-operative was below our expectations.

Based on this, the Board has decided to limit our dividend to just the 10 cents paid in April and has confirmed the final Farmgate Milk Price for the 2017/18 season at US$6.69 per kgMS,” added Mr Hurrell.

The company’s CEO also added that these results are not just numbers – they’re the livelihoods of the Co-operative’s farmers and their families and the investment of unitholders.

“There are people depending on us – farmers, unitholders and employees who want to be part of a successful Co-operative.

We are putting in place a clear plan for how we are going to lift Fonterra’s performance. It relies on us doing a number of things differently.”

Fonterra’s Board and Management has outlined a plan based on three immediate actions:

Taking stock of the business – Fonterra will re-evaluate all investments, major assets and partnerships to ensure they still meet the Co-operative’s needs.

This will involve a thorough analysis of whether they directly support the strategy, are hitting their target return on capital and whether it can scale them up and grow more value over the next two-three years.

This will start with a strategic review of the Co-operative’s investment in Beingmate.

Getting the basics right – Fonterra has already begun taking action and fixing the businesses that are not performing.

The level of financial discipline will be lifted throughout the Co-operative so debt can be reduced and return on capital improved.

Ensuring more accurate forecasting – the business will be run on more realistic forecasts with a clear line of sight on potential opportunities as well as the risks.

It will also be clear on its assumptions, so farmers and unitholders know exactly where they stand and can make the decisions that are right for them and their businesses.

The company also addressed its outlook for 2019, stating that the forecast Farmgate Milk Price for the 2018/19 season is held at the US$6.75 per kgMS Fonterra announced at the end of August and the Co-operative’s forecast earnings per share range for FY19 is 25-35 cents.

At US$6.75 per kgMS the forecast Farmgate Milk Price for the 2018/19 season is the third consecutive year of strong milk prices.

That’s good for farmers and for rural economies where farmers spend 46 cents of every dollar they earn.

Chairman John Monaghan said the Co-operative is being clear with farmers and unitholders on what it will take for the Co-operative to achieve the forecast earnings guidance.

“For the first time we are sharing some business unit specific forecasts. Among others, these see the Ingredients and Consumer and Foodservice businesses achieving an EBIT of between US$850 million and US$950 million, and between US$540 million and US$590 million, respectively.”

The company added that it was 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 capital investments.

“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.”

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