Fonterra reports annual loss, unveils new strategies to drive profitability

NEW ZEALAND – Fonterra reported an annual loss of NZD 605 million ($380.1 million) for the year ending July 2019 as the dairy cooperative struggled with write-downs across its business amounting to NZD787m (US$497.4m).

Fonterra witnessed a tough financial year as reflected by loss widening  by 208%  from last year’s loss of NZD 196 million ($123.9m), which has seen the dairy company embark on reviewing its business in a bid to drive profitability.

“These included us reflecting changing realities in asset values and future earnings, lifting our financial discipline, getting clear on why we exist and completing a strategy review,” Fonterra CEO, Miles Hurrell said.

During the year, the company made the decision to reduce the carrying value of several of assets and take account of one-off accounting adjustments. These totalled to NZD826 million, which weighed heavily of the company’s performance.

“When it came to DPA Brazil, Fonterra Brands New Zealand and China Farms, we saw there were either some changes in their local economies, increased competition or business challenges impacting their forecast earnings.

“This meant we needed to reduce their carrying value. Clearly, any write-down of an asset is not done lightly,” Hurrell explained

Last year, Fonterra set out a three-point plan: take stock of the business, get basics right and ensure more accurate forecasts which Hurrell notes that it definitely helped focus the Co-operative.

As part of taking the stock taking strategy, the company reviewed its asset portfolio and made significant calls on three assets including the sale of Tip Top for NZD380 million (US$240.1m) and offloading the stake in DFE Pharma for NZD633 million (US$240.1m).

Fonterra wound back its relationship with Chinese infant formula maker Beingmate and is now looking at options to reduce our financial stake in the company. 

“Taking stock of our business didn’t stop there. We also exited our Venezuela businesses, announced the closure of our Dennington manufacturing site in Australia and kicked off a strategic review of DPA Brazil and two of our farm-hubs in China.

“As part of the three-point plan, we also set a goal in FY19 to reduce our debt by NZD800 million. Tip Top made a significant contribution and, along with the sale of DFE Pharma, we expect to exceed this target in FY20. 

“We also set ourselves a target to reduce capital expenditure by NZD200 million in FY19 and we achieved NZD261 million. We reduced our operating expenses by NZD185 million, year on year,” Hurrell said.

New strategy unveiled

Going forward, Fonterra has now unveiled a new operating model and organization strategy introducing a new customer-led operating model to best deliver the new strategy.

This will see the co-operative move from a two central businesses; ingredients, and consumer and foodservice to a three customer facing-sales and marketing business units.

The three units will include Asia Pacific (APAC); Greater China (GC); and Africa, Middle East, Europe, North Asia, Americas (AMENA).

In line with that the Fonterra has appointed Judith Swales as the new CEO for the APAC unit and Kelvin Wickham to head the AMENA region while Marc Rivers will remain the CFO, Deborah Capill as MD People and Culture and Mike Cronin as MD Co-operative Affairs.

“Our strategy will see us focus on world-class dairy ingredients for our customers around the world, and innovative ingredients that meet nutrition needs right across people’s life stages.

“We will focus on ingredient categories: Paediatrics, Medical and Ageing, Sports and Active, and Core Dairy. This focus on dairy ingredients and foodservice will see us playing to our strengths and driving more value from the parts of our business that consistently perform.”

“We will also create new opportunities in new ways for foodservice. This will include building on our foodservice success in China and developing new markets, particularly in Asia Pacific.

“This focus on dairy ingredients and foodservice will see us playing to our strengths and driving more value from the parts of our business that consistently perform.”

1NZD = US$0.63 in current terms