It confirmed a payout for the season of a $6.69 a kilogram of milksolids farmgate payout and the already paid dividend of 10 cents a share.
The co-op’s sales revenue was $20.4 billion, up 6%, but its earnings before interest and tax were $902m, down 22%, and its gross margin was 15.4%, down from 16.9% the previous season.
The return on capital was 6.3%, down from 8.3%.
It has held the forecast farmgate milk price for this season at $6.75/kg MS and the earnings range of 25-35 cents a share.
“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,” chief executive Miles Hurrell said.
Chairman John Monaghan said “FY19 is about lifting the performance of our co-operative.
“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.
“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,” Monaghan said.
Its plan has three planks:
1. 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 today.
That 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.
It will start with a strategic review of the co-operative’s investment in Beingmate.
2. 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.
3. 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.
Hurrell said Fonterra’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.
“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.”
Un addition to the $232m payment to Danone and $439m 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,” Hurrell said.
“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.”
However, the underlying performance of the business shows progress has been made in moving more milk into higher value products, he said.
“While sales volumes were down 3% in FY18, a larger proportion of milk was sold through consumer and food service 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 food service 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 this 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.”
“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.
At $6.75 per kg MS the forecast farmgate milk price for this season is the third consecutive year of strong milk prices, he said.
“That’s good for farmers and for rural economies where farmers spend 46 cents of every dollar they earn.
Monaghan said Fonterra 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 food service businesses achieving an EBIT of between $850m and $950m and between $540m and $590m, respectively.”
