As a result the board has decided the co-op will not pay a dividend for financial year 2019, chairman John Monaghan said. He warned there is yet more to do in the recovery process.
“These are tough but necessary decisions we need to make to reflect today’s realities,” chief executive Miles Hurrell said.
He described the move as making some significant, adverse one-off accounting adjustments.
“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.”
So the value of DPA Brazil will be impaired by about $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.”
The loss from the sale of the Venezuelan consumer business and the closing of the small Venezuelan Ingredients business because of the country’s economic and political instability has now been put at $135m relating primarily to the release of the adverse accumulated foreign currency translation reserve.
China Farms will also be impaired by about $200m because of 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 the NZ consumer business the compounding effect of operational challenges and a slower than planned recovery in market share has resulted in future earnings being reassessed.
“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. This includes the $50m previously announced as part of the Dennington announcement,” Hurrell said.
The Fonterra review and work done so far to prepare its financial statements for FY19 show Fonterra had to reduce the carrying value of several assets and take account of other one-off accounting adjustments, which total approximately $820-$860m.
“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.
“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.
“We made a commitment to provide information to update farmers and unit holders as it comes available.
“The numbers still need to be finalised and audited but we now have enough certainty overall to come out in advance of our annual results announcement in September.
“We’re in no doubt 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.
“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,” Hurrell said.
Monaghan said “We have made the call not to pay a dividend for FY19.
“Our owners’ livelihoods were front of mind when making this decision and we are well aware of the challenging environment farmers are operating in at the moment.
“Ultimately, we are charged with acting in the best long-term interests of the co-op.
“The underlying performance of the business is in-line with the latest earnings guidance but we cannot ignore the reported loss of $590-$675m once you look at the overall picture.
“Not paying a dividend for the FY19 financial year is part of our stated intention to reduce the co-op’s debt, which is in everybody’s long-term interests.
“Our co-op remains strong at its core. Over the last 12 months we have improved our cashflow, reduced our debt and removed significant cost from within the business but there is still more to do.
“The business units that are at the heart of our new strategy are delivering for us and we look forward to discussing our new strategy and our performance with our owners in September.
“It’s important that we now implement our new strategy and deliver value back to them,” Monaghan said.
