Chairman John Monaghan and interim chief executive officer Miles Hurrell disclosed bad news in early August of a considerable dividend downgrade ahead of the official results.
The interim dividend of 10c will likely be the only one to be paid, severely short-changing the yield for investors in the Fonterra Shareholders Fund and providing an inadequate return on supply share capital for farmers.
The early August news included a milk price trim of 5c/kg to $6.70 followed by a late-August downwards revision of 25c to $6.75 in this season’s forecast.
Both farmgate milk price numbers are good for farmers but they hold down Fonterra’s ability to make good margins and profits on added-value products, which now account for more than 40% of milksolids processing.
Having cleared the decks Monaghan and Hurrell will be keen to find some positive indicators ahead.
In that category Hurrell last week released news of a small first-half profit made by Fonterra’s major investment vehicle in China, Beingmate Baby and Child.
It posted a net profit of NZ$1.9m, nearly $84m better than the same period last year.
In March Fonterra took a $405m write-down in the value of its Beingmate stake, plus a $28m share of 2017 operating losses.
It was the second year of major losses for Beingmate after Fonterra spent $700m buying 18.8% of the Chinese infant formula producer and dairy goods distributor.
Along with the $160m payment to Danone following arbitration on the damages from the 2013 botulism scare recall, Fonterra booked a $348m loss in 2018 first half trading.
Second-half earnings appear to have been positive, judging by the earnings guidance maintained of 25-30c a share for the full year.
But in August it said high ingredients costs mean margins on consumer and food service products are down and competition made it difficult to lift wholesale prices.
Forsyth Barr equities analyst Chelsea Leadbetter predicted about $400m net profit, followed by a substantial improvement to $650m in FY2019.
Since the beginning of this year the FSF share price has fallen from $6.50 to $5, a capital loss of more than $200,000 for the average-sized dairy farm.
On taking office Hurrell said Fonterra has to ensure its results deliver on promises to stakeholders.
The 2018 results and related announcements will be the beginning of a long road back to Fonterra profitability and reliability.
