Nothing was going to take away the shock of a $605 million loss on top of a $196m loss the previous financial year.
More than $800m of write-downs and impairments had been signalled six weeks in advance and the reported loss was towards the lower end of the forecast $590m-$675m loss range.
Dividends had been cancelled for the year and Fonterra’s directors have vowed never to borrow to pay dividends in the future as they effectively did in the first half of FY2018.
But behind the ugly bottom line there were better-looking numbers.
The farmgate milk price came in at $6.35/kg milksolids, technically the fifth-highest in Fonterra’s 19-year history, though three further payouts were higher when dividends were included.
It was also the third season in a row of $6-plus payouts, with a predicted fourth consecutive season now under way and prospects for New Zealand milk production and world demand-supply conditions looking favourable.
Farmers will not have forgotten the horrible seasons of 2014-15 and 2015-16 but the prolonged period of good payouts might now have over-shadowed the extreme variation in dairy prices that characterised the decade that began with the global financial crisis and the commodities boom.
The fall from the record 2013-14 payout of $8.50 to the 2014-15 one of $4.65 was the most extreme example of that variation.
NZ milk payments were consistently behind those to European and American dairy farmers, even without EU and US government subsidies, but over the past three years they have grown to parity or even leadership.
The end of milk quotas under the EU’s Common Agricultural Policy in April 2015 played a big part in stabilising supply and demand along with Fonterra’s own Global Dairy Trade auction platform for price discovery.
The reason for bringing up this history is to show Fonterra’s farmers have consistently received 90%-plus of their income for the past three years, despite what the co-operative itself has endured.
Senior executives and directors argue that it is because of the co-operative ownership of 80% of NZ milk production, which represents 30% of world-traded dairy commodities, not in spite of that ownership, that world prices have been good and consistent.
That point will be driven home time and again during the discussion of Fonterra’s structural reform that needs to follow the reset of its strategy.
The FY2019 numbers also show normalised sale revenue was $20 billion, down only 2% from the year before and that NZ milk collection was 1.523b kilograms MS, up 1%.
Though normalised earnings before interest and tax fell by 9% to $819m, gross margin was 15% at $3.015b and the giant co-operative had a good year in operating results.
Operating expenses were down a creditable 7% to $2.311b and the co-operative distributed $9.7b to its shareholders in payments for milk.
The debt ratio stayed at 48% but the day before the annual results Fonterra announced the conditional sale of its 50% stake in DFE Pharma, the medical lactose company in Europe, for $633m.
When the proceeds of that sale, and the divestment of foodspring protein specialist venture are received and banked Fonterra’s debt will shrink to a forecast $4.5b and a gearing ratio of about 38%.
Savings will also come from improved earnings, lower capital expenditure and other divestments, chief financial officer Marc Rivers said.
Other forecasts for FY2020 are relatively modest as Fonterra’s top table said the year will be one of transition towards a sustainably profitable company.
Alongside the annual results Fonterra left the farmgate milk price range forecast unchanged at $6.25 to $7.25/kg milksolids.
It said capital expenditure will be no more than $500m and operating expenditure will be maintained at the 2016-17 level of $2.3b.
It has also forecast gross margins for the ingredients and consumer-food service divisions will be unchanged from last year.
The financial results for 2019 were overshadowed by the big release of Fonterra’s new strategy by chief executive Miles Hurrell.
Eighteen months ago Fonterra might have said it was a global dairy giant aimed at collecting 30b litres of milk annually, only two-thirds of which would come from NZ.
That is no longer the driving force behind the co-operative, which is now aimed at doing amazing things with NZ milk to create value for its customers and its farmer-owners.
It does not want to be a multinational, fast-moving consumer goods company like Nestle, Danone, Kraft and Kerry.
“That may not sound so radical but this simple change of how we think of ourselves takes us to a really different place,” he said.
Fonterra will now be driven by innovation, sustainability and efficiency and its target markets will be core dairy, food service, paediatrics, sports and active and medical and aging.
It will now concentrate on value not volume, prioritising NZ milk not global milk pools, it will partner using its intellectual property and research rather than seeking to own everything and will run a conservative balance sheet instead of debt-funded growth.
It is divesting non-core businesses and focusing on where it has a competitive advantage.
That does not mean exiting from Australia and Chile, to name two high-profile examples, but the new strategy will drive discretionary spending in future, Hurrell said.
Milk supply growth in NZ and Australia cannot be expected in future and so the focus has switched to product and market optionality to drive premium prices through innovation, Fonterra strategy head Chris Greenough said.
It must return more value to shareholders to retain its milk market share at 80%.
Among the realities of its position are increasing competition for milk, constrained capital, high debt, lack of trust and confidence at home, increased environmental costs and recent under-performance.
Among its strengths are 20,000-plus employees, 10,000-plus farming families, 400 researchers, pasture-based milk, low greenhouse gas footprint, the global supply chain, customer relationships and food safety and traceability.
Greenough drew attention to what he calls cross-over products like butter, cheeses and milk powders that can be sold in bulk for further processing and in portions with high end-user margins.
For the first time Fonterra has adopted triple-bottom line reporting, under the headings healthy people, healthy environment and healthy business.
Under the people heading it includes nutritional guidelines, employee health and safety and engagement, farmer satisfaction, which needs a big improvement, customer satisfaction and public perception.
The environment goals are reducing greenhouse gas emissions and water use by 30% by 2030 and eliminating solid waste to landfill inside five years.
But it is the three-year and five-year business targets that drew the most attention.
They are to stabilise the gross margin at 15.6%, lift EBIT to $1b and more, to grow net profit to $650m then $800m, to keep capital expenditure down at $500m and to bring debt inside a range of 2.5x to 3.5x EBITDA.
The goals on which Hurrell will be judged, and paid, include return on capital of 8.5% and earnings per share of 40c in three years, improving to 10% and 50c respectively in five years.
He said performance targets for his own remuneration, as well as all senior executives in future, will be based on those numbers.
The strategy cannot be reduced to a simple slogan like V3 or turning the wheel.
It is a slimming down and refocusing of the co-operative, cutting off poor-performing business units.
All overseas business units will have to pay their own way in future, Hurrell said.
The new operational model will be based on three in-market sales and marketing units – Asia-Pacific, Greater China and Africa, Middle East, Europe, North Asia and Americas.
Judith Swales will head the Asia-Pacific unit and Kelvin Wickham Africa, Middle Eat, Europe, North Asia and the Americas.
Both Chinese market leaders, Christina Zhu in consumer and food service, and ingredients chief Teh-Han Chow, will hopefully be in the running for the Greater China role, Hurrell said.
A new team will be created under the office of the chief operating officer to enable the market business units to create value through sustainability, innovation and operational scale and efficiency.
Chief operating officer Robert Spurway has decided it is time for a change in direction in his career and will leave Fonterra. Hurrell is recruiting for his replacement.
