Fonterra announces chief stepping down while China and Danone issues cut 2017 profits

By Jim Cornall contact

- Last updated on GMT

Fonterra's chief executive Theo Spierings said a strong commitment to quickly shifting more volume into higher value products is critical to the business achieving its forecast.
Fonterra's chief executive Theo Spierings said a strong commitment to quickly shifting more volume into higher value products is critical to the business achieving its forecast.
New Zealand dairy cooperative Fonterra Co-Operative Group Limited has announced chief executive Theo Spierings is to leave his role later this year; meanwhile, its interim results for the half year ending January 31, 2018, show a net profit after tax (NPAT) loss of NZ$348m (US$252m).

Fonterra said succession discussions with Spierings started last year.

The company was hit by a US$125m payment to Danone​ after the French company was awarded the sum at a tribunal in Singapore late last year following the WPC80 precautionary recall in 2013.

In addition, Fonterra said while its Greater China business continues to perform well overall, it has re-assessed the value of its Beingmate investment so that it reflects a fair value at this point in time.

Chairman John Wilson said the board assessed the carrying value of Beingmate at NZ$244m (US$177m) and therefore taken an impairment of NZ$405m (US$293m).

Spierings said the NPAT loss reflects the payment to Danone and the Beingmate impairment.

“As these are one-off events, our normalized NPAT of NZ$248m (US$180m) is a better reflection of our underlying operating performance for the half year,”​ Spierings said. 

China woes

Wilson said, “While we appreciate the substantial opportunity and privilege of our business in China, our shareholders and unitholders will be rightfully disappointed with this outcome.

“Beingmate’s continued under-performance is unacceptable. The turnaround of the investment is a key priority for our senior management team.

“The opportunity in the Chinese infant formula market remains, as does the potential for our Beingmate partnership – but an immediate business transformation is needed for Beingmate to benefit from the ongoing changes in the market.”

Increased forecast milk price

Fonterra increased its forecast Farmgate Milk Price for the 2017/18 season to NZ$6.55 (US4.74) per kgMS.

Wilson said the ongoing strong global demand for dairy and stable global supply are continuing to support global prices, particularly for the whole milk powder category.

He added the board will decide how the Beingmate impairment and the Danone payment will be treated for final dividend purposes after the end of the financial year when it will have the full picture of Fonterra’s operating performance.

Given the possible impact of these decisions, the board announced a forecast dividend range for the full-year of 25-35 cents per share, rather than just the earnings per share guidance normally given.

Business performance

Spierings said the operating performance for the first half year was generally as expected.

He noted total sales volumes are down 11% to 10.5bn LME, and normalized EBIT 25% lower at NZ$458m (US$332m) compared to NZ$607m (US$440m) in the same period last year.

However, he added overall sales revenue in the business was up 6% to NZ$9.8bn (US$7.1bn), mainly due to the improved global prices for dairy.

“We knew going into this year we would have to carefully manage low starting inventory levels. This was followed by reduced New Zealand milk collections due to difficult weather conditions, further impacting our volumes available for sale,” ​Spierings said.

“On top of this, we also had to navigate higher input costs which squeezed our margins.”

Ingredients positive despite lower sales

Spierings said the ingredients business achieved a strong result with normalized EBIT growth of 9% to NZ$558m (US$404m), despite lower sales volumes of 9.8bn LME.

On Fonterra’s consumer and foodservice business, Spierings said higher input costs meant margins were reduced by 15% over the period, with strong competition in the cooperative’s strategic markets, especially in foodservice, limiting the short-term options to pass through the higher costs.

He said the division’s volumes were 2% lower compared to the same period last year, adding, while sales volumes in Asia, Latin America, and Greater China improved, they were offset by lower volumes in Oceania, caused primarily by operational start-up challenges at the new Auckland distribution center. 

Consumer and foodservice normalized EBIT was NZ$193m (US$138m) compared to what Spierings called an exceptional NZ$313m (US$227m) in the prior comparable period when input costs were considerably lower.

Greater China business

Spierings said, while the Beingmate investment has underperformed, the cooperative’s integrated Greater China business is delivering positive results and continues to have high growth prospects.

“Clearly, the outcome of re-assessing the value of our investment in Beingmate downwards is unacceptable to our shareholders and unitholders. The recovery of the value of this investment is the number one immediate priority for me and the senior management team.

“To be blunt, the investment in Beingmate has not gone the way we expected and there are things we would do differently knowing what we know now. We are very focused on doing all we can to get things where they need to be.”

Spierings said, as an 18.8% shareholder, Fonterra does not have direct control over the company but it has called for an urgent business transformation by working co-operatively with Beingmate’s founder and majority shareholder.

Outlook

Fonterra said it expects its earnings to be weighted to the second half of the year.

Despite more favorable weather conditions recently, the cooperative still expects its New Zealand milk volumes to be down for the year and will be managing its inventory and product mix carefully for the remainder of the season to ensure it maximizes the overall value of its milk.

Spierings said a strong commitment to quickly shifting more volume into higher value products is critical to the business achieving its forecast.

Spierings to go

Fonterra said Spierings and the board have agreed he will leave the cooperative later this year as “part of a planned CEO succession process.”

It said succession discussions started last year, with an international search in November last year to identify potential candidates that has resulted in a shortlist of candidates.

Related topics: Manufacturers, Fonterra

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