The cooperative reported a net loss after tax of NZ$196m (US$128.4m), with normalized EBIT down 22% to NZ$902m ($591m). The cooperative’s gearing ratio was up from 44.3% last year to 48.4% and return on capital was 6.3%, down from 8.3%.
Fonterra CEO Miles Hurrell says the cooperative’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,” Hurrell said.
“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.”
Reasons for performance
Hurrell said in addition to the previously reported NZ$232m (US$152m) payment to Danone relating to the arbitration, and NZ$439m (US$288m) write down on Fonterra’s Beingmate investment, there were four main reasons for the cooperative’s poor earnings performance.
“First, forecasting is never easy but ours proved to be too optimistic. 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.”
Hurrell said 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, performance is still down on 2017.
He added that, when looking at the underlying performance of the business, progress has been made in moving more milk into higher value products.
“While sales volumes were down 3% in FY18, a larger proportion of milk was sold through Consumer and Foodservice 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.”
He added Consumer and Foodservice business grew in all regions, except Oceania, with 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 cooperative was below our expectations. Based on this, the board has decided to limit our dividend to the 10 cents paid in April and has confirmed the final Farmgate Milk Price for the 2017/18 season at NZ$6.69 (US$4.38) per kgMS.”
Plans for improvement
Hurrell said Fonterra is putting in place a clear plan for lifting Fonterra’s performance.
“There are people depending on us – farmers, unitholders and employees who want to be part of a successful Co-operative. It relies on us doing a number of things differently.”
Fonterra’s board and management has outlined a plan based on three immediate actions.
Fonterra will re-evaluate all investments, major assets and partnerships to ensure they still meet the cooperative’s needs. This 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-to-three years. This will start with a strategic review of the cooperative’s investment in Beingmate.
Fonterra said it want to ‘get the basics right,’ and has already begun taking action and fixing the businesses that are not performing. The level of financial discipline will be lifted throughout the cooperative so debt can be reduced and return on capital improved.
It also promised to ensure 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.
Outlook for 2019
The forecast Farmgate Milk Price for the 2018/19 season is held at the NZ$6.75 (US$4.42) per kgMS Fonterra announced at the end of August and the cooperative’s forecast earnings per share range for FY19 is 25-35 cents.
At NZ$6.75 per kgMS, the forecast Farmgate Milk Price for the 2018/19 season is the third consecutive year of strong milk prices.
Chairman John Monaghan says the cooperative is being clear with farmers and unitholders on what it will take for the cooperative 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 Foodservice businesses achieving an EBIT of between NZ$850m and NZ$950m (US$557-US$623m), and between NZ$540m and NZ$590m (US$354m-US$387m), respectively.”
Monaghan said FY19 is about lifting performance.
“We are taking a close look at the cooperative’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 cooperative’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.”