No dividend as Fonterra expects big losses for FY2019
It will also pay no dividend this year.
Fonterra reconfirmed its underlying earnings guidance for the 2019 financial year that ended on July 31, 2019, announced a final decision on its full-year dividend for FY19, and provided further information on some adverse one-off accounting adjustments.
Chief executive officer Miles Hurrell said that as a result of the full review of the business that has taken place across the year, as well as the work done so far to prepare its financial statements for FY19, it has become clear that Fonterra needs to reduce the carrying value of several of its assets and take account of other one-off accounting adjustments, which total approximately NZ$820-860m (US$530-556m).
“Since September 2018 we’ve been re-evaluating all investments, major assets and partnerships to ensure they still meet the Co-operative’s needs,” Hurrell said.
“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.”
Hurrell said while the coop’s FY19 underlying earnings range is within the current guidance of 10-15 cents per share, taking into consideration the likely write-downs, Fonterra expects to make a reported loss of NZ$590-675m this year, 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 finalized and audited but we now have enough certainty overall to come out in advance of our annual results announcement in September,” Hurrell said.
He added the majority of the one-off accounting adjustments related to non-cash impairment charges on four specific assets and the divestments that the coop has made this year as part of the portfolio review.
“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.”
Hurrell said, “Our accounting valuation for DPA Brazil will be impaired by approximately NZ$200m (US$129m). 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.
He said that as a result of the previously announced sale of Fonterra’s Venezuelan consumer business, and the closing of its small Venezuelan Ingredients business, due to the country’s economic and political instability, the coop has made an accounting adjustment of approximately NZ$135m (US$87m) relating primarily to the release of the adverse accumulated foreign currency translation reserve.
“Our carrying value for China Farms will be impaired by approximately NZ$200m (US$129m) due to 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.”
On Fonterra’s New Zealand consumer business, the compounding effect of operational challenges, along with a slower than planned recovery in Fonterra’s market share has resulted in reassessing future earnings, Hurrell said.
“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 NZ$200m.”
He noted the Australian Ingredients business is adapting to “the new norm of continued drought, reduced domestic milk supply and aggressive competition in the Australian dairy industry.”
He said this includes closing the Dennington factory, which combined with writing off the goodwill in Australia Ingredients, results in a one-off impact of approximately NZ$70m/US$45m (including the NZ$50m/US$32m previously announced as part of the Dennington announcement).
“These are tough but necessary decisions we need to make to reflect today’s realities.
“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.”
Chairman John Monaghan said the board had brought forward its decision on the full year dividend for FY19.
“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,” Monaghan said.
“Not paying a dividend for the FY19 financial year is part of our stated intention to reduce the coop’s debt, which is in everybody’s long-term interests.
“Our coop 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.