Fonterra Cooperative Group said it is taking stock of its business, prioritising a return on capital and aiming to set realistic forecasts as it looks to turn the business around after a disappointing full-year loss that fell short of its guidance. 

“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,” interim chief executive Miles 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,” he said. 

The dairy giant reported a loss attributable to shareholders of $221 million in the year to July 31 versus a profit of $734 million in the prior year. Normalised earnings before interest and tax dropped 22 percent to $902 million. Normalised earnings per share were 24 cents, below its forecast of 25-30 cents per share. 

The dairy giant said its return on capital was 6.3 percent, down from 8.3 percent. The gearing ratio was 48.4 percent versus 44.3 percent the year before. 

Sales rose to $20.4 billion from $19.3 billion, while cost of sales climbed to about $17 billion from $16 billion.

John Shewan, chairman of the Fonterra Shareholders’ Fund, said the fact the earnings guidance was not met and the dividend was limited to 10 cents already paid in April “is unacceptable for both the fund’s unit holders and Fonterra’s farmer shareholders.” 

Units of the Fonterra Shareholders’ Fund diopped 0.6 percent to $4.94, having fallen 23 percent so far this year. 

Shewan had previously told BusinessDesk that he would be closely watching to see how Fonterra was planning to address the situation.

“The bottom line is that Fonterra does a number of things really, really well and a number of things have not gone well and that’s been acknowledged,” he said ahead of the result. “The question now is what are the plans to turn some of those things around?” 

According to Hurrell, in addition to the previously reported $232 million payment to Danone relating to the arbitration, and the $439 million writedown on Fonterra’s Beingmate investment, there were four main reasons for the cooperative’s poor earnings performance: forecasting was too optimistic; butter prices didn’t come down as anticipated, affecting sales volumes and margins; the increase in the forecast farmgate milk price late in the season added to that pressure; and operating expenses were up in some parts of the business. 

As a result, Fonterra is embarking on a process to 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-three years,” the company said.

It will “get the basics right,” which means fixing the businesses that are not performing and it will ensure more accurate forecasting. Fonterra said it will be “more transparent in its assumptions so farmers and unit holders know exactly where they stand and can make the decisions that are right for them and their businesses.”

“We are taking a close look at the co-operative’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,” said Fonterra chairman John Monaghan.

“You can expect to see strict discipline around cost control and respect for farmers’ and unitholders’ invested capital. That’s our priority.” 

In the current financial year it is forecasting ebit of $850 million to $950 million for the ingredients business and $540 million to $590 million in the consumer and foodservices business.  

In the year to July 31, normalised ebit for the ingredients business was $879 million, while it was $525 million for the consumer and food services business. 

The company is also looking to lower the gearing ratio to the 40 percent to 45 percent range. 

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