Sharechat Logo

Fonterra confident its got the strategy right

Thursday 26th September 2019

Text too small?

Fonterra Cooperative Group reported its second loss in a row but is confident it now has its strategy right.  

“We have a more focused business, we are clear about who we are, where we are going and where we can win,” said chief executive Miles Hurrell. 

The Auckland-based cooperative posted a net loss attributable to shareholders of $557 million in the 12 months ended July 31, widening from its maiden loss of $221 million a year earlier.

Revenue fell 1.5 percent to $20.11 billion, while its cost of sales - primarily what it pays for milk - decreased 1 percent to $17.1 billion.

Fonterra had primed its farmer-shareholders and external investors in the Shareholders' Fund for the red ink last month, saying they could expect a loss of $590-675 million, or 37-42 cents per share, and writedowns of as much as $800 million but those writedowns came in at $826 million. It had also canned the prospect of a dividend.

Today, the cooperative announced a new divided policy where it will pay out 40-60 percent of reported net profit – excluding abnormal gains – down from 65-75 percent.

Importantly, the dividend will not exceed 100 percent of available cash flow and will not result in the debt-to-ebitda (earnings before interest, tax, depreciation and amortisation) ratio exceeding levels required to maintain an "A" credit rating, it said. In other words, Fonterra doesn't want to have to borrow to pay dividends.

“It is really important that we have a strong, conservative balance sheet,” said chief financial officer Marc Rivers.

“This is what gives us optionality. It allows us to withstand the volatility that is a natural part of our history, but it also gives us strategic optionality, so when we see opportunities, we can go after them,” he said.

Together with a new dividend policy it unveiled a new strategy that puts greater emphasis on extracting value rather than pursuing volume. The strategy also brings the focus squarely back to New Zealand. "We exist to collect New Zealand milk," said Hurrell. 

The company has been flogging off assets it no longer sees as central to its business, including its 50 percent stake in DFE Pharma to a private equity fund run by CVC Capital and its Tip Top ice cream unit. That's raised $1 billion, which Fonterra will use to repay debt.

“We’ve made good progress on our business reset. You can see it in our financial discipline. We have significantly lowered our operating and capital expenditure and improved our cash flow,” Hurrell said.

Fonterra gave a fairly muted forecast for the current financial year.

According to Rivers, the milk price is slightly more favourable and milk collection volumes are largely steady.

Forecast earnings, however, “reflect the business reset we are going through, the transitioning to the new strategy,” he said. It is expecting earnings of 15-25 cents a share in FY20.

It is forecasting its gross margin to be 7-9 percent in its ingredients business, versus 8.4 percent in FY19. Forecast ebit for that side of the business is for $600-700 million, down from this year’s $811 million.

In consumer and foodservice, it is expecting a gross margin of 22-24 percent versus 23.1 percent in FY19 and ebit of $430-530 million, versus $450 million in the year just ended.

Rivers said the guidance is based on its Chilean Soprole investment returning to historical levels of earnings after being under pressure – something it was already seeing in the final quarter of  last year -  and that “we do not repeat the slow start to the year in China.”

Farther out, however, Fonterra is banking on the new strategy bringing about a significant improvement. 

Normalised net profit, excluding non-controlling interests, was $269 million and is seen increasing to $650 million in the next three years and to $800 million in the next five years. 

Debt-to-ebitda – currently at 4.3 times – is seen at 2.5-3.5 times in both the three and five-year plan. Importantly, the return on capital is seen lifting from 5.8 percent in the year ended July 31 to 8.5 percent in the next three years and 10 percent in the next five.

However, Fonterra is expecting its gross margin to lift from 15 percent in the year to July 31 to 15.2 percent in the next three years and 15.6 percent in the next five.  

According to Rivers, the improving net profit comes from a combination of things including greater efficiencies and lower operating expenses. “We will see gross margins improve as product mix improves and we perform better there,” he said. At the same time, debt will come down.

When questioned why the gross margin lift isn’t very significant, he said: “There will be businesses we exit, businesses we invest more in. You will see that portfolio evolve and that will show up in different ways along the line.”

In the shorter term, Fonterra today announced it was closing its Paraparaumu cheese plant with up to 70 job losses as it looks to combine processing in Taranaki, where 34 new staff will be hired.

Hurrell said no further site closures are planned in New Zealand. "We need to become a leaner organisation, given our strategic direction. We haven’t landed on what that looks like yet” but it is likely there will be job losses.

He also reiterated that the cooperative has no plans to exit its Australian business.

“The strategic direction we have chosen is to bring New Zealand to the fore, but that doesn’t mean it is going to be the extent of our business,” said Hurrell.

“We will continue to look at places like Australia to ensure they can stand on their own two feet.”

When questioned about the possibility of further write-downs, Rivers said conditions can always change, but the current situation “represents our best view, looking forward.”

(BusinessDesk)



  General Finance Advertising    

Comments from our readers

No comments yet

Add your comment:
Your name:
Your email:
Not displayed to the public
Comment:
Comments to Sharechat go through an approval process. Comments which are defamatory, abusive or in some way deemed inappropriate will not be approved. It is allowable to use some form of non-de-plume for your name, however we recommend real email addresses are used. Comments from free email addresses such as Gmail, Yahoo, Hotmail, etc may not be approved.

Related News:

SML - Synlait Milk Limited - Trading Halt of Securities
AIA - Auckland Airport announces board chair changes
AIA - Auckland Airport announces board chair changes
CEN - Tauhara commissioning progress update
FPH initiates voluntary limited recall
March 28th Morning Report
KFL Celebrates 20 Years of Excellence in Investment Mgmt.
SVR - Savor FY24 Earnings Guidance & Change in Banking Partner
NZK - NZ King Salmon Investments Limited FY24 Results
March 27th Morning Report