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Fonterra scraps dividend on expected FY loss, won't meet debt target

Monday 12th August 2019

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Fonterra Cooperative Group expects to report a full-year loss of up to $675 million and won't pay a dividend as it slashes the carrying value of assets around the world. It also didn't meet its $800 million debt reduction target for the year. 

Chair John Monaghan said in light of the significant write-downs "we have made the call to not pay a dividend for FY19," for the year ending July 31. While the firm's underlying performance is in line with the latest earnings guidance, "we cannot ignore the reported loss," he said.

Fonterra reported its first net loss attributable to shareholders of $221 million in the July 2018 year and paid annual dividends of 10 cents per share. 

Chief executive Miles Hurrell said that, after a full review of the business during the past year, it became clear that Fonterra needed to reduce the carrying value of several of its assets. That, and other one-off accounting adjustments, will total $820 million to $860 million. 

While full-year underlying earnings are within current guidance of 10-15 cents per share, "when you take into consideration these likely write-downs, we expect to make a reported loss of $590-$675 million this year, which is a 37 to 42 cent loss per share."

Units of the Fonterra Shareholders' Fund fell 4.5 percent to $3.59, while farmer-owned Fonterra shares were down 4.3 percent at $3.60. 

On the $800 million debt reduction target, chief financial officer Marc Rivers said the firm had made good progress but "we are not all the way there." Fonterra had "kept the ratings agencies well appraised and they are very supportive of the direction," he said.

Early this year, Fitch Ratings revised its outlook to negative from stable to reflect its view that the cooperative has structural issues that weaken the defensive traits underpinning its historically strong business profile. When Fonterra lowered its guidance in May, Fitch said the downgrade increased the importance of Fonterra's planned $800 million in asset sales in deleveraging.  Fitch was not immediately available for comment on latest news.

Regarding the specific write-downs, Hurrell said DPA Brazil will be impaired by approximately $200 million due to economic conditions in Brazil. The carrying value of the China Farms will be impaired by approximately $200 million due to the slower than expected operating performance. 

In the New Zealand consumer business, the combined impact of operational challenges and a slower than planned recovery in market share means a write-down of approximately $200 million. The total is closer to $300 million but is offset by the $100 million gain from the sale of Tip Top. 

In Australia, a one-off impact of approximately $70 million includes the previously announced $50 million on the soon-to-be shuttered Dennington factory.

When questioned about why Fonterra had opted to write-down the assets now, Rivers said "the key point is we have to look at those businesses based on where we see them today and we have to project out on what we think we will be able to earn looking forward."

On the New Zealand situation, Hurrell said increased competition had also played a role. 

"Across the board, whether its liquid milk or high-spec cheese. It’s a very competitive market here in New Zealand," he said.

Harbour Asset Management senior research analyst Oyvinn Rimer said the news "wasn't entirely unexpected" given efforts to sell some of the assets hadn't been successful.

"That suggests to me the pricing expectations or the valuation has been too high," he said. 

He noted, however, "most investors thought maybe Australia and New Zealand was about to turn around and then we get this big write-down. That is probably the more concerning one." However, assets in New Zealand and Australia are also being looked at for sale and this might mean "it's less of a shock when they ultimately sell these assets at a low price." 

Rimer said the saving grace for farmer shareholders is the fact that the farmgate milk price is reasonably strong. "Ultimately farmer shareholders want a high milk price." Hurrell confirmed that the forecasts for the previous and current seasons remain the same. 

"These are tough but necessary decisions we need to make to reflect today’s realities," said Hurrell, adding that he expects farmers and unit holders will be "rightly frustrated" by the write-downs.

"I want to reassure them that they do not, in any way, impact our ability to continue to operate," he said.

"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.”

(BusinessDesk)

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