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FIRST CUT: Fonterra posts loss of $557m as it writes off $826m from global businesses

Thursday 26th September 2019

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Fonterra Cooperative Group reported its second loss in a row as it racked up $826 million of charges writing down assets around the world and meeting other one-off costs. 

The Auckland-based cooperative posted a 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. It also canned the prospect of a dividend. 

The dairy exporter had been scheduled to report the result earlier this month but delayed it to work through significant accounting adjustments with auditor PwC. The professional services firm's long-standing contract with Fonterra ended with these accounts. 

"Clearly, any write-down of an asset is not done lightly. But what I hope people can also see is that we’re leading the co-op with a clear line of sight on potential opportunities as well as the risks," chief executive Miles Hurrell said in a statement. 

The board also set the farmgate milk price for the 2019 season at $6.35 per kilogram of milk solids. 

Fonterra separately unveiled its new strategic direction today, which will put greater emphasis on extracting value rather than pursuing volume. 

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. 

The dairy company's net debt shrank to $5.7 billion, down $469 million from a year earlier, which has seen its gearing ratio shrink to 48.2 percent from 48.4 percent. 

Fonterra forecasts an earnings range of 15-25 cents per share in the year ending July 31, 2020, and wants to lift that to 50 cents over a five-year period. 

It will also retain more earnings, with the board changing the dividend policy to 40-60 percent of reported net profit from 65-75 percent. 

Fonterra's farmer-owned shares closed at $3.22 yesterday, down 35 percent over the past 12 months, and putting a market value of $5.19 billion on the dairy cooperative. Fonterra Shareholders' Fund units, which offer exposure to the cooperative's earnings stream, closed at $3.21 yesterday, and are also down 35 percent. 


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