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Fonterra is employing a back to basics strategy that will involve it getting rid of its overseas 'milk pools' over time; is targeting lower dividends in the immediate future and will not borrow to pay for these

Fonterra is employing a back to basics strategy that will involve it getting rid of its overseas 'milk pools' over time; is targeting lower dividends in the immediate future and will not borrow to pay for these

Fonterra has announced a net loss of $605 million for the year to July after incurring significant writedowns on assets.

It's also announced that the final milk price for the past season will be $6.35 per kilogram of milk solids.

The milk price forecast for the current season has been retained at the extremely broad range of $6.25 to $7.25.

The struggling dairy co-operative has also announced a new strategy that will see it employ a more back to basics approach.

This will include abandoning the ambitious 'milk pools' strategy of producing milk in other countries. So, in other words this will mean focusing on production of New Zealand milk and making the most from that. This is likely to be a popular decision among farmer shareholders.

Fonterra had set itself a target of reducing debt by $800 million in the past financial year.

In the event it fell well short of the target, with a reduction of just $469 million.

This left the company's gearing ratio outside of its targeted 40%-45% level at just over 48%.

However, it has subsequently announced sale of its stake in DFE Pharma for $633 million and the proceeds from this deal will be available in the 2020 financial year. 

This was the announcement released by Fonterra on Thursday:

• Total Cash Payout for 2018/19 season: $6.35
o Farmgate Milk Price $6.35 per kgMS
o Dividend of 0 cents per share
• New Zealand milk collections: 1,523 million kgMS, up 1%
• Normalised sales revenue: $20.1 billion, down 2%
• Net loss after tax: $605 million, compared to a loss of $196 million
• Normalised EBIT: $819 million, down 9%
• Normalised gross margin: 15%, down from 15.4%
• Normalised operating expenses: $2,311 million, down 7%
• Capital expenditure: $600 million, down 30%
• Normalised Return on capital: 5.8%, down from 6.3%
• Free cash flow: $1,095 million, up 83%
• Normalised earnings per share: 17 cents
• Gearing ratio: 48.2%, down 0.2%
• FY20 forecast Farmgate Milk Price: $6.25-7.25 per kgMS
• FY20 forecast earnings per share range: 15-25 cents
• New strategy, operating model and changes to management team announced

Today Fonterra announced its FY19 annual results, the final milk price for the 2018/19 season, its refreshed strategy and changes to its operating model and management team.

The Co-operative reports a Net Loss After Tax of $605 million. Normalised earnings before interest and tax (EBIT) was $819 million, down 9%, the Co-operative’s free cashflow was $1,095 million, up 83%, and the return on capital was 5.8%, down from 6.3%.

Fonterra CEO Miles Hurrell says that 2019 was incredibly tough for the Co-op but it was also the year Fonterra made decisions to set it up for future success.

“These included us reflecting changing realities in asset values and future earnings, lifting our financial discipline, getting clear on why we exist and completing a strategy review.

“Many of these calls were painful, but they were needed to reset our business and achieve success in the future.

“We made the decision to reduce the carrying value of several of our assets and take account of one-off accounting adjustments. These totalled $826 million, which contributed to a Net Loss After Tax of $605 million for FY19.

“As we do every year, we took a hard look at our asset valuations and future earnings potential. When it came to DPA Brazil, Fonterra Brands New Zealand and China Farms, we saw there were either some changes in their local economies, increased competition or business challenges impacting their forecast earnings. This meant we needed to reduce their carrying value.

“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.”

Commenting on the underlying performance of Fonterra, Mr Hurrell said Fonterra’s normalised earnings per share for the year was 17 cents, which was above the last forecast for the year of 10-15 cents.

“The gross margin from our largest business, New Zealand Ingredients, was $1,332 million, up 3% on last year due to increased sales and price performance.

“Our Foodservice performance also improved on last year, with gross margin up 10%. This was despite lower total sales volumes, following a slow start to butter sales in Greater China and Asia.

“But we can’t ignore that we had a number of challenges across the year – these included Australia Ingredients, our businesses in Latin America and the consumer businesses in Sri Lanka, Hong Kong and New Zealand.

In September 2018 Mr Hurrell set out a three-point plan – take stock of the business, get basics right and ensure more accurate forecasts. Reflecting on that plan, he said that it definitely helped focus the Co-op.
“I’m pleased with the progress we’ve made with our financial discipline. You can see it in our improved cashflow, reduced debt and significant cost savings.

“As part of taking stock of our business we reviewed our asset portfolio and made significant calls on three assets we identified as no longer core to our strategy. We sold Tip Top for $380 million and our share of DFE Pharma for $633 million. We also wound back our relationship with Beingmate and are now looking at options to reduce our financial stake in this company.

“Taking stock of our business didn’t stop there. We also exited our Venezuela businesses, announced the closure of our Dennington manufacturing site in Australia and kicked off a strategic review of DPA Brazil and two of our farm-hubs in China.

“We have contributed to China’s dairy industry by developing high quality model farms. We made these investments as they were seen as necessary to protect our significant exports to China. Growing demand for fresh milk in China’s consumer market suggests prices are likely to rise in the future – however, the timing is uncertain. As a result of this, and the fact that the development of these farms is now complete, we are looking at how we can best unlock the value in the farms.

“This sort of discipline around reviewing our asset portfolio isn’t a one-off. We need to be continuously reviewing our assets and making sure they are meeting the changing needs of our Co-op.

“As part of the three-point plan, we also set a goal in FY19 to reduce our debt by $800 million. Tip Top made a significant contribution and, along with the sale of DFE Pharma, we expect to exceed this target in FY20.

“We also set ourselves a target to reduce capital expenditure by $200 million in FY19 and we achieved $261 million. We reduced our operating expenses by $185 million, year on year.

Final Farmgate Milk Price for the 2018/19 season

Fonterra announced a final Farmgate Milk Price for the 2018/19 season of $6.35 per kgMS.

Fonterra Chairman John Monaghan said this was the third year of sustainable prices and represented $9.7 billion for milk payments to the Co-op’s farmer owners in the 2018/19 season.

Global prices for whole milk powder, butter and anhydrous milk fat were weaker compared to last year. This was driven by excess supply relative to demand, particularly for whole milk powder, for much of the season. Skim milk powder prices, however, were stronger.

The refreshed strategy and FY20 earnings guidance

Mr Hurrell said the final big call for the year has been sharing the Co-op’s new strategy.

“It’s a strategy which recognises we are a New Zealand co-op, doing amazing things with New Zealand milk to enhance people’s lives and create value for customers and farmers. It’s a strategy that’s rich in innovation, sustainability and efficiency. It unlocks value and sees us focusing on three goals – healthy people, healthy environment and healthy business.

“This is the right strategy for us, but it requires us to make some hard choices. We’ve looked at the big opportunities and risks for a New Zealand dairy co-op today. We’ve also got clear on what our strengths are and the hard realities we have to face up to. I’m pleased that we now have a strategy that is built from the belief that our farmers’ milk here in New Zealand is the best and most precious in the world.

“Recognising this, while we will complement our farmer owners’ milk with milk components sourced offshore when required, we will start rationalising our off-shore milk pools over time.

“Our strategy will see us focus on world-class dairy ingredients for our customers around the world, and innovative ingredients that meet nutrition needs right across people’s life stages. We will focus on ingredient categories: Paediatrics, Medical and Ageing, Sports and Active, and Core Dairy.

“We will also create new opportunities in new ways for foodservice. This will include building on our foodservice success in China and developing new markets, particularly in Asia Pacific.

“This focus on dairy ingredients and foodservice will see us playing to our strengths and driving more value from the parts of our business that consistently perform.

“We will still be in Consumer and will focus on markets throughout Asia Pacific. The majority of the products we sell in these markets are made from New Zealand milk and are similar to those we sell in our Ingredients business. This creates efficiencies and helps us play to our strengths. It also means we will reduce our consumer product portfolio to those that create superior value.”

Mr Monaghan said the new strategy sounds simple but the best strategies often are.

“Simplicity shouldn’t be confused with a lack of ambition. Our forecast earnings range for FY20 starts at 15-25 cents per share, but the five-year plan is to deliver a target of 50 cents per share.

“Our starting earnings range reflects our change in culture. We will earn the right to make ambitious decisions by first doing the basics right and returning our balance sheet to a position of strength. That will give us options to go for the opportunities that we create in the future.”

As announced at half year, the Board reviewed the Dividend Policy guidelines within the context of the new strategy. Mr Monaghan says the new guidelines better reflect the annual performance and financial strength of the Co-operative.

“Under the new guidelines, we would expect the dividend payment to be 40-60% of reported Net Profit After Tax, excluding any abnormal gains, from what was previously 65-75% of adjusted Net Profit After Tax over a period of time. An interim dividend will not be more than 40% of the forecast total dividend and no more than net earnings at half year.

“In addition to the new percentage of earnings, two additional key principles will guide our Board when considering the payment of a dividend. A dividend should not require our Co-op to take on more debt, and a dividend should not reduce our Co-op’s ability to service existing debt.

“The distribution of any abnormal gains, such as an asset sale, will be considered separately,” he says.

New operating model and changes to the management team

One of the immediate priorities for the Co-operative is organising itself to best deliver the new strategy.
Mr Hurrell said he is introducing a new customer-led operating model.

“We need an organisational structure that allows us to live within our means, create better connections with our customers, create value by focusing on what we are good at, and where we can differentiate ourselves. The structure encourages us to work together as one team.

“Our new operating model will see us move from our two large, central businesses (Ingredients, and Consumer and Foodservice) to three in-market customer facing sales and marketing business units – Asia Pacific (APAC), Greater China (GC), and Africa, Middle East, Europe, North Asia, Americas (AMENA).

“We are creating a new team (office of the Chief Operating Officer) which will be the enabler for our in-market business units to create value through sustainability, innovation and operational scale and efficiency.

“We are also looking at ways to prioritise activities and increase efficiency for our central support functions, ensuring they add direct value to our Co-op.

“These changes also mean there are changes in my lead team and I’m delighted to make the following appointments from my current team, which are effective immediately:
• APAC CEO – Judith Swales
• AMENA CEO – Kelvin Wickham

“Marc Rivers will remain our CFO, Deborah Capill our MD People and Culture and Mike Cronin our MD Co-operative Affairs

“It is with regret that I announce Robert Spurway has decided it’s time for a change of direction in his career and will leave Fonterra after eight outstanding years with our Co-operative. Prior to joining Fonterra, Robert held several CEO positions and he now wants to fulfil his passion for directly running a business again.

“He has been a huge contributor to the ongoing strength and performance of our NZMP Ingredients business and has set the platform for continued success - through innovative technologies, a team of highly capable people and significant progress on sustainability across our manufacturing operations - all central to our strategy.

“Over the next few months Robert will help transition Global Operations to the new operating model as well as working with the Greater China leadership team to implement the new Greater China regional go-to-market model.

“I have recruitment processes underway for the China CEO and Chief Operating Officer.

“I look forward to working with this team and the wider Fonterra team to move forward and reset the Co-op. Our priorities in our first year of our new strategy will be to build a winning team, support regional New Zealand, reduce our environmental footprint and hit our financial targets.”

 See here for the full dairy industry payout history. 

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A $ 605 million loss .... ohhh .. I thought it was gonna be $ 675 m negative .. WOW .. not so bad , then ...

.. bonuses for everyone in Fonterrible HQ ...

... only a $ 605 000 000 loss .... whew !!!

The bonuses at HQ interests me a lot. Namely in how long before they come back.

They should never come back but I'm sure they will, which will in turn prove that nothing has changed with the culture in that office.

Nothing wrong with bonuses in good times, although it's having your cake and eating it too when you look at the exorbitant salaries they also draw.

I worked for a Multinational Corporate with bonuses included for all staff, not only tied to individual KPIs but conditional to achieving 85% or above EBITDA. One year our NZ operations more than doubled budget yet Australia bombed due to some Desalination Plant projects being deferred, the company decided to incorporate all as one "Australasian" operation and nobody got a bonus (despite still being very profitable).

Maybe more of the bonuses should be pegged longer into the future. Bonuses for short-term performance incentivise short-term measures, and there's more than one way to improve profitability in the short-term while undermining the future.

At a first glance it does not sound like an awful result, given what has already been out in the public.

Not much mea culpa on the past performance or plans on future management changes or acknowledgement of the cocerns of the public about bail out etc. No word yet on why the financials were delayed and what is the role of auditors in the past, present and future in ensuring good governance, management, performance, etc.

Theyll probably steal from the farmers first by dropping the farmgate price before they go after a taxpayer bail out

Maybe not , Fonterra no longer has complete control on milk there is a market mechanism in place ............ and the market is a hard taskmaster

Not too bad, $605 million writedown against $20 billion in sales revenue, I think theres enough wriggle room to fight another day in that result and the farmers will get a good payout too. Personally I'd be more worried about the high concentration of on farm question...what to do with the legacy milkpool farms...I say keep them operating, keep the IP safe (if thats even possible in China) and leverage the investments in those assets into providing consultancy services for those countries own growing farmer base.

@4th estate ...........Lets get something clear here , Turnover ( sales ) is not profit , and as they keep telling us the profit margins in milk are paper thin everywhere in the world ...........the losses over the past 3 years are close to $1,000,000,000 ( 1,0 billion) , thats a mighty big number

Thanks for that, I do differentiate between the two. Point is the farmers are getting paid and thats what the co op exists for, like it or not. Notwithstanding, I do enjoy the debate around the direction it has taken and quite where it is heading. Taxpayer bailout? Not sure about that one...

the farms in china are one of the biggest losers, they hide the loss in other parts of the company, they need to shut it down or sell it for whatever to stem those losses ASAP.
its a flawed plan and whomever thought of it (along with the other disaster Chinese investments) should be marched from the building

Look on the bright side, and I am. Hurrell has delivered results on the right side of forecast. Its been a while since Fonterra did that. It will give farmers some confidence that they are genuinely cleaning the crap out. And we could do with some positivety out on farm.
Why do some commentators - with no knowledge keep spouting on about tax payer bailout? Leverage is 48%, slightly high but not death knell stuff.
What will interest me will be the impact of a lowering profit % distributed as dividend. Will that drive unit prices even lower and indirectly hurt farmer equity even more? Or will the price go up on the basis the worst is out now?

@Wilco I admire you positive outlook are either a glass mostly full sort of person or you have been drinking this morning .

Truth is the debt levels are unsustainable , as is the business model , and there needs to be a shakeup or a breakup ............. leaving it and doing nothing will not work

Fundamental decisions have been made. Hopefully we can realise some significant value through pasture provenance differentiation.

What ? you think?

So this industry fills our rivers with wee, separates bobby calves from their mothers before bludgeoning them, then sells the mother's lactation for a loss to feed rapacious primates the globe over.

What a stupid business.

How come you're using a laptop to put comments on the web instead of hunting wild game with a spear and cooking it over an open fire you started with a flint then Timmeh?

Quite the leap.

He is vegan ..........c'mon

He simply avoids dairy..job done.

Your vegetable oil is destroying our forests to feed rapacious vegans the planet over.

Coconut Oil is destroying our forests? And I thought Palm Kernals were feed to cows?

Palm kernel is a by product of palm oil production. Before it was used to feed cattle, it was dumped in the ocean as it had no value. So palm oil deforestation is the reason we have palm kernel as a feedstock

Whats wrong with grass - also heard the oil from the kernal was making its way through the cows gut and ending up in the Milk. Fonterra had to tell the naughty farmers lay of the Palm Kernal boys - please grass only. And before you ask this was from Fonterra Staff.

Not exactly no. Infact not at all. A diet high in Palm kernal exspeller changes the type of or combination of days in the milk which alters the properties of various products putting them outside spec.

Nice Spin

No spin. I even know the guy who did his thesis on the subject, doesn't mean I got the explanation exactly correct but I know it basically is.
Actually get quite angry that Fonterra took a punitive action rather than pay a reward for grass only and like the fact I don't have to use PKE.

Grass needs water, thats why palm kernel is popular.
And your next point is true - Fonterra put PK restrictions on its suppliers and then wondered why their suppliers jumped ship to Open Country.
Fonterra suppliers also must have 1 share for every kg/ms produced, which is the other major factor they lost suppliers

So this urban business fills our rivers and bays with raw sewage every time it rains, separates homes from businesses thus mandating long commutes, then counts the cars, fuel and wasted hours of those commutes as positive GDP contributions.......

That's stupid too. But... two wrongs don't make a right.


What a basket case, and why did NZ place so many of its eggs (or milk) in that basket? Terrible financials and a great deal of environmental degradation. Who’s idea was this?

A relative of mine worked for Fonterra for about a year. Regrouping from their overseas operations (i.e. disasters) seems necessary. However, the description he gave me of the lacklustre operations, incredible waste and over-application of corporate newspeak & kum-ba-yah sessions suggests it needs a thorough overhaul in the entirety of its NZ operations.

*checks Synlait and A2 share prices*

FSF up 3.43%, Synlait down 0.65%, A2 up 0.6%. Are investors leaving a non dividend paying Synlait for Fonterra SF?


I warned when Fonterra moved into its swanky new head office costing about $100,000,000 that this was folly by every definition .

Apart for the look and feel of hubris on the part of management , the only thing such a Head Office produces is a stream of really expensive Company vehicles out of its basement at 4.30 each day.

When I worked for Standard Chartered near on 35 years ago , I was always astonished at how little proper work was done at its various Head Offices be it in Singapore , Harare , Lusaka , London or KL .......... endless meetings and talk-fests , " strat sessions' , long lunches ("with clients ") early departures for "dinner " dates often charged as a Company expense . Sundays were spent playing tennis at the Standard Chartered Sports Club (yes can u believe it ) outside Harare , complete with an opulent lunch served by waiters with fez's . And it was paid for by the Bank !

Head office suits ( usually tailor made ) tend to feed off each other , ignore bad news or stuff they don't want to deal with , and rely on committees to deal with problems

Last month, Fonterra reported 30% of its staff made north of 100k, majorly managers and professionals in FY19.
Hopefully, a corporate restructure shall release all the "valuable skills" trapped in its offices and reduce some of the gap facing other "productive" industries.

The office is in Auckland, and $100k is only 10% of a pretty average house's price.

ive been banging on about that waste for ages, they need to quit auckland and build a office on their land at Te rapa, too bad if some of the management don't want to live in Hamilton,

Hamilton doesn't have an international airport. Would be better to be in the South Island if it moved anywhere as more Waikato farms will move out of dairy as is happening in the Bay of Plenty. ;-)

Hurrell did not regret the sale of Tip Top for $380 million in May, saying the ice cream business was not well-aligned to Fonterra's other businesses, and was not globally scalable
He could've said it better - "The golden-egg laid by our goose back home didn't align with our main product- white gold. So we had to feed it into the fire to keep ourselves warm during icy winter."

That dividend is a chunk of change that won't be circulating in the economy this year. No new cars, house renovations, holidays etc. The slow down of NZ Inc continues.

Welcome to our world

The dominoes are falling. Very interesting times ahead

During the last year 708 staff earning over $100,000 left Fonterra, ...

How's that Farm Debt Remediation bill coming along?

"High profile executives such as chief global operating officer Robert Spurway have resigned"

Seems only fair, but...

" ...a new head of the China operations is being recruited. A Fonterra spokeswoman said the current China president Christina Zhu may apply for the position. (She) was responsible for the due diligence on the failed $750m Beingmate investment."

I hope her analytical skills have improved before she gets the job...But lets' have another look at what's going on here. Westland Milk's 'bailout' by Yili and Bellamys" (over in Oz) bid by China Mengniu Dairy might give us a clue?

Look at how the USA is re positioning in regard to China.
And Trump's clear address at the UN.

Trump's UN address was more like a 'State of the World' report.
His calm delivery must have scared many. Though he said a few right things.

Globalism only works if everyone is playing the same game, I guess.

It's like jokes about communism. They're only funny if everyone gets them.

She is not from the right part of China and gets no respect there, not the right person at all.

So apart from some of the good ones who have resigned, the rest of the team that were there while all the harm was done and over 4 billion dollars of farmer value was lost are trusted to steer the ship in the new strategy.....for gods sake, the board needs to wake up!
The the 'Leader' of the very expensive shareholders council says the new strategy is all good - FFS!
Coull also supported the last 6 years of Fonterra strategy and mgmt and board as chair and before that as a deputy and a member of the Council.
Going on past "Coulls calls" we should have very little hope that he has any understanding of the new strategy - he has sat there on his hands as Fonterra lost over 4 billion dollars of farmer value during his tenure as Chair of the council.....he has not carried out his job, has been a disaster and has let farmers who pay him, down.

The good ones usually do half the work.

Do not expect that 50% of outcomes be done (nor understood) by the remaining remainders, nor new-bees.
The new bees in will calibrate themselves to what the see.
Nor will the consultants with their $million spreadsheets help.
This current period is very tricky!

So, the culture has been called out as a huge problem but the head of people and culture stays and the head of coop affairs stays even though farmers are not happy, that coop affairs is supposed to be a framer facing, relationship management department and that Cronin is legacy terrible culture. He is probably more powerful than Monaghan and Hurrell put together and nothing can change while he is still here.
Judtith Swales has been there for years - she was employed by Spierings and is part of the past bad outcomes - first Australia and then New Zealand. Wickham is an egotist and sycophant which is the opposite of what is needed right now and the only one who should remain is CFO Marc Rivers as he was not around under Spierings, did not support the poor strategies and decisions and did not lose farmers over 4 billion dollars in value.
“These changes also mean there are changes in my lead team and I’m delighted to make the following appointments from my current team, which are effective immediately:
• APAC CEO – Judith Swales
• AMENA CEO – Kelvin Wickham

“Marc Rivers will remain our CFO, Deborah Capill our MD People and Culture and Mike Cronin our MD Co-operative Affairs

Imagine they will have negotiated hard too!

Where is there the added Witt to sort out Australia.

It will be very interesting to see what happens to any money that may be generated if they sell any of their Chinese assets. There are lots of organisations trying to realise cash from their investments in China, but hitting a brick wall when they try to get the cash out of the country.

They will get very little for china farms even if anyone wants it - it loses millions per year even when fonterra china pay over the odds for the poor quality milk it produces.
Disappointed that they didn't fully write down china farms, beingmate and australia as everyone knows they are done - its just a matter of a very short time.

Fonterra was always a crazy idea. A bit like Japan combining all their car companies into one huge company. - fat, lazy, inertia, bureaucracy, lack of innovation. You name it. This is exactly what you can expect from this sort of monopolistic arrangement. If I was the government I would sort them out, then split them into two competing companies. But that probably will not happen given that our government is full of Chinese puppets. It , along with all our farms eventually, will go to China. We all better start learning "to pull rickshaws"

Rickshaws have been replaced by cars and cars will in turn be replaced by self driving EVs made beyond our shores. So what's the average Kiwi gonna be doing for a living ?

That is why I put the term in quotation marks.

too late they already have internal competition here, and more coming each year
westland now owned by the Chinese with deep pockets, not to mention Yashili or synlait
so the premise of NZ farmers joining together to compete against the world has been a lost battle
time to think lean and mean

I for one welcome our new financial overlords. I'd like to remind them that, as a trusted blogger, I can be helpful in rounding up soon-to-be-unemployed Fonterra managers to toil in their underground chocolate latte production facilities.