Co-operative hopes it’s turned corner
Fonterra says the 2020 financial year will be one of “transition” with only modest forecasts for performance improvements across the group.
But underpinning the conservative outlook is a strong hope among its leaders and staff that New Zealand’s biggest company has turned a corner.
Fonterra’s announcement of a new, much simpler business strategy and changes to its operating model and management team took some of the sting out of some ugly full-year 2019 financial results, which included a net loss after tax of $605m, slightly better than the forecast $590m-$695m.
The loss was spawned by asset writedowns of $826m, at the lower end of forecast accounting adjustments of $820m-$860m. The previous year Fonterra recorded a historic first loss of $196m.
Revenue at $20.1 billion was 2 per cent down on the previous year and ebit fell 9 per cent to $819m. Return on capital was down at 5.8 per cent, from 6.3 per cent the previous year. Net interest bearing debt was $5.7b, compared to $6.1b the previous year.
As forecast, the cooperative did not declare a dividend.
Looking ahead to FY20, Fonterra is forecasting ebit of $600m-$700m for its core ingredients business ($811m) and a forecast gross margin of 7-9 per cent, compared to 8.4 per cent in FY19.
Forecast ebit for its consumer and food service business is $430m-$530m ($450m).
Chief executive Miles Hurrell, in the job 12 months, said capital expenditure had been reduced by $261m to $600m, the result of a 7 per cent decrease in essential spending to $340m and a 47 per cut in growth spending to $260m.
Forecast FY20 capital expenditure would be no more than $500m. A priority was to ensure debt was no more than 3.75 times earnings and gross margin exceeded $3b.
The number of fulltime employees had been cut by around 1400 across the business. Fonterra’s total staff now number 20,013, compared to 21,324 in 2017. Hurrell signalled more job losses, most likely in Fonterra’s senior ranks. But there were no plans to move out of the downtown Auckland headquarters.
No further asset sales were announced. A review of Fonterra’s loss-making China dairy farms was still under way.
Fonterra also announced it will be closing its specialist cheese plant north of Wellington.
A major change to the company’s dividend policy and an upbeat future earnings per share target suggest brighter days ahead for its longsuffering farmer-shareholders and listed unit holders.
The five-year plan is to deliver a target of 50c per share, and the dividend payment will from now on be 40-60 per cent of reported net profit after tax, instead of 65-75 per cent, reflecting market criticism that the company doesn’t retain enough earnings. The co-op forecast a $6.25-$7.25/kg milksolids price range for 2019-20 and forecast earnings per share of 15-25 cents. The farmgate milk price for FY19 was $6.35.