Fonterra is looking at whether it should get rid of its disastrous Beingmate investment as part of an 'everything up for grabs' strategic review.
Speaking as the company announced the first full-year loss in its 18-year history,
chairman John Monaghan said the company was doing a "full stocktake and portfolio review looking at all our major investments, assets and joint ventures to see how they are performing and where they fit with our strategy".
Beingmate was a key investment under the spotlight.
Fonterra spent $750 million acquiring 18.8 per cent of Beingmate in 2015. It wrote down $405m of that in the 2018 year, along with taking a $34m hit for a share of the firm's operating losses.
The stake is now worth $204 million.
Former chief executive Theo Spierings argued Beingmate was crucial to give Fonterra a "direct line" into its largest market. Yesterday, Monaghan said Beingmate should be seen as "just one part of an integrated China strategy".
Beingmate originally had sole rights to distribute Fonterra's popular Anmum brand in China. That's no longer the case, the new chairman said.
"They are no longer exclusive distributors... That ended recently."
Fonterra's other major China play is its $800m investment in dairy farm group China Farms.
Although the group has made some recent progress towards higher value sales, inking deals with Starbucks and Alibaba's Hema Fresh store chain, it's hardly a feather in Fonterra's cap and will certainly face board scrutiny during the next few months.
China Farms made a $9m loss in the year to July 31, with volumes down 15 per cent and sales revenue down 3 per cent.
Overall, Fonterra reported a full-year loss attributable to shareholders of $221m, compared to a profit of $734m the year before.
Normalised earnings before interest and tax dropped 22 per cent to $902m, and return on capital fell to 6.3 per cent.
Chief financial officer Marc Rivers said the return on capital was down because of lower earnings and higher borrowings.
The strategic review was focused on turning both of these around this year.
"Our debt level is higher than we want it to be, based on current earnings. We are committed to improving this based both on reducing our debt and improving our earnings, so the debt-to-earnings ratio returns to being between three and four times.
"We will also return our gearing ratio to within a 40-45 per cent range this year. For us to return to our gearing range we have to reduce debt by $800m We are going to do this through improved earnings and looking at our assets."
James Grigor, senior portfolio manager with NZ Funds, agrees with Rivers that debt levels are crucial. He is nervous about whether the company is on track with the solution.
"Why I am negative around Fonterra is because in order to keep debt levels in check they have to have growing earnings, and they aren't growing as much as expected. And so how are they going to keep debt levels in check?"
Monaghan also suggested there might be some change in the capital structure of the company, although he stressed the company would remain a cooperative.
"We have had multiple meetings with farmers and some tell us they are looking for flexibility with the structure." Fonterra Cooperative Group was founded 17 years ago, and failing to adapt "keeps me awake at night", he said.
Monaghan said it was too early to provide any detail of what "flexibility" might look like.
However Arie Dekker, managing director and head of institutional research of broking firm FNZC, said the dilemma is that at present Fonterra relies heavily on its farmers for capital, while at the same time farmers increasingly have options to supply independent processors.
"There are multiple options for this flexibility, but they ultimately revolve around having an alternative source of capital to the farmers' capital and having more capacity in the balance sheet to fund the business without relying on farmers to provide all the capital they do today," Dekker said.
"Bringing outside capital in or selling non-core businesses to free-up debt capacity are options for providing greater flexibility. Lifting the performance of the co-operative is another factor that would help."