Fonterra's profit out this week could be half that of last year, reflecting the co-op's struggles with high milk prices - its biggest input cost - lower margins and increased debt.

There are also one-off items - the Beingmate writedown and the Danone settlement - and Fonterra's uncomfortably debt high levels.

New chairman John Monaghan has already made it clear that the co-operative is going through a period of change as it takes stock of its current position.

Brokers Forsyth Barr estimates that Fonterra 's normalised net profit for the year to July 31 to be almost half the previous year's at $396 million. The company reports on Thursday.


Forsyth Barr has cut its dividend expectations for the 2019 year by 11.4 per cent to 26.3 cents, and the 2020 expectation by 9.3 per cent to 29.2 cents.

In May, Fonterra said that its gearing ratio was expected to move above its 40-to-45 per cent target range in the 2018 financial year before returning back within the range in the 2019 financial year.

Forsyth Barr senior analyst Chelsea Leadbetter expects Fonterra's gearing to be "materially higher" and to remain above the target range for the next two years.

Mark Lister, head of private wealth management at Craigs Investment Partners. Photo / Bay of Plenty Times
Mark Lister, head of private wealth management at Craigs Investment Partners. Photo / Bay of Plenty Times

The result will take into account Beingmate investment impairment of $405m and the $183m Fonterra paid to Danone last year following the conclusion of an arbitration that arose from the WPC80 precautionary recall in 2013.

It's been a tumultuous year for Fonterra.

In March, the co-op announced that chief executive Theo Spierings would be stepping down.

Then came the news that chairman John Wilson had stood down to recover from a health scare.

In August, for just the second time in Fonterra's near 20-year history, Fonterra cut its milk price to help bolster its balance sheet - this time by 5c to $6.70/kg - but stuck with its earnings per share range of 25-30 cents.


Controversially for Fonterra unit holders, final dividend was scrapped, leaving investors with just the 10c interim dividend paid in April.

Later that month came the bombshell that long-serving executive Miles Hurrell would take over as the co-operative's interim chief executive, and that the global CEO search had been suspended.

Monaghan said at the time said that there would be a review of Fonterra's current portfolio and direction and that it was time to "breathe some fresh air into the business".

Craigs Investment Partners head of wealth research Mark Lister said the friction between the milk price and the dividend would continue to be an issue for Fonterra.

Units in the Fonterra Shareholders' Fund, which give investors exposure to Fonterra' dividend flow, have dropped by 19 per cent in value over the last 12 months, closing on Friday at $4.97.

"It feels like they have stolen from the unit holders to keep the farmer-suppliers happy, which is the age old issue with Fonterra," he said.

Fonterra's structure, its ill-fated investment in Beingmate, corporate governance, and the ongoing friction between he milk price and the dividend were all live issues, he said.

"The changes that Fonterra needs to make to its organisation are the ones that happen over a long period of time and this result is not going to provide answers to those questions that the investment community is asking," he said.

"The market will want to evaluate whether he (Miles Hurrell) is steering the ship in the right direction and whether he is willing to make the changes that are necessary to get the co-op back on track," he said.

Lister said Fonterra's issues around strategy, governance, structure, dividend payments, overseas investment were not ones that could be resolved overnight.

In the meantime, Fonterra's unit price has suffered as its financial performance has faltered.

Lister said investors now have other large scale dairy investments - such as Synlait and a2 Milk - to consider as investment options.

"Fonterra is not the be all and end all any more, and I guess that's another reason why the unit price has underperformed because investors have other options," he said.

Fonterra's tough year

March 31

• Announces net loss of $348 million for six months to Jan 31.
• As part of a planned CEO succession process, announces departure of CEO Theo Spierings.
• World-wide search for a successor begins.

May 23

• Sets farmgate milk price of $7.00 per kg - one of the highest yet - for 2018/19 season.

July 27

• John Wilson stands down as chairman as he recovers from serious health scare. • Board selects John Monaghan - a director since 2008 - as new chairman.

Aug 10

• For the first time in near 20-year history, Fonterra cuts milk price to help bolster balance sheet - this time by 5c to $6.70/kg.
• Sticks with earnings per share range of 25-30 cents, but indicates it will be at or slightly below bottom of range.
• Says final dividend unlikely, leaving investor with just 10c interim dividend paid in April.
• Monaghan says decisions in the best long-term interests of its farmer shareholders and unitholders.

Aug 15

• Announces long-serving executive Miles Hurrell will take over as the co-operative's interim chief executive, with immediate effect.
• Suspends global executive search.
• Announces review of current portfolio and direction and to "breathe some fresh air into the business".

Aug 31

• Revises 2018/19 farmgate milk price down to $6.75 from $7.00/kg, citing signals of strong supply coming from key dairy producing regions around the world.