Fonterra looks for modest improvements in 2020 year

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 FY19 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 on-off 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 spend to $340m and a 47 per cut in growth spend to $260m.

Forecast FY20 capital expenditure would be no more than $500m. A priority was to ensure debt was no more than 3.75x earnings and gross margin exceeded $3b.

The company gave earnings guidance of 15-25c a share for 2020.

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 company's new multi-storey downtown Auckland headquarters.

No further asset sales were announced. A review of Fonterra's loss-making China dairy farms was still under way, and while its Chilean ingredients business Prolesur posted a 16 per cent decrease in milk collection and a gross margin reduction of $13m to $4m, earnings had improved in the second half of the year.

During the year New Zealand icecream business Tip Top was sold for $380m. This week Fonterra announced the sale of its share of DFE Pharma, a 50 per cent joint venture with Royal Friesland Campina of the Netherlands.

Fonterra also announced it will be closing its specialist cheese plant north of Wellington.

The plant, which produces Kāpiti products, employs 70 staff. Hurrell said it is not yet clear how many job cuts there will be. The plant's operations are to be moved to Fonterra's Eltham, Taranaki specialist cheese plant.

A major change to the company's dividend policy and an upbeat future earnings per share target suggest brighter days ahead for its long-suffering farmer-shareholders and listed unit holders.

Fonterra leaders outline the future of the dairy giant. Photo/Will Trafford

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 the 2019-20 year and forecast earnings per share of 15-25 cents. The farmgate milk price for FY19 was $6.35.

Hurrell announced a new organisational structure to enable the cooperative to deliver its new business strategy.

It would move from two large central businesses, ingredients and consumer and food service, to three in-market sales and marketing units that would be close to customers.
Called APAC for Asia Pacific, Greater China and AMENA covering Africa, Middle East, Europe, North Asia and the Americas, the new units would be led by a new team working under the office of the chief operating officer.

Chief executive of APAC would be senior leadership team member Judith Swales, while veteran Fonterra senior executive Kelvin Wickham would lead AMENA. A chief executive and chief operating officer for the China business will be recruited.

Marc Rivers would remain chief operating officer, Mike Cronin managing director of cooperative affairs and Deborah Capill, managing director people and culture.

Robert Spurway, chief operating officer for the now defunct global operations unit, would be leaving the company after eight years.