Fonterra's financial road in next two years far from smooth: Miles Hurrell

Fonterra CEO Miles Hurrell said the cooperative is on track to share a new strategy in September. Photo / Dean Purcell.

Fonterra has warned the sort of bumpy financial report delivered for its third financial quarter will continue for a couple of years yet as it resets and simplifies its business strategy to shake off massive debt and quit assets that don't fit the new direction.

"We're on track to share our new strategy in September," said new chief executive Miles Hurrell, unveiling more bad news for the big farmer-owned cooperative along with actions aimed at turning it around.

"Farmers and unit holders can expect to see some fluctuation in our earnings over the next couple of years and there will be one-off transactions and adjustments - some positive, some negative, as we reset the business and deliver on our new strategy."

He later told a media briefing there would be "ups and downs as we get the business in shape".

Along with milk price forecasts and earnings updates, New Zealand biggest company has announced it is closing its Dennington, Australia, processing site with the loss of nearly 100 jobs; starting a strategic review of its loss-making seven dairy farms in China in which it has invested nearly $1 billion; and is considering whether to continue its Dairy Partners Americas (DPA) joint venture in Brazil.

The good news was sales volumes, at 16.6 billion litres, were up 4 per cent and revenue at $15b was up 1 per cent. Capital expenditure was down 28 per cent at $419 million.

The bad news was normalised EBIT was 9 per cent down at $522m and forecast earnings per share were revised down to 10-15c from a previous 15c-25c per share range.
Forecast full-year normalised EBIT for the whole ingredients business, Fonterra's core activity, was revised down to $645m-$725m, from the $750m-$850m range given at the half year.

This season's farmgate forecast milk price was narrowed to $6.30-$6.40kg milksolids and the opening forecast milk price for the new season starting June 1 was put at $6.25-$7.25/kg.

Fonterra Shareholders' Council chairman Duncan Coull said farmers would be disappointed at another earnings downgrade. But they realised that "resetting" Fonterra could take up to three years.

He urged Fonterra leaders to be totally transparent with farmers during the journey.
"It's good to see some progress on strategy and further reviews - farmers have been asking for that."

On the new season opening forecast, Coull said there was a long way to go yet and it was the milk price that closed next season that was the most important number.

The good news for Fonterra was sales volumes at 16.6 billion litres, were up 4 per cent and revenue at $15b was up 1 per cent. Photo / File

Hurrell said the Q3 performance had been "solid in some areas" but the improvement hoped for in others had not materialised so earnings per share guidance was changed down.

"The key uplift had to come from the consumer and food service businesses. It came through in parts but the degree needed in the fourth quarter is not going to be sufficient."

Hurrell said the "major headwinds" had been in the performance of the ingredients part of the Latin American business and Australia, exacerbated by continuing drought.

No decision had been made on the future of Fonterra's Chile businesses, Soprole and Prolesur, he said.

The market in Chile had been "soft" but the company was working hard to maintain its market share and the business "was starting to turn back around". It was on track to show and improvement in 12-18 months.

Questioned on the China farms review, Hurrell said only seven farms in two hubs were under scrutiny. Another two farms owned in a joint venture with Abbott were not on the table.

The seven farms carry 31,000 cows.

Hurrell said the China farms had been developed as "model" farms and Fonterra had proven there was a growing opportunity for fresh milk sales in China. The company, which has sales partnerships in China, was still interested in that market and would have the two joint-venture farms to work with. The partnerships account for less than 5 per cent of milk from the seven China farms.

Chief financial officer Marc Rivers said the total investment in the China farms was around $1b. Fonterra would not provide total losses, telling journalists to look up annual reports for the past five years.

They show normalised EBIT losses totalling $142m between the 2015 and 2018 financial years. The 2014 annual report shows earnings of $21m. The 2017 report says the farms made $1m profit.
The total loss for the seven farms in the first half of the 2019 financial year was $21m.
This comprised a direct loss of $17m plus a $5m loss for the China ingredients business which buys milk from the farms at an inflated price.

The investment in the Brazil partnership has not been disclosed.

Rivers said the company was making good progress on its stated ambition to reduce debt by $800m by the end of the financial year. Last year Fonterra posted debt of $6.2b along with a historic first annual loss - of $196m.

Fonterra CFO Marc Rivers. Photo / File

The confirmed sale of ice-cream business Tip Top would "go a long way" to meeting the debt reduction target, Rivers said. Fonterra's gearing target ratio was 40-45 per cent debt to equity.

Hurrell said the China food-service business was making "some progress" after a soft market in the first half.

The company would clarify further plans to add value to milk in September, he said.

The strategic business review under way since early this year was being done by staff, Hurrell confirmed.

He said the international demand outlook for dairy products was "in good shape" but with trade wars and other global events the macro-outlook called for the company to be cautious.

More milk would be available in the world soon as Europe began spring production.

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