Fonterra's interim CEO says the company did not meet the promises it made to farmers, after posting a big loss for the 2018 financial year.
The Co-operative reported a net loss of $196 million and CEO Miles Hurrell said performance was below expectations.
"At our interim results, we expected our performance to be weighted to the second half of the year. We needed to deliver an outstanding third and fourth quarter, after an extremely strong second quarter for sales and earnings but that didn't happen."
Fonterra lost $348 million at the beginning of the year due to a compensation payout to French company Danone and a write down of its investments to Chinese company Beingmate.
Mr Hurrell said that in addition to that, there were four main reasons for the co-operative's poor earnings performance.
"First, forecasting is never easy but ours proved to be too optimistic.
Second, butter prices didn't come down as we anticipated, which impacted our sales volumes and margins."
Third, the increase in the forecast Farmgate Milk Price late in the season, while good for farmers, put pressure on our margins.
And fourth, operating expenses were up in some parts of the business and, while this was planned, it was also based on delivering higher earnings than we achieved."
Mr Hurrell says the Co-operative's business performance must improve.
"There's no two ways about it, these results don't meet the standards we need to live up to. In FY18, we did not meet the promises we made to farmers and unitholders." he said
Mr Hurrell said when looking at the underlying performance of the business, seen in the normalised EBIT of $902 million, progress has been made in moving more milk into higher value products.
Plan to lift performance
The co-operative has released a plan to lift Fonterra's performance.
Fonterra's Board and Management has outlined a plan based on three immediate actions:
1. Taking stock of the business:
Fonterra will re-evaluate all investments, major assets and partnerships to ensure they still meet the co-operative's needs today. This will involve a thorough analysis of whether they directly support the strategy, are hitting their target return on capital and whether it can scale them up and grow more value over the next two-three years. This will start with a strategic review of the Co-operative's investment in Beingmate.
2. Getting the basics right:
Fonterra has already begun taking action and fixing the businesses that are not performing. The level of financial discipline will be lifted throughout the Co-operative so debt can be reduced and return on capital improved.
3. Ensuring more accurate forecasting:
The business will be run on more realistic forecasts with a clear line of sight on potential opportunities as well as the risks. It will also be clear on its assumptions, so farmers and unitholders know exactly where they stand and can make the decisions that are right for them and their businesses.
- Total Cash Payout for 2017/18 season: $6.79
- Farmgate Milk Price $6.69 per kgMS
- Dividend of 10 cents per share
- New Zealand milk collection: 1,505 million kgMS, down 1%
- Sales volumes: 22.2 billion Liquid Milk Equivalents (LME), down 3%
- Normalised sales revenue: $20.4 billion, up 6%
- Net loss after tax: $196 million
- Normalised EBIT: $902 million, down 22%
- Normalised gross margin: 15.4%, down from 16.9%
- Return on capital: 6.3%, down from 8.3%
- Normalised earnings per share: 24 cents
- Gearing ratio: 48.4%, up from 44.3%
- FY19 forecast Farmgate Milk Price: $6.75 per kgMS
- FY19 forecast earnings per share range: 25-35 cents