Dud investments, political instability in South America, overvalued assets in NZ and the drought in Australia have made a mess of the accounts of Fonterra, the giant New Zealand dairy group which has been forced to omit the final dividend to shareholders in its listed trust for a second successive year.
The huge co-operative (which is the world’s largest dairy exporter) yesterday warned of a full-year loss on impairments of up to $NZ860 million ($A819 million), including a drought-driven $NZ70 million write-down against its Australian business.
Fonterra warned that it now expects a loss of between $NZ590 million to $NZ675 million for the 12 months to July 31 due to “significant adverse” one-off adjustments and will withhold a final payout to shareholders for a second year.
It is the second year the dairy group has been hit by big write-downs ($NA430 million off the value of a big Chinese investment) and an $NZ230 million one-off payment to French dairy giant, Danone after Fonterra lost an arbitration case.
The full-year results for 2018-19 will be released later this month and the company yesterday said the losses would be between $NZ590-$NZ675 million.
In 2017-18 Fonterra lost $NZ196 million and its underlying earnings figure of $NZ902 million was down 22%.
The news saw investors react quickly, selling down the securities in the listed trust by more than 5% over the session and leaving them at a new all-time low of $3.40. The securities are down more than 25% so far this year.
Fonterra told the Australian and New Zealand stockmarkets yesterday it was making “tough but necessary decisions” on account of the ongoing drought in Australia, subdued sales in New Zealand and China, economic instability in Brazil and an exit from Venezuela.
CEO Miles Hurrell said the move followed a strategic review (which was started a year ago) that made it clear the business needed to make changes to ensure a sustainable future.
“We’re in no doubt that farmers and unitholders will be rightly frustrated by these write-downs,” Mr. Hurrell said.
“I want to reassure them that they do not, in any way, impact our ability to continue to operate.”
Mr. Hurrell said Fonterra’s cash flow remained strong, it had reduced its debt, and the underlying performance of the business for FY19 was in line with the latest earnings guidance.
The company said its Australian business had suffered from continued dry conditions, with domestic milk supply shrinking and competition increasingly aggressive.
Bega Cheese is another dairy group to have warned recently that earnings from the dairy business are under pressure from the drought as milk supplies become scarcer.
Fonterra said the impact of the drought was reflected in the closing of its Dennington factory, which, combined with writing off the goodwill in Australia Ingredients, resulted in a one-off impact of about $NZ70 million.
Fonterra’s Brazil unit will be impaired by about $NZ200 million, mainly due to economic conditions in the country, while the previously announced sale of the company’s Venezuelan business will see the company take a charge of $NZ135 million.
The carrying value for China Farms will be impaired by $NZ200 million due to the slower than expected operating performance, and the New Zealand consumer business will cop an $NZ200 million write-down on restructuring costs and a slower than expected recovery of market share.