Fonterra warns of significant 2019 loss

Fonterra, the world’s biggest dairy firm and a major player in the US$24 billion canned baby formula market, has revealed that it expects to make a significant loss this year as a result of a number of overvalued assets. 

The New Zealand dairy cooperative has warned that it will likely record a loss of NZ$590-675 million ($381-436m) in 2019, equating to a 37-42 cent loss per share.

Following a full review of Fonterra’s business, it became clear that the cooperative needed to reduce the carrying value of several of its assets and take account of other one-off accounting adjustments, which total approximately NZ$820-860m.

“Since September 2018 we’ve been re-evaluating all investments, major assets and partnerships to ensure they still meet the cooperative’s needs,” said Miles Hurrell Fonterra’s chief executive. “We are leaving no stone unturned in the work to turn our performance around. We have taken a hard look at our end-to-end business, including selling and reviewing the future of a number of assets that are no longer core to our strategy. The review process has also identified a small number of assets that we believe are overvalued, based on the outlook for their expected future returns.”

Hurrell acknowledged that farmers and unit holders will be “rightly frustrated by these writedowns. I want to reassure them that they do not, in any way, impact our ability to continue to operate. Our cash-flow remains strong, our debt has reduced and the underlying performance of the business for FY19 is in-line with our latest earnings guidance of 10-15 cents per share. We remain on track with our other targets relating to reducing capital expenditure and operating expenses.”

The majority of Fonterra’s one-off accounting adjustments concern non-cash impairment charges on four specific assets and the divestments that the cooperative has made this year as part of its portfolio review.

“DPA Brazil, the New Zealand consumer business, China Farms and Australian Ingredients’ performance have been improving, but slower than expected and not at the level we had based our previous carrying values on,” Hurrell reported.