This is the second chapter in the woes of Fonterra, and behind it the dairy industry, on which the New Zealand economy is so dependent.
Point of Order listed some of those woes last week. Now, in the wake of the latest revelation, Fonterra will have to absorb a loss of between $590m and $675m for the current financial year.
Critics of the industry have sprung to the attack: Minister of Regional Economic Development Shane Jones is calling Fonterra’s management “corporate eunuchs” and labels Fonterra’s board as “grossly inept”.
Greenpeace has a simple solution: halve the dairy herd, a move that would cost the country $8.3bn in lost exports, and lower the standard of living of every New Zealander.
Jones’ ideas to resolve Fonterra’s financial difficulties are hardly more realistic.
Sacking the board won’t solve anything: nor trying to recruit a new executive team (though it might be worth asking Chris Luxon if he’d take a look).
Jones (and other critics) contend the board, if it wants a quick fix, will have to insist farmer-suppliers accept a lower payout: perhaps by as much as 50c a kg/MS. The risk is that with credit conditions tightening in the rural sector, many suppliers might go to the wall.
They are already having to forgo a dividend from the NZX-listed Fonterra Shareholders’ Fund, whose market capitalisation has slid 28% to $367.47m over the last 12 months (in the same period as AT2 Milk has seen its market capitalisation soar 48.9% to $11.79bn.)
There’s a fair bit of grumbling in the dairy sheds about Fonterra, but it is unlikely they’ll be looking to the Beehive for solutions.
Jones likes to think of himself as a bit of a whiz in the field of business, having once been chairman of the Treaty of Waitangi Fisheries Commission. So he blames Fonterra’s board for its “hubris” and suggests they might soon come knocking on the door of politicians to get Fonterra out of the financial pickle it finds itself in.
But he also notes a good crisis often can open a well of creativity. And certainly Fonterra will have to go in search of creativity.
There’s no point in shouting back at the politicians they are responsible for the legislation that has been such an incubus for the co-op, insisting Fonterra take every litre of milk its suppliers offer it, and making Fonterra supply milk to some of its big competitors in the retail industry.
In forecasting a loss of between $590m and $675m for the year current financial year, Fonterra said it expected to write down the value of four significant overseas ventures in South America, China and Australia by more than $600m.
The writedowns come as it reviews its business from top to bottom and looks to cut its debt by $800m this year.
CEO Miles Hurrell, said as a result of the review it has been undertaking of the entire group, it became obvious certain assets were overvalued relative to what they would earn in the future.
“It has become clear that Fonterra needs to reduce the carrying value of several of its assets and take account of other one-off accounting adjustments, which total $820-860m. While the co-op’s FY19 underlying earnings range is within the current guidance of 10-15c per share, when you take into consideration these likely write-downs, we expect to make a reported loss of $590-675m this year, which is a 37 to 42c loss per share,” he said.
The major asset writedowns were:
- The DPA-Brazil joint venture with Nestle, written down about $200m because of economic conditions in Latin America. The business is under review and possibly up for sale as Nestle has indicated it wants to quit
- A $135m adjustment following the closure of its Venezuelan operations
- A $200m writedown in the value of its China Farms fresh milk operation because of underperformance
- About $200m in the revamp of its NZ consumer business. It has already sold the Tip Top ice cream business as part of the restructuring
- About $70m for the restructuring of its Australian business including the closure of its Dennington factory
Fonterra has been reviewing its business over recent months as it looked to cut its debt by $800m this year.
Hurrell says these are tough but necessary decisions to reflect today’s realities.
“They do not, in any way, impact our ability to continue to operate. Our cashflow remains strong, our debt has reduced and the underlying performance of the business for FY19 (fiscal year) is in-line with our latest earnings guidance of 10-15c per share.”\
Whether the co-op will need to take even more drastic steps to avoid the fate of becoming one of NZ’s corporate dinosaurs (remember NZ Forest Products Ltd? Or Carter Holt Harvey?) remains to be seen.
Presumably the board and Hurrell are getting the corporate structure (and salaries) back to realistic levels after the departure of Theo Spierings set the pace with his multi-million-dollar sackful and ensured others close to him were paid far beyond any skills they brought to the co-op.
Dairy farmers themselves have been doing their bit to increase efficiency: even though the number of dairy cows has become static and may even been falling, output per cow is rising. And thanks to genomic tools it could keep rising.
What Fonterra needs is similar creativity, both in managing its capital structure and in marketing new products.
Some authorities believe it has become too bureaucratic and needs a top-to-toe overhaul, perhaps splitting off high-performing businesses in a separate entity which could attract the capital it needs (or find a product as A2 Milk did which captures both a premium in its sales as well as delivering health benefits).
It is clear Fonterra needs a new business model, as well as that creativity Jones spoke about.