Fonterra, New Zealand’s largest company, reported a net loss of NZD 196 million ($128.5 million) in its full-year results – its first annual loss since its inception in 2001.
The dairy co-operative said it has let farmers down with over-optimistic financial forecasts. Last year it recorded a profit of NZD 745 million ($488.5 million).
For the year ended 31 July 2018, Fonterra’s revenue from the sale of goods was down 5.9% to NZD 19.23 billion ($12.61 billion).
It has since announced a major shake-up of its business and CEO Miles Hurrell, who was appointed to the role just one month ago, said the co-operative’s performance must improve.
“There’s no two ways about it, these results don’t meet the standards we need to live up to,” he said. “In FY18, we did not meet the promises we made to farmers and unitholders.
“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.”
The poor figures were affected by a legal settlement with Danone after a false botulism scare in 2013 and a NZD 439 million ($287.7 million) writedown on Fonterra’s investment in Chinese infant formula maker Beingmate.
In addition to these factors, Hurrell believes there are four main reasons for the company’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.
“Even allowing for the payment to Danone and the writedown on Beingmate, which collectively account for 3.2% of the increase in the gearing ratio, our performance is still down on last year.”
In a move to boost the company’s performance, management has outlined a plan based on three immediate actions: taking stock of the business, by re-evaluating all investments, major assets and partnerships; getting the basics right, through fixing businesses that are not performing; and ensuring more accurate forecasting.
Federated Farmers of New Zealand chairperson Chris Lewis said the company’s net loss is a “very disappointing result”.
“From a NZD 745 million profit last financial year to a NZD 200 million loss – that’s a big drop and they simply must do better. But I’m confident they’ll turn things around.”
He added that farmers and shareholders will be looking for the new chief executive and chairperson to hit the ground running.
“I hope those two have a new broom for the shop floor. Good communication will be key.”
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