Big losses force shake-up at Fonterra

By Dairy News

FONTERRA AUSTRALIA has moved to reassure suppliers it is still looking for more milk after media reports circulated that the international company was scaling down its demand for milk in Australia.

Fonterra Australia managing director, René Dedoncker, said there would be no change or impact to Australian farmers following the announcement of the Co-operative’s new strategy, and Fonterra had no plans to exit the Australian operation or pull back on milk collection.

“Our Consumer and Foodservice business is a high-performing business, delivering strong returns and is a real star.

“While the Ingredients returns have been impacted by drought, less milk, and greater competition, we have refocused our Ingredients business to build on our strong customer partnerships to accelerate paediatric (nutritionals) and value-add ingredients.”

“We’ll continue to pay our own way in Australia, offer a competitive milk price to our farmers, and deliver a sustainable return to our shareholders,” Mr Dedoncker said.

The NZ dairy giant posted a $NZ557 million ($A514 million) loss partly related to the drought across the ditch.

The dual-listed dairy processor said an increase in Aussie milk prices and input costs due to the big dry had necessitated plans to reduce what is the company’s largest milk pool outside NZ.

Fonterra’s investments in China, Brazil and Venezuela were written down by a total $NZ547 million, while it took a $NZ50 million hit against its Australian operations in FY19, with drought playing a major role.

Chief executive Miles Hurrell said Fonterra would start rationalising its off-shore milk pools over time.

The amount of milk collected from Australian farmers in the 2018–19 season was 120 million kilograms of milk solids, 33 million kilograms or 22 per cent lower than the year before. Mr Hurrell maintained Fonterra would not completely back away from Australian milk.

“(While we will) focus on New Zealand, that doesn’t mean it will be the extent of our business,” he said on Wednesday. “The drought has played havoc for Australian dairy farmers and the Australian farmer community … and we’ve made tough decisions.

“One of those decisions was the closure of the 108-year-old Dennington plant in south-west Victoria, which cost Fonterra a total $NZ54 million in redundancies and plant and equipment impairments.”

Fonterra, which delayed its full-year results announcement so auditors could calculate the unprecedented size of the one-off hits, made the largest single adjustment of $NZ210 million against its New Zealand operations.

Fonterra fell short of its $NZ800 million debt reduction target for the financial year, though the $NZ633 million sale of its stake in drug supplier DFE Pharma this week will help it hit the target in FY20. Mr Hurrell said Fonterra had been forced to reassess the value of its assets by changing conditions everywhere.

“Many of these calls were painful, but they were needed to reset our business and achieve success in the future,” Mr Hurrell said.

“We can’t ignore that we had a number of challenges across the year — these included Australia.”

Fonterra, which scrapped its final dividend and could sell some of its Chinese farms, is looking to refocus closer to home.

The company will shift from two central businesses — ingredients and consumer/food service — to three geographically split operations: Asia Pacific, Greater China, and the balance of its worldwide interests. Fonterra is looking for a chief executive of its China operations and also a new global chief operating officer, with Robert Spurway leaving Fonterra amid the transition.

“Prior to joining Fonterra, Robert held several CEO positions and he now wants to fulfil his passion for directly running a business again,” Mr Hurrell said.

Fonterra’s total revenue edged 1.6 per cent lower to $NZ20.1 billion, but the dual-listed company’s normalised earnings slumped 9.2 per cent.

The company’s ASX-listed shares fell 0.66 per cent to $A3.01 by 1022 AEST on Thursday, having lost more than 30 per cent of their value so far in 2019. Fonterra’s stock is less than half the value of the six-year peak of $A6.10 reached in January 2018.