September 25, 2019 / 8:49 PM / 19 days ago

New Zealand's Fonterra goes back to basics after record annual loss

(Reuters) - New Zealand’s Fonterra (FSF.NZ) (FCG.NZ), the world’s largest dairy exporter, reported a record annual loss on Thursday, and unveiled a new strategy to phase out overseas “milk pools”, cut debt and focus on its local production.

FILE PHOTO: The Fonterra logo is seen near the Fonterra Te Rapa plant near Hamilton August 6, 2013. REUTERS/Nigel Marple

The scaled-back global ambitions are likely to be welcomed by the group’s 10,000 farmer shareholders, who have been frustrated by rising debt and costs from the troubled expansion, while analysts described the strategy as underwhelming but necessary.

Chief Executive Officer Miles Hurrell said in a press conference on Thursday that Fonterra would be a “leaner, more focused business”.

“I’m pleased that we now have a strategy that is built from the belief that our farmers’ milk here in New Zealand is the best and most precious in the world,” Hurrell, who took over the top job at earlier this year, said in a separate statement.

“Recognizing this, while we will complement our farmer owners’ milk with milk components sourced offshore when required, we will start rationalizing our off-shore milk pools over time,” he added.

Founded in 2001 as a national cooperative representing New Zealand’s dairy farmers, Fonterra has become a global milk giant focused on value-added products with deep inroads into major consumer markets such as China.

However, those plans ran into trouble with previous management’s hunt for fatter offshore margins missing targets while its local business took a hit from drought and aggressive competition.

Angry Fonterra farmer members were expected to confront management at its annual general meeting on Nov. 7 about its foreign expansion and resulting poor returns.

“There’s no wow factor in the strategy,” said ANZ Agriculture Economist Susan Kilsby.

“But I think where they have gone wrong is being too ambitious in some areas. So the strategy of doing what they do well and building on it is the right one for the moment,” she added.

BIG LOSSES

The company on Thursday reported a loss of NZ$605 million ($379.34 million) for the year ended July 31, which was at the lower end of its forecast of NZ$590 million to NZ$675 million loss. This is the dairy firm’s biggest loss to date after reporting its first annual loss of NZ$196 million last year. No dividend would be paid, as flagged in previous guidance.

Fonterra, which announced a write-down of up to NZ$860 million on assets in Brazil, Venezuela and China in August, said net debt stood at NZ$5.7 billion as at end July, against the NZ$7.4 billion it owed at the end of January.

While the new “back to basics” strategy sounds simple, analysts believe it is the right approach for the company.

“They may have to give up some market share on the global scale in terms of volumes, but they’re not looking to be a global player in terms of milk volume now,” said Jeremy Sullivan, investment adviser at brokerage Hamilton Hindin Greene. “They primarily want to be a New Zealand story on the global scale.”

Fonterra scrapped bonuses and froze pay of about 7,000 employees.

The company said it expects earnings per share of between 15 and 25 cents for fiscal 2020 and aims to touch 50 cents per share in five years.

Under its new dividend policy, the company said it expects future dividend payment to be 40-60% of reported net profit after tax, down from the previous 65-75% payout.

Fonterra said it would increase focus on its better performing food service business, which makes products such as butter and cheese in China and the Asia-Pacific region.

Reporting by Rashmi Ashok in Bengaluru; Editing by Arun Koyyur and Sam Holmes

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