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Chief financial officer Marc Rivers says the co-op’s earnings performance is not satisfactory; “a fundamental change” in direction is needed.
“We need stronger earnings to deliver a respectable return on the capital invested in the co-op and a strong balance sheet,” he says.
Rivers’ comments followed rating agency Fitch revising its rating outlook for Fonterra to negative from stable, although the co-op’s long term credit rating remains as ‘A’.
The revision results from Fonterra reducing its forecast earnings for the year ending July 2019.
“This indicates that the cooperative has structural issues it needs to address to retain the defensive traits that have underscored its historically strong business profile,” Fitch says.
Fonterra’s current review will be crucial in this, it says.
Rivers says the co-op is taking “a series of proactive steps” to turn things around.
A full review of strategy is underway and a portfolio review has revealed three questionable assets, including investment in Beingmate and Tip Top. Fonterra is expected to give an update on the possible sale of assets during its interim results announcement this week.
The co-op is also reducing debt: by the end of the 2018-19 financial year it will have cut debt by $800 million by selling assets and/or reducing its ownership of certain assets.
It is also reducing capital spending to $650m in 2018-19 from $861 million in 2017-18.
“These steps are needed for Fonterra to deliver to its full potential and to give our stakeholders confidence in our business,” says Rivers.
Fitch acknowledges the co-op’s efforts in reducing leverage and reviewing its portfolio.
“We believe asset sales are critical for Fonterra to return its metrics to a level in line with its current rating, given the impact the structural issues continue to have on its ability to organically deleverage.”
Any delay in the expected $800m asset sales will put pressure on the co-op’s rating.
Fitch notes Fonterra is a world leader in dairy exports representing about 15% in the global market including a 42% share in whole milk powder. And it is New Zealand’s largest dairy producer, collecting 82% of the country’s milk supply during the 2017-18 season.
“The average cost of dairy production in NZ is among the world’s lowest,” the report says.
Give us time
Fonterra chief executive Miles Hurrell is asking shareholders for time to turn the business around.
Hurrell, confirmed this month as chief executive after six months in an interim role, believes his appointment is the start of a new era for the co-op.
He acknowledges that farmer shareholders and unitholders are looking for a change in direction: “Something we have to move on very quickly, in my mind,” Hurrell told Rural News.
“We need to do things differently… but it’s a large organisation with businesses and footprints all over the world. Changing direction does take time.”
Hurrell says he is humbled by the support from farmer shareholders since his appointment.
“I thank farmers for messages of support and I look forward to working with them as we go about getting this business back to where it needs to be.”
Fonterra last year posted a historic first annual net loss of $196m.