Expert Says Fonterra Backing Current Strategy With New CEO Appointment
The appointment of Richard Allen as Fonterra's new chief executive signals execution, not strategy, according to agribusiness expert Dr Nic Lees.
The clearest warning sign is the collapse in gross profit. Synlait has swung from a positive $94.5 million gross profit in the prior period to a negative $1.4 million this half year – a deterioration of almost $96 million. That is more than a weak result. It means the company’s sales are no longer even covering the direct cost of making and processing its products.
That should set off alarm bells because the weakness sits in Synlait’s core business – milk powder, liquid milk, and nutritionals. This is the foundation of the company, and right now that foundation is under serious strain.
The result points to a broader mix of pressures, including rising production and operating costs, and inventory problems.
Furthermore, there is significant provision for onerous contracts customer contracts that are expected to lose money because the cost of supplying them is now higher than the revenue they bring in. In other words, some of Synlait’s deals may now be destroying value rather than creating it.
Revenue held up, but cost of sales rose to the point where Synlait was losing money before administration, distribution, and finance costs were even counted. That is why the overall loss is so large. Once gross margin turns negative, every other cost line adds to the damage.
Until Synlait’s core business starts covering its production costs again, the turnaround will remain long, difficult, and far from certain.
- Dr Nic Lees, Senior Lecturer - Agribusiness
