Why Fonterra accepted defeat in the dairy aisle
OPINION: Fonterra's sale of its consumer dairy business to Lactalis is a clear sign of the co-operative’s failure to compete in the branded consumer market.
Council chairman Duncan Coull, in the role for four years, says this is “the most difficult” annual letter to shareholders.
“The last 12 months have been bruising for us all, with financial results that fall well short of my expectations, yours and those that your board and management set themselves,” Coull wrote in the annual report sent to farmers last week.
“This is not good enough and fundamental change is required in thinking and practice to reverse the performance of the business.”
Fonterra recorded a net loss of $196 million for financial year 2018; also impacting the reult were a $232m compensation payment to French company Danone and a $439m write-down of the co-op’s Beingmate investment in China.
The council’s report to shareholders suggests that Fonterra’s board wasn’t transparent with shareholders on the Beingmate saga. After the impairment in the first half of FY18, the council asked more questions and sought reports from the board.
“Council has challenged the board as to whether it was as forthcoming and transparent as it could have been with council.
“The blame for Beingmate’s poor performance was repeatedly placed on market factors and regulatory changes when there were other significant issues known to management and the board.”
The council says “improved processes” have been put in place for investment due diligence and monitoring.
The council also noted that Fonterra’s poor performance last year was not only due to the Beingmate write-down and Danone compensation but “underperformance right across the business”.
It says the impact on earnings, dividend and share value is totally unacceptable and one that “our farming families will not want to see repeated”.
“The council has loudly and clearly voiced its strong dissatisfaction to the board and management.
“It is not unreasonable to expect some challenges, however it is clear that during the FY18 underperformance was right across the business.”
Fonterra’s poor performance means the co-op will not be investing in any new project this year. But it has signalled a capital expenditure (capex) forecast of $650m this year.
The council says this represents the lowest level of capex since 2011.
“Management has indicated that FY19’s forecast capex will allow for maintenance expenditures and completion of ongoing projects but not for any new project.”
