Fonterra profit tumbles on writedowns

The dairy giant Fonterra has made a first-half loss after taking a large write-down on its Beingmate investment, in addition to damages to its rival, Danone.

Fonterra chief executive Theo Spierings Photo: RNZ / Dan Cook

The cooperative‘s loss for the six months ended September was $348 million compared with a profit of $413m a year ago.

The main reason for the slump was a write-down of $405m in the value of its stake in Chinese food company, Beingmate. Fonterra bought a nearly 19 percent of the company in 2015 for $750m, but its shareprice has slumped amid poor earnings and questions over its management and strategy.

Fonterra‘s also had to account for $183m damages to French dairy company Danone for losses caused by the botulism scare of 2013.

Leaving aside the one-off items the company‘s normalised net profit was $248m, down more than a third on the year before.

“Our shareholders and unitholders will be rightfully disappointed with this outcome.

“Beingmate‘s continued under-performance is unacceptable. The turnaround of the investment is a key priority for our senior management team,” chairman John Wilson said in a statement.

The company‘s sales were up 6 percent to $9.8bn, but it was feeling the effect of weather on production and it has had to pay more for raw materials because of a rise in global milk prices.

Weather and prices

Chief executive Theo Spierings said the operating performance was generally as expected.

“We knew going into this year we would have to carefully manage low starting inventory levels. This was followed by reduced New Zealand milk collections due to difficult weather conditions, further impacting our volumes available for sale.”

He said the company‘s bulk milk powders and ingredients business did better than last year, but the rise in milk prices hurt returns from the high-margin consumer goods division.

The cooperative reduced the losses of its Chinese farms, which are producing fresh milk products for markets there.

Mr Spierings said Fonterra was working hard behind the scenes to improve Beingmate.

“Our cooperative remains focused on delivering sustainable value for our farmers – that‘s a sustainable Farmgate Milk Price, dividend, and return on their investment in the co-op,” he said.

It raised its forecast payout to suppliers by 15 cents to $6.55 a kilo of milk solids, and forecast a dividend range of 25-35 cents a share.

Synlait contrast

By contrast, the much smaller Canterbury-based specialty dairy company, Synlait, reported a bumper increase in profit.

Its net profit for the six months ended September rose nearly fourfold to $40.7m, driven by strong growth in infant formula, which it makes for the A2 Milk company.

Revenue was flat at around $61m and production was slightly lower, but it shifted much more production into high margin consumer products, as well slashing its debt levels.

The company has recently signed a deal to supply the South Island stores of supermarket chain Foodstuffs with consumer products, as well as a plan to build a new factory in South Island.