Fonterra takes huge equity bite out of farmers' balance sheet: shareholders' report

Annual report of Fonterra shareholders' monitoring council makes for grim reading. Photo / 123RF

More than $1.5 billion was written-off Fonterra farmers' balance sheets in the 2018 financial year.

In its annual report, the Fonterra Shareholders' Council said this was the effect of a 27 per cent fall in the company's share price and a constrained dividend of 10c a share.

Fonterra's share price started the year at $6.08, and finished it at $5.12.

The board's decision to shift 5c/kg milksolids from farmers' milk price to retentions to ease Fonterra's "strained gearing position" was effectively a capital contribution to the balance sheet from farmers, said the report, which found Fonterra achieved only one of its key performance measures in 2018 - the farmgate milk price.

Chairman Duncan Coull, delivering his fourth annual message to shareholders, said it had been the most difficult to write.

Fundamental change in thinking and practice was required to reverse the performance of the business, he said. The council's role is to be the voice of Fonterra's 10,000 farmer-owners.

The report said Fonterra's financial position deteriorated significantly in 2018, with a $598 million increase in net debt and a $440m decrease in equity.

Normalised EBIT declined 22 per cent from $1.1 billion to $902m. Normalisations included the $232m recall compensation costs awarded to French food giant Danone for Fonterra's false botulism incident, the $405m China Beingmate investment impairment and Fonterra's share of Beingmate's losses.

The cooperative posted a net loss of $196m - the first loss since it was formed in 17 years ago.

Normalised earnings per share fell to 24c from 47c last year.

Return on capital was 1.8 per cent compared to 5.7 per cent in 2017.

Gearing increased to 48.4 per cent from 44.3 per cent, and was now outside the target range of 40-45 per cent. Excluding the Danone and Beingmate impacts, gearing would have been 45.2 per cent, still outside the target, the council said.

On Fonterra's disastrous investment in Beingmate, the council said it had challenged the board "as to whether it was as forthcoming and transparent as it could have with the 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 report also noted that EBIT on the China farms investment would have been a loss of $39m if Fonterra had not sold milk to its ingredients division at a higher-than-market price, essentially a transfer of earnings.

Fonterra's gross margin declined from 17 per cent last year to 15.5 per cent, an effect of the increase in milk price paid to farmers.

Working capital days, how long it took to convert milk into cash, increased by eight days to 83 days.

Each working capital day amounted to $56m in capital invested, so the eight-day increase represented $448m of additional investment, said the council.

Coull said he continued to be optimistic that the cooperative was best-placed to serve current and future shareholders of Fonterra.

"We have the transparency to challenge the parts of the business that need focus. Our milk price model will deliver us the highest possible returns from the market place.

"Let's not waste this moment to regroup, unite and deliver on the promise to be a national champion we can all be proud of."