By David Hargreaves
Fonterra's warning that its earnings for the year to July 2018 might be different to the guidance previously given and so it has put its various NZX and ASX-listed entities into a trading halt as of Thursday afternoon.
In a brief statement to the NZX on Thursday Fonterra said it was currently preparing its annual financial statements for the financial year ended July 31.
"As a result of the work being undertaken there may be a variation from the earnings guidance previously given to the market," the co-operative said.
"Fonterra is working to determine whether this is the case and expects to be in a position to notify the market by the close of business on 10 August 2018. Accordingly, a trading halt has been requested to allow Fonterra to determine this and to make any required announcement to the market."
While Fonterra doesn't give any indication at all of whether it thinks the "variation" in earnings will be up or down, it would seem reasonable to speculate that any revision is likely to be downward, given that it has taken the fairly severe step of putting a trading halt on its securities.
When announcing a half-year loss in March the co-operative slashed the likely dividend payout for its farmer shareholders and yet this was followed by another reduction in dividend forecast just two months later in May.
In March it was announced that chief executive Theo Spierings would be leaving once a replacement was found, though no replacement has yet been named.
And chairman John Wilson, under pressure to step down because of the poor performance of Fonterra, did step down recently due to health issues.
He has been replaced by long-time Fonterra director John Monaghan.
In March Fonterra took a big hit on its 18.8% stake in Beingmate Baby & Child Food Co, acquired in 2015 for NZ$756 million. Beingmate made a loss this year of about NZ$208 million.
Fonterra's wrote its holding down by $405 million, to a value of $244 million, which reflected then recent on-market prices. Since that time the Beingmate price has fallen further, with Fonterra's stake worth less than $210 million at current prices.
In March the co-operative declared an interim dividend of 10c a share and forecast a full dividend for the year of between 25c and 35c. Last year the dividend was 40c.
However, only two months later the dividend forecast was revised down to between 15c and 20c - so possibly less than half last year's.
At that time Spierings said the co-operative had expected its earnings to be "weighted" in the second half of the year "and this has not transpired due to the rapid rise in our input costs late in the season into our value-add business".
He conceded the business "has not delivered the third quarter results it had planned".
18 Comments
Good old Theo knew when to jump ship. probably spent a bit too much time with Uncle John on their trips to China together. It's becoming a bit of a challenge deciding on what to 'short' at the moment there are so many opportunities presenting themselves.
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Reminds me of a conversation that I once had with a long term employee where I worked. He told me that a particular service that we sold cost nearly three times what we were now getting for it 20 - 30 years later. The profits were still OK (just), but nothing like the price difference would indicate. Despite increases in wages and equipment prices, competition had forced us into a huge efficiency increase. To add to that we had also raised the quality of our offering.
This is what 1987 was all about. While it caused NZ quite a few problems and we went overboard on a few things, the general thrust was very valid. In future however it would be far better for NZ to assert this sort of rigour on a more continuous and measured basis, rather than being forced into cold turkey as we were in 1987. We seem to have lost the lessons of this time and the national government seems to have been more prone to the crony capitalism that can lead to this sort of problem.
I would suggest there are a bunch of sectors that are crying out for a very strong dose competition and come out from hiding behind the skirt of benign/corrupt protection of government. If they are up for the challenge the good ones will survive and prosper. The weak will fail, and so they should, they are just a drain on the economy and we will all be better off without them.
It almost makes you think that maybe Mr Orr had a conversation with the Fonterra board before penning his speech this morning.
Fonterra: 'Well me may have to revise our forecasts down again because things aren't going as well as we hoped for when we issued our forward guidance.'
Governor: 'Would things be improved if the exchange rate was weaker than it currently is?'
Fonterra: 'Would you do that for us? You are a very good fellow, that would be marvellous'
Governor: 'Just leave it with me, we'll sort this out, how low does the dollar need to go to make a beneficial difference?'
Fonterra: 'NZ$2 - US$1 would be ideal.'
Governor: 'No promises, but let me see what I can do.'
Fonterra; 'Oh thank you Governor, are you available for Golf on Thursday'
Governor: 'Best not this week, but next Thursday would be perfect.'
Fonterra: 'Booked!'
A nice piece of cynacism that may not be to far removed from reality. The Kiwi dropped to about .67c against US$ on the back of the RBNZ's comments and then at 1.40 hit .666 (devil's number) presumably on the back of Fonterra's release. It has come back up to .668 (3.27pm) but between the two announcements there has certainly been a response. What the 'variation from the earlier earnings" relates too is going to be interesting?? Aussie drought? Less volumes would have pushed up unit returns I'd thought.
Big a loss as it is Beingmate is almost a side show. The last ten years Fonterra has pulled in billions in new capital from farmers needing to share up on new production, added to that they are then able to borrow againest this. All they appear to have to show for this is three HUGE driers and a shiny HQ.
That source of funds has now stopped, but is that what was propping up what was admittedly a already poor dividend. Due to Fonterras rabbit warren style accounts very few can work it out.
The Chickens are on their way.
I have no farming background and have lived here only since 2003,so there is much about Fonterra that I don't understand. However,to an outsider like me,it looks like a badly run company,with grossly overpaid and inept directors and a bunch of supine shareholders. Is that fair?
This outfit came a cropper with a minority stake in a Chinese company which adulterated its milk and caused several deaths. Some time later,it again took a minority stake in a Chinese company which has seen it lose several hundred million dollars. it is purely a price taker for its main product-milk powder-and would seem to have been not very successful in its value-added drive. Yet,its so-called owners have apparently shrugged their collective shoulders and let the board carry on regardless,if not rewardless.
The sooner we cut our undue reliance on the dairy industry the better.
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