New Zealand dairy cooperative Fonterra expects to make a loss for the second year running amid impairment charges on certain “overvalued” assets and has consequently announced it will not be paying an annual dividend to shareholders.

The reported loss for the year ended on 31 July has been put at NZD590m (US$381.4m) to NZD675m, or a loss of 37 to 42 cents per share, the Anchor butter owner said in a statement today (12 August).

Write-downs relate to DPA Brazil – the Dairy Partners Americas joint venture with Nestlé – the New Zealand consumer business, Fonterra’s China Farms arm and the Australian ingredients division and total NZD820-860m. Chief executive Miles Hurrell explained the one-off accounting charges follow a review of the business over the past year and Fonterra will be issuing its final results in September.

He added: “Since September 2018 we’ve been re-evaluating all investments, major assets and partnerships to ensure they still meet the Co-operative’s needs. We are leaving no stone unturned in the work to turn our performance around. We have taken a hard look at our end-to-end business, including selling and reviewing the future of a number of assets that are no longer core to our strategy. The review process has also identified a small number of assets that we believe are overvalued, based on the outlook for their expected future returns.

“The numbers still need to be finalised and audited but we now have enough certainty overall to come out in advance of our annual results announcement in September.”

Hurrell said the majority of the one-off accounting adjustments related to non-cash impairment charges on the four assets, along with divestments the Auckland-based firm made as part of the portfolio review. While the performance of those assets has been improving, the world’s largest dairy co-op said it had been slower than expected.

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The impairment charge for DPA Brazil amounts to NZD200m and is connected to the poor economic conditions in the South American country. “Consumer confidence and employment rates are not at the level required to support the sales volumes and price points our forecast cashflows were based on,” Hurrell clarified.

He continued: “As a result of the previously announced sale of our Venezuelan consumer business, and the closing of our small Venezuelan ingredients business, due to the country’s economic and political instability, we have made an accounting adjustment of approximately NZD135m relating primarily to the release of the adverse accumulated foreign-currency translation reserve.”

China Farms also carries an impairment charge of NZD200m due to a poorer operating performance, while Fonterra is re-assessing future earnings for the New Zealand consumer business amid a slower-than-expected recovery in its market share. Last week, the company revealed it planned to sell part of its 18.8% share in an infant-formula joint venture in China with Beingmate Baby & Child Co. amid a disappointing performance.

“While the extent in which we participate is under strategic review [China Farms], the fresh milk category in China continues to look promising and is growing,” the CEO added. “In our New Zealand consumer business, the compounding effect of operational challenges, along with a slower than planned recovery in our market share has resulted in us reassessing its future earnings. 

“We are now rebuilding this business and, as part of this, have sold Tip Top which allows the team to focus on its core business. The combined impact is a write-down of approximately NZD200m.”

Fonterra’s Australian ingredients business will incur a one-off charge of NZD70m, including NZD50m previously announced in connection with the disposal of its Dennington plant.

Hurrell said: “Our Australian ingredients business is adapting to the new norm of continued drought, reduced domestic milk supply and aggressive competition in the Australian dairy industry. These are tough but necessary decisions we need to make to reflect today’s realities.”

He went on to try and reassure investors who drove the stock price down more than 5% by the close in New Zealand today at NZD3.57.

“We’re in no doubt that farmers and unit holders will be rightly frustrated by these write downs. I want to reassure them that they do not, in any way, impact our ability to continue to operate. Our cashflow remains strong, our debt has reduced and the underlying performance of the business for FY19 is in-line with our latest earnings guidance of 10-15 cents per share. We remain on track with our other targets relating to reducing capital expenditure and operating expenses.”