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UPDATE: Fonterra takes $405M Beingmate charge

UPDATE: Fonterra takes $405M Beingmate charge, raises forecast milk payout

(Adds analyst comment, updates Shareholders' Fund unit price)

By Jonathan Underhill and Nikki Mandow

March 21 (BusinessDesk) - Fonterra Cooperative Group wrote down the value of its Beingmate Baby & Child Food investment by $405 million, calling the performance of its Chinese partner "unacceptable". The writedown and a $183 million settlement with Danone led to a first-half loss.

The net loss was $348 million in the six months ended Jan. 31 from a profit of $418 million a year earlier, the Auckland-based company said. Sales climbed 6 percent to $9.8 billion.

An impairment on its 18.8 percent holding in Beingmate was widely expected, given the slide in the unprofitable Chinese company's share price. Fonterra invested about $755 million in Beingmate in early 2015 but had already dialled back the value of the investment in 2017, when it took an impairment loss of $35 million, reducing the carrying value to $617 million. The investment was now being carried at a value "aligned to the current share price."

The Beingmate charge "was on the upper end of what we were expecting," said ASB senior rural analyst Nathan Penny. "We thought they might defer some, but they decided to do it all now. Have they stopped the bleeding? From where I’m sitting and what I've seen reported it does appear things could get worse before they get better."

Units of the Fonterra Shareholders' Fund fell 0.2 percent to $5.82 and have dropped 6.3 percent in the past 12 months while the S&P/NZX 50 Index gained about 20 percent.

Today, Fonterra chair John Wilson said shareholders and unitholders "will be rightfully disappointed with this outcome."

"Beingmate’s continued under-performance is unacceptable," he said. "The turnaround of the investment is a key priority for our senior management team. The opportunity in the Chinese infant formula market remains, as does the potential for our Beingmate partnership – but an immediate business transformation is needed for Beingmate to benefit from the ongoing changes in the market."

The first-half results also include a $183 million settlement with Danone following their dispute over the 2013 whey protein recall.

Fonterra declared a first-half dividend of 10 cents a share and forecast full-year dividends in a range of 25-35 cents. Wilson said Fonterra's board "will decide how the Beingmate impairment and the Danone payment will be treated for final dividend purposes after the end of the financial year when it will have the full picture of Fonterra’s operating performance."

The cooperative lifted its forecast farmgate milk price to $6.55 per kilogram of milk solids from the $6.40/kgMS it projected in December, reflecting the improvement in global dairy prices since then. The total cash payout is forecast to be in a range of $6.80 to $6.90.

ASB's Penny said the lift in the forecast payout beat his estimate. "$6.55 is a good number - it’ll mean most farmers will be making profits and can recover from the skinny seasons - pay down some debt and maybe catch up on maintenance."

Excluding one-time items, 'normalised' profit dropped 36 percent to $248 million as the company's gross margin fell 6 percent to $1.66 billion while operating expenses climbed 3 percent to $1.26 billion.

The results show volumes fell across the company's ingredients, consumer and foodservice, and China Farms businesses. Ingredients gross margin was unchanged at 11.1 percent and normalised ebit rose to $558 million, while consumer and foodservice gross margin tumbled about 24 percent, pushing earnings down to $193 million. China Farms gross margin was -6.1 percent for a $12 million loss.

The company said its consumer and foodservice business faced higher input costs "with strong competition in the cooperative’s strategic markets, especially in foodservice, limiting the short-term options to pass through the higher costs."



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