(Reuters) - New Zealand's Fonterra <FSF.NZ> <FCG.NZ> called a halt to an ambitious and ill-fated overseas expansion on Thursday, announcing plans to phase out overseas milk production centres, as the world's biggest dairy exporter reported a record annual loss.
Unveiling a long-awaited "back to basics" strategy, Fonterra pledged to cut debt by focusing on domestic production as it acknowledged mistakes were made under previous management.
The dairy giant has been buffeted by strong criticism from the 10,000 plus farmers who make up its cooperative as its foray into countries like China and value added consumer products smashed its profits.
"I'm pleased that we now have a strategy that is built from the belief that our farmers' milk here in New Zealand is the best and most precious in the world," Chief Executive Officer Miles Hurrell said.
"Recognising this, while we will complement our farmer owners’ milk with milk components sourced offshore when required, we will start rationalising our off-shore milk pools over time," Hurrell, who took over the top job earlier this year as part of a management overhaul, added.
The company said it expects earnings per share of between 15 and 25 New Zealand cents for fiscal 2020 and aims to touch 50 cents per share in five years
Fonterra shares rose 5% to their highest level in a month on the turnaround strategy announcement.
"There's no wow factor in the strategy but I think where they have gone wrong is being too ambitious in some areas," said ANZ Agriculture Economist Susan Kilsby. "So the strategy of doing what they do well and building on it is the right one for the moment."
Founded in 2001 as a national cooperative representing New Zealand's dairy farmers, Fonterra has become a global milk giant focused on value-added products with deep inroads into major consumer markets such as China.
However, those plans ran into trouble with previous management's hunt for fatter offshore margins missing targets while its local business took a hit from drought and aggressive competition.
Among Fonterra's biggest missteps was the 2015 purchase of an 18.8% stake in Chinese infant formula manufacturer Beingmate Baby & Child Food <002570.SZ>, which the company is desperately seeking to sell.
Still, Fonterra Chairman John Monaghan said China remains a key market with Fonterra responsible for 40% of all dairy imports, earning the company some NZ$4 billion annually.
Fonterra said it would look to 'unlock value' of its China Farms investment, without elaborating.
RECORD LOSS
The company's reported loss of NZ$605 million ($379.34 million) for the year ended July 31 had been flagged earlier, along with its decision to withhold a dividend. The loss was at the lower end of Fonterra's forecast and its biggest loss to date after reporting its first annual loss of NZ$196 million last year.
Net debt stood at NZ$5.7 billion as at end July, against the NZ$7.4 billion it owed at the end of January.
Writedowns of up NZ$826 million on assets in Brazil, Venezuela and China are being investigated by New Zealand regulators.
Hurrell said there were no plans at this stage to exit its operation in Australia, where earnings have been battered by harsh weather, but said the company would continue to evaluate locations "to ensure that they can stand on their own two feet as an operation."
It will also consolidate its speciality cheese making facilities in New Zealand, resulting in a factory closure and 65 job cuts.
Nathan Penny, senior rural economist at ASB Bank, said the new strategy was "sensible ... but we remain healthily sceptical."
After a string of poor results, only a subsequent string of strong results will make us believers," he added.
(Reporting by Rashmi Ashok, Aby Jose Koilparambil and Nikhil Nainan in Bengaluru; Writing by Praveen Menon in Wellington; Editing by Sam Holmes and Jane Wardell)
