Freedom Foods declares $590m writedown after investigation into accounting practices

Freedom Foods reveals its internal forensic accounting investigation is now a full-blown probe by the financial watchdog.

Cereal and snack company Freedom Foods has unleashed a write-down of more than half a billion dollars.

Cereal and snack company Freedom Foods has unleashed a write-down of more than half a billion dollars after revealing its internal forensic accounting investigation has spilled over into a full-blown probe by the financial watchdog.

The Australian Securities and Investments Commission is now investigating Freedom after the board identified a series of accounting discrepancies earlier this year.

The board released some of the findings in a statement after the market closed on Monday. They relate mainly to new products being sold below costs and accounting treatments being “based on unrealistic assumptions”.

The investigation, launched in late May, found that most of the costs capitalised during the commission phase of the company’s capital investment program “should be more appropriately treated as expenses”.

“These accounting treatments contributed to decisions on new products and expansions that were based on unrealistic assessments of market opportunities and margin assumptions that were not realised,” the company said in a statement after market close on Monday.

“As a result, too many group products were sold at prices that did not fully recover their costs.

“The group is co-operating with the Australian Securities and Investments Commission in relation to investigations into these matters. ASIC has formally requested documents from the group through the issue of a Section 30 notice under the Australian Securities and Investments Commission Act.”

A month after Freedom’s board launched its investigation, long-serving chief executive Rory MacLeod resigned after being on forced leave for several weeks. His departure came a week after chief financial officer Campbell Nicholas also resigned.

The investigation has led to a “material restatement” of Freedom’s accounts for the past two financial years, including a $590m writedown - $372.8m of which reflects changes to accounting policies and practices.

A further $75.9m relates to write-downs of goodwill and brands, while $60.1m comprises “out-of-date, unsaleable and obsolete inventory”. The remainder, or $38.9m, accounts for a reduction in the value of capitalised new costs.

The board initially identified the issue as the company moved stock from five external warehouses to its own facilities.

At the time chairman Perry Gunner said the board had relied on information, which he said had been audited, from the company’s employees and it was not the board’s job to complete a stocktake of Freedom Foods’ warehouses.

Michael Perich has since been appointed Freedom’s interim chief executive and launched a $280m capital raising to turnaround the business. The Perich family’s privately-owned investment company Arrovest, which owns the majority of Freedom’s shares, will participate in the raising, while the company said it has received “several offers from credible parties”.

“Freedom Foods Group has been reviewing options to recapitalise the business – through debt, equity or a combination of both – with any proceeds used to retire debt and for general corporate purposes. The board undertook an extensive process to select the right capital solution for the group given the uniqueness of its current situation,” the company said in a statement.

“The proposed approach is focused on raising the necessary capital by way of an ASX-listed convertible note, protecting the incoming capital as secured debt while providing equity-linked optionality and flexibility.

“The group received several offers from credible parties and is now in exclusive, advanced

discussions with a new investor to support the capital and operational turnaround of the business. It is anticipated that the capital raising will total up to $280 million, and the raising intends to provide existing shareholders with an opportunity to participate.”

Freedom also announced its earnings for the year to June 30 on Monday afternoon. The company dived $29m into the red, recording a net loss of $174.5m. Revenue meanwhile increased 26 per cent to $580.2m. Michael Perich said the result was “deeply disappointing” and blamed past accounting practices.

“The results reflect the significant costs of past accounting and operational matters –

matters we have identified with the assistance of independent experts and are taking steps to remedy,” Mr Perich said.

“The new executive team, with the support of the board, is transforming Freedom Foods Group. We have implemented a clear focus on operational accountability, improved cashflow reporting, reduced outstanding payables and improved customer and supplier terms.

“We have reviewed and improved many of the governance frameworks and policies, undertaken a culture review and improved engagement with employees. Operationally, we are reviewing the economics of every product line, every site, every sales channel

and every market segment to ensure we are focused on those brands with the greatest potential to deliver profitable sales.”

Mr Perich said the company would also be removing products that are “not delivering value and investing in the ones that are”.

The company will not pay a dividend.