Freedom Foods details scale of losses

Freedom Foods has revealed just how deeply mired the food manufacturer is in poor accounting practices and strategic mismanagement. Last year’s purported $11 million profit is now a $145 million loss.

Freedom Foods has revealed net asset writedowns and restatements of $590 million.

FREEDOM Foods shareholders are learning the extent of a scandal that has forced the Australian food manufacturer to pursue a significant recapitalisation to offset ballooning losses, including a $174 million loss for the 2020 year.

A litany of failures, from products being sold at unprofitable prices to delays building capacity at its Victorian manufacturing plants and a flurry of new product launches for little gain, has beset the company best known for its Milk Lab plant-based milks and Australia’s Own Dairy in recent years.

Freedom Foods announced in the middle of the year it had discovered warehouses full of obsolete and out-of-date stock and with product withdrawals, the losses would require a writedowns of $60 million.

The company went into a trading halt on the Australian Securities Exchange on June 24 and has remained untradeable ever since.

Among the new blows to shareholders was news of net asset writedowns and restatements of $590 million and that the company’s ability to turn its fortunes around largely hinges on a capital raising to be announced in mid-December, and therefore the market’s confidence in Freedom Foods’ ability to do so.

The company said it would need to raise up to $280 million in capital to get itself out of the hole it now finds itself in, although the size of the funding and how it would be raised was to be detailed by the end of this month.

Freedom Foods’ borrowings have blown out from $49 million in 2018-19 to $292 million this year, mostly through its existing main bankers, HSBC Bank Australia Limited and National Australia Bank.

The borrowing accounted for the major increase in Freedom’s liabilities.

Net assets have fallen massively from $234.7 million in 2018-19 to just $61 million this year.

An internal review of board members determined that chairman Perry Gunner, who had been a director for 17 ½ years, was no longer independent due to the length of his tenure, although it “does not consider this has impeded his ability to properly perform his functions as a director”.

Mr Gunner, a former chairman of barley trader ABB Grain Ltd, would not stand for re-election at January’s annual general meeting. “The board is undertaking a search for a suitable person to be appointed to the board as independent chair,” the company said.

Independent director Trevor Allen, who has been at the company for seven years, would also not seek re-election in January.

Mr Gunner described the company’s financial performance as “deeply disappointing”.

“Freedom Foods shareholders and employees have a right to feel angry and frustrated and they deserve to know that the board and new management team have been relentlessly focused on addressing historical matters and are instigating longer-term financial, operational and cultural improvements across the group,” he said.

An internal review is under way led by interim chief executive Michael Perich — the son of director Ron Perich — that aims to significantly simply the business. Options being canvassed include selling or closing non-core businesses, including its cereal lines and tinned seafood division. Dozens of products will be deleted or repriced after it was discovered during a warehouse consolidation program in May that products were being sold at prices that didn’t cover their cost of production.

It was around this time that the company discovered out-of-date, unsaleable and obsolete inventory and significant issues with inventory accounting practices that led the Australian Securities and Investments Commission to initiate its own investigation into the matter, which is still underway.

In June Freedom Foods' board initiated a series of investigations into its finances and operations with PwC, Ashurst, Arnold Bloch Leibler and Moelis Australia. Concurrently an audit by Deloitte and a forensic accounting investigation by PwC discovered “a range of accounting matters” going back years.

This has led to adjustments to prior financial statements dating back to 2018, and the asset writedowns and restatements of more than half a billion dollars.

Last year’s annual report showed the company generated an after-tax profit of $11.6 million off revenue of $476.2 million to June 30, 2019. The company is now reporting an after-tax loss of $145.8 million off revenue of $461.8 million for the same year.

The trading of shares is expected to extend until December 15 to finalise its financial position and prepare for a recapitalisation.

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