Freedom Foods financial strife linked to ‘accounting matters’

Dairy, cereals and snack food manufacturer Freedom Foods was heading on a growth trajectory. But what went wrong?

Messy Monkeys is one of the brands in Freedom Foods’ cereals and snack division, which is now undergoing a strategic review.

IT’S probably appropriate that dairy, cereals and snack food manufacturer Freedom Foods has a brand called Messy Monkeys.

A look at the Freedom Food’s financial reports shows the mess the company now finds itself in — all under the watch of recently departed senior managers and, indeed, some current board members.

In the space of a few months this year, Freedom Foods has moved from becoming a major food and beverage business to a struggling performer where shareholders have lost massive value.

By the end of June, Freedom Foods had discovered its warehouses were full of obsolete and out-of-date stock that had to be dumped at a loss of $60 million.

Its chief financial officer Campbell Nicholas and managing director Mr Macleod resigned and an investigation began into the company’s finances.

That investigation, released last week, showed Freedom Foods’ losses were nearly $600m, previous financial reports seriously misstated the company’s fiscal position and it was selling product at less than the cost of production.

Further, delays in commissioning its Shepparton lactoferrin plant had resulted in wastage and lower yields of the nutritional protein.

Even its surplus milk was being sold to other dairy companies at a loss.

Chairman Perry Gunner said in Freedom Foods’ annual report, released last week, revenue had grown every year for the past five years.

“What has become clear, however, is that the growth obtained by the group was not profitable growth in a number of its businesses,” Mr Gunner said.

“What has also become clear is that some aspects of the culture within the business were not aligned to the best interests of all stakeholders.”

Freedom Foods engaged a range of external consultants including accountancy business PwC, legal firms Ashurst and Arnold Bloch Leibler and financial services adviser Moelis Australia to investigate.

“Those investigations identified a significant number of accounting matters, some of which contributed to selling products at prices insufficient to recover production and operating costs,” Mr Gunner said.

Freedom Foods was forced to restate the financial accounts for 2018-19.

Its revenue was reduced marginally from $476.2m reported last year to a restated position of $461.8m. But the $11.6m net profit after tax has now emerged to be a $145.8m loss.

The company reported an after tax loss of $174.5m for the 12 months to June 30 this year.

Net assets have slumped from $234.7m in 2018-19 to just under $61m this past year.

Net tangible assets at June 30, 2019, was $1.92 a share. Now it is 8.75 cents a share.

Mr Gunner said Freedom Foods was co-operating with the Australian Securities and Investments Commission on the findings of its financial investigations.

Freedom Foods is now seeking $280m in funding from a capital company to prop up its business.

Details on that lifeline are expected to be announced in coming weeks.

The directors said if those negotiations failed, the company would reassess its options, including extending its debt facilities with existing bankers HBSC Bank Australia and National Australia Bank and selling non-core businesses and/or assets.

Freedom Foods is reviewing its cereal and snacks division, which has plants at Dandenong in Victoria and Leeton and Darlington Point in the Riverina.

Proportionately, the cereals and snacks division, which includes the Messy Monkeys brand, has made the highest losses relative to revenue.

For each of the past two years, it made losses of $34m from revenue of $80.9m in 2018-19 and $69.9m in 2019-20.

Dairy and nutritionals made a loss of $52.4m but off revenue of $362.9m and the plant-based drinks business is profitable.

The company has been in a trading halt an the Australian Securities Exchange since June but the share price, which last traded at $3.01, is expected to tank when trading resumes.

After 17 years with the company, Mr Gunner will resign at what is likely to be a fiery annual general meeting in January.

Another director, Trevor Allen, with seven years’ experience, is not seeking re-election.

There are good arguments for Tony and Ron Perich, who have been board members for 14 and 15 years, respectively, to depart as directors, but that is unlikely, given their family company, Arrovest Pty Ltd, owns 52.5 per cent of the shares.

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