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I see there are no longer any investors in Noumi Limited (Formerly Freedom Foods) on Strawman. I’ve never owned it. I had no idea of the extent of the fraud and corporate cover up by the executive at Freedom Foods until reading this story in “The Age” today. Noumi as a business is still suffering from the former CEOs actions.
Are there any lessons to be learnt from this for other companies we own? What were the first signs of corporate governance going amiss? At what point were there clues the CEO could not be trusted? It makes me shudder to think this could happen with another company in our portfolio. Is it possible to safe guard against being caught up in this scenario, or is it unforeseeable?
I’ve exited a number of companies because I lost trust in the management, here are a few: Nufarm, Kogan, Rectifier Technologies, HighCom (formerly XTek).
‘Hidden factories’ and missing millions: Unravelling Milklab’s $590m corporate cover-up
I have just seen the following come up in the Australian.
$NOU (formerly Freedom Foods, $FNP) is one of my all time big fails in investing, losing 90%+ of my capital in a large position.
While it can be hard to detect fraudulent management behaviour - and I don't blame myself for that - I made three big mistakes:
It is important to learn lessons from your mistakes, and I think $FNP delivered a lot of educational value to me
Disc: Not held :-)
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Noumi will pay a $5m civil penalty and $50,000 towards financial regulator ASIC's costs in relation to court proceedings alleging disclosure failures and breaches by its former chief executive Rory Macleod and former CFO Campbell Nicholas.
ASIC sued the executives of Noumi (formerly Freedom Foods) in February 2023 alleging continuous disclosure failures, breaches of company director and officer duties, and false or misleading conduct.
The matter relates to the failure to disclose material information about the value of inventories in its financial reports for the full year ending June 30, 2019 and the half-year ending December 31, 2019. It is also alleged to have failed to disclose material information about its sales revenue, gross profit and profit after tax in its financial report for the half year ending 31 December 2019.
In its statement on Friday, Noumi admitted breaches on a qualified basis based on information that was known or should have been known by its former CEO and former CFO. "The company has cooperated with ASIC during the process," it told investors. The penalty is subject to consideration by the Federal Court on July 18.
After what I can only summarise as an accounting fraud, FNP has been left in tatters.
The balance sheet is an absolute mess and it's really hard to tell when/if we will see positive operating cashflows.
Despite the above I think there is some upside. I believe some of the brands FNP owns have very strong imbedded value and are very well regarded by customers, including myself.
Given that the convertible notes allow for interest to be capitalised I think FNP will pull through. At the current level of sales (circa $500 mil) if FNP can even get a 10% net profit margin that gives you a profit of around $50million dollars.
If the market cap of FNP on a fully diluted basis is around $500 million (assuming a share price of $0.70) then all of a sudden things are looking pretty good, especially when you consider how quickly sales are growing.
If I discount $0.70 in 6 years time back to today at 15% I get $0.31.
Will update as more prices of the puzzle are unveiled.
06-Nov-2020: AFR: Whistleblower raised Freedom Foods red flags with ASIC in 2019
You may need to be an AFR subscriber to read that article. Here's what Marcus Padley's daily newsletter ("MarcusToday") had to say about it this morning:
Excerpt from the article:
A whistleblower raised red flags with the corporate regulator over the accounting practices of Freedom Foods Group as far back as May 2019, but the agency decided to not act on the information at that time.
According to emails obtained by The Australian Financial Review, the whistleblower reached out to the Australian Securities and Investments Commission after becoming concerned about the very aggressive use of the capitalisation of items such as labour costs, gas, electricity, excess waste, cleaning costs and protective gear worn by staff.
"Virtually every P&L line was being capitalised," the whistleblower, who spoke on condition of anonymity, said.
"Head office – they were also doing their own capitalisation of costs on things like marketing and other head office costs… the reality was they changed the numbers, to make it fit. There was no accountability for anything."
Another source confirmed to the Financial Review that this practice was rampant in the business, which recently extended its trading suspension for another month until November 30 – taking it out to a five-month hiatus and raising questions over how much more bad news will come.
"A large proportion of all operational costs (about 70 per cent) were capitalised by the company," the other source said. "They were claiming everything from labour, utilities, chemical spend and freight variances."
The trading extension was needed in order for the board and the company's auditors, Deloitte, to finalise the accounts for the past few years.
Freedom Foods declined to comment on a series of questions asked by the Financial Review about its accounting practices.
"It would be inappropriate to comment pending the outcome of the ongoing investigations,” a spokesman said.
Freedom Foods is also seeking to finalise a possible $200 million capital raise backed by major shareholders the Perich family, who control 52.5 per cent of the troubled maker of kids' snacks Messy Monkeys, Heritage Mill cereals and MilkLab almond milk drinks.
Freedom Foods in June revealed accounting irregularities and a $60 million blowout of obsolete stock dating back to 2017.
The whistleblower advised ASIC that repair and maintenance expenses – which were merely to maintain existing performance of plant, and contract labor to maintain day-to-day operations – were disproportionately capitalised. Similarly, any adverse expense above standard was being capitalised under fixed assets.
The whistleblower outlined to ASIC that many expenses had been taken to the balance sheet to reach specific EBITDA (earnings before interest, tax, depreciation and amortisation) targets, which he estimated to be the motivation.
"These guys have additional capitalised costs on a conservative basis of between $25 and $30 million for this 2019 period. You can't believe the kind of shit they were capitalising. They were breaking all the rules of accounting. It was a textbook fraud," he said.
The whistleblower told the Financial Review that he raised this aggressive capitalisation strategy internally at Freedom Foods, but was told that the policy had been vetted by the audit committee, and agreed to by the auditors.
By July 2019, following several months of initial investigations, ASIC decided to not pursue the matter due to insufficient evidence that Freedom breached relevant laws. ASIC was unable to substantiate the claims, and did not not have sufficient access to company documents.
ASIC declined to comment, but the Financial Review can reveal that Freedom Foods is now under full investigation by the corporate regulator.
It is believed ASIC re-opened the case around April 2020, proceeding any public information being released about the company's dire position and its accounts.
The whistleblower also told ASIC about the out-of-date inventory. Freedom Foods was paying third-party warehouses to store this off inventory, valued about $15 million to $20 million at the time.
"I explained the auditors [Deloitte] were not picking this up," he said.
According to the whistleblower, Deloitte was not unable to pick up the inventory issue because the company was not providing the full data set to the auditor. In other words, the off inventory was not being added into the full inventory position, and the auditor did not question this, according to the whistleblower.
Logistics and freight costs were also an issue, with Freedom Foods unable to run distribution effectively, the whistleblower said.
"There was an emphasis of overproduction to bring the average fixed cost down, but in turn labour costs spiralled out of control," he said.
The whistleblower said he felt compelled to report to ASIC since he was raised with "certain ethical standards".
--- end of excerpt ---
by Carrie LaFrenz, who has more than 10 years' experience as a business journalist having previously covered healthcare, retail/consumer goods, industrials and agribusiness. She is based in AFR's Sydney newsroom.
[I do not hold FNP shares.]
July 1st, 2020: https://www.afr.com/companies/retail/disclosure-questioned-at-freedom-foods-20200701-p557wz
Disclosure questioned at Freedom Foods
AFR article, by Carrie LaFrenz, Senior reporter.
The disclosure around irregularities and the timing of investigations into the accounts at Freedom Foods Group have been called into question after heavy trading in the stock in the lead up to its suspension on June 25.
Industry insiders told The Australian Financial Review it was rumoured that former chief executive Rory Macleod was sidelined and “in real trouble” about six weeks ago as the company began consolidating its accounts for the end for the financial year reporting.
Two sources suggested disclosure could be an issue for the troubled cereals, snacks and drinks business, whose stock remains in a trading halt while it further investigates accounting and reporting shortfalls.
Freedom Foods is also is searching for a new managing director after long-serving Mr Macleod resigned Monday night less than a week after the exit of chief financial officer Campbell Nicholas, who had been in the role since 2016.
Their departures came as Freedom Foods flagged a blowout of $60 million in writedowns in obsolete stock dating back as far as 2017 – roughly half of its stock position from the first half of 2020. More writedowns are possible. PwC and Ashurst are investigating the company's financial position, including possible inflated asset valuations.
Executive chairman Perry Gunner said on a call to investors on June 23: "We're looking at everything. These matters have only arisen in the last 24 hours, 48 hours. I mean, we need to continue to investigate, continue to see what we can do about it."
However, one industry source questioned that timing. "It was rumoured that Rory was sidelined some time ago."
Another industry source, who also listened to the investor call and knows Mr Gunner said the "chairman's tone and approach – he was in complete shock".
A red flag was raised as far back as March 17 when the company told the ASX it proposed to issue up to 2.1 million securities to employees under its Equity Incentive Plan after the issue was not completed.
Mr Gunner clarified on the call to investors that the options were not being properly recorded, and therefore not properly valued at the time and "the charge was not properly identified, and included in the accounts".
A source suggested when the board realised there had been a disclosure issue around options, it should have triggered more investigations across the business, which should have been disclosed.
By May 29 – the day the company flagged $25 million writedowns in discontinued and obsolete stock and culled the interim and final dividends – 12.75 million shares changed hands. This was followed by 6.48 million shares traded on June 1 – which some corners of the market are calling questionable given the stock's average trading volume was just over 1 million shares per day.
Tony Perich and family, who control 54 per cent of the company, disclosed their spending over $3 million to buy shares over June 2 and 3. By June 24 – the same day Mr Macleod was put on "leave" but before a pause in trading – over 21.5 million shares traded hands.
As a matter of course, ASIC inspects trading in around announcements. A surprise departure of a CEO, and general governance would also catch the eye of the regulator.
One shareholder was not happy about the level of disclosure saying the board should have been highly alert to any irregularities in the current environment.
"To have two market updates saying that everything was okay, so encouraging people to buy stock, then to turn around and say actually we've got a problem, and then now to have this one is incredible," he said.
Sources said the events that have transpired showed the lack of rigour on the audit committee, as well as failure by the external auditors, Deloitte Touche Tohmatsu.
"Categorically – external auditors – have to take some responsibility," said one industry source. "The audit committee should be meeting with auditors and picking up on the flags of the auditors."
Freedom Foods, which declined to comment, is the largest supplier of almond milk to supermarkets through the Blue Diamond Almond Breeze brand and also makes So Natural and Vitalife soy and dairy drinks. Other brands include Freedom breakfast cereals, Messy Monkeys and Heritage Mill snacks.
--- ends ---
Carrie LaFrenz has more than 10 years' experience as a business journalist having previously covered healthcare, retail/consumer goods, industrials and agribusiness. She is based in the AFR's Sydney newsroom.
Further Reading:
https://www.afr.com/companies/manufacturing/freedom-foods-ceo-resigns-20200630-p557kb
AFR: Street Talk: Goldman Sachs runs numbers on Freedom Foods, drops conviction
by Sarah Thompson, Anthony Macdonald and Tim Boyd
July 2nd, 2020:
Embattled cereals, snacks and dairy company Freedom Foods rocketed to the top of equity raising watchlists last week when it announced a $60 million inventory write-down and its CEO and CFO left the building.
Talk about a triple whammy for shareholders.
Analysts at Goldman Sachs have modelled what a $150 million equity raising would mean for shareholders, who are already bracing for the stock to tank once PwC and Ashurst finish an investigation into Freedom's finances and it resumes trading.
In a note to clients on Thursday, the analysts said earnings per share could drop by between 18 per cent and 27 per cent depending on how deeply discounted the offer was.
The analysts said a $150 million equity raising would reduce Freedom's net debt to EBITDA to 2.5 times by December 2020.
Without a raising, Goldman Sachs thinks Freedom's net debt to EBITDA would peak at 4.9 times in December 2020, before gradually falling to 2.3 times by June 2022.
Freedom has not disclosed its debt covenants to the market but the analysts estimated that it would be somewhere around 3 times on a net debt to EBITDA basis, based on the company's Australian and New Zealand peers.
Goldman Sachs noted that it did not "incorporate an equity raising into our numbers at this stage, although we highlight this as a key risk" and said its equity raising modelling was for "illustrative purposes only".
A potential equity raising is just another thing for Freedom Foods to consider. There's also matters including the PwC/Ashurt investigation targeting the company's financial position, the FY20 results and the appointment of a new CEO and CFO.
In the meantime, the analysts removed Freedom Foods from the team's conviction list and downgraded the stock to "neutral".
--- ends ---
Sarah Thompson has co-edited Street Talk since 2009, specialising in private equity, investment banking, M&A and equity capital markets stories. Prior to that, she spent 10 years in London as a markets and M&A reporter at Bloomberg and Dow Jones.
Anthony Macdonald co-edits Street Talk, specialising in private equity, investment banking, M&A and equity capital markets. He has 10 years' experience as a business journalist and worked at PwC, auditing and advising financial services companies.
Tim Boyd is a journalist based in Sydney who writes for the AFR's Street Talk column.
[I don't hold FNP shares]
A great thread on freedom foods from Twitter user @snowcapresearch
https://twitter.com/SnowCapResearch/status/1278828363860324353?s=19
Well thats sucks.. Big gap don today on the news of CEO being stood down.
Increase in shorts over the last couple of weeks not a good look. Still mangment buying a heap of shares on market a month ago and now they can clear the deadwood and get someone better in there to run it.
I bought more in my personal portfolio this morning. Sure there may be more skeletons in the closet and it makes buying here uncomfortable.. But my the time you get reassurance you won't get this price.
Trippling down here in my own portfolio at ~2.90. Lets see how we go.
24-June-2020: https://www.afr.com/street-talk/freedom-foods-stock-tanks-as-ceo-goes-on-leave-20200624-p555nf
Excerpt:
Freedom Foods stock tanks as CEO goes 'on leave'
[by Sarah Thompson, Anthony Macdonald and Tim Boyd]
There's something amiss at listed cereals, snacks and dairy company Freedom Foods and investors aren't sticking around to find out what it is.
Fundies were left scratching their heads on Wednesday morning when Freedom announced its chief executive Rory Macleod was "on leave pending a further announcement", the day after its chief financial officer Campbell Nicholas resigned.
Freedom stock was torched in early trade on the news, with its shares plunging more than 16 per cent by mid morning, to $2.95.
A spokesman for the company told Street Talk the company was making no further comment to its ASX announcements.
In its Wednesday announcement, Freedom said Macleod's leave was "pending a further announcement that is expected to be made early next week".
Fund manager sources said Freedom's management was well liked and well known in the market. The company is majority owned by the Perich Family – who hold multiple seats on its board – and fundies relied on the CEO to look out for minority interests.
The news comes a bit more than 12 months after Freedom raised $130 million in fresh funds at more than 1½ times Wednesday's share price. That deal was done at $4.80, with the help of UBS and Veritas Securities.
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[Doesn't sound very positive unfortunately]
A stock that isn’t that exciting but one I have been keeping one eye on as it is owned by a few Fund managers I rate highly. When the recent downgrade came a couple of days ago I was asking myself I wonder whether those fundies think this price drop is warranted and perhaps getting out or maybe a buying opportunity.
Then the directors stepped up with some massive on market buying, a sign that they think the drop is overdone and worthy of putting some more cash to work. This combined with some sharp folks already liking it is a massive green light right here for me.
High conviction Buy.
29-May-2020: COVID 19 Trading Update
There is some good news in here - some green shoots in terms of seeing signs of the beginning of a recovery, but there's also enough bad news to see FNP down over 14% so far today.