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Tough year reflected in stormy AGM for Wellard Limited

James Nason, 30/11/2016
Mauro at the helm of the Shearer

Wellard Limited CEO and major shareholder Mauro Balzarini at the helm of the MV Ocean Shearer at its launch in China earlier this year.

Australia’s largest cattle exporter says tough trading conditions are expected to continue for the first half of 2017 due, driven by continued high cattle prices.

However, as Australian herds rebuild on the back of recent rain, and an expectedly large Chinese appetite for Australian cattle begins to fulfil its long-held promise in the next 12 months, Wellard Limited predicts normal trading conditions to return in the 2018 financial year.

In his chairman’s address to a standing room only crowd during yesterday’s Annual General Meeting, David Griffiths said it was clearly evident the company has endured a challenging start to listed life since floating in December 2015.

Mr Griffiths said pressure on earnings and working capital meant Wellard Limited is likely to breach some of its loan covenants for the current half year to December 31.

Shareholder discontent was clearly evident in the drama-charged AGM, where four resolutions put forward by the board were rejected by shareholders.

First-Strike

That included a “first strike” for the Wellard Limited board, with 56 per cent of shareholders voting against its remuneration report, which outlines each director’s individual salary and bonus.

The move technically means a board spill could be forced if the next remuneration report is rejected again at next year’s AGM.

(What is a first-strike? The “two-strikes” amendment was introduced to the Corporations Act in 2011 in response to growing concerns about executive pay levels, and gave shareholders the ability to vote for or against a company’s remuneration report.

If the remuneration report presented to an AGM does not attract 75 percent of the votes cast (or in other words is opposed by at least 25pc of votes cast), then a company records a “first strike”.

If the remuneration report at the next AGM incurs a “second strike” (ie also receives a no vote of at least 25pc), then the whole board must stand for re-election by the shareholders at the same AGM to be voted in or out. If this ‘spill’ resolution passes with 50 per cent or more of eligible votes cast, then a ‘spill meeting’ will take place within 90 days.)

The first strike against the remuneration report was one of four resolution put forward by the Wellard Limited Board that were rejected by shareholders at the AGM.

Shareholders voted against the granting of executive share options to chief executive and major shareholder Mauro Balzarini, and against the company’s executive share option plan.

In addition, a resolution calling for a 10 per cent placement capacity was defeated.

However, an attempt by Wellard’s third largest shareholder, Pakistani meat and livestock trader and Wellard competitor Tariq Butt, to have his nominee Tyrone Dennison elected to the board was not successful.

Shareholders did approve resolutions to confirm the appointment of chairman David Griffiths and director Philip Clausius, and the appointment of former Hancock Prospecting chief development officer John Klepec as a new director, and former Wellard Limited chief financial officer Greg Wheeler as a non-executive director.

A challenging start to listed life

In his first address as Wellard Limited chairman, Mr Griffith said it was clearly evident to all shareholders that the company has endured a challenging start to listed life.

Soon after listing it experienced two vessel breakdowns. While other vessels were chartered to ensure it met its customers’ needs, Wellard Limited’s business model provided maximum returns “when we own and operate vessels”.

In the second half of the financial year Wellard was acutely impacted by the wettest ‘dry season’ in years.

Limited cattle supplies led to the highest cattle prices since the Eastern Young Cattle Indicator was established in 1996, pushing the market to levels that customers had resisted.

The result was repeated profit downgrades, damage to the company’s credibility and a tumbling share price. From a listing price of $1.39, Wellard shares are now trading at around 20c.

“Wellard must now work hard to earn the trust and confidence of investors through operational excellence, solid and improving financial results and, at the right time, growth,” Mr Griffith said.

Pointing to positives

Despite the setbacks, Mr Griffiths said the company had achieved a positive a pro forma net profit after tax of $14.8 million.

This was achieved because the company had reacted quickly and responsibly to the issues it was facing, he said, including diversifying its cattle sourcing options from South America, and rebuilding markets in Turkey, Egypt and Israel.

“There were some initial teething problems as we quickly ramped up our operations, but they have been largely overcome,” Mr Griffith said.

“I note, however, that Australia will remain our primary supply market for the foreseeable future.”

Other highlights he mentioned included Wellard retaining its position as Australia’s largest cattle exporter, shipping 425,000 cattle globally for the year, and exporting and/or processing 384,000 sheep and goats.

The company also launched a new vessel, the world’s largest specialist livestock carrier M/V Ocean Shearer, which just pipped the M/V Ocean Drover. The Shearer and the Drover were the company’s most profitable vessels, he said.

Wellard was also a leader in animal welfare, he said, and in some cases had made its technology available to other exporters, so the whole industry standard was lifted.

Capital expenditure program wound back

Despite those highlights, the tough trading environment had forced Wellard to slow down its capital expenditure program.

It has pushed back construction time frames for Pre-Export Quarantine facilities in Darwin and Portland, the Wellao Joint Venture development in China, and the M/V Ocean Kelpie.

New CEO John Stevenson has also been instructed to implement a rigorous cost cutting program.

Covenant breach

Mr Griffiths said the tough trading environment had placed pressure on Wellard’s current earnings and working capital.

The company was likely to breach some of its loan covenants for the current half year, he said.

“In the annual report, Wellard referred to certain breaches of undertakings with the working capital facility and the likely breach of certain financial covenants measured at 30 September 2016.

“We are advanced in dealing with our bank to amend or waive these breaches however the continuation of subdued trading conditions will mean that Wellard is likely to breach certain financial covenants at the half year to December 31 2016.

“We are in constructive dialogue with our banks and believe that we will be able work through any issues arising from the half year result.”

China demand will be key

Mr Griffiths said some positive signs were emerging that, if continued, would assist Wellard in the second half of the financial year.

Australian cattle prices had started to fall a little, which had made purchasing somewhat easier and importers had been able to pay a little extra for cattle.

“If sustained, the recent small decline in the Australian dollar relative to the US dollar will also aid the restoration of margins, particularly when the wet season finishes around March 2017.

“With the passage of time cattle sale numbers, and steers in particular, can be expected to return to a more traditional supply model and therefore return to a more normalised and profitable market.

“We are expecting that our China live export trade will commence in the second half of the current financial year.

“As we ramp this new market up it has the potential to absorb a significant amount of shipping capacity on longer voyages thus reducing supply and improving trading conditions.

“This increase in the Australian trade relative to the South America trade will also improve our working capital position.

“Overall, we expect that the first half of FY2017 results will reflect the current tough trading conditions experienced in the later part of FY2016 before seeing some improvement in the second half of the financial year with more normal trading conditions becoming evident in FY2018.”

Wellard shares closed at 19.5 cents per share, down 0.1 per cent.

The Australian Financial Review reported today that Butt Nominees, the company’s third-largest shareholder, which contributed to the large votes against key resolutions, placed a sale order on 10 million of its 57 million shares in Wellard immediately after yesterday’s AGM.

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