Elders AGM told financial position improving

James Nason, 20/12/2011

Elders says its focus on debt reduction and the re-direction of capital into traditional, higher performing areas of its business is already translating into improved sales and profit so far this financial year.

Elders chairman John Ballard told the company’s annual general meeting in Adelaide today that the  board was extremely conscious of shareholders’ disappointments and frustrations after the company posted a statutory loss of $395m after tax last financial year.

After trading above 60c in February, Elders shares were sitting at 23c today.

Despite posting an underlying after-tax profit of $4.7m for 2010-11, the headline result was a $400m loss from non-recurring items, overwhelmingly driven by the writedown of the company’s extensive forestry business.

At the start of this year Elders’ forestry business had a book value of $523m, and encompassed 50,000 hectares of freehold land and the management of 170,000ha of plantations.

Elders was the largest remaining player in the supply of certified plantation woodchip to Japanese markets, shipping up to 850,000 green metric tonnes per annum.

Mr Ballard explained that the former Futuris board had seen significant opportunities for plantation timber to replace native grown woodchip in Asian markets and in particular in paper production in China. To benefit from those anticipated structural changes, the company had invested $623m to build a leadership stake in the sector.

However, a number of events, including the contraction of Japanese demand and sharp falls in woodfibre prices in 2011, significantly undermined the investment. The forestry business recorded a trading loss of $4.4m this year and absorbed $29m in operating cash flow.

Mr Ballard said the investment had declined to a point where it could no longer justify retention, particularly in comparison with the superior outcomes available from releasing and redirecting the capital to debt reduction or investment in other areas of Elders’ business.

He acknowledged that the decision to exit forestry had clearly had a substantial impact on Elders’ balance sheet, with Net Tangible Assets per share falling from $1.50 to 55c.

“I can reassure you, however, that the decision to exit forestry is a necessary course of action for Elders,” Mr Ballard said. “The completion of the divestment will remove cash consuming and loss-making assets from Elders’ portfolio, and will enable a further reduction in debt and interest.”

Further costs of $23m had been absorbed in restructuring the business to simplify and extend Elders' debt facilities in the past year, which had included replacing eight banks and 19 US private placement holders with just five banks.

Reducing debts and the interest burden was the single most important thing Elders could do to improve profits, Mr Ballard said.

In the company’s 2011 profit results, interest absorbed approximately 80c of every dollar of EBIT generated by the company.

“Even reducing that figure to 50c in the dollar translates into a $10m increase in profit before tax.”

He said Elders had also divested several assets and operations, most of which produced an unacceptably low profit return. Discontinued holdings included the sale of the company’s shareholding in Rural Bank, the sale and re-chartering of the MV Torrens live export vessel, the cessation of Elders’ wool and grain trading divisions and the consolidation and refocusing of its Chinese operations.

“With the exception of the Rural Bank shareholding, these operations were not sufficiently profitable in their own right,” he said.

“Their discontinuation has brought costs and non-recurring items in 2011 but also released capital which can be redirected into a more sharply focused Rural Services Business.”

Looking at where the company saw opportunities to improve financial performance and share price, Mr Ballard said the improvement in underlying profit last financial ear provided good reason for confidence in the future of Elders.

Within that result were some “noteworthy and encouraging” outcomes including the strong improvement in Elders’ traditional network operations in Australia, where sales rose by 13pc and EBIT rose by 92pc compared to the previous year, and cost reductions of $23m or 6pc across the company.

He said signs from the new financial year were already encouraging.

“We are expecting the momentum evident in Elders’ underlying performance in 2011 to continue and be reflected in a much improved financial result in 2012,” Mr Ballard said.

“How, and when, this is reflected in the share price I am unable to predict.

“However, I can report that Elders’ sales and profit results for the first two months of the new financial year are in line with our expectations for improvement.”

On the issue of distributions, Mr Ballard said the restructuring arrangements had removed prohibitions on the payment of dividends to shareholders implemented in September 2009.

However the company currently regarded the reduction of debt as the foremost management priority, and therefore any consideration on potential distributions until at least the finalisation of the 2012 full year accounts was unlikely. 


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