Report Card: Zespri Group mostly delivers what growers really need to know

By David McEwen

Friday 28th June 2002

New Zealand's sharemarket is unusual in that most of the nation's largest and most successful enterprises are not listed.

One of these is Zespri Group (a corporate entity that emerged from the Kiwifruit Marketing Board in 1996). It is owned by its growers and suppliers and dwarfs most listed companies with its annual revenue last year of $800 million.

Its latest annual report puts many listed company reports to shame for the quality and quantity of information it discloses.

This makes sense for a company that lists "improved communications with growers" as one of its achievements during the year to March 31.

Unlike most reports, it talks happily about its growth strategy over three pages - including a two-page foldout showing its "system" in graphical form.

Executive chairman Doug Voss takes nine pages instead of the usual one or two found in other reports to discuss the company's strong improvement in profit, the opportunities and challenges of the industry and strategy for improving performance.

Such topics are normally the province of the chief executive, but the reason for this quickly becomes clear.

Tony Marks needs 20 pages, including graphics, to discuss big picture issues such as social and environmental responsibility, the importance of innovation (such as its yellow-fleshed fruit known as Gold kiwifruit) and, most importantly, judging by the space given over to it and the company's core function, marketing.

Ironically, after outlaying an immense number of words, he sums up the company, its strategy and marketing focus in a single sentence, "New products do not sell themselves and that is why we must invest now in promoting Gold to consumers in strategically critical markets and use the excitement generated to pull along Green while also meeting the niche demand of organics."

The company is in good financial health and the report generates a self-confident air.

It reveals sales were up 11% to a record $800 million and net profit more than doubled to $7.2 million. Of this, $1.5 million is to be paid out in the company's maiden dividend of 7c per share.

As Mr Voss puts it: "It is pleasing to note that the first dividend is intended to be paid within two years of our capital raising - a year earlier than expected."

This capital raising means the company had equity at March 31 of $22.3 million against total assets of $77.4 million. At 29% of total funds this is not a conservative ratio but a major improvement on 2001's 10%.

A lowish equity ratio is acceptable when a company has strong operating cash flows. Zespri has those but runs close to the edge in leaving a net surplus of only $2-3 million in the past two years from income of $744-806 million. The company has little to sustain it or its growers if things don't go according to plan.

One significant omission in the report is detailed segment information. Zespri is a global business that buys and sells fruit from other countries as well as New Zealand and has offices in nine countries.

Yet it states in its report that "Zespri Group operates predominantly in one industry: the purchase, export and marketing of kiwifruit. Zespri Group operates predominantly from one geographic area: New Zealand."

This may be technically true but other companies don't hesitate show how much they earn from each revenue source and country they operate in.

Zespri is not a listed company and its report has a very different tone from listed company reports.

At first glance it seems to contain too much information, and favours supplier-oriented details rather than the standard exposition on profits and dividends.

That's likely to be because its readers are growers as well as owners. They rely on the company for their income and that is of more concern than dividends, which may well to be treated as a bonus.

In this major communication from their company they will want to know as much as possible about what it does and where it is going. In most respects, Zespri delivers.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's Investment Report. Web: www.mcewen.co.nz, email: davidm@mcewen.co.nz

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