Tough half year for meatworks as they scrabble for livestock

By Peter V O'Brien

Friday 7th June 2002

Substantial half-year losses from meat processors Affco and Richmond were understandable but frustrating for shareholders.

They reinforced the view expressed in The National Business Review last year (May 25, 2001) that the companies had a capacity to take one step forward and two back.

Erratic profit results go beyond the seasonality of activities, whereby the companies get most of their income in the second half, after "holding on" through the first six months.

The meal industry has suffered from structural imbalance for years, making it unusually susceptible to the climatic and stock procurement situations that occurred in the six months ended March.

Affco and Richmond have tried to overcome the general problems in their own ways.

The former's constant talk about restructuring and "reappraisal" of activities is losing credibility. It has gone on for at least four years.

Chairman Sam Lewis said in 1999 that the company's programmes to take costs out of the business, which were built on drastic writedowns and other cuts in 1997/98, would yield more than $50 million when completed.

Affco's loss for the six months ended March was $14.74 million, due mainly to a wet spring and summer and "intense domestic competition" for livestock.

"This crystallised in reduced margins in order to attract sufficient quantities of livestock."

Richmond cited similar matters when commenting on a $1.47 million loss for the first half. Chairman Sam Robinson said Richmond had a significant processing and supplier servicing advantage during peak supply period but that was "blunted" by the very flat livestock supply profile, the result of an exceptionally wet spring and summer and then "rampant grass growth."

Affco went further, blaming the climate and stock procurement problems. Mr Lewis said the impact of several factors had "highlighted the need to quicken the pace of restructuring and cost reduction initiatives to better enable the company to withstand these conditions."

"Measures to address these issues have already been implemented across the company. Significant progress has been made in the past few months to reduce fixed costs and improve plant efficiencies."

A continuing strategic review highlighted Affco's "unacceptably high" level of fixed costs, particularly in head office, in administration and at plants.

Mr Lewis said it was expected the restructuring programme would be concluded by the end of the financial year. He ended with the comment he was "confident that the foundations have been firmly laid for an improved future outlook, although in this industry that will not be without its difficulties."

Affco's reference to fixed costs was directly relevant to the companies' problems in the latest six months.

They operate expensive plants, with relatively high depreciation costs.

Affco took a $6.13 million depreciation charge to account in the six months ended March on property, plant and equipment with a book value of $115.63 million.

Richmond's half-year depreciation was $7.12 million on property plant and equipment worth $137.01 million.

Such figures and other high fixed costs demand maximum throughput of livestock at the companies' plants, which is one explanation for the industry's regular stock procurement battles, including bidding up payments.

Operators may prefer to take a margin cut to ensure they get livestock through the works, when the margin is a small proportion of the revenue-cost equation and the gross income available from increased throughput helps cover the fixed cost structure.

Affco and Richmond were caught in an unusual bind in the latest six months.

Price realisations for product ex-works were relatively high, particularly in the early part of the period but the problems associated with obtaining stock and the necessary prices paid for procurement led to a reduction in dollar revenue and erosion of margins.

The revenue figures in the accounts consequently disguised a higher proportionate decline in livestock volumes.

Affco's gross revenue was $494.34 million, down 9.6% on the corresponding period of the previous year, and Richmond's dollar figure was 2.6% lower than last year.

Richmond underscored the throughput issue in the interim saying the result's major influencing factors were a reality in what was predominantly a "volume-sensitive, seasonal business."

Mr Robinson said the $2 million pre-tax loss for the first half was $2 million, being a first quarter loss of $15.2 million and a second quarter profit of $13.2 million. It seems there could be a useful full-year profit, although lower than last year.

Richmond has emphasised for some time its transition from a meat company to a "food" company. Retiring chief executive John Loughlin has been preaching that message to various farming groups.

The transition has been based on the dairy industry model and moving from a commodity market mentality to presenting meals.

That may work in time and Richmond executives acknowledge the time factor.

Meanwhile, shareholders will look to another second-half "recovery" and no more backward steps after the next forward.

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