Goodman Fielder restructurings come to a head

Friday 14th December 2001

Mao Tse-Tung was big on the concept of perpetual revolution but companies prefer to get their restructuring over with and return to profitable growth as quickly as possible.

It is rare to see a company like Goodman Fielder, which has been restructured under several managing directors over at least a decade without seeming to have delivered any significant improvement in performance.

Now it seems matters have come to a head with a strategic review that chairman Jon Peterson says in the company's latest annual report extended to such options as "a breakup of the company and even an outright sale of the entire business."

The outcome of this review was to go with a plan developed by management to pull the horns in and become an Australasian-focused business. This goes directly against the plan of a decade ago, when expansion into Asia was seen as the main ingredient of success.

There seems to be some difference of opinion about the company's performance. Mr Peterson notes that a year ago he had told shareholders "that the board of directors was not satisfied with our recent performance."

However, chief executive David Hearn, who was replaced in October by food executive Tom Park after six years in the job, stresses that "the business is in much better shape than when we started the group-wide restructuring program six years ago."

If so, the benefits have yet to show up in the bottom line. The report has a five-year performance summary which reveals:

Pre-tax margin on sales this year was 7.9%, lower than in 2000 (8.1%) and 1998 (8.0%) although well above the other two years

Net margin (before what the company refers to as "significant items" that includes restructuring costs and this year tipped Goodman Fielder into a $A78.3 million net loss) was 3.9%, lower than 1998's 4.6% in 1998 and 4.1% in 2000

Shareholders' equity as a percentage of total assets has declined from 59.4% in 1997 to 42.6%

Judging by a graph in the chairman's review, one of only two in the report, the company is proud of having maintained dividends at 7.5Ac for the past four years. The steadiness of dividends masks a marked variability in the company's ability to afford them.

The review shows earnings per share comfortably exceeding dividends per share in each of those four years. However, the profit figures exclude the aforementioned "significant items." Add these back and we find that in each of the past three years, Goodman Fielder has paid out more in dividends than it earned. Doing it once might be acceptable if the dip in earnings was genuinely temporary, but that is debatable when the company is going through a protracted restructuring. Doing it three times borders on the reckless.

Another page, showing industry and geographic segment data, also proves revealing.

One thing that stands out is how much more profitable the New Zealand business are compared to the Australian. Another way of looking at it is that New Zealanders are paying much more for their foodstuffs than Australians.

New Zealand assets made a profit of $69 million in 2001 on sales of $520 million, a margin of 13.3%. In Australia, the company made $123 million from sale of $1.96 billion for a margin of just 6.3%.

The return on assets shows an even bigger gap, with New Zealand assets delivering a return of 19% against Australian ones producing a mere 7.7%.

Lest it be thought that something unique to either country is responsible for such a difference, the margin on non-Australasian assets was also lower than New Zealand's at 8.9% on sales and 9.7% on assets.

On the whole, this report expresses itself in a clear and straightforward manner. The tone and style is minimalist, befitting a company that is keen not to waste money when shareholder returns are inadequate.

Most importantly, it manages to exude a sense of confidence that, this time, the restructuring will produce results. If justified, that is the report's greatest accomplishment.

David McEwen is an investment adviser and author of weekly share market newsletter McEwen's investment report. Internet: www.mcewen.co.nz Email: davidm@mcewen.co.nz

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