Meat processors benefit from buoyant times

Peter V O' Brien, Finance writer

Friday 23rd November 2001

A company chairman who has just reported a 96% profit fall shows high optimism when he says his organisation has been rigorous in affirming its core business and positioning itself for growth, profitability and international success.

Chairman Sam Lewis of meat processor Affco took that positive approach to the company's business.

He said a net profit of $574,000 for the year ended September 30, compared with $15.15 million in the previous year, both before unusual items, was disappointing for the board and shareholders.

Affco should be able to bounce back, because the past year was extraordinary by any criteria. Top executives left, a US marketing subsidiary was closed and the company sold the Mathias Meats group.

Other restructuring also had an impact on the company. Affco and Richmond are the two meat processors whose ordinary shares are listed but Alliance Group has unsecured notes listed and therefore also reports to the Stock Exchange.

Unusual items affected the three companies' final operating surpluses, while Alliance deducted pool surplus distributions to supplier shareholders before striking a figure of $37.18 million, compared with $17.17 million in 2000.

Alliance's pool distributions were $30.34 million, an increase of 55.6% on the previous year's $19.5 million.

Chief executive Owen Poole said the enhanced positioning of the company's products in the marketplace and the low value of the dollar, combined with higher productivity and reduced overheads, provided the basis for the record profit and higher returns to farmers.

He said returns from sheepmeat products to producers in the coming season were expected to be similar to those paid in 2001.

Richmond's tax-paid profit for the year ended September 30 was $20.65 million, up 77.3% on 2000's $11.65 million and ahead of the $19.7 million forecast in the prospectus before listing the company's shares and capital notes issue. The result included unusual items of $2.92 million.

Issues are popular among meat companies at the moment. Richmond announced last week another $50 million capital notes issue and Affco's 1:5 share issue at 25c is being made to shareholders on the register last Friday.

A closing price of 33c on Friday gave the rights a theoretical price of 6.7c. The issue will raise $11.25 million, to be used for "general corporate purposes, working capital and funding of capital expenditure."

It is fully underwritten by the four largest shareholders and "interests associated with management."

The underwriting decision was another indication of the company's positive approach, a situation some shareholders may not share to the same extent, although the size of a shortfall, if any, will prove or disprove that.

Meat processors obviously benefited from buoyant conditions in the primary products industries last season and, with the exception of Affco, produced results commensurate with their size. The three companies has total assets worth $991.95 million, combined revenue of $3.85 billion and year-end shareholders' equity of $505.39 million.

Richmond's return on average equity was 14.39% and Alliance's was 15.31%, based on a profit after pool distributions of $37.18 million.

Affco has a long way to go before reaching any satisfactory returns but that could happen in a year or two if Mr Lewis' view of the future is correct.

There were interesting figures in the companies' statements of cash flow, particularly related to operating cash flow.

It is normal for meat processors to have negative operating cash flow in the first six months of the year, because peak sales have yet to be achieved, while fixed operating costs must be met.

Affco's operating cash flow was $23.04 million, compared with only $1.89 million in the previous year, the main changes being solid rises in "receipts from customers" and "payments to suppliers and employees."

That was logical, given higher export meat prices and correspondingly higher payments to farmers.

Alliance's operating cash flow had a similar trend, going from $12.68 million in 2001 to $39.51million, again with substantial increases in receipts and the payments to suppliers and employees.

Richmond went against the trend, going from 2000's positive operating cash flow of $13.2 million to a negative $29.05 million.

It paid more to employees and suppliers (1.396 billion) than it received from customers ($1.391 billion). That difference accounted for most of the negative glow, apart from a $3.14 million increase in interest paid and a lift of $1.72 million in income tax paid. Sundry debtors went up substantially, offsetting the decrease in net operating cash flow. The debtors will presumably pay in the current year.

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