Monday, May 01, 2006

Allan Barber: PPCS still faces hard climb over debt mountain

The recent releases of half-yearly results by Affco and PPCS confirm what they had flagged. The first half is never as good as the second six months, especially for PPCS, whose financial year starts and ends one month later than the rest of the meat industry.

But the impact this season has been compounded by a series of factors that have conspired to make it a difficult period for processors, at the same time ensuring their suppliers felt totally unhappy at what they saw as deliberate misinformation from meat exporters and failure to take farmers' business concerns into account.

The exchange rate came down too late to have any beneficial impact on lamb prices, which had already hit a brick wall because of serious oversupply of heavy lambs. In addition, poor returns for wool, pelts and offals contributed to a taxing spring for farmers and meat companies.

Early in the season leading up to Christmas, after the heavy old season's lambs had been slaughtered, grass growth wasn't sufficient for decent volumes of lambs or cattle to fill the works. Then, after Christmas, the South Island's dry continued, while the North's weather was punctuated with infrequent, but sufficiently regular, downpours to allow farmers to hold stock on farm.

Meat companies starved, as shown by PPCS' half-year trading loss of $26.7 million and Affco's sharply reduced trading profit of $3.8 million. PPCS has suggested its balance date exaggerated its loss by $40 million; in other words, removing September's loss and adding its March profit would have produced a trading profit before tax and asset sales of $13 million.

How much a change of year end would have affected last year's profit is open to conjecture, but it would have produced a result barely above break-even after asset sales, but before pool payments to suppliers.

The March result bodes well for a good second half for PPCS, which is suggesting a positive trading profit for the full year. The combined impact of South Island lamb and venison and North Island cattle and lamb earnings is likely to produce for the first time some of the benefits expected from the Richmond acquisition.

Affco has performed well over the past two years, demonstrating the benefits of stable shareholding, capital expenditure and cost control. Shareholders now receive regular dividends and the share price is underpinned by Talleys' offer for a majority shareholding.

The big differences between Affco and PPCS are the ownership, size and geographic spread of each, and their respective levels of debt. PPCS is a national farmer co-op with 24 plants and a $2 billion turnover; Affco is a listed company with half the turnover and all but one of its plants in the North Island. However, each company has similar levels of equity but with total liabilities of $152.8 million and $694.5 million respectively.

Affco seems to have achieved a stability unknown during its 100 years and, while profits will expand and contract with seasonal variations, it only has to focus on plant efficiencies and cost structures to maintain a profitable performance. Union negotiations pose a threat.

PPCS, on the other hand, still has a mountain to climb to reduce debt and build its farmer shareholders' equity, so it can afford to maintain plant efficiencies and pay a competitive price for its livestock supply. It is projecting shareholders' funds in excess of $260 million, an improvement of $35 million, by year end, which will be a significant improvement on the present position, but will still entail debt of at least twice equity.

* Allan Barber is a freelance writer, business consultant and former chief operating officer at Affco.


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