Volume, volume, volume.
That’s what’s needed to produce the financial results of which Agricore United and other grain companies are capable, says the AU’s chief executive officer.
“The main issue that has challenged us has been industry-wide grain volumes,” said Brian Hayward.
Canada’s largest grain handling company last week reported the first annual profit in its five-year history, recording net earnings of $12.5 million, or 25 cents per share in 2004-05.
That represents a $23 million increase from the previous year’s loss of $10.2 million, or 25 cents per share.
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Hayward said while that represents a significant improvement, it’s not good enough.
“While we are pleased with the results, given the circumstances of the past year, they do not yet represent what we consider an acceptable level of financial performance for this company,” he told reporters and market analysts during a Dec. 15 conference call.
He said the company’s aim is to achieve a return on equity of 10-11 percent. The 2005 results translate into a return of two to three percent.
The key to achieving the goal is to get grain shipping volumes up to the levels of the 1990s.
“If the industry shipped 33 million tonnes and we got our proportionate share, our gross profits would increase by $30 to $35 million,” said Hayward. “That would get us close to 11 percent.”
The company’s gross profit in 2004-05 was $460.6 million.
Hayward added that given the large 54 million tonnes produced in 2005, and a sizable carryover from last year, there is a good prospect for more grain shipments this year.
If, as he expects, shipping climbs back to pre-drought levels, the company could handle 11 to 11.5 million tonnes in 2005-06, up from 9.9 million tonnes last year.
The company’s earnings before interest, taxes, depreciation and amortization (EBITDA), considered a key indicator of a company’s ability to generate cash, increased by 24 percent to $129 million.
In 2004-05, AU handled more grain at its country and terminal elevators, generating EBITDA from grain handling of $67 million. The company’s market share was unchanged at 35 percent. Average handling margins of $21.26 a tonne were also essentially unchanged.
Gross profits from sales of crop inputs increased by 15 percent to $185.9 million, fuelled by strong fertilizer and seed sales. The company’s profit margin in the crop production services division was 23 percent of sales.
Livestock services provided EBITDA of $19.8 million, nearly double the previous year’s $10.1 million. The volume of feed sales increased by 10 percent, reflecting strength in the hog, poultry and dairy markets and an increase in the number of cattle on feed, while profit margins increased by two percent to $43.66 a tonne.
Cash flow from operations was $75.3 million, or $1.64 per share, a significant improvement from the previous year’s $51.8 million ($1.12 per share).
Hayward said that in many ways cash flow is a better measure of the company’s progress than net income or return on equity.
“Because there was so much investment in the 1990s in new grain handling capacity, net income doesn’t really reflect the economic power of the business, because depreciation takes time to spin through,” he said.
Cash returns represent about eight percent of assets, not far from the company’s goal of 11 percent.
