Rain at the beginning and end of last year’s growing season watered down profits for Canada’s largest pulse processing company.
Earnings before interest, taxes, depreciation and amortization (EBITDA) for Alliance Grain Traders Inc. were $37.2 million, down from $45.5 million a year earlier despite a 66 percent increase in sales.
“Certainly we’re disappointed with these results,” company president Murad Al-Katib told investment analysts and media during a March 30 conference call.
“We believe that these issues are related to supply disruption caused by the adverse weather issues and not due to fundamental changes in demand.”
Read Also
Avoid bargain-basement canola markets to ease tariff damage
China’s canola tariffs aside, the global oilseed complex has eased to a lower price level and is likely to stay there for now — that is, unless problems develop with crops in the U.S. or South America.
Robert Winslow, analyst with Wellington West Capital Markets Inc., said investors realize Alliance is still a “very sound business” and that there were unusual circumstances in 2010.
However, the poor results still make his company nervous.
“What it did do is it highlighted the cyclicality of Alliance Grain’s business,” he said.
Alliance is still too reliant on Canadian operations and the pulse portion of its business, Winslow said, despite Al-Katib’s attempts to diversify the company.
“It’s the right strategy. He’s just not there yet.”
Al-Katib told analysts 2011 will be a better year for processing volumes and margins.
He said demand looks promising and expectations for reduced Canadian lentil plantings will be offset by a large carryover leading to a similar total supply as 2010.
Alliance continues to eye expansion through acquisitions in the United States, India, China, Australia and southern Africa.
“Ultimately our company continues to believe in the strategy we have in place. We are undeterred,” said Al- Katib.
Winslow said investors might not be as willing to overlook last year’s results. He estimated that Alliance’s gross margin per tonne of handled product fell below $40 per tonne in the fourth quarter, which was below expectations.
“I do believe that it’s going to take at least one to two quarters for the investment community to regain confidence in the Alliance Grain Traders story,” he said.
Al-Katib said heavy rain at seeding and harvest caused a late and poor quality pulse crop. The company estimates 25 percent of lentils and chickpeas made the top two grades compared to the long-term average of 75 percent.
Many growers were released from their contractual obligations to deliver No. 1 and No. 2 product by the Act of God clauses contained in the documents.
That forced Alliance to fill sales orders with quality spot market product harvested before the fall rain.
“We had to pay significantly higher prices than contracted prices to deliver on our sales commitments,” said Al-Katib.
That situation, coupled with a lower use of the company’s processing capacity caused by the late crop, lowered fourth quarter earnings by millions of dollars. Some sales were made at a loss.
Conditions were more favourable in other markets where the company owns processing plants. American growers harvested their lentils before the fall rain.
In Australia, most of the crop was what would amount to a No. 2 grade in Canada, despite harvest rain.
Al-Katib said investors should be impressed the company was able to deliver fourth quarter EBITDA of $7.3 million in what he called the most challenging weather conditions of the last 50 years, even though it was down from $21.5 million a year earlier.
“It doesn’t get a lot worse than this,” he told the analysts.
He said management should be applauded for living up to its sales commitments during trying times, enhancing the company’s reputation as a reliable supplier.
He suggested there are other companies in the pulse industry that wouldn’t have done that.
“If they were faced with the quality issues that we were faced with, they would have shipped substandard quality to make sure they didn’t lose money.”
One analyst asked Al-Katib to comment on rumours that some Canadian pulse processors have gone out of business and that Alliance has gained significant market share because of its ability to upgrade quality through its colour sorting and splitting technology.
Al-Katib said its pulse market share is “stable to up” with the exception of very poor quality lentils shipped in bulk to India and Turkey.
“This is a year we wished we had five times the splitting capacity,” he said.
Another analyst asked why the company includes Act of God clauses in its grower contracts if it can’t pass the risk along to buyers in sales contracts.
Al-Katib said Alliance generally contracts no more than 33 percent of expected production and that every Act of God clause is offset by a stipulation binding growers to deliver the balance of their production to the company at an unfixed price, providing Alliance with the security of supply.
