It’s turning out to be a bittersweet year for Agricore United.
Canada’s largest grain company is shipping more grain, increasing its market share and earning higher margins on every tonne of grain handled.
That all sounds profitable.
But a late spring, cool, wet growing conditions through the summer and an early frost and delayed harvest have added a less pleasant taste to the year and cut into the firm’s earnings.
“It’s a bitter pill to swallow,” chief executive officer Brian Hayward said last week in announcing the company’s financial results for the third quarter of 2003-04.
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On the positive side, the company recorded a gross profit on grain handling operations of $69.6 million during the three months ending July 31, 2004, up from $37.1 million during the same period a year ago.
Grain handling volumes during the quarter were up by 1.2 million tonnes or 72 percent from a year ago, market share climbed to 35.2 percent and the average grain handling margin was $24.68 per tonne, or $2.04 higher.
However, it was a different story in the crop inputs and farm supply business, which generated gross profit of $106.7 million, down from $137.1 million last year.
The third quarter is traditionally the company’s strongest for selling crop inputs and services, but the weather didn’t allow that to happen this year.
Many farmers were unable to apply fertilizer because of the late spring and sales suffered accordingly. Excess moisture also prevented some producers from applying pesticides at the appropriate times, again reducing sales and revenues.
During a Sept. 16 conference call with market analysts and reporters, Hayward noted somewhat ruefully that in the aftermath of the 2002 drought, he said the recipe for AU’s success was to just add water.
“I guess I need to add the caveat, ‘not too much,’ ” he said. “And that heat helps too.”
When all was said and done, AU reported net earnings for the quarter of $42.8 million (72 cents per share), down from $44.9 million (75 cents per share) in the third quarter last year.
Earnings before interest, taxes, depreciation and amortization, or EBITDA, a key measure of a company’s financial health, were $94.6 million for the quarter, down from $100.2 million a year ago.
Cash flow from operations during the quarter declined by $10.7 million to $84.2 million, reflecting the decline in EBITDA and a $5 million increase in income taxes.
The third quarter results prompted at least one investment company to downgrade its ratings for AU.
National Bank Financial dropped its target price for AU shares to $6.20 from $10 and now projects the company’s stock will underperform relative to the rest of the grain sector over the next 12 months, down from its previous rating that it would match the overall sector performance.
It also reduced its estimated earnings per share for AU to a loss of 41 cents in 2003-04 and a profit of 32 cents in 2004-05, compared with its previous estimates of profits of 25 and 77 cents respectively.
Hayward tried to reassure investors, expressing frustration that the fledgling grain company, created by the 2001 merger of Agricore and United Grain Growers, has had to cope with tough times throughout its existence.
“This company is not quite three years old and two out of those three years have been difficult ones,” he said.
“What shareholders have seen since the formation of AU is not what people should be thinking is the normal situation going forward.”
Other highlights of the third quarter report:
- The livestock services division generated a modest increase in gross profit and revenue, reflecting sales of increased tonnage of feed and good returns from investments in swine production. However, that was offset by higher operating expenses and higher credit expenses. EBITDA was $1.8 million, down from $2.1 million a year ago.
- Operating, general and administrative expenses during the quarter totalled $95 million, up from $85.1 million last year.
- Total net funded debt stood at $355 million on July 31, down from $401 million one year earlier.
