Tight credit | Ripples from banking crisis reach Canadian pulse companies
Two of Canada’s biggest pulse processing firms have felt the sting of Europe’s financial crisis.
A year that began full of optimism ended in bitter disappointment for Alliance Grain Traders Inc.
“The 2011 year would be categorized as among the most difficult the global pulse industry has ever faced,” company president Murad Al-Katib said during a conference call announcing AGT’s most recent financial results.
Earnings before interest, taxes, depreciation and amortization for the fourth quarter of 2011 were $9.2 million, down from $15.03 million the previous quarter despite a 21 percent increase in sales.
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Net debt for the year ending Dec. 31, 2011, is more than double what it was the previous year and accounts receivable has risen $36.6 million in the same time frame.
Al-Katib estimates the company lost $3 to $5 million of EBITDA due to customers defaulting on sales contracts.
The European banking crisis of 2011 has had a bigger impact on AGT than the U.S. banking crisis of 2008 because European banks are more active in emerging markets, where many pulses are consumed.
Tighter credit availability has resulted in diminished liquidity for AGT’s customers. The situation has been exacerbated by currency volatility in all the major importing markets and political unrest in the Middle East and North Africa.
“This uncertainty has contributed to importers significantly lowering their buying activities, leaving local market stocks in the low or relatively depleted states,” said Al-Katib.
“The global economic headwinds have become a significant factor in our business.”
Joel Horn, president of Legumex Walker Inc., used the same terminology to explain his company’s disappointing fourth quarter results.
“These headwinds are affecting the entire industry, but we believe we are well positioned to ride them out,” he said during a conference call with reporters and investment analysts.
The European financial crisis, currency fluctuations, political instability and a strengthening Canadian dollar have all hurt sales.
“These factors contribute to an environment where buyers have been reluctant to purchase additional product,” said Horn.
The company posted EBITDA of $2.7 million for the quarter and a net loss of $400,000 for the abbreviated year. The company was only in existence for 171 days in 2011.
AGT’s sales revenues were up quarter-on-quarter because of higher prices for Australian commodities as well as for beans, chickpeas and pasta. However, profits fell as sluggish demand for core products caused the company to sell at lower margins to keep plants running.
The company was forced to process unfamiliar crops such as flax and canaryseed at its Canadian facilities to make up for flagging lentil sales. It also processed more peas, which is not part of Alliance’s long-term strategy.
“We don’t want (those crops) to be the main driver of our assets because we are a value-added processing company,” said Al-Katib.
Margins have also been constrained by pushing product into the Middle East and North Africa to make up for slumping sales to Asian customers, who have been handcuffed by liquidity issues and currency constraints.
Al-Katib is convinced there will be a return to more normalized buying activity in the second half of 2012 as credit and currency markets improve and potentially lower crop supplies in India and Turkey are confirmed.
“I’m confident we have better days ahead for AGT,” he said.
Horn echoed that sentiment.
“We think many of these factors are transient,” he said.
AGT recently received an extension for its $130 million senior secured credit facility from a consortium of three banks, which Al-Katib said is a show of faith in AGT from the financial community. The credit facility will assist AGT with its sales program.
It continues to explore ways to reduce its reliance on North American production. The company wants to expand its presence in India by acquiring processing, warehousing and distribution assets in that country.
“We’re looking at India very seriously,” said Al-Katib.
Legumex Walker has a new $107 million secured credit facility that will be used to refinance debt, support working capital and fund potential new acquisitions.
