Tough times in the grain industry didn’t deter United Grain Growers Ltd. from posting some impressive financial numbers in what could be its last-ever annual report.
Earnings before interest, taxes, depreciation and amortization, or EBITDA, were a record $64.1 million in the fiscal year that ended July 31, 2001.
Cash flow was a record $39.9 million.
Operating income from grain operations increased by 82 percent and the company’s long-term debt was reduced by 10 percent.
At the end of the day, net earnings of $11.7 million, or 63 cents per share, were the company’s second highest ever, behind only the $16.3 million profit recorded in 1997-98.
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But chief executive officer Brian Hayward says even that’s not good enough.
“It’s nice to have record EBITDA and record cash flow,” he said in an interview Sept. 21. “But we don’t see our returns as being anywhere near where they need to be in the longer run.”
The company’s return on invested capital was just under five percent last year, he said, which is about half the level it should be in order to provide a proper return on equity.
“We’re basically earning as a company what you’d get by putting it into bonds, which is not a proper return for the longer term of the business.”
That’s why UGG is pursuing a merger with Agricore, he said. The two companies will be able to combine revenues while slashing expenses in a bid to boost net returns.
As for last year’s profitable performance, Hayward said one of the keys was a strong focus on keeping down costs.
“We’re very focused on our expenses,” he said. “You have to be that way whether you’re a grain company or a farmer. The margins just aren’t there for a lot of fat.”
He said there is no magical formula or “silver bullet” to explain the company’s profitable year.
“I don’t want to get into a huge amount of detail for competitive reasons, but a lot of it is just plain meat and potatoes business, managing your expenses.”
The company’s net earnings of $11.7 million reflect two unusual items: a provision of roughly $15 million to cover all future costs associated with elevator closures; and a non-cash accounting gain of roughly $7 million associated with the purchase of an annuity related to money owed to retired employees.
The higher profits came despite a slight drop in grain volumes at country and terminal elevators. They reflect lower operating expenses and slightly improved margins. Operating income in grain handling was $27.9 million, up from $15.3 million last year.
In the crop production services division, poor weather limited sales of farm inputs and forced prices down, resulting in lower margins. Lower canola acreage hurt returns in Proven Seeds. Nevertheless, operating income was slightly higher at $13.4 million.
Livestock services saw its operating profit increase by 25 percent to $11.4 million, due to increased sales, stable margins and the acquisition of Pro Form Feeds.
Farm Business Communications posted an operating profit of $1.4 million, down from $1.5 million the previous year.
Long-term debt declined by about 10 percent to $122.4 million, and the company’s debt to equity ratio improved during the year. Spending on new construction and acquisitions was down, reflecting completion of the company’s infrastructure renewal plan in the country and a decision to limit capital expenditures.
