ANZCO loss could have been worse, says Barber

Allan BarberANZCO’s published result confirms anticipated loss – but could have been worse, according to meat industry commentator Allan Barber.

ANZCO’s financial result to the end of September 2012 was posted on the Companies’ Office website on Friday in compliance with the statutory requirement for private companies. ANZCO reported losses of $25.6 pre-tax and $19.2 million after tax, Barber writes in his latest blog.

We now have the details for the big three meat companies which publish their results and, as anticipated, none makes pleasant reading – total pre-tax losses of $140.4 million and post-tax $102.2 million.

But after seeing the numbers from Alliance and Silver Fern Farms in December, it was possible ANZCO’s could have been quite a bit worse. That they weren’t appears to have been the combination of strength in beef and some good management decisions which mitigated the worst effects of a very difficult year.

ANZCO’s business is split approximately 65 percent beef and 35 percent sheepmeat and, while lamb was the major cause of industry losses last financial year, beef was quite profitable. Impressively, from the management perspective, cashflow was positive to the tune of $35 million, compared with a negative cash flow of $22 million the previous year. This was the result of good control of inventory and receivables, because the company recognised early that cash was doubly important in a year of tight margins and procurement competition.

ANZCO’s total borrowings consequently came down by nearly $30 million which saw the debt to equity ratio improve slightly. Its share of EU sheepmeat quota also increased for the second year in a row, indicating an increase in the company’s overall share of exports, although the meat companies are not currently filling their quota entitlement. This is due to the reduced lamb kill in recent years and market diversification to non-traditional markets for sheepmeat.

China has emerged as New Zealand’s second biggest sheepmeat market, although the volume percentage shipped there exceeds its value by a considerable margin. After several years when China was considered nothing but a disposal market for low value cuts, exports to that market have considerably lifted in value and demand from high end restaurants. With the global financial crisis still depressing European demand, the industry’s ability to diversify to China is a blessing.

Although Alliance has the biggest share of sheepmeat sales to China, ANZCO has very good Asian connections, particularly in Japan and Korea. Its majority shareholder is Japanese meat company Itoham which is also the main customer for the value added products from ANZCO’s Gourmet Foods subsidiary.

The current financial year is likely to be very profitable for all the meat companies which inevitably perform well in a drought, because both throughput and procurement prices are favourable. It should enable them all to restore the strength of their balance sheets after the caning they took last year, which makes ANZCO’s performance all the more creditable.

While a pre-tax loss of $25.6 million isn’t exactly a cause for celebration, the company must have been cheered to be able to reduce debt and inventory levels in such a difficult year. This stands it in good stead to take full advantage of more favourable conditions this year.

However, the most critical issues facing all the meat companies are the serious effects of the drought on future years’ processing volumes and the increasingly strong demands from farmers for industry rationalisation. While many farmers will reserve their right to continue to play the spot market, there will be increasingly strident calls for two way commitment between farmer and processor. How the companies respond, whether individually or collectively, will be a big challenge.

Allan Barber is a meat industry commentator. This article has appeared at www.interest.co.nz and at Allan’s own blog Barber’s Meaty Issues and can be contacted by emailing him at allan@barberstrategic.co.nz.

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