Rural services company Elders has downgraded earnings guidance and now expects a full year loss because of low prices for farm supplies, subdued real estate activity and the collapse of management investment schemes in the timber and forestry sector.
The impact of the slump is dramatic, a turnaround of nearly $70 million in the underlying result.
The forecast has been downgraded, even though the company has more than three months left to go in its 2010 financial year.
That saw the shares plunge 48% in early trade yesterday as investors digested the downgrade (which was promised last Thursday) and found nothing to their liking.
The shares ended down 46.3%, or 38c, at 44c, the lowest since the company was listed in 1981.
Underlying profit for the 12 months to September 30 now is expected to be a loss of between $8 million and $14 million, according to Elders’ statement to the ASX yesterday.
That compared with the prospectus (for the recent fund raising) target of a profit of $55.7 million.
Looked at another way, it is the 4th downgrade for Elders in the last year.
Elders reported an underlying profit after tax of $1.1 million for the 2010 first half.
Elders now joins Sigma Pharmaceuticals and Alesco Corporation in reporting earnings downgrades that have shocked the market with their size and suddenness.
CEO, Malcolm Jackman, said in yesterday’s statement that the company was not earning enough revenue from rural services sales to achieve guidance, especially after a downgrade to its forestry MIS sales forecast earlier this month.
Elders said it had previously undertaken to provide the market with an update on its earnings outlook after the peak June quarter sales period for farm supplies concluded.
"The bottom line is that while we have lifted our volume, cash, costs and margin performance, the prices and activity levels in current markets are not permitting sufficient revenue to be generated. Uncompromising market conditions have also been compounded by ongoing tight working capital availability within the rural sector," Malcolm Jackman said.
”There is a greater proliferation of low priced generic product and a much greater willingness by growers to use cheaper generic product over branded items.”
He later apologised on a conference call.
”These numbers are not the numbers that we as a management team and particularly I as a CEO want to be talking about.
”We are taking decisive action to try and rectify the situation and you will need to continue to be patient with Elders on the way through.”
The company said results from New Zealand and the real estate divisions also reflected subdued market conditions, with those businesses down $4.5 million thanks to falling gross margins.
"Even though our margins are up as a percentage of sales, the impact of ongoing lower prices in agricultural chemicals alone has acted to reduce gross margin by roughly $12 million in the first 8 months of the year" Mr Jackman said.
"The lower earnings from Rural Services, coupled with the lower MIS income expected from Forestry and announced previously, means that Elders has recorded a break-even underlying after tax profit for the 8 months to May 2010.
"While this is well ahead of the corresponding underlying loss of $(16.8) million for the previous corresponding period, it is well behind the budget comparative for the period of $25 million."
Elders said its cash position was strong, with $110 million in cash and available credit at May 31. The company also said it was well within its covenants with its banks.
Mr Jackman said improvements in operations and cash and cost management had been overwhelmed by the fundamental changes in the rural service and forestry markets.
He said Elders planned to reduce its cost to serve by $45 million, or 11%.
Elders plans to cut the lowest 10% of performers out of the business put a recruitment and replacement freeze in place and create a flatter executive structure.
Mr Jackman would take responsibility for the Rural Service performance personally and CEO Mike Guerin has resigned because his position was no longer viable.
Elders added that it planned to scale back its forestry managed investment structure activities with a focus on operating existing projects.
A breakeven earnings before interest and tax result is being targeted for the MIS business in the 2011 financial year.
