Next week’s interim profit report from Nufarm (NUF) must be poor – why else would the company reveal a revamp of its Australian business well ahead of the figures due on March 26?
The usual strategy when results are weak or the company is getting criticised for a low share price, as Nufarm has been for much of the past six months, is to trot out some cost cuts and restructurings.
Usually, the clever company separates the two reports, with the revamp story preceding the profit report by a few days so the market and investors can be spun the story that a company has already moved to tackle whatever the problem(s) are.
And so it was with Melbourne-based crop protection group Nufarm which yesterday revealed plans to cut 15% of its work force over the next two years to save the grand total of $13 million a year.
A total of 105 of the company’s 673 Australian jobs will go in the revamp, which will be driven by the closure of its Lytton and Welshpool manufacturing plants and several regional services centres.
Nufarm shares have fallen under $4 this month – a 12 month low and a level not seen since early 2010.
Driving the slide have been investor fears about the impact of the dry conditions in some states, the drought in Brazil (a big market for the company), the continuing strength of the Aussie dollar, and concerns about the company’s governance.
The two consecutive hot, dry seasons in Australia have hurt Nufarm’s sales and and earnings as profit margins fall because of the impact of falling production on the company’s high fixed cost base in its manufacturing, logistics and warehousing operations.
NUF 1Y – Nufarm to revamp its Aussie businesses ahead of expected weak results
Last year, Nufarm’s Australian revenue fell 14% to $604.4 million while earnings plunged 67% to $35.4 million.
That means the forthcoming results next week won’t be pretty, seeing the drought has worsened, especially in Queensland in the last six months.
Yesterday’s news release and briefing from the management and CEO Dough Rathbone didn’t thrill the market.
The shares were up from $3.90 at the opening, peaked at $4.04, and fell to $3.99 in the afternoon.
Mr Rathbone said the new structure places stronger focus on product innovation and portfolio development and will improve utilisation of assets.
He said the loss of capacity from the phase-out closure of the Welshpool plant in Western Australia and the Lytton facility in Queensland will be offset by the expansion manufacturing facilities in Victoria.
Nufarm expects to incur one-off restructuring costs of up to $39 million, of which $28 million will be non-cash.
"This is about improving the business and more effectively meeting the needs of our customers with an efficient and cost-effective structure," Mr Rathbone said in yesterday’s statement.
Nufarm will reorganise its Australian regional service centre and warehouse network, closing six facilities but retaining key centres in major cropping regions.
There will also be an overhaul of administration and support roles and an unspecified headcount reduction.
A review of Nufarm’s New Zealand operations is ongoing and the early results of this study will be discussed with staff in coming weeks, the company indicated yesterday.
Investors should remember that Nufarm has been hit by drought and dry conditions for the past two years, without it being called an El Nino event – which is the driest period of all in the Australian climate and the generator of the most intense droughts.
Now the Australian Bureau of Meteorology and US government weather authorities have started warning that the chances are growing we will see an El Nino event later this year because of warming sea temperatures in western parts of the Pacific Ocean. That could very well deepen Nufarm’s woes if it eventuates.
