Nufarm profits for the 2017-18 have badly damaged out by the worsening drought. The news saw the shares slide more than 11% to $7.48. At one stage they were down nearly 12% in early dealings.
The company told the ASX yesterday that it expects earnings from its Australia and New Zealand business to be “significantly impacted” in 2017-18 because of drought.
It is now forecasting EBIT contribution from ANZ to be between $5 million and $10 million, compared to $51.6 million last year.
Nufarm said it “now expects the Group FY18 underlying EBIT result to be in the range of $A255-$A270 million.” That compares to the 2016-17 figure of $302 million, a fall of around 18% at the present time.
The figure will worsen judging by the tone of the Nufarm commentary in yesterday’s update which is very gloomy about the outlook for the 2018-19 year as well.
“Australia has experience one of the driest autumns since records began more than 100 years ago, leading to an extremely poor winter crop season,” the company said in in its statement.
Nufarm said that as a result the Australian crop protection market (its core business) “is down substantially as a result."
"The limited demand for crop protection products across the country has led to increased competition and high inventory levels in the channel, resulting in significant margin pressure.
"These seasonal conditions have also impacted the mix of products sold, with growers purchasing lower margin foundational products over higher margin differentiated products. Nufarm’s expected FY18 ANZ result also includes the impact of the previously communicated manufacturing plant upgrade works at Laverton North.
"It is not unusual to experience dry conditions in early autumn, with a normal winter crop possible if a rain break arrives by mid-June, with July being the very latest that growers are able to plant. Feedback from channel partners was that the post-emergent market was expected to be stronger year on year because knockdown products were not used on millions of hectares of crops that were dry-sown due to the seasonal conditions.
"It is now clear that continued dry conditions into July are contributing to one of the driest seasons on record in many crop regions.
"By the end of Friday 20 July, following feedback from Nufarm teams in the regions who had been communicating with growers and channel partners, and with reference to weather and crop forecasts, it was determined that the market had reached a turning point, and it was now considered unlikely that a viable crop season would occur in many parts of the country and the expected demand for post emergent products would not eventuate.
"The Australian business’ sales are weighted to the second half, and in a late season such as this year this is further exacerbated, with sales concentrated in the June and July months.
Anticipation of a normal winter crop season led to a high level of imports in the Australian crop protection market; however, the poor season has resulted in inventory levels across the sector that are substantially higher than anticipated.
“Given poor demand in FY18 there will be a substantial overhang of inventory in the channel. "Grower demand will depend on a return to normal summer conditions in FY19, however it should be noted that the Australian Bureau of Meteorology (BOM) is currently forecasting a dry spring and has issued an El Nino watch alert. Anticipated low levels of demand, coupled with the current over-supply, is expected to constrain sales and margin into FY19,” Nufarm warned.
"Given the weak result for the ANZ business in FY18, and the anticipated flow-on impact to FY19, Nufarm is currently reviewing the impairment implications for the Australian business. Nufarm remains committed to the current strategy for the ANZ business. Over recent years the company has delivered extensive productivity improvements and strengthened competitiveness, consolidating six manufacturing plants into three and merging two main customer brands into a single Nufarm brand.
"Despite the drought conditions Nufarm remains confident it has retained market share in Australia, in line with the long term strategic objective. Nufarm will continue to execute against the group strategy, delivering the previously announced transformation projects and embedding a culture of continuous improvement across the business.”
Nufarm said that as a result of the dry and weak sales it expects Net Working Capital (NWC) for the Group at 31 July to be $A200 million-$A300 million higher than last year.
"This reflects the high inventories in the Australian business due to the difficult seasonal conditions, and the higher receivables in the Northern Hemisphere countries resulting from the delayed seasons in those markets (long and relatively cold winter seasons). Average NWC to sales will remain at approximately 38%. The higher NWC at 31 July will adversely impact net debt and cash flow for the Group,” the company warned yesterday.
Add to this around $12 million off the 2017-18 result from slow approval in France of a key chemical.
