Winnipeg, Manitoba-based Agricore United (AU), a leading Canadian agri-business, yesterday [Thursday] released the results of its Q1 as a combined company, as well as supplementary disclosure of the operations of the two “heritage” companies.
There was a net loss during the Q1 of C$11.8m and a net loss of C$17.9m for the six months, ended 31 January 2002. Although earnings are seasonally low in the first six months of the year, this year earnings have been adversely affected by last summer’s drought.
Nevertheless, the prairie-based firm insists that it is on track to achieve the business plan outlined in the prospectus filed in the fall of 2001. The plan is to achieve C$12.2m of synergies in fiscal 2002, with this amount growing to C$24.7m in the 12 months ended 31 October 2002. For AU’s first full fiscal year as a company, the 12 months ended 31 July 2003, the plan is to achieve C$49m in synergies.
In its Q1 of operations, AU’s cash operating expense fell C$9m relative to the level experienced in the same period last year for the two heritage companies combined. Excluding the effect of increased expense in the rapidly growing Livestock Services segment, operating expense fell C$12.5m.
“We are very pleased with the progress we’ve made combining two businesses into one-we have achieved synergies that have exceeded our expectations,” said Brian Hayward, CEO: “We have made substantial progress in integrating operations and systems. We have the support of employees-who recently voted in favor of a direct working relationship with the company. At the same time, we have maintained our share of the western Canadian grain handling market. We fully expect to achieve all of the cost savings we identified in the merger plan.”
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By GlobalDataSince the merger of United Grain Growers Ltd (UGG) and Agricore Cooperative Ltd took effect on 1 November 2001, the contribution from the operations of Agricore Ltd. is only included in the results from that date forward. As well, the comparative numbers only include the results from UGG alone. For that reason, proforma statements have been included in this report to provide a basis for consistent comparison. Gross profit for the two heritage companies for the same quarter one year earlier was C$136m. Gross profit has been negatively effected by the drought, and a very different seasonal pattern to sales of crop inputs (Agricore United’s largest business).
Consolidated financial results
Gross profit and revenue totalled C$102m for the Q1 ended 31 January 2002, up from C$56.5m in fiscal 2001. EBITDA was C$10.8m (versus C$17.7m for the prior period). EBITDA for the H1 was C$12m (versus C$21.3m). Comparative results for UGG alone last year do not fully reflect the new reality of AU’s business. AU is approximately two-and-a-half times the size of UGG and, as such, the impact of seasonal losses on the combined company was significantly greater than the impact on UGG alone. Conversely, the gains traditionally recorded in the Q4 (historically representing 80% of the operating income recorded in the year) will also be proportionately larger.
EBIT, or operating loss, for the H1 of fiscal 2002 was C$15.8m. The effect of last summer’s drought on grain handling volume reduced Q2 operating income by about C$14m compared to the prior year. Crop Production Services (CPS) operating income has also been adversely affected by a substantial reduction in fertilizer sales this year. In fiscal 2001, farmers increased purchases of fertilizer in the fall in anticipation of price increases related to escalating natural gas prices. This skewed last year’s fertilizer sales into the earlier part of the year – compared to the more normal pattern that is expected to occur this year. The sales pattern was further skewed due to unseasonably dry fall weather this year that reduced Q1 sales. This shortfall may be fully recovered over the balance of fiscal 2002 depending on moisture levels this spring.
Western Canadian grain shipments for the first two quarters of fiscal 2002 have decreased by over 13.2% year on year. AU’s 12.3% decline was slightly better than the industry average. Although industry shipments are expected to continue to decline over the last half of the year, AU may be cushioned by a smaller concentration of elevators in Saskatchewan – the area most impacted by last year’s drought. As noted last quarter, the income reduction resulting from low handling volumes is expected to be partially recovered under UGG’s integrated risk financing program. Grain Handling segment results are showing an improvement over last year as a result of including results on a combined basis from 1 November 2001 forward.
Livestock Services posted another quarter of record-breaking sales. Gross profit for the six-month period grew 52% to C$25.9m, and EBIT grew 91% from C$4.8m to C$9.2m as a result of contained expenses in relation to the increased sales and a gain on sale of the Unipork Genetics business of C$2.8m. As noted in the Q1, Unifeed Chilliwack, which was acquired in the Q2 of fiscal 2001, has contributed significantly to the increases in the segment. Livestock Services expenses for the six months have increased by C$4.6m due to that acquisition and have been more than offset through increased gross profit.
Farm Business Communications’ year-to-date EBIT improved C$336,000 to C$222,000 due to increased advertising revenue and reduced operating costs. Operating income was also negatively impacted by lower results from AU’s interest in the operations of CanAmera Foods. CanAmera Foods results have been negatively impacted by the drought, which has caused the price of canola seed to increase thereby putting pressure on crush margins.
Interest expense for the H1 of fiscal 2002 was C$13m compared to C$10.8m year on year; a relatively small increase given the increased size of the company. The small increase is attributed to the implementation of UGG Financial, the company’s credit program.
AU’s seasonal loss for the H1 of fiscal 2002 was C$17.9m (C$0.63/share). The Q2 loss was C$11.8m (C$0.29/share). Cash flow for the quarter was C$0.08/share compared to C$0.63/share in the prior year. On a year-to-date basis, cash flow was C$0.11/share compared to C$0.75/share in fiscal 2001.
Liquidity and capital resources
Non-cash working capital increased by C$71.3m during the H1 to 31 January 2002 compared to an increase of C$77.5m during the same period last year. These increases are seasonal.
Cash outflows from investing activities during the Q2 and year-to-date were about C$240m greater than the same period last year. This was almost AU Proforma Financial Statements Incorporating Agricore Ltd. and United Grain Growers Limited Operating Income Results entirely attributed to the merger with Agricore Ltd., which resulted in net assets acquired at fair market value for share consideration of C$241m. Capital asset expenditures decreased 9% compared to last year, reflecting the company’s planned reduction in capital spending in fiscal 2002.
Long-term debt was reduced by C$9m in the Q2 and H1 of this year compared to virtually no change in the comparable periods of the prior year.
Short-term debt increased by C$65m during the H1 compared to an increase of C$79.3m in the same period last year. Cash holdings increased C$27.2m compared to a decrease of C$3.4m last year, for a net increase in short-term financing of C$37.8m compared to a net increase of C$82.7 million in the H1 of fiscal 2001. Net short-term financing increases were reduced compared to last year because UGG Financial was not implemented until March 2001. Credit sales in the H1 of fiscal 2001 were therefore financed internally with short-term debt.
Share capital increased significantly as a result of the merger. Share capital increased by C$298m for the H1 compared to remaining virtually unchanged during the prior year. To effect the merger, 20,539,095 shares were issued to former Agricore members for C$241m. AU also issued 7,965,791 shares to raise approximately C$56m through a share offering under the terms of the short form prospectus dated 11 December 2001.
Looking forward
The six-month proforma cash expenses indicate a reduction in expenses of C$12.5m after adjusting for the increase in Livestock Services expenses. Livestock Services expenses have increased as a consequence of the feed plant acquisition in February 2001.
Further cost reductions will have an increasingly favourable impact on earnings for the remainder of this fiscal year and beyond.
“By the end of the July, we expect to have substantially completed our integration project,” said Hayward: “That would be months ahead of our original schedule. We’ll also have a much stronger balance sheet.”
Net indebtedness of C$770m at 31 January is still expected to decrease by about C$250m by 31 July as a result of cash flow from operations, divestitures, securitization of remaining inventories and increased utilization of UGG Financial.
“I’m proud of how quickly we have pulled together as one team,” Hayward says: “We are on track to achieve our goal of being the leading provider of agri-business services in Western Canada.”