Winnipeg, manitoba
September 16, 1999
Uniteg Grain Growers (UGG) announced today that its
earnings before depreciation, interest and taxes (EBITDA) for the fiscal year ended July
31, 1999 were $42.4 million - the third highest in the Company's history but still 30
percent lower than the record $60.6 million achieved in 1998. "A low in the
agricultural market cycle is the reason why UGG did not continue to grow in fiscal 1999,
said Brian Hayward, UGG's Chief Executive Officer. Since UGG became a public company in
1993, EBITDA has previously increased each year, from $25.5 million in 1994 to $60.6
million in 1998 - a compound annual growth rate of 24 percent.
Grain and oilseed markets hit 25-year lows during 1999. Canadian wheat exports were down
32
percent from 1998. Hog prices reached their lowest levels in 50 years. The inevitable
result -
depressed farm incomes - dampened demand for seed, crop protection products and livestock
feed. These market-related events had a substantial, adverse effect on UGG's operating
income. "It's unfortunate - after five consecutive years of growth since becoming
publicly traded - to report our first year of decline in operating performance'' Hayward
commented. "World agriculture is
weathering stormy economic seas - and UGG is, relatively, a cork in this ocean. Our task
is to
manage through this short-term adversity and strategically position the Company for the
inevitable
turnaround.''
Temporarily depressed markets have not deflected the Company from continuing to pursue its
long-term strategy, involving heavy reinvestment in Grain Handling infrastructure and
growth by
capital expenditure and acquisition in Crop Production Services and Livestock Services.
Such
spending reached $91 million in 1999, bringing the total in UGG's six-year history as a
public
company to $265 million. These investments have, however, increased depreciation and
amortization and interest costs in 1999, resulting in a more pronounced reduction in
consolidated earnings before interest and taxes (EBIT) and earnings after taxes (Net
Income). Depreciation increased by $3.5 million to $20.8 million and EBIT consequently
fell by $21.7 million to $21.6 million.
Interest and securitization expenses also increased by $2.2 million to $13.6 million and
the effective rate of tax increased to 56 percent in 1999, from 49 percent in the previous
year - a result of the regressive nature of Large Corporation Capital Tax. Net Income was
therefore down from $16.3 million in 1998 to $3.6 million in 1999.
All segments of the Company's business were affected by the downturn in agricultural
markets. Crop Production Services (retailing fertilizer, seed and crop protection
products) was impacted least, to the extent that it has now become the biggest contributor
to UGG's operating profit - the first time in the Company's 93 year history that grain
operations were not its largest business. Crop Production Services operating profit fell
by $3.9 million to $16.6 million in 1999 - notwithstanding a significant contribution from
the acquisitions made in this sector during 1998 and 1999. "While UGG is not directly
involved in agricultural production, it is not immune from the implications of
dysfunctional agricultural markets'' Hayward observed. "When farmers see poor
markets, they do as other business people do when times are tough - they cut back on
expenses, relying more on 'farm-saved' seed and extending herbicide application rates.''
Grain Handling suffered particularly from a substantial reduction in the Canadian Wheat
Board
(CWB)'s export programme, which reached its lowest level since 1989, the year following a
drought. UGG's CWB shipments were down by almost 700,000 tonnes or 22 percent. As a
result, Grain Handling operating earnings declined by $15.6 million to $14.2 million in
1999. Livestock Services had to contend with the precipitous decline in hog prices during
the earlier part of the fiscal year, which not only impacted directly on the profitability
of UGG's swine genetics business but also influenced the market for a significant customer
segment of the Company's feed manufacturing operations.
Operating earnings dropped by $2.2 million to $5.1 million, reflecting a similar reduction
in hog
related revenues and the lack of opportunity to continue the previous five years' growth
in earnings
from feed manufacturing.
Farm Business Communications operating earnings also declined by $323,000 to $1.2 million,
largely due to an increase in outsourced service costs. UGG's results were further reduced
by a lack of income from its interest in the Prince Rupert grain terminal which was closed
for much of the fiscal year, again due to restricted CWB sales.
"UGG is not pleased with the results for the year,'' declared Hayward. ``We remain
committed to
building an organization that provides proper returns to shareholders. And we believe the
results for 1999 - while not satisfactory - contain within them the indicators of
resurgent growth. As noted, in spite of the most difficult markets seen in at least a
decade, UGG posted its third best ever operating performance.'' Some highlights of this
performance include:
- Cash flow from operations was down by only 17 percent to $29.9
million in 1999 --again, the third highest on record. -Despite the fact that the market
for several major crop input product groups actually shrank in 1999, UGG gained market
share and increased total sales.
- While industry-wide country grain shipments declined by 12
percent, UGG volumes were down by 10.7 percent.
- At port position UGG also fared better than the industry --
UGG terminal shipments were only 1.6 percent lower than in 1998 compared to a drop of 20
percent in all grain shipments through Canadian ports.
- Strategic investments have laid the foundation for further
growth in Crop Production Services and Livestock Services as agricultural markets recover
in fiscal 2000 and beyond.
- The Company reduced grain handling operating expenses by a
further $3.4 million in 1999 - bringing the reduction in operating expenses since the
Company formally embarked on a restructuring plan in 1996 to over $10 million per year.
- Corporate expenses were reduced by $1 million, to $17.4
million, in 1999.
- The Company's financial position remains strong; although
leverage increased during 1999, the ratio of debt to assets employed was still well within
-- indeed, at the lower end of - the Company's target range.
"Commodity markets appear to have hit the bottom of the
cycle and current prospects for the 1999 Canadian harvest are better than average,''
Hayward added. "The CWB and private trade have good sales in prospect through the
fall and current industry forecasts suggest that Canadian grain shipments could increase
by as much as 20 percent in fiscal 2000. UGG is well positioned to take advantage of an
agricultural recovery - returning the Company to its longer-term growth track.''
UGG is one of western Canada's largest agribusiness firms. Founded in 1906, the Winnipeg
based company is diversified into crop input sales and distribution, grain merchandising,
livestock production services and farm business communications. UGG is publicly traded on
the Toronto Stock Exchange and Winnipeg Stock Exchange under the symbol "UGG''. For
more information on UGG contact the company web site at www.ugg.com or
www.ugginvestor.com.
Company news release
N2113 |
