''I know we are getting a reputation as being a company that only has bad news, but unfortunately we are where we are.''
CALLING a spade a spade is a quality for which the Elders boss Malcolm Jackman is renowned. It is an endearing quality, as is his ability to issue a massive mea culpa when required.
It may not be that the earnings debacle that the company announced yesterday could have been mostly avoided by Jackman, but it is easy to see why he and the company he runs have been roundly punished. Its prospectus earnings projections have proven to a fiction of the worst kind, and investors demonstrated their disgust yesterday with a 43 per cent demolition of the company's share price.
However, what is of equal concern is talk the bankers that pushed the company to undertake a recapitalisation and a purge of the management last year are once again on the war path.
Jackman told the Herald yesterday he suspected the banks would be unhappy but that at this stage there was nothing they could do.
The Elders statement yesterday said it was still sitting comfortably within its lending covenants with gearing (excluding trade debtor financing) sitting at 35 per cent and net debt of $394 million.
But like investors, the banks cannot be happy with the latest turn of events. ''The banks will be disappointed and will rattle their sabres at me … but we have an arrangement and they can't do anything unless we breach [lending covenants]'', Jackman said.
The trajectory for the recovery in this business is simply not holding to the track outlined by the company last year when it asked its investors to dig it out of a debt hole.
Some asset sales have taken place and others have not. But this is not the root of the problem.
The company gave the market an expectation that it would engage in a big operational overhaul and that earnings would respond accordingly. They haven't.
The outlook for the rural sector is at present as good as it has been in the past 10 years but farmers are not following the script of ploughing revenue back into the coffers of rural services companies.
The business plan that Jackman put in place to revive Elders appears to have been hugely optimistic.
Rural operators have found their own survival mechanisms - a big part of which has been to cut costs in their own businesses, which involves spending less on their own inputs.
They are still buying from Elders, and volumes are actually improving in most products, but farmers big and small are not paying for branded products. This is cutting a swathe though Elders's revenue, margins and earnings.
For example, chemical prices are down 36 per cent and fertiliser prices are down 23 per cent, while glyphosate has fallen a massive 42 per cent in the year to date.
Heaped onto these troubles are enormous falls in meat and livestock trading, thanks to the Indonesians all but cutting off the import of live beef, and a particular set of problems in the West Australian fertiliser market.
The latter two issues are said to be short-term (or at least rectifiable) but there is a big question mark over whether the decline in revenue from the core rural goods and services business presents a more structural problem. Monsanto, for example, which supplies the Roundup brand of pesticides, has abandoned the branded market in Australia and is supplying only generic product.
Jackman admits the new business environment is probably the sign of a structural shift and one which he is dealing with by changing what Elders calls its ''cost to serve''. In retail parlance, this is called the cost of doing business, and in most other people's language it's just called cutting variable costs.
In most businesses, the blunt tool used to do this is reducing staff. Elders will do the same as part of an effort to remove $45 million from the expense base.
Sounds simple enough, but success is all in the execution. This is not just about sacking packer-and-stacker and checkout staff.
There is a good deal of specialisation required in the marketing workforce in this particular area.
To manage the process, Jackman has already taken some big-ticket scalps in head office and will use the slower attrition method to reduce the rest of the workforce by about 10 per cent.
Whether the board takes the view that Jackman should be part of this number depends in part on whether the problems should have been reasonably forseeable.
The underlying earnings for the year to September 30 are now expected to come in at a loss of between $8 million and $14 million. This compares with the original prospectus target of a profit of $55.7 million, which the company made last September when it recapitalised its balance sheet.
It's hard to avoid the conclusion that the management was too optimistic in its assessment of a recovery in this business this year.
Jackman has raised cash from investors and sold some unwanted assets. He has also experienced some bad luck in parts of the business. But he has also presided over a massive fall in shareholder value and has arguably not reacted quickly enough to avoid the massive collapse in Elders's earnings.
Email a friend