A cost cutting drive across Ruralco’s diverse farm services network is not expected to mean widespread cuts to agency operations, although some branches and Total Eden water equipment offices are under the microscope.
Ruralco this week retrenched seven staff in South Melbourne as it closed its southern live export subsidiary Frontier International Agri (FIA).
It also confirmed the restructure of its Total Eden business, likely cuts to non-core assets and some branch rationalisation.
Ruralco has also surprised the share market by tipping a big profit downgrade to between $3 million and $5m for the 2015-16 trading year - just a few months after reporting a record first-half profit.
Despite prospect of a bumper spring and summer season in many cropping and grazing areas, company restructuring costs totalling up to $15m have collided with tough live export market conditions and sluggish cropping sector sales to hammer its balance sheet.
Its share price sagged under $3.23 this week - down from $3.77 in July - as investors reacted badly to falling profit expectations.
Managing director, Travis Dillon, said underperforming parts of the network needed to be reviewed, but he did not anticipate many stock and station agency branch closures.
In fact, Ruralco was still looking to expand its farm services footprint if the right opportunities arose.
However, the Total Eden business, acquired for $57.4m in 2014, had been reviewed by new executive general manager, Peter Weaver, who was now instituting rationalisation strategies, including site by site operational decisions.
“We’re trying to make sure we’re in the right locations to properly service our main customer base and can deliver improved operating performances,” Mr Dillon said.
“I expect a lot of costs savings across our businesses will come from getting more efficiencies into our back end operations and supply chain.”
Ruralco posted a $10.8m net profit after tax in May - up three per cent on the same first-half period last year.
However, second half earnings have been cruelled by strong buyer competition for limited supplies of young cattle which have which left little room for profit in the live export trade to near northern markets such as Indonesia.
Ruralco’s live export business has also been hurt by the Department of Agriculture’s cancellation of its southern division licence after a June air freighted dairy heifer consignment tested positive to Bovine Johnes Disease in Japan.
A dry autumn also restrained farmer spending on fertiliser and crop chemicals.
Persistent rain has since followed in many areas, making application of crop inputs particularly hard in many boggy eastern Australian cropping regions.
Business in its significant Tasmanian market has been particularly hampered by the wet.
Mr Dillon said while Ruralco’s northern live export business continued to supply feeder beef cattle to export buyers, “live export margins have been very tight and we still see headwinds in the live export business”.
The company was “taking a deep breath” and assessing its longer-term options in the live export market for dairy and beef breeder cattle, specifically from southern Australia.
This had prompted its decision to shut down FIA’s Melbourne office and all activities associated with the southern business, at a likely cost of between $3m and $5m.
Meanwhile, FIA’s restructure includes moving Frontier International’s chief financial officer, Will McEwin, to managing director of the company.
For the full year to September 30, Ruralco’s underlying earnings before interest, tax, depreciation and amortisation are expected to be $40m to $44m.
Up to $4m to $5m in restructuring costs are expected in the Total Eden water equipment retail and farm advisory business while a further $3m to $5m in other pre-tax restructuring costs would also be booked as a non-recurring charge to the 2015-16 financial results.
Mr Dillon said management was confident the group’s diversified business streams and geographical network was well positioned for the future, including taking advantage of seasonal opportunities in the coming six months.
Its strategy of expanding its market-leading position in water services via its integrated retail network, infrastructure services and water broking division should also deliver a significant point of difference and enhance group operating results.
