Blue Sky Profit Announcement: Tough Challenges Ahead

Tue, 03 Aug 2004
Allan Williams

Small Southland processor Blue Sky Meats says legislation could be as big a threat as competition.

Chairman Barry Thomas says new legislation such as the Holiday Pay Act and Employment Relations Act could add another $500,000 to $600,000 in annual costs for the company. "It is disappointing to get something that the board and management can do nothing about. You are running a very efficient business, and something like this gets slammed in on us". Blue Sky Meats is yet to decide if the new costs will be absorbed or passed on to clients. Thomas wrote in the latest annual report that "the only comfort is that the larger companies (Alliance and PPCS) will have the same problem''. On top of costs for border security, bio-security, and the changed European Union quota management system, these can be expected to erode margins further.

The Government-imposed cost hikes coincide with plans by major North Island company, Affco, to build a meat processing plant at Invercargill. At the same time, lamb numbers in the South Island have fallen by about one million over the previous year. The procurement market is very competitive, though Thomas says Blue Sky Meats has not had a "particular problem'' securing lambs. He acknowledges that lamb numbers have declined but believes the conversion of pastoral land to dairying is now tapering off. Blue Sky has a loyal supplier base, with contracts operated in advance on a year to year basis. "We've actively looked after our clients for many years, and I think it was pretty evident in that takeover bid last year that we retain their loyalty". Thomas believes the same loyalty will help see off the Affco challenge.

Nevertheless, plans for a new processing plant in Southland are a concern. There is already enough processing capacity for the numbers of available stock, and he says there is no spare capacity in the labour force. "We know we need to be competitive, and if people do silly things we will assess it at the time. There are more ways to look after clients than sheer money".

Blue Sky Meats reported an after tax profit of $3.67 million for the year ended March 31, and 18% fall from the $4.5m profit a year earlier. Apart from prices to farmers remaining high, the strengthening of the dollar in the final months of the financial year was a negative as this is a peak time for overseas earnings. Thomas says the processing season was also the company's most challenging for many years, with the continuing trend of the kill being condensed in to a shorter and shorter timeframe, and extreme weather patterns also distorting stock flows through the works. After a late start December, January, and February were very busy. Rain in March meant farmers held stock back to build up weights, and there was no pressure on killing space after that. The difficult season meant that many stock killed were outside the premium price weights, some were too light because of drought conditions others too heavy after the rains came. Thomas says the contract schedule system put a lot of effort into giving farmers the message about the type of animal required in the market place, and the company was committed to it. On the bright side, product sales increased into Japan, China, Russia and the United States, though Britain remains the major market. Though its Auckland-based marketing subsidiary Horizon Meats, Blue Sky exports to 41 countries.

Horizon was acquired last year as part of the restructuring when Blue Sky saw off the takeover bid from Hawkes Bay company, Lowe Corporation,. Thomas conceded early that Lowes had offered a fairly good price, but the wish for independence meant more to the shareholders. Horizon had owned 37% of Blue Sky, so this stake was bought back, with some shares cancelled (at a cost of Blue Sky of about $5m) and others on-sold to existing and new shareholders. At the end of the process, the number of Blue Sky shares on issue was reduced to 5.76 million from 7.13 million. The one-off costs of the restructuring were a factor in the lower profit reported for the March 31 year. Blue Sky emerged in strong shape, with operating cash flow for the year being a very good $11.7m. At balance date, the ratio of debt to debt plus equity was just 29%, and no borrowings. Borrowings used to buy back its shares have been repaid. The shares last traded at 500c, compared with a net tangible asset backing of 304c a share. The dividend will be 28c a share, just under half of the earnings a share of 61c a share. This is lower than the 30c paid out on the bigger capital base last year, though that payout included factors involved with the share restructuring and using up available imputation credits. Thomas might be understating things in saying the latest dividend is "reasonably conservative and should be maintainable in future years".

A lot of money is continually reinvested in the plant at Morton Mains, and he says there could be some new capital spending in the by-products area.