Shares in Nufarm ended down more than 12% yesterday after the company surprised with an earnings downgrade.
It was an example of how delicate investor sentiment remains, despite the sharp rise since March and the improvement in confidence.
Surprises are not liked, no matter what’s happening in the wider economy and Nufarm delivered a shock yesterday.
It told the market that net operating profit for the current financial year was likely to be 15% lower than previously forecast.
The company blamed the downgrade on lower than expected demand for glyphosate through May and early June.
The shares closed down 12.1% at the end of trading at $10.63, a loss of $1.47 on the day.
Because of the fall in demand, the earnings contributions of Nufarm’s glyphosate business will not meet previous targets as it is forced to cut profit margins and discount selling prices to meet competition for the lower level of sales.
The company said that glyphosate sales in May and through the first half of June "are tracking significantly below previous forecasts and it is now apparent that the full year contribution from Nufarm’s glyphosate business will not meet earnings targets".
Nufarm CEO, Doug Rathbone said it is not yet possible to accurately estimate the impact on Nufarm’s year end net operating profit, but – on current projections – the company expects to miss the previous guidance of approximately $220 million by about 15%.
"Given the importance of the final six weeks of the financial year, we will not be in a position to assess the final impact on group earnings until the end of July."
At the time of the $capital raising in May Nufarm revealed that:
"Current trading conditions and the outlook for the balance of fiscal year 2009 are generally consistent with the company’s commentary at the time of interim results release in late March.
"The company believes that its current full year profit guidance (approximately $220 million operating NPAT) can be achieved, recognising that the final three months of the period are expected to see strong sales demand."
Yesterday Mr Rathbone said in the statement to the ASX that a combination of later than normal buying decisions, seasonal impacts, lower application rates and distribution customers not able or willing to hold normal inventory levels have combined to dramatically impact the glyphosate business in recent weeks.
"We have been saying for some time that the buying patterns this year were much later than normal, but trading over recent weeks has revealed that volumes are also going to be down and will not recover in the current season.
"Sales over the past six weeks in Nufarm’s two largest glyphosate markets – the USA and Australia – are well below those of the previous year and recent price competition is substantially impacting margins on the sales that are being achieved.
"The planting seasons in those markets are now well advanced and the window for achieving additional glyphosate sales before the end of the company’s financial year (July 31) is closing quickly."
He said the most dramatic impact is being felt in the US glyphosate market, with growers in many areas planting crops very late in the season and requiring fewer applications of glyphosate.
"Over the past few weeks, we have also seen an aggressive response from competitors in the glyphosate business, cutting prices in an attempt to capture a reduced volume opportunity. Our need to respond to this increased level of competition means that margins are being adversely impacted."
Glyphosate is one of the world’s most widely used herbicides.
Nufarm said it would remain focused on achieving its targeted reduction in glyphosate inventory and has adjusted purchasing of raw materials and production to assist in that regard.
The company said that while seasonal conditions in Australia are reasonable in most cropping regions – and winter crop plantings are estimated to be approximately in line with last year’s plantings (as we have just read from ABARE) "sales demand for glyphosate is well below last year and significantly below the company’s original forecasts".
Mr Rathbone said it appeared many growers were electing this year to move from an emphasis on pre-plant weed control to a post-plant weed control regime.
"While this will be favourable for our selective herbicide sales, some of those sales may well fall into the new financial year."
Nufarm raised $300 million in last month’s institutional placement and yesterday extended its share purchase plan for small retail shareholders to Tuesday, June 23.
Mr Rathbone sold $19 million worth of shares into that issue at $11.25.
