Nufarm Unable To Weather The Drought

Shares in crop protection group Nufarm slumped sharply yesterday after the company revealed a loss for the half-year thanks to the intensifying drought. The company also suspended its dividend while a jury decision in a court case in San Francisco sets up another possible legal blow to the key chemical in its main product.

Nufarm shares fell 24% to $4.23 (a five year plus low) on the result and the news from the US court and a warning that the current second half for the company will be “challenging”.

Nufarm warned the weather outlook is still uncertain and it expects to produce 50% less fungicide-based products.

In suspending its dividend (5 cents a share a year ago) Nufarm joins the like of Seven West Media, Myer and Virgin Australia in withholding returns to shareholders.

While revenue grew 8% to $1.58 billion the company fell into a post-tax loss of $13.6 million for the February half year.

Nufarm saw a 26 percent decline in sales of its crop protection business in Australia and New Zealand to $222 million, leading to a 70 percent decline in earnings from that segment.

Nufarm is forecasting full-year earnings between $440 million and $470 million that was well under the market forecast of $490 million as analysts seem to have misread the intensity of the drought in Eastern Australia.

“Persistent dry conditions in key Australian cropping regions reduced demand for the product, contributing to high channel inventories and aggressive pricing competition,” Nufarm told the ASX this morning. Glyphosate sales volumes are down about 50 percent on the previous year.

“Production levels at the company’s manufacturing facilities were also greatly reduced, resulting in lower overhead recoveries.” Nufarm estimates summer crop areas fell 23% to 1 million hectares. It will also spend $10 million on a performance improvement program (ie cost cuts).

Nufarm Managing Director and CEO, Greg Hunt, said the half-year EBITDA result reflected strong performance in the North American, Latin American and Seed Technology businesses, which largely offset weaker performance in Australia and Europe.

“We achieved good revenue and earnings growth in North America, Latin America, and Seed Technologies and this reflects the potential we’ve set our business up to achieve. We had a difficult half in Australia and Europe with dry weather conditions impacting earnings in both regions, and product availability issues further impacting results in Europe.

Earnings from Asia were lower as Indonesian farms were also affected by drought, while the US was affected by floods. However, a successful turf & ornamentals segment off-set poor sales.

“We’re well prepared for a difficult second half,” Nufarm boss Greg Hunt said yesterday.

“We’re preparing the business to deal with tough conditions in the second half. Farmers on the east coast of Australia are facing continued dry conditions and we’ll be scaling back manufacturing and running down inventories in anticipation of another difficult season.

“This will impact profit in the second half as we won’t be able to fully recover manufacturing overheads.

“In Europe, we’re working through supply issues in the product portfolios we acquired last year,” he added in a comment that draw analyst attention of a continuing problem for Nufarm.

He also said the company had adopted a conservative stance in managing its balance sheet but acknowledged that investors would be disappointed that the company would not pay an interim dividend.

“But we think that protecting the balance sheet is the right thing to do for shareholders right now,” he said.

That can be seen by the way the drought is helping push Nufarm’s debt higher.

The company said yesterday that “net debt at 31 January rose to $1,577 million from $981 million at HY18.”

“The prior year net debt excludes the equity proceeds related to the acquisition funding.

“The higher net debt reflects both the increase in net working capital and the debt associated with the European acquisitions. It also includes the benefit of the $296 million equity raise completed in October 2018.”

Meanwhile, in the court hearing in the US on Tuesday, a jury found Bayer’s (it took over Monsanto last year) glyphosate-based weed killer to be a “substantial factor” in causing a man’s non-Hodgkin’s lymphoma cancer.

The decision allowed the trial to proceed into a second phase on liability and damages which started overnight before the same jury to determine Bayer’s liability and potential damages.

The jury in San Francisco federal court in a unanimous found Roundup, one of the world’s most widely-used weed killers, to be responsible for the cancer of California resident Edwin Hardeman. It was not a finding of liability against Bayer – yet, however.

Nufarm produces a glyphosate-based weed-killer product that is one of its biggest sellers.

Reuters reported that the case was only the second of some 11,200 Roundup lawsuits to go to trial in the United States. Another California man was awarded $US289 million ($408 million) in August after a state court jury found Roundup caused his cancer, sending Bayer shares plunging at the time. That award was later reduced to $US78 million and is on appeal.

“Hardeman’s case was a so-called bellwether trial intended to help determine the range of damages and define settlement options for the more than 760 Roundup cases consolidated in the federal court in San Francisco,” According to Reuters.

Nufarm’s board, shareholders, investors, and customers will be watching what happens in this case very closely.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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