Alliance Group looks at capital structure after $98m pre-tax loss

Alliance Group is New Zealand's biggest sheep meat exporter. Photo / Alan Gibson

Alliance Group, which this year turned in a $97.9 million pre-tax loss, is looking at its capital structure and may sell some assets.

The farmer-owned co-op - New Zealand’s biggest sheep meat exporter - said it needed to make changes to ensure it could better navigate volatility in global red meat markets and return to profitability.

The market for New Zealand meat has generally been favourable in recent years, and last year’s profit from Alliance was a record $116.3m.

But this year - Alliance’s 75th - was a different story, driven mostly by a slump in demand from New Zealand’s biggest export destination, China.

The company’s net loss came to $70.17m against a profit of $73.6m in the previous financial year.

Alliance chairman Murray Taggart said changes to the capital structure had been brewing for the last six years, but this year’s shock loss may have served to speed up the process.

In terms of possible asset sales, Taggart was quick to point out the co-op was not planning plant closures.

“Essentially, what’s been happening is our shareholders’ funds have not been increasing at the same rate as the business has been growing,” he told the Herald.

“Over time, you get to a point where you have to do something about that,” he said.

In 2016, Alliance implemented a faster method for farmers to “share up” in the co-op by deducting 50c per animal processed.

“We concluded three years ago that it was still not quite doing the trick.”

Alliance last year distributed very little of its record profit as a way to build shareholders’ funds.

Early this year, Alliance increased per animal deduction to $1 a head.

“While these changes have helped, we still think it is still not going to get us in front of the curve because we have got opportunities to invest, which are going to require more capital,” Taggart said.

“When we look at maximising opportunities, we can’t see how we are going to do that without retaining more capital in the business.”

Alliance Group chairman Murray Taggart.

Taggart said the co-op was looking at assets to sell.

“We have got some investments - which at the time seemed necessary or appropriate - but we are now thinking, ‘Do we need capital tied up in that?’

“Likewise, with working capital, we have made progress in recent years, but we realise that there is more opportunity there.

“The next option after that is to raise the number of shares a shareholder needs to hold for every livestock unit processed.”

Taggart said 2023 had been a difficult one for the co-op, with the slowdown in China spreading across other markets.

No correction

Alliance does not expect to see a market correction any time soon.

“But in saying that, it feels like things are pretty much finding a floor.”

Taggart told farmers at Alliance’s annual meeting in Alexandra last week all red meat processors and exporters were impacted by the deteriorating global market, but Alliance was particularly affected by the sharp decline in sheep meat.

Soon after last year’s annual meeting in December, the extent of the market collapse became apparent, especially for sheep meat.

Following a brief recovery, the Chinese market crashed and the downturn spread to other markets around the world.

Margins remained compressed for the remainder of the year as all New Zealand exporters struggled to reposition product into other markets, which resulted in lower prices than were justified by farmgate schedules.

Alliance Group also incurred additional costs bringing on extra processing capacity for farmers in anticipation of a 2023 summer drought, which never eventuated.

The combined impact of these market and weather factors saw profitability slump and reduced revenue of just over $2 billion.

Alliance Group chief executive Willie Wiese said the new season has started on a much more positive note than the equivalent time last year.

Despite still operating in a tough trading environment, the company is on track to deliver the expected 2024 budget outcomes.

Results from the two other players – Silver Fern Farms and ANZCO, both of which have December balance dates – are due out early next year.