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Zespri: Structure Powers a New Record Performance

Integrated Industry Structure Powers a New Record Performance

ZESPRI Group Limited, the world’s leading kiwifruit marketer, has reported its sixth consecutive record financial and marketing performance in the year that the industry celebrates 100 years of kiwifruit in New Zealand.

ZESPRI Group has reported a 59.3% increase in net profit after tax for the year ended March 31 2004, up $8.5 million over the previous year to $22.9 million as a result of significantly higher net global sales, which consequently boosted the company’s margin return, aided by prudent cost management.

“While the performances of the 12-month procurement and processing business units did not meet expectations, overall ZESPRI’s performance to March 31 2004 was excellent,” Chairman Craig Greenlees said in announcing the company’s final audited results, which will be published later this month in ZESPRI’s 2004 Annual Report.

Mr Greenlees said the Board intended to declare a fully imputed dividend of 50 cents (20 cents) per share, amounting to $10.6 million ($4.2 million) to be paid in October 2004 to the company’s 2,517 grower shareholders. This represents a return of 41.7% on the original $1.20 share issue price. ZESPRI Group shares have also risen dramatically, with trades in March 2004 peaking at $3.00 per share, reflecting strong demand from growers and confidence in a positive future.

Company equity increased to $53.9 million ($35.2 million), providing a strong capital base to move forward on strategic long term growth initiatives.

“The result is a tribute not only to the worldwide ZESPRI team but also to the entire industry team,” the Chairman said. “It is a winning combination and proof of the power and value of the New Zealand industry’s integrated structure with ZESPRI as the single international marketer of New Zealand kiwifruit.”

Performance Highlights

The record performance was driven by exceptional performances in Europe, Japan and East Asia, boosting net global kiwifruit sales to a new high of $911.1 million ($860 million), up 5.9%, based on a total New Zealand delivered crop of 65.1 million trays (62.2 million trays). Net global sales include $14.8 million from collaborative marketing and $8.2 million from net sales of non-New Zealand produced kiwifruit.

Total ZESPRI Group commission income increased by $8.7 million to $100.7 million ($92.0 million) for the year under review. ZESPRI Group’s commission was derived from 9% of net sales revenue, exclusive of collaborative marketing contributions, and 3.6% of total fruit and service payments to suppliers.

Another factor driving profitability was prudent cost management. Offshore costs rose slightly to $37.9 million ($34.6 million) as a result of higher commissions paid to local agents on higher volumes but the full impact was mitigated by favourable exchange rates in local market currencies. Onshore costs reduced by 15% to $34.6 million ($40.8 million).

The key expenditure items were innovation investment of $5.2 million ($5.7 million) and head office costs of $25.8 million ($26.3 million) which included management and administration of the supply chain and quality assurance.

Mr Greenlees said the Board was disappointed with the results from the new business units. ZESPRI Fresh Produce suffered a shortfall of $423,354, which was underwritten by Kiwifruit International Limited. The structure and strategy employed to develop year-round marketing and category management was being reviewed as a result of the “unsatisfactory” performance, the Chairman said.

The new ventures unit dealing in process quality fruit, Aragorn, posted a pre-tax loss of $0.9 million on stronger sales which was an improvement on the previous year’s pre-tax loss of $1.3 million and “gave cause for some optimism”, Mr Greenlees said.

“This year we have already got off to a very good start having achieved sales in the first two months of $0.8 million,” he said.

Suppliers received record fruit and service payments of $585.0 million ($520.3 million), up 12.4%. Foreign exchange movements stripped $50.6 million, equivalent to 78 cents per tray, from the total, but the impact would have been markedly worse had it not been for the impressive price rises in Europe and sustained strong pricing on the back of increased volumes in Japan.

Orchard gate return, the grower benchmark, averaged $38,488 ($33,685) per production hectare, an improvement of 14.3%. The average OGR per production hectare for each of the main products was GREEN $37,593 ($32,455); ORGANIC $37,033 ($32,293); and $44,425 ($42,857) for GOLD.

Strategic Focus

Mr Greenlees said the strategic focus during the year had been on ensuring the Executive delivered a credible financial result and on improving the efficiency and effectiveness of the ZESPRI™ System and of the ZESPRI business, measurable ultimately through orchard gate returns. “A priority has been on building stronger commercial and more participative relationships with growers, exemplified by the introduction of direct grower supply and payment options,” he said. “The focus in the 2004-05 financial year will be on identifying opportunities for more meaningful commercial involvement by post harvest partners in the onshore and offshore business.”

A joint industry review of the onshore supply chain to make it more market responsive and efficient would also identify areas for commercial integration with the post harvest and supply sectors.

“But, regardless of how the supply chain may evolve, the principle of grower ownership and control will not be compromised. It is a given that for the industry to endure and prosper through its second century, growers must remain at the heart,” the Chairman said.

The Board has recently initiated discussions to find appropriate mechanisms to enable ZESPRI Group Ltd share ownership to be much better aligned to production thereby strengthening grower ownership and control of the business. Recommendations for a pathway forward will be put to the July 29 Annual Meeting.

Outlook

In 2004-05 the power of the integrated marketing structure and of direct customer relationships – and direct supply relationships – will be critical to achieving the best outcomes as we work to extract optimum value from our exclusive range of ZESPRI™ Kiwifruit, Mr Greenlees said.

“Forecasts indicate a greater negative impact on returns from unfavourable foreign exchange movements despite best efforts to mitigate the effect and the markets will be under challenge to sell a significantly larger crop while maintaining premium prices.”

In facing what is expected to be an extremely challenging season, Mr Greenlees called on the industry to build on its legacy and to “reflect on and celebrate the success of our first century as the pioneers of a new industry in New Zealand and the world”.

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