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Sanford Limited annual announcement

For full NZSX announcement, see Stock Exchange Announcement Sept 2005.pdf (PDF)


Typical of companies in the export sector profit for 2005 declines from $53.9m last year to $30.4m this year. The ongoing high value of the New Zealand dollar coupled with record high fuel prices continues to seriously impact on fishing and aquaculture profitability. Results from our Pacific tuna and expanded Australian operations were well below expectations and a slow-down in the North American orange roughy market impacted sales and profitability in the latter part of the year. Results from the acquisition of the Simunovich scampi and inshore fishing operations were in line with expectations but catch and profitability targets for the Ocean Fresh business in Australia and the Ocean Breeze tuna operation in the Pacific were not met.

The high level of the New Zealand dollar resulted in foreign exchange gains which totalled $40.4m (before tax) this year compared with $55.2m last year. At 30 September 2005 forward cover of $13.5m remained with a potential gain of $5m that will be realised by the end of November 2005.

EBITDA (Earnings before interest, taxation, depreciation, amortisation, foreign exchange gains and the asset sales) improved slightly from $35.6m last year to $38.3m this year. However, interest costs and an impairment charge of $2.2m on our FPI investment resulted in tax-paid earnings declining to $30.4m. Sales for the year totalled $365.8m, an increase of 4.4% over the previous period.

Net cash flows from operating activities decreased from $59.5m last year to $40.7m. Investing in the purchase of assets and subsidiaries (mainly from Simunovich Fisheries Limited) took $176.1m which was financed from borrowings and cash flow.

The result for the year was affected by :

- difficulties and delays in completing the integration and converting the Ocean Fresh business from a development operation into a profitable fishing enterprise.

- catches of tuna in New Zealand and in the Pacific being lower than expectations and below breakeven for the three large freezer tuna purse seiners.

- lower sales volumes and prices for orange roughy in the second six months.

- an impairment review of our 15% investment in listed Canadian company Fisheries Products International Limited (TSX: FPL) was undertaken on the basis of announced third quarter trading being poor and the float of the Ocean Cuisine business as an income trust being deferred pending a Canadian government review of the tax status of income trusts. As a consequence Directors decided to write down its investment by NZ$2.2m as an expense in the current period. The shares are now valued at C$7 in our books which Directors believe to be a fair value. On small volume trading after the announcement of the poor results and the deferment of the income trust float the shares traded down from C$7 to as low as C$4.20 but in recent days has been C$4.70.

- the significant impact of higher fuel prices on the larger freezer trawlers, longliners and purse seiners. For every US$1 change in the barrel price of fuel our profitability was impacted by approximately NZ$0.1m.

- the industry continues to be impacted by constant escalation of Government imposed charges on the industry without any consideration on the economic impact on the industry. Costs of fisheries and conservation services that are levied on the industry increase despite the large decrease in hoki quota. Other Government costs such as ACC levies, maritime and food safety charges, border and biosecurity charges, road user fees, and OSH charges continued to escalate despite our declining earnings because of the high New Zealand dollar.

- higher inventory levels resulted from a deferment of sales of some species, such as toothfish, to take advantage of price improvements which should result in higher returns. The average age of inventory declined as the benefits of our integrated information system allowed us to take more advantage of market opportunities.

- the integration of the scampi and inshore fishing operations acquired from Simunovich Fisheries Limited being successfully implemented. The benefits are flowing through our deepwater, inshore and Auckland Fish Market operations and will further increase as the exchange rate improves. Rationalisation of some of the scampi and inshore fishing fleets is being undertaken and some surplus vessels are being advertised for sale.

- toothfish catches being much improved this year and with higher market prices this operation added substantial value to our deepwater business this year.

- demand and prices for most other species, including mussels, hoki, and ling have remained relatively stable over recent months.

- aquaculture results being steady with mussel and oyster production increasing but overall results remaining stable due to the high New Zealand dollar.

- our 25% investment in Weihai Dong Won Food Company Limited in Weihai, China achieving target profits and receiving a maiden dividend during the year. In October 2005 we exercised our option to increase our stake to 40% by the injection of additional capital in the company as part of the financing of a second processing plant which opened in July 2005.

- the Auckland Fish Market and Seafood School are proving to be an increasingly popular attraction for discerning seafood customers and budding cooks. Daily auction market turnover has doubled over the initial year and corporate use of the Seafood School has become a popular alternative for many organisations. Further promotion of the Auckland Fish Market as the best place to buy seafood will occur over the coming year.

- the Company repurchasing 2,036,982 shares at an average price of $4.20 per share. These shares are presently held as Treasury Stock.

The Directors have today declared a final dividend of 13 cents per share payable on 14 December 2005, making a total ordinary dividend of 22 cents - the same level as last year. The share register will close 5pm Friday 2 December and reopen 8.30am Monday 5 December to determine dividend entitlement. The fully imputed dividend will be paid on Wednesday 14 December.

The 2006 year will continue to be a challenge for the Company at current exchange rates and as advised last year, when the exchange rate is above 60 cents acceptable returns will be difficult. All forward exchange cover benefits will cease from November 2005 but further benefits will flow from the acquisition of the Simunovich businesses.

In the current exchange rate environment and without further forward cover it will be very difficult to reach this year’s result. For Sanford Limited a 1 cent variation in the exchange rate changes our tax-paid profit by $1m.

As is normal in the fishing business, the final outcome for next year will depend on our success in the more variable fisheries such as pelagic species (like skipjack tuna and blue and jack mackerels) and squid and toothfish.

E F Barratt
Managing Director 23 November 2005


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