Report by the Chairman of the Board at FirstFarms annual general meeting 20 April 2010

Transcription

1 Report by the Chairman of the Board at FirstFarms annual general meeting 20 April 2010 Dear shareholders, Welcome to FirstFarms annual general meeting which is an important event for the company. I am pleased to see so many shareholders and interested parties a total of 101 in attendance here in Billund today to hear about FirstFarms. The year was a difficult year for FirstFarms, in which the expectations were not fulfilled. In 2009, FirstFarms achieved a turnover of DKK 75.6 million, an EBIT-result of DKK million and a pre-tax result of DKK million. One could rightly ask the question: Is the Board of Directors satisfied with and EBIT-result of DKK -36 million in 2009? We can never be satisfied with a deficit. Having said this we have in the account explained why the accounts look as they do. I am not saying that there is nothing in the hindsight we could have done better but we are highly affected by conditions from the outside. In 2009 FirstFarms has been affected by extreme low settlement prices on milk and grain. All farmers know that it is not possible to make money with the low prices on milk we have been witness to. With a very large herd our bottom line is affected extra hard when the settlement prices are low on the other hand we are reaping great benefits when the prices are high. In 2009, the average milk price in Slovakia has been DKK 1.69 per kg; approx. DKK 0.50 lower than in Denmark. Besides this we have to realise that the delay of the construction has entailed that the milk production was a lower than assumed. We must admit that we have underestimated the constructions influence for the milk production. The administration costs in the company have been reduced significant in the year but they are still too high. FirstFarms possibility for growth has been significantly different than assumed in the prospect because financing of expansions has turned out to be difficult, mainly due to the financial crisis. Therefore, there is still a too small turnover compared to the set up that should be in a listed company. In 2009, the milk prices were lower than expected resulting in lower revenue in the company. FirstFarms succeeded in reducing the costs for fodder and salaries due to lower fodder prices and a significant effort for further efficiency improvement. In spite of the savings, the low settlement price entailed that the contribution margin was negative as average for the whole year. In Q2 and Q3 2009, the economical losses were significant, as the settlement price on milk in this period was historical low and under pressure due to the large price decreases on raw milk on the world market. In Q3 the milk prices began to increase but the settlement price in Slovakia was far below level compared to Western Europe. The construction of cattle stables was delayed in 2009, so FirstFarms did not purchase the expected number of cows for the new production facility. Among other things, this was why the company s milk production in 2009 was lower than expected. At the end of the year, FirstFarms 1 / 6

2 delivered approx. 42 tons of milk on a daily basis to the Slovakian dairy company RAJO, which is a subsidiary of the large German dairy group Meggle. As it is a major producer, FirstFarms had no problems in selling or getting payment for the milk in At the end of the year, FirstFarms obtained licence to export raw milk, so there is now an alternative possibility to export the raw milk to the nearest countries. In 2009, the construction of cattle stables in Slovakia was delayed, due to the difficult climate conditions in the winter and the spring and also due to the contractor s technical problems. However, FirstFarms expects that the stables will be completed in the middle of In January this year, cows and heifer calves were bought, so that the herd now consists of 2,650 dairy cows and appurtenant breeding. In Slovakia, significant savings were achieved by means of rationalisations and lower costs for especially salaries, fertilizer, chemicals and fuel in the field production. However, these savings could far from compensate the bad settlement prices on the cash crops. The yields for rape, wheat, rye, triticale, maize and barley were a little under the expectations in Slovakia due to a very wet spring which was followed by an early drought period and also much rain in the harvest period. At the half-year report in August 2009, FirstFarms changed its expectations to the result of the year due to the lower yields, where the sales prices on grain were 40 percent lower on average than originally expected and the prices on oil seed were 20 percent lower on average. In 2009, FirstFarms also sold the last part of the harvest from 2008, which was put in stock at the turn of the year 2008/2009. This entailed a larger turnover in 2009 for the company but the crops were sold at the value they were accounted for in the accounts for 2008 so the larger turnover had no effect on the result. FirstFarms has a large production of fodder for the cattle herd in Slovakia which mainly consists of maize and alfalfa for silage and also beets and hay. The yields in the silage for maize and alfalfa were lower than expected and the quality was not at the same high level as the previous years. This meant a more unfavourable financial situation than expected. Despite the lower yields, the fodder consumption for the herd in 2010 was secured. In 2009, FirstFarms operated 4,352 hectares of land in Eastern and Western Romania. The crops consisted solely of cash crops, as the company has not yet established an animal production in Romania. In Western Romania, where it was the second cultivation season, a total of 2,559 hectares of land was cultivated with crops fairly equal divided between rape, wheat, sunflower and maize. In the growth period, a part of the crops was severe damaged by hail and in general it was very dry at the end of growth period where the grains are developed. A great difference could be seen on the land that had been cultivated in the second year compared to land that had only been cultivated for one year. This is due to the fact that especially the land structure and the nutrient availability is poor the first operating year, just as the plants on new-cultivated land are more exposed to drought damages. The difference in yield between first and second year s fields was tons per hectare for the advantage of the second year fields. In Eastern Romania, it was the first operating season for FirstFarms. A total of 1,793 hectares was cultivated dispersed on rape, wheat, spring barley, sunflower, maize and sorgum. The area was afflicted by extreme weather with storm and hail and severe drought and heat at the end of the growth season. Thus, the yields were percent below the expectations. In the coming years, 2 / 6

3 the company will have great focus on securing more constant yields by establishing irrigation systems in larger scale. The opportunities for this are present in the area as the channel system from the communist years with water from Donau is still intact and functional. Due to a decision of centralising and expanding the operation in the company s existing centre in Eastern Romania and as an effect of the low settlement prices and the company s lack of positive cash flow from the operation in 2009, FirstFarms sold of the operation centre in Western Romania close to Timisoara in December The sale also entailed possibility to strengthen the financial resources. FirstFarms achieved a profit before tax of DKK 14 million from the sale. As informed on the annual general meeting last year, 2009 was the year in which FirstFarms should consolidate the company s land areas in Romania and only purchase land to a lesser extent. During the year, FirstFarms purchased 335 hectares of land in Romania, whereas 1,983 hectares were sold off was a special year for land prices due to the financial crisis, as practically no land in FirstFarms areas was traded during the year. Therefore it is also difficult to give a real impression of the land prices. There are no official statistics for purchase and sale of agricultural land in neither Slovakia nor Romania. In lack of public registrations of land prices FirstFarms has in Romania appraised its land by an impartial certified valuation company in February As per 31 December 2009 FirstFarms owned 7,143 hectares of agricultural land in Romania, which in the accounts is entered at DKK 100 million corresponding to an average price of DKK 14,118 per hectare. The certified valuation states a value of DKK 115 million corresponding to an average price of DKK 16,100 per hectare, which is DKK 15 million higher than the entered value. In Slovakia, FirstFarms operates 8,300 hectares of land of which the company owns 401 hectares. The remaining area is leased on 5, 10 or 15 years land lease contracts, which are being renewed on an ongoing basis. The lease fee constitutes approx. DKK 300 per hectare per year. In 2009 no land has been purchased in Slovakia. Due to the financial situation it is uncertain whether there will be any general price increase on land in the area. The land that the company owns is booked at DKK 9.5 million corresponding to an average price of DKK 23,733 per hectare. Strategy FirstFarms strategy is still to invest in agriculture in Eastern Europe as described in the company s annual report. A description of the company s investment criteria is also to be found there. In 2010, focus will be on completion of the construction of cattle stables in Slovakia, efficiency improvement in the operations and compacting of the land in Romania so it is combined in larger units. In later years FirstFarms growth strategy has been slowed down as it has not been possible to achieve the financing assumed at the listing in The company has established platforms in Slovakia and Romania that can generate the assumed investments, productions and returns but it is necessary to cut to the bone. Savings have been realized in 2009 and the effort will continue in To ensure that the pricing on the share is as accurate as possible, FirstFarms makes sure to inform the stock market of significant circumstances that have or could have influence on the share price. 3 / 6

4 The company also has an IR-policy to ensure a good relation to the company s shareholders. During the last year, FirstFarms has had focus on cutting down the administration costs and therefore new initiatives on the IR-front will also be cut down. It is a fact that the administration costs in the company at the moment are too high compared to the turnover which to a great extent is linked up with the fact that the company is listed and therefore has many legal obligations. The development in the agriculture in was marked by very large fluctuations on the commodity market and the prices on grain and oilseed decreased worldwide. This was caused by the financial crisis, low prices on crude oil and two years in a row with record-breaking yields worldwide, especially for wheat. The world s transition stock for wheat measured in consumption in days increased during the year and has increased steady since The largest increase was in wheat. Structural problems in Eastern Europe also entail significant lower actual market prices when selling crops compared to the Western European markets. In 2009, the harvest in Europe was in general good and along with the lower demand that the financial crisis caused it entailed that the crop prices were very low. Due to local weather conditions FirstFarms yields were lower than expected. For a longer period a significant part of the cultivated area in Eastern Romania had lied fallow. In connection with the re-cultivation of the land the crops were affected by the very severe drought that occurred in the cultivation area. The harvest was therefore bad even though the company s yields were higher than the average in the area. In the period from 2007 to 2009 the price on raw milk showed very large fluctuations. From December 2008 to May 2009 the settlement price decreased with 32 percent and reached a low ebb, which was significant lower than in Denmark and most of the Western European countries. In July 2009 the settlement prices began to increase again and at the end of December 2009 they reached a level of approx. DKK 2.08, which almost corresponded to the level in December The low milk prices have entailed significant production losses for the whole milk sector, but Slovakia was particularly afflicted resulting in production decrease. Slovakian milk farmers have left the market as the Slovakian farmers are not consolidated and have poor opportunity of financing. In Slovakia, a low utilisation of the milk quota is therefore expected in 2009 and The expectations in EU for the milk market in 2010 are in general a steadier development with minor increasing prices through the summer. Organisation In 2010, adjustments have been carried out as a result of the wish for savings: In connection with the sale of the operation centre in Western Romania the activities in Romania were significantly reduced and therefore the company s Country Manager was discharged. The management of the organisation in Romania is today attended to by the Managing Director in FirstFarms A/S, which of course gives some challenges due to the distance but this solution has been chosen in order to be able to save costs until the activities in Romania increase again. In February, the company s IR-manager got a new job and in that connection a new employee was not appointed. The tasks are therefore taken over by existing staff in Denmark. In February, FirstFarms also thanked Kim Stokholm for the cooperation. He has worked as Managing Director in FirstFarms since the company s start-up in To replace Kim, the company s board member Per Villumsen has entered as temporary Managing Director. 4 / 6

5 Per has a long-time experience in agriculture and is one of the original founders of the company. The Board has chosen another profile to run the company. Due to the savings and the changes in the organisation it is a fact that the organisations in Denmark and Romania at present are narrow organisations. Because the company has been under construction and therefore not until the coming years can realise a significant larger turnover, FirstFarms is marked by high overhead costs for i.e. stock exchange, VP Securities Services, auditing and management compared to the relative low turnover. These costs will however even out in the coming years as the turnover increase significantly. The mentioned costs are ordinary and necessary operating costs in a listed company in Denmark. In 2009, it became a demand for listed companies to have an accounting committee who refers to the Board of Directors. In FirstFarms the accounting committee is attended to by the board members Kjeld Iversen and Jens Møller who both have great experience with accounting and auditing. The company complies with the recommendations of the Nørby Committee on Corporate Governance and has prepared a document open to the public, which is available on the company s website in which the company takes position on the recommendations of the Nørby Committee. I will not go into details on the company s attitude to the recommendations in this forum as the document can be seen on our website but only inform about the most essential item where the company at the moment do not comply with the recommendations, which is that the Managing Director of the company today is a member of the Board of Directors. This fact will be further clarified in Risk management In the 2009 annual report, FirstFarms has a chapter about risk management. Here you will find a survey of the risks we are facing as a listed agricultural company and also a description of what FirstFarms does to minimize these risks. The recent years have shown us that a significant risk relates to the settlement prices and therefore the terms of trade in the agricultural sector and the limitations which the financial crisis has entailed for the company s financing possibilities. The future for FirstFarms In 2010, FirstFarms will have focus on optimising the operations and on savings in the administration and expects in 2010 to achieve a turnover of DKK million (+ 16 million), an EBITresult of DKK 0-5 million (+ 39 million) and a pre-tax result of DKK -5-0 million (+ 40 million). The increase in the result can be divided in an improvement in the milk production in Slovakia of DKK 34 million, as a result of completion of stables and purchase of high yield cows and an improvement in the field production of DKK 14 million, especially in Romania, due to adjustment of input factors and lower prices on seed corn, manures and chemicals. On the general meeting in April 2009 I informed that the construction in Slovakia would be completed at the end of 2009 and more animals would be bought for the stables. As the construction was delayed during the year the purchase of animals has been postponed to The purchase of the cows will entail a significant increase of herd size and thus the production. As an effect hereof the company expects to be able to carry out a cost reduction of 28 percent per kg milk produced 5 / 6

6 compared to The main reason is lower unit price on fodder and the effect of the rationalisation in the new stables. As a consequence of the gradually increase of the cattle herd in Slovakia, with expected completion in the middle of 2010, a milk production of 25 million kg milk is expected compared to a production of 16 million kg in In 2010, the settlement price is expected to be DKK 2.24 compared to DKK 1.69 in 2009 which is an increase of 28 percent. A change in the milk price of 10 percent in 2010 will entail a change in the EBIT-result of DKK 5.8 million. It is however important to be aware that the expectations are closely connected with the development on the commodity markets, which FirstFarms has no influence on. In 2010, the cultivated area in Romania is expected to constitute 2,300 hectares which is 2,000 hectares less than in 2009 due to the sell off in Western Romania. There will be further 600 hectares of land in operation in Eastern Romania compared to the 2008/2009-season. In 2010, FirstFarms expects to establish irrigation on hectares and at the same time the company is working on establishing irrigation in a larger scale which in the long term is expected to be increased to a total of 1,000 hectares to prevent the risk of drought in the area. This year there is also a great uncertainty concerning the settlement prices on grain (wheat, rye, maize and barley) as these are depended on the world market prices on commodities, but in 2010 FirstFarms expects a settlement price on DKK per tonne and for oil seed DKK 1,750-1,800 per tonne. A 10 percent change in the sales prices or quantities on grain and oil seed will entail a change in EBIT with DKK 3.3 million. Besides investment in completion of stables and purchase of high yield cows, minor machinery investments and renewals are to be carried out in Slovakia and Romania as well as investments in grain storages. Consequential investments are also expected in connection with final registration of land purchased in Romania. In 2010, FirstFarms expects to invest DKK 31 million in total. Conclusion 2010 will be the year where FirstFarms will optimise the existing operation, completes the constructions in Slovakia and achieves a satisfactory level in the milk production. From 2011 and forth the company expects new challenges in Eastern Europe and with the new modern cattle stables there will be a strong basis for satisfactory earnings in the future. Let me finish by thanking the company s staff who has worked hard to reach the company s goals in the past and difficult year, which unfortunately did not give the expected results for the company and its shareholders. Finally, I would like to thank my colleagues in the Board for a good cooperation and I also thank the company s shareholders and others for the interest they have shown and are showing towards the company. I hope that just as many interested will monitor the company in the years to come. Thank you for your attention. 6 / 6