Crop protection group Nufarm (ASX: NUF) is capping off a whirlwind financial year with a $215 million hit to its asset values in Europe, where competition and high input costs have put profit margins under strain.
It is a state of affairs that prompted the Melbourne-based group to curtail herbicide manufacturing at its operations Austrian operations in June, when Nufarm also revealed its decision to cease manufacturing insecticides and fungicides at its Raymond Road site in Laverton, Victoria.
Apart from logistical challenges and demand pressures caused by the pandemic, dry weather has also worked against Nufarm in Europe as less rain means less disease pressure and people don't buy as many fungicides.
The opposite is the case in Australia and New Zealand, where CEO Greg Hunt says wet weather led underlying EBITDA to double in the second half.
But overall the company is expecting a 29 per cent reduction in EBITDA to $290-300 million for FY20; a decline also partly driven by around $33 million foreign exchange losses due to currency volatility that damaged returns in some markets such as Eastern Europe and Mexico.
Expectations of underlying EBITDA for continuing operations are lower still at $230-240 million, following Nufarm's $1.19 billion sale of its South American assets.
"We have delivered positive momentum across most regions in the second half of the financial year, however earnings for the full year will be down on last year, primarily due to the divestment of the South American businesses, lower earnings in the first half and reduced earnings in Europe," says Hunt.
"Drought breaking rains on the east coast of Australia in late January and good follow up rainfall has provided welcome relief for farmers and generated strong demand for crop protection products.
"This has more than doubled second half underlying EBITDA for the ANZ business compared to the prior year and provides a much stronger outlook for the summer cropping season."
He says EBITDA in North America also increased in the second half with increased crop planting and improved seasonal conditions lifting demand for crop protection products, with a particularly strong performance in Canada.
"This more than offset the impact of lower demand in the Turf and Ornamental segment due to COVID-19 restrictions. Earnings in the second half also benefited from a stronger US dollar relative to the Australian dollar," says Hunt.
"Our business in Asia had a strong second half as a result of improved weather, positive momentum from product launches and lower costs contributing to a much stronger EBITDA performance than the second half last year."
The market appears to have expected a worse result as NUF shares rose 5.1 per cent to $4.12.
This price level is still well down on Nufarm's $5.50 level three months ago before multinational Bayer reached one of the largest civil settlements in US history at more than $10 billion over claims Roundup - which Nufarm sells - caused cancer for more than 10,000 claimants.
Controversy has surrounded Roundup, scientifically known as glyphosate, since 2015 when the chemical herbicide was declared as "probably carginogenic" by the World Health Organisation.
NUF shares were trading at close to $10 each in 2017, but the potential implications of legal cases and court orders against glyphosate's former owner Monsanto - which was acquired by Bayer - were not lost on Australian investors and shares have steadily declined since then.
The company is now aiming to rise above these issues through its other divisions, including the ramp-up of commercialisation activities for Omega-3 canola oil and Carinata as part of its seed technologies business.
Nufarm is also switching its financial year from ending on 31 July to finishing on 31 September, so it is currently in a transitional period before that change takes effect.
The company will report its financial results on 23 September, and the following day ex Bunnings Group CEO and Officeworks chairman John Gillam will succeed Donald McGauchie AO as Nufarm chairman.
Updated at 10:50am AEST on 2 September.
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