CHIEF EXECUTIVE’S ANNUAL MEETING PRESENTATION (including Financials)
For Media
16 November 2011
It is a pleasure to present my 6 th Annual Report.
As Stuart mentioned, LIC remains in a strong position – we are continuing to innovate to improve products and services for our customers, we have a great team through the business, and we continue to deliver strong financial results which give us the ability to continue investing to set up an even better future for our cooperative.
Stuart has covered a lot of ground in his presentation today, so this year I will focus on the financial result, some of the key operational statistics, and a brief recap of our strategy for the future.
Financial Overview
Our financial result of $24.3M EBIT was achieved after revenues increased by 21.4% to
$166M. Sales growth was achieved in all product categories, with two of the highlights being:
Herd testing where activity increased by 1.1 million samples; and
Genetics [Premier Sires] where activity increased by 250,000 straws
Underlying net earnings”,which is essentially operating profit after tax, was $17.1M, up 88% compared to $9.1M last year.
The company retains a strong balance sheet with equity of $185 m which represents 78% of total assets at $237M.
Based on after tax Underlying Earnings, our Return on Capital Employed was 9.25%. Strong operating cash flows of $21.3M funded net investments of $22.2M.
Seasonal debt facilities of $10M were in place for last spring’s peak debt in November and cash on hand at balance day was $16.4million. At year end LIC had no term debt.
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These results are excellent, and reflect the strong underlying financial position of the company. It is critical that LIC remains financially strong as we have large investment programmes ahead in research, new product development, improving our business infrastructure and IT systems, as well as meeting the growing service requirements of our expanded business.
Every dollar of revenue collected by LIC is either re-invested in the business, or paid back to
NZ dairy farmers as dividends.
What we Earn
The main thing to take from this slide is the steady growth in the size and profitability of LIC over the past 5 years – profits have grown as the business has grown and diversified. The volatility of our industry, and the effect this has on our financial results is also clearly evident in 2009/10. We are sure there will be periods of volatility in the future, and it is essential that we remain strong to allow us to get through these periods without having to cut into our research and new product development programmes when times are tough.
I draw your attention to the Impairment of $1.5M this year. This was primarily related to the write down of the value of our farm land assets, in line with the position that we have all faced on our own farms.
What we invested in
LIC continued its commitment to reinvesting in its business with high levels of capital expenditure approved and spent during the year.
Our Board approved $17.8M in the year and we spent $20.1M, which included the completion of some projects that were approved in 2009/10.
As you will see, we invested in improving today’s business and developing improved products for the future. We have a heavy emphasis on developing new and improved software and farm automation products, which you will shortly see being rolled out with
MINDA Milk. You will also see a lot more innovation launched over the next 6 – 12 months in both these areas.
Looking forward we expect to invest between $20 - $30M per annum in assorted capital development and major project initiatives.
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Our Cashflow
Finally, and briefly, our cashflows remained strong, but highly seasonal. Debtor collections improved over the season as a result of improved financial performance of our customers, and an increased focus internally.
Short term investments of $15.2M is essentially the closing cash balance on term deposit.
In addition to the short term investments of $15.2M LIC has $11.7M of term investments including the $10M short-term loan to Agria Singapore to support their takeover of PGGW.
Operational Performance
Let me now cover some of the major operational performances during the year.
Genetics
We estimated that the overall NZ AI market fell by approximately 3% in 2009. During the
2010 season the market size recovered as farmers increased their AI periods, and increased the number of yearlings they mated to AI. We increased our total straws sold by 255,000 and clawed back some of the market share lost in 2009. DNA Proven volumes more than doubled.
Genomic Selection is the technology breakthrough that will deliver large genetic gain advantages for farmers. This is new and emerging science and there is room for further improvement in the accuracy of individual bull evaluations. The steps we have taken over the past few years in genotyping larger numbers of bulls, with bigger genotype panels, is making a significant improvement in the accuracy of selection of elite young sires. This is demonstrated by the “Bulls on the Line” campaign.
Reflecting the competitiveness of the NZ genetics market, and our co-operative focus on helping our farmers, we elected not to increase any of our selling prices in 2010, and have done this again for the current season.
Sexed semen remains near the top of the farmer wish list and we are now selling top NZ bulls in this form. Our fresh sexed semen product is delivering Non Return Rates that have consistently been within 5% of traditional fresh and frozen semen Non Return rates. The majority of the sexed semen we have sold has been to farmers wishing to participate in the very strong export heifer market that currently exists. Over time we expect sexed semen use to expand into more commercial herds as a way of helping farmers accelerate the genetic merit of their herds.
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The KiwiCross TM segment continues to grow strongly and now represents one-third of our total sales. The quality of the KiwiCross TM sires we are selling continues to improve and we are delighted to announce the arrival of Howies Checkpoint, the new all breed leader with a
BW of 287/72.
Genomics
We know we need to keep investing in genomics technology to enable the refinement and improvement of our DNA Proven product. We believe that, over time, we can improve the accuracy of individual sire predictions to approximately 65%, up from our current reliability of around 55%.
To achieve this we are continuing to invest between $3 - $5M per annum across a range of genomics initiatives.
We have sequenced 9 sires as part of the Dairy PGP programme and have plans to sequence hundred’s more animals over the next few years. This will give us a complete profile of the dairy genome of the more influential sires in NZ’s history. These insights will help us predict the markers that are the most relevant with even greater accuracy.
We know that NZ dairy conditions are unique, and that profitable cows in NZ have characteristics which are different than the common North American or European cow. For this reason, the genotypes of foreign bulls are not that valuable in predicting which bulls will perform here in NZ.
Given that we have genotyped all of the sires that we have marketed in the past in NZ, we are now starting to genotype the daughters of our SPS sires to increase the size of our reference set. We genotyped 15,000 females in 2010/11, and expect to have genotyped another 25,000 females by the end of this financial year.
We have also concluded swaps of genotypes with the Irish, the Australians and CRV for their
NZ proven sires. Each of these genotype swaps increases the size and value of our reference population, and the accuracy with which we can predict new candidate sires genomic BWs and TOP.
We have learnt a lot in the area of genomics in the last few years, in large part due to the fact that we have invested heavily, and had the courage and confidence to commercialize the technology. If genomics had been left in the R&D lab then there is no way we would have created the platform we have for future increases in genetic gain for NZ farmers.
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Farm Systems
Protrack had a great year with orders exceeding 100 systems in the last quarter. Our focus over the last six months has been to ensure we deliver on our promise through the installation process as well as maintaining high levels of support and service for existing
Protrack customers. At over 850 systems nationally, we are the leader in in-shed automation in NZ, and now have an install base that is big enough to sustain more investment in product development and sales and operational support.
MINDApro uptake has increased from 3,300 MINDApro users in 2006/07 to over 9,000 - approximately 85% of all NZ farmers.
Around 1,850 customers now use our electronic yellow notebook equivalent – MINDA
Mobile.
With the advent of Rural Broadband, our focus is moving to delivering more value to our farmer customers, more frequently, anywhere, anytime, on any device.
To achieve this we need to move the focus of our information software program to the web.
MINDAMilk has been launched, and new pasture measuring and forecasting and
Reproduction management applications will be rolled out shortly.
Our Innovation Farm at Rukuhia is starting to play a significant role in many of these developments, and I’m pleased to say it’s also now performing well as a commercial farm.
Diagnostics
I reported at the 2010 LIC AGM on the $5M re-engineering project to introduce new technology and automation into our GeneMark lab.
Our goal was to improve result accuracy, speed up the processing time, and automate a large number of processes that were previously manual. The team at GeneMark has done a great job over the last 24 months to validate and integrate the new DNA technology software, improve work processes, and improve customer service and satisfaction.
Our operational performance has continually improved over this time with significantly better Turn-around-times and parentage matching rates.
Customers responded to the financial support package we offered to help them upgrade to the new G3 test technology, and we now have all customers off the old microsatellite technology.
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This year we completed the development of a new Tissue Sampler unit in partnership with
Allflex. After extensive development and trialing the unit was issued to our customers, with clients receiving a replacement unit free of charge as part of our commitment to the upgrade process. Customer feedback on the usability of the unit has been excellent, and equally important, sample re-test rates have fallen dramatically, reducing hassle for our customers, and improving our lab processing times.
We are bringing on approximately 150 new herds per year to GeneMark whole herd.
In 2009 we launched our BVD monitoring programme, and again experienced large growth in customer uptake in the last year – over 4,000 customers are now monitoring their herds
BVD status with LIC.
We are planning on growth year on year in our Diagnostics product range, and uptake. To ensure we are able to meet the growth and customer turnaround time expectations, we have commenced a major upgrade of our Lab Information Management systems – and expect this project to be completed over the next 18 months at a total cost of around
$1.5M.
International
Our International business delivered another strong result for the 2010-2011 season, exceeding our budget targets. Sales volumes exceeded 750,000 straws for the first time, which helped offset the negative impact of higher exchange rates.
We are now genomically screening our Holstein Friesian calves with ICBF on their EBI index, and this will identify elite sires for Irish conditions within our NZ population. We expect to find superior sires for Ireland which will further increase our market share there.
We are working closely with Fonterra to support their International Farming Ventures. We established our Genes on Legs programme this year signing up 88 farmers to use LIC sexed semen to breed heifers for sale to Fonterra to export to China. This initiative helps Fonterra, grows LIC and provides a mechanism for farmers to increase their genetic gain and generate additional income from sales of heifers.
The outlook for growth in dairying around the world, combined with concerns of price volatility for inputs, is increasingly raising the profile of grazing and pasture based dairy farming. LIC is well positioned to grow as this trend gains momentum through the supply of genetics and advice.
Our future focus is on expanding our distribution through the World. We are involved in a number of interesting initiatives with Fonterra, Agria, New Hope, our existing agents in many countries, and some new potential partners - I expect a number of these will come to
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fruition over the next 12 months, and will translate to further sales and profit growth from our international business.
Strategy
So, what’s our strategy for the future ……..
Our strategy goal remains to assist farmers to generate sustainable farm productivity gains.
We will achieve this through our 4 growth strategies, supported by our 4 major enabling programs of work.
We will continue to push hard to increase rates of genetic gain in the National herd, and assist farmers with tools and advice to help them get their cows in calf. We will collect more and more data on our customers cows and farms, and we will find more useful and innovative ways to deliver information and decision support tools back to farmers. We will keep growing our international business, and we will always keep looking for new areas that we can work in to support our customers.
To achieve this we need great people, great technology, a strong focus on achieving the highest levels of operational excellence, and we need to keep collaborating with many other partners through the Industry and internationally. This work never stops.
Appreciation
Finally, I would like to pay tribute to the great work that was done by staff across LIC during the year in review. There are 636 permanent members of the LIC team, and a further 1,577
[1286 AB Techs; 241 HT; 50 AB Ops seasonal] who join us over the season to deliver AI and
Herd testing services. We would simply not be able to deliver the value we do to our customers, to the Industry and to NZ without this great team. I am very proud to be a part of the LIC, and I thank everyone for their passion, commitment and really hard work for the cooperative.
As Stuart mentioned in his address, this will be his last AGM after 24 years of service. On behalf of all staff I would like to thank Stuart for his visionary and passionate leadership of
LIC – you will be missed.
Thank you.
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