Levy

Promising to deleverage after pumping hundreds of millions into two ethanol plants, Jamaica Broilers Group (JBG) said last week it would cut its $5.5-billion debt load by $2 billion in less than a year.

Its strategy: replacing high-cost bank debt with low-cost funds, and driving up revenue.

On Wednesday, the company announced that it had signed with three overseas companies to distribute fertiliser and agrochemical products. Before that, it secured a loan from Inter-American Investment Corporation (IIC), private-sector affiliate of the Inter-American Development Bank, that is to partially offset its debt.

At the end of its financial year in May 2010, according to Broilers President and Chief Executive Officer Chris Levy, the company should owe no more than $3.4 billion. Broilers' debt is now 3.86 times earnings before interest and taxes, or EBIT.

"We invested over US$45 million in ethanol over the last two years. A lot of that was financed out of debt," he told the Financial Gleaner.

"There is also the working capital for that business, plus they just increased the capital for Best Dressed chicken in terms of grain prices, and grain prices have doubled over the last two years - so it takes twice the amount of capital to do the same amount of business."

Best Dressed is the brand under which the company's poultry and fish are marketed.

"That strategic reduction of our debt will, we believe, enhance our ability to further diversify our business as we continue to explore major investment opportunities outside of agribusiness, inclusive of energy, shipping and logistics management," he continued.

"This will require prudent management in terms of our profitability and cost control and really focusing on that reduction. We raised some good financing from IIC and the local banks and we are moving in that direction very aggressively."

JBG obtained a loan of US$7 million (J$630 million) from IIC to pay down some of its expensive debt to local banks.

Its books reflect $3.8 billion of short-term borrowings while its long-term loans amount to more than $1.6 billion.

Immediate savings

The group agreed to take the IIC funds in two tranches, with the first disbursement of $5 million replacing more costly short-term loans, resulting in immediate savings of about US$250,000 per year, the company's vice-president of finance and energy operations, Ian Parsard, said back in July.

The company's debt-servicing costs last year doubled to more than $400 million amid signs that revenues in some segments were slowing.

Broilers' ethanol segment in the first quarter ending August 1, for example, brought in $1.4 billion, a much poorer showing than the 2008 period when sales rose above $2.2 billion, moving from top seller in the group to third place in three main segments.

Revenue was down overall across the group from $6.2 billion to $5.9 billion in the quarter.

Ethanol remains highly profitable, however, returning higher profits of $443 million at year end May 2009, which was $42 million more than the $321 million it made in 2008, and continuing that performance in the first quarter of 2009/10 with a $330- million or 53 per cent contribution to operating profit of $852 million.

Speaking at the company's AGM last Saturday, the president and CEO said the performance of the ethanol operations was not surprising, given that there is greater demand for the commodity from the United States and increased production from Brazil during the summer months, becoming the group's premier foreign-exchange earner.

Levy said 30 per cent of net profit is earned in hard currency, but the company would like to increase that to 50 per cent.

"That is pretty good in terms of foreign currency," said the president, who succeeded his father Robert in January 2009. "There is certainly a strong bias to any investment that can earn us much-needed foreign currency."

According to Levy, Broilerscurrently receives a return on investment of 30 per cent from its ethanol division.

The company's fish division, which was expected to be a leading foreign-exchange earner, fell flat in the export market due mainly, Levy said, to competition from Chinese fish producers, eventually leading to the shutdown of that line of business and a refocus on domestic fish sales.

"When the oil and soya prices skyrocketed last year, we were not able to pass on those price increases to our customers and we were standing to lose a lot of money and had to make some tough decisions to scale back," Levy told the Financial Gleaner.

"Right now we are producing 70 to 80 per cent of what we use to produce in terms of volume and we are selling everything locally."

The 11 new products on its distribution schedule are already on the market, said Conley Salmon, vice- president of marketing for field and agriculture supplies at Hi-Pro.

Broilers, through its Hi-Pro Division, now sells fertiliser for American firm Diamond R under a three-year contract; biological stimulants for plants on behalf of Agri-Gro, another US-based operation; and products of Caribbean Chemicals of Trinidad, whose merchandise will make up JBG's new product line, Crop Care.

The company will also be looking for new cost savings of 10 per cent this year by keeping expenses to a minimum.

mark.titus@gleanerjm.com