Operating cash flow is crucial to a firm’s survival particularly in hard times.
The Auditor General has been concerned for some considerable time about FT’s operating cash flow.
In 2008 Mike Blake reported “..... cash generated from operating activities is tight. Management are keenly aware of this position and are monitoring operations closely. I am advised that management is developing longer term strategies to maintain long term sustainability”.
In 2009 the observation was “(c)ash from operations remained tight with investing activities having been funded primarily through short term funding from the TCFA grants. Management are keenly aware of this position and are monitoring operations closely. I am advised that management is developing longer term strategies to maintain long term sustainability”.
A similar message in 2010 stated “(i)t is not sustainable for Forestry to generate negative cash from its operating activities, a situation management and the Board must address. Management are keenly aware of this position and are monitoring operations closely. We are advised that management is developing longer term strategies to maintain future cash flows.”
Mike Blake is known as a Master of the polite understatement (as well as the cut and paste). So when he points out a problem, it must be serious. Four years in a row, operating cash flow has fallen. FT was heading in the downward direction of the S-bend.
But were the Committee’s terms of reference broad enough to ask FT about, heaven forbid, its cash flow?
Yes, the terms of reference specifically covered “actions taken by Forestry Tasmania to address the decline in operating cash flows previously reported and noted by the Auditor General”.
My Pakistani bookmaker thought a question about cash flow was a certainty.
But Bob didn’t, as evidenced by the following exchange.
CHAIR – (T)he question I am trying to get to the bottom of here, and I tried last time and I did not get very far either, was what do you believe is the minimum operating cash surplus that is required per annum?
Mr GORDON - While we still have to meet our obligations or while we are not paid a CSO, I mean that depends on the circumstances.
CHAIR - In running your business the way you run it now with the community service obligations that you have -
Mr GORDON - Which are unfunded.
CHAIR - We accept that, we know that. What do you believe the minimal operating cash surplus required per annum is for the business?
Mr GORDON - And again the acquittal of the TCFA money is almost over and that drives our capital expenditure at the moment.
CHAIR - The answer to the question is?
Mr GORDON - I will take it on notice.
Just as well Chair Ruth Forrest didn’t ask a hard question like ‘What was Captain James Cook’s first name?’ or ‘How long did the Seven Year’s War last?’
The full transcript of the vaudeville performance is available HERE
The buck stops at the Board?
It’s a little hard to believe that a CEO properly instructed by a responsible Board would take such a recalcitrant attitude to a parliamentary hearing.
Maybe the Board has given instructions not to cooperate?
The role of Boards is very much in business news lately with ASIC’s case against arguably remiss Centro Directors.
The facts here are that Centro produced a terribly misleading set of financial statements, signed by Directors, which suggested none of its borrowings was current, meaning none had to be repaid or renegotiated in the next 12 months.
But there was billions that fell into that category which when publicly revealed caused Centro’s share price to plummet resulting in a near death experience.
ASIC are arguing Directors need to bring a switched on awareness when they sit at a Board table. They can’t simply rely on management or auditors.
The Directors are arguing that they acted properly in ensuring that systems were in place to prevent errors in the accounts. A mistake occurred, albeit a huge one, that’s all.
If ASIC lose this case Boards will henceforth have a readymade excuse for mistakes and errant behaviour.
Not that FT’s Board need any excuses if recent behaviour is any guide.
The supposed half yearly accounts were just a few numbers on a media release, not a set of accounts by any stretch of the imagination. ‘The accounts weren’t audited, that’s why we couldn’t release them’ was the excuse from the CEO.
Gunns’ half yearly’s are not audited either, they are simply reviewed by the auditor which is substantially less in scope than an audit.
FT refuses to reveal its operating cash flow, instead releasing only an adjusted figure which it calls ‘operating profit’.
But we know this figure to be false and misleading.
· It is false because the cost of some employees’ superannuation is omitted.
· It is misleading because the cost of servicing its largest liability, the $122 million super liability is omitted.
· It is misleading because no costs are attributed to timber felled and sold.
Meanwhile a good result from the Centro case is needed to raise the bar for some Boards.
It been a year since banks stopped ignoring breaches of loan covenants by FEA forcing FEA to appoint a Voluntary Administrator (VA).
The banks responded by appointing a Receiver to look after their interests.
The VA and the Receiver have been battling it out. The VA has been trying to look after the interest of unsecured creditors and Growers involved in the 15 remaining MIS Projects whilst the Receiver has been trying to break the land leases, kick the Growers off their land so they can sell and repay the banks.
The VA has negotiated a deal to merge the 1999 to 2009 MIS schemes and FEA Group assets such as land into a new entity, which will raise new equity and finance. Growers will end up with 49%, investors will put in $85 million for a 49% interest and unsecured creditors will end up with a 2% interest.
Banks will put in $100 million. All existing borrowings (well over $200 million) will be cleared, and some FEA assets sold. (Gunns’ new sawmill for instance was one of these latter assets)
The new entity will also look after Growers’ trees from earlier MIS Projects and remit harvest proceeds to Growers in the normal course. The land used to grow these trees will be owned by the new entity.
Ignoring what investors have put in already, all MIS schemes are viable but not sustainable.
They are viable because they will give investors a return in excess of costs from here on (not necessarily in excess of costs if one includes the initial contribution).
But they are not sustainable because the MIS projects operate mostly on a deferred fee basis which means that FEA was to meet the ongoing costs of the schemes and in return get a cut at harvest time.
But the costs now need to be met on a PAYG basis. The banks weren’t prepared to lend more to FEA in its current condition, that’s why they pulled the pin.
At first glance it looks as if the VA has done a pretty good job.
But it’s taken a year and considerable more than 200 hours, the suggested time for Stage 1 of the Strategic Review into FT recently announced by the Premier.
Anyone who thinks that much is going to be achieved in 200 hours is living in a world of illusion.
Especially if Bob and his Board cooperate in the manner to which they have become accustomed.
It was obvious to even visually impaired Fred that a VA should have been appointed 12 months ago when the Roundtable started.
There are such a lot of unanswered questions with regard to unspent TCFA funds received by FT that it was always unlikely that the Feds would tip in more whilst there were doubts about the whereabouts of the $145 million that has been paid into FT’s bank a/c over the last 5 years.
Any answers to questions about TCFA funds are always prefaced with a homily that the monies are not freebies but rather compensation for land stolen. That’s fine Bob, that’s not the issue, the issue is simply where did all the money go? How much cash is yet to be spent? And where are you going to find the cash Bob, if you’ve spent it to help remain afloat?
Bob told us at the recent hearing that Michael Aird proposed the strategic review before he left.
It took Lara 6 months to get round to doing something.
Since Mr Aird departure as Treasurer the clowns downstairs had a golden opportunity at Estimates last December to quiz FT about its record breaking loss.
But the ever vigilant and concerned Liberals did not ask one question about the myriad of concerns previously flagged by Mike Blake.
At least Mark Shelton had an excuse; he was probably too busy on mayoral duties to adequately prepare. But Pete Gutwein couldn’t even be bothered reading the financials. Perhaps he did but couldn’t understand them?
No one followed up answers to questions on notice and no one could be bothered writing a report.
Policy runs a poor second to theatre.
At least the Leg Co seem intent on obtaining answers.