Friday, 26 July 2013

Ta Ann --- the supreme beggar

Ta Ann Tasmania Pty Limited (TAT), the current leading light of the Tasmanian timber industry finally revealed the extent of its accumulated losses with the belated lodgement of its 2012 annual financial report with ASIC in late June 2013.

The losses of $10.2 million on revenue of $28 million means losses now total $26.8 million. TAT doesn’t have bank borrowing. Its losses have been financed by its parent which is now owed $28.2 million.

It’s probably just a coincidence that the compensation from the IGA of $26 million resulting from the proposed reduction in wood supply from public native forests, is almost the same as the amount owed to the parent company. It was thought that some of the compensation might be used to build value adding production facilities like a plywood mill but Mr Rudd has just committed a further $7.5 million from IGA funds for that purpose.

It‘s difficult to work out how the compensation was calculated. After all TAT makes losses. It makes operating losses even before overheads are taken into account. In other words it sells its product to its parent at a loss. It doesn’t even cover factory costs let alone  overheads. If the parent company is adding value which it reputedly does with the manufacture of plywood, then it looks suspiciously like profit shifting. If it’s good enough for Google Apple and Microsoft why not Te Ann?

It does beg the question which entity is to be compensated? If it’s the local company TAT then any calculation of compensation could  be a negative number. If it makes losses at the factory level a reduction in wood supply may well reduce the losses. If the compensation is a negative number then doesn’t that mean that TAT should pay us for agreeing to a reduction in wood supply? It appears that at least 75% of factory costs are the variable expenses of logs labour and electricity which means reducing throughput may reduce losses.

Not that TAT pays electricity as billed. It’s in dispute with Aurora Energy for $1.8 million. It is hoped that any dispute with a Government owned business is resolved before any government hands over more money to TAT.

Maybe the party to be compensated is TAT’s parent company? To the extent the parent adds value to the product supplied by TAT and makes a profit then maybe the loss of wood supply by TAT will have flow through effects.

But that would mean the best of both worlds for the Group. Shift profits overseas but retain the ability to claim compensation locally for any subsequent loss of overseas profits.

Without knowing who is being compensated and the precise nature of the compensation it’s a little hard to say whether it will attract resident tax. It’s likely to be either a revenue item being a loss of income, or a capital gain of some description. There’s a long and noble tradition amongst accountants of converting income receipts into affairs of capital wherever possible. It would be surprising if the compensation results in tax payable. TAT has enough accumulated tax losses if an offset is required. TAT doesn’t even bother to record future benefits of tax losses in its accounts because it does not believe that future profits are likely. This is the company that currently is the cornerstone of the new forest industry. The Directors don’t expect it to make taxable income in the future.

Profit shifting usually keeps local tax to a minimum. TCFA grantees received extra to compensate for tax on the grants. However it’s a bonus if taxable income can be reduced to nil by other means.

The compensation of $26 million will add to the $10 million already received from governments via the TCFA plus the $7.5 million announced today. The two shareholders, both companies in the Group have put in share capital of $53 million plus, as already mentioned, working capital of $28.2 million. Without an assurance from the parent company that it won’t seek repayment of any working capital before 30th April 2014, the Directors wouldn’t have been able to sign off on the solvency declaration that TAT could pay its debts as and when they fall due.

The $10 million received from TCFA funds and used to purchase the veneer plant was treated in the financial accounts as ‘deferred income’ and included in the balance sheet. Each year a portion is transferred to the P&L and recorded as income for that year. The ‘deferred income’ is thus written off over the life of the plant. At first it appeared as if 20 years was the effective life selected but in the latest year 2012 a much larger amount was written off suggesting the life of the plant has been reduced to about 10 years.

In addition to depreciation expenses, extra impairment charges were recorded against the value of plant on the basis that reduced future income was likely.

The financial accounts suggest TAT has revised both its future revenue and its life expectancy.

It’s difficult to interpret TAT’s figures with any confidence. Only once in the last 4 years (NB TAT’s income years are calendar years not the usual July to June common to most resident companies) have the factories made a gross profit (before overheads). That occurred in 2011 with gross profit of 11% or $5.5 million on sales of $49 million. But in that year sales were boosted by $8 million in book entries. (NB all sales are with the parent). Most of the time cash changes hands but there are some book adjustments via the loan account referred to above as the working capital loan from the parent company. It is not at all clear why a sales adjustment of $8 million was required in 2011.

In the other 3 of the past 4 years the factories have made a loss before overheads. But each time sales adjustments via book entries exacerbated the losses. It’s difficult to know the legitimate basis, if any, for the sales adjustments or whether they’re just a crude form of profit shifting. Over the past 4 years sales have only totalled $145 million. At a guess one million tonnes of timber (the quota was 290,000 tonnes per annum) have been fed into the factories. Producing product worth $145 per tonne is a joke. It’s not much better than woodchips. Forestry Tasmania(FT) would be lucky to get $30 per tonne at the stump a price that doesn’t cover roading and regeneration costs let alone the direct costs of FT staff plus other holding costs over the rotation. Sure trees grow again but what’s the point from a financial viewpoint? To describe it as subsistence farming conducted by fatalists would be an overstatement. It’s institutionalised stupidity. The timber then arrives at the mill door with a cost of about $70 after harvesting and cartage. The TAT factories  incur about $75 worth of costs including about $30 worth of labour and ship the product overseas at cost. Overheads including  about $11 in selling and distribution expenses ensures the local operations are well and truly in the red.

TAT’s factories are little more than sheltered workshops. Even if TAT was environmentally sustainable it is not financially viable. It will struggle to survive given its current modus operandi. Even with price capping via a long term wood supply agreement it doesn’t make profits onshore . The miserable amounts of payroll and FBT tax remitted to Governments are dwarfed by the assistance received and probably by the profits shifted offshore.

The cheerleaders for special species want price control. They want to socialise losses and privatise gains if possible. TAT has gone a stage further. It secured fixed prices but shifts profits offshore and parades itself as an onshore beggar eligible for more handouts.

Meanwhile there are  150,000 hectares of Gunns’ and other MIS plantations still in the hands of liquidators/voluntary administrators.  A Macquarie led consortium looked to have secured grower/investor approval to take over a couple of Gunns’ MIS schemes.  The growers said ok but the Courts intervened at the behest of the liquidator. Judge Robson in the Supreme Court of Victoria found the new pretenders were little different from old ones and that Macquarie’s behaviour “constituted misleading or deceptive conduct or conduct likely to mislead or deceive growers”.

Nothing’s changed. The new forest industry is not yet at square one.



1 comment:

  1. John, There is no "new forest industry". Just the same old forest industry continuing to be ideologically and politically driven. Checkout their latest "vision" statement:

    Not a mention of profitability or competitiveness. Just another opportunity to bleed the taxpayers. Cheers, Gordon.