Tuesday, 24 February 2009

Great Southern to quit Tassie

Great Southern held their AGM on Thursday 19th February 2009 at which they announced plans to quit Tasmania. They reviewed a tough year for the company. Their woes are typical of the MIS industry. The Chairman and the Managing Director addressed the meeting. The full address can be found on the ASX website (http://www.asx.com.au/asxpdf/20090219/pdf/31g4gmvvxd9h02.pdf ) but like all such addresses is very much a sanitised view of events. An earlier draft of the address has been ‘discovered’, a draft before the usual sanitisation and omission of facts and the application of gloss by spin doctors.



Thursday 19th February 2009

Ladies and gentlemen, as you will all be well aware we are living in extraordinary times. The global financial crisis is testing the fabric of the global economy and many of the business models which have been operating successfully over the last decade are now being severely tested. In these uncertain times businesses must recognise that if they are to survive and even prosper it is necessary to question past practices and to adopt to the new realities.

This is particularly true for our company. Great Southern has built up a very strong portfolio of assets over the years primarily in the form of agricultural landholdings. Our core business and cash flow, however was predicated on selling MIS projects each year. For years we relied on Abe Lincoln’s maxim that “you can fool some of the people all the time ”. And it worked. A select group of taxpayers either with more money than sense, or the wherewithal to borrow, kept showering us with money rather than pay a lesser amount to the Australian Taxation Office to fully discharge their civic obligations. But Abe’s maxim is no longer true. We’ve lost our ability to fool anyone any longer. It only goes to show one can’t necessarily trust the word of a President of the US of A. Not that we need further proof.

New challenges caused primarily by the regulatory uncertainties created by Government and the Australian Taxation Office and by the changes in Australian economic conditions, not to mention the appalling yields that we had managed to keep well hidden for 10 years but regretfully had to confess to as part of the information disclosure requirements of Project Transform, have meant that our core business model of simply selling increasing volumes of MIS product is no longer appropriate going forward. This is particularly the case given the increased operational costs that the company needs to continue to meet in respect arising from projects previously sold and the level of debt the company must service as a result of acquiring land and capital equipment needed to facilitate past sales. It has come as a surprise to Great Southern that investors expect a return from their investment and expect their woodlots to be attended to with the silvicultural skills as agreed by Great Southern. We at Great Southern always believed the contracts with investors were just a smokescreen to keep the Australian Taxation Office happy. Great Southern now needs to reduce overall debt levels and cost structure and decrease its reliance on the level of MIS sales.

As shareholders you will be aware that as a result of these issues, Great Southern began a process of reviewing its business model which led to Project Transform, which faced some epic headwinds but now has been implemented, at least in part. We have just issued approximately 130 million more shares to investors in consideration for them selling their woodlots to our company. We valued their woodlots at $64 million so we were pleasantly surprised when they accepted shares in this company which today have a market value of only $14 million. And this is before the Australian Tax Office takes a cut of $5 million. These sacrifices are what has built Great Southern into the company it is today. Such philanthropy needs to be applauded. We at Great Southern salute the selflessness of investors in helping to keep the company afloat.

The board is acutely aware that our share price has fallen substantially. We think it is clear that the share price reflects uncertainties associated with cash flow, legacy costs, gearing levels, capital structure and future earnings. In fact there is little else. We will need to address these issues before our assets can be appropriately valued by the market. If time permits.

Great Southern is exploring a range of options to meet its future funding needs and since there are very limited opportunities to raise cash through issuing equity in this market, because let’s face it, who in their right mind would lend us a dime, so we will need to sell assets. By collapsing the cattle MIS schemes we will be able to sell cattle and the associated beef properties. It’s not a good time to sell assets because many companies are in the same position. But we have no choice, without cash flow we will not survive.

If we turn now to the results of the financial year ending 30th September 2008, it is clear that the results represented a disappointing set of numbers. MIS sales declined by 24% to $314 million. As I already mentioned, the decline was in part a result of the external factors due to uncertainties over the MIS industry created by Government and ATO , in part also to the rapidly deteriorating economic conditions which became evident late last year when sales are traditionally at their peak, and in part due to our continued failure to produce profits for investors.

A loss of $63.8 million was achieved, after asset write downs and allowances for goodwill impairment and doubtful debts. In the case of goodwill, $30 million was written off in 2008 leaving $40 million remaining on the balance sheet. This will have to be written off in 2008/09 as over half relates to the cattle business which will disappear as cattle are sold to raise cash. In the case of doubtful debts a further $57 million in doubtful debts relating to MIS loans was provisioned in the annual accounts, taking the total provision to $62 million. Total MIS loans owing to Great Southern were approximately $130 million. In other words we only expect to be able to collect approximately 50% of amounts owing. What is it about the modern age, people are refusing to pay their bills. We gave them the perfect vehicle to avoid tax, and now they apparently want a return on their investment as well. Great Southern has been fortunate in that most MIS loans have been securitised and transferred off balance sheet to other lenders who will bear most of the costs of default. Great Southern has in place $7 million worth of guarantees to the securitised lenders. This is the maximum exposure that Great Southern has in respect of securitised loans.

As I said earlier, these are challenging times and as a company we must face our challenges head on which will undoubtedly mean some further pain in the short term, particularly with respect to earnings. Our half year earnings will be significantly impacted by more goodwill impairment, more doubtful debts, a reversal of amounts totalling $65 million that had been previously included as income but now has to be expensed following the cancellation of cattle contracts with investors following Project Transform. It will be a bleak first half year, and with loan securitisation as good as dead following turmoil in the credit markets and Great Southern being unable to lend investors the funds for their MIS payments because of cash flow problems, the second half of the year where MIS sales traditionally occur, also looks dismal.

One glimmer of hope amongst all the gloom, is that as part of Project Transform we confessed to being able to reliably assess the 10 year yield of a plantation once the plantation was 4 years old. We had managed to keep this information from investors for 10 years, but the Independent Accountant released it all as part of Project Transform. We therefore took the opportunity in the 2008 accounts to include as income the commission amounts that relate to future crops, some even 6 years hence, provided the crop yields can be reliably measured, which can happen at 4 years of age. This gave a boost to the bottom line, by bringing forward future earnings. With the acquisition of $64 million worth of trees as part of Project Transform we will be looking to see if this can be returned as income immediately. It might require a few long lunches with our auditors, but rest assured your Board is always exploring ways to improve the bottom line. Innovation and abandonment of past practices is the key to the future.

If one indulges oneself and logs onto internet chat sites such as Hot Copper or Australian Stock Forums one soon discovers a high level of feeling against Great Southern. This has been further exacerbated by threats of legal action by investors against Great Southern. Your Board undertakes to meet these challenges head on. For years we’ve operated a nice little earner under the radar with full support of financial planners and accountants who easily succumbed to our generous commission arrangements, and by making minimal disclosure and burying other matters in obscure Notes to Accounts. And then the global financial crisis hit us like a tsunami. And with Bernie Madoff’s arrest in the US, everyone now knows what a Ponzi scheme is, and an accusing finger is being pointed at Great Southern. It will be a gruelling year.

In the short term we must focus on the fact that we have $105 million of debt due to be repaid or renegotiated by October this year, we have our $80 million worth of hybrid securities that need to be repaid, reset or converted by the end of October this year and we have to keep generating cash to pay all the operating costs of existing MIS schemes that have become a pesky annoyance now that investors expect a return. Our core business was once shuffling paper, not looking after tree plantations. We will however adapt to the changed environment.

Following a recent review of our forestry business, we consider it appropriate to focus forestry operations in 4 key regions, being the South West of WA, the Green Triangle region of Victoria and South Australia (including Kangaroo Island) and the Tiwi Islands in respect of our hardwood pulpwood estate and Northern Australia for our high value timber estate. The company’s other forestry areas including Tasmania will be non core areas and whilst we will continue to manage the plantations located in these regions until harvest we will seek opportunities to realise value from the land holdings within these regions. In Tasmania for instance our plantation land has a value of $60 million which will be useful when sold. But it can’t be sold whilst still leased to investors to grow trees. Which in turn causes a further problem. The Tasmanian plantations are similar to most of our plantations in that most are unprofitable for investors, the woodlot owners. We have been advised that because the plantation are unprofitable, the primary producer exemption does not apply, and therefore land tax of $1.5 million pa will need to be paid. This is the cost to do business in Tasmania.

This will effect our pursuit of other opportunities that are beginning to emerge within the sector. Specifically , the Government’s Carbon Pollution Reduction Scheme White Paper indicates that rotational pulpwood forestry operators are likely to be able to generate permits under the proposed carbon scheme, as long as they commit to a long term forestry plan. If that’s the case we may return to Tasmania to carpet the island with trees.

Please be assured that the Board and management will continue to strive to look after your interests as well as their own. But not necessarily in that order.

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