Silver Fern Farms’ has disappointing half year, but hopes for year end profit

The transformation of Silver Fern Farms (SFF) from a disjointed monolith across two islands and a large number of ageing plants to a leaner, efficient, market led meat processor remains very much a work in progress. The half year loss to the end of February represents a disappointing turnaround from last year of $31.1 million pre-tax and $16.2 million after tax to losses of $16.7 million and $5.9 million respectively.

 

The year end forecast is to move into profit as a result of margin earned on selling down the high level of inventories and less currency volatility. However lamb procurement prices will eat into any extra margin, while demand for sheepmeat from major markets is very sensitive to high prices causing consumers to change to other forms of protein and less lambs available must have an impact on processing efficiencies. The cull cow kill, currently 100,000 ahead of last year, may be the salvation for all meat companies’ profits, not just SFF.

 

The last full year produced an improvement on the first half of $36.8 million before tax and member distributions, but this was on the back of a substantial capital stock kill and lower livestock prices. A year end trading profit is possible, but it won’t be as good as last year’s.

 

The most positive aspects of the financial performance are 10% reduction in debt compared with February 2008 and the projected improvement in the equity ratio to a more respectable 45% by the end of the year. It’s not clear whether or not this includes the cash and shares from the settlement with PGG Wrightson (PGW), but the settlement must be seen as a positive outcome for SFF, outweighing the costs associated with the collapse of the deal, if not the lost equity contribution.

 

SFF has lost about a third of its combined lamb market share since 2002, based on the latest EU quota figures, equivalent to a loss of 27,000 tonnes. Translated into livestock numbers, based on this year’s forecast of around 20 million lambs to slaughter, this share loss equates to a reduction of 2.75 million lambs from the total processing volumes of the then PPCS and Richmond businesses.

 

This inevitably leads to an assessment of the likely success of the rightsize project, including closure of six plants, five lamb chains and, not surprisingly when you see the reduced procurement volumes, a reorganisation of the procurement arm. Coupled with these moves is the further development of the plate to pasture marketing strategy and consumer branding with a deliberate (the cynical might say forced) move away from lighter weight lambs to UK and European supermarkets to a heavy weight lamb programme to Europe and other markets.

 

The intended procurement restructure is designed to move suppliers progressively away from production led livestock supply towards ensuring the majority of suppliers grow product to meet market requirements. Buyer headcount will drop by 10 and SFF will employ four regional supplier managers, each with a team of 15-20 buyers reporting to them which will bring about a decentralisation of the procurement process.

 

The four managers will have a different skillset from the traditional livestock manager, enabling them to work with suppliers in their region to communicate the market requirements the company’s new consumer led marketing strategy demands, including assistance with genetics, breeding and feeding programmes.

 

This was no doubt the sort of procurement approach PGW envisaged providing in the heady days last year when both parties planned their long term relationship. Despite PGW’s references to its hope this might still happen, SFF has now moved on a long way since then and I get the impression thinks it’s better off doing the job with its own team, rather than outsourcing an integral part of its business to a part owner’s agents with different motivation.

 

The next thing to resolve is equity in the company which will now be sought from farmers, resulting in a tidying up of the different classes of share, as all suppliers will be invited to subscribe capital on the same basis.

 

This year is more about continuing on the journey towards becoming a substantially different business, rather than the year’s profit as an end in itself.

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