Fairton closure unfortunate but inevitable

Silver Fern Farms decision to close its Fairton plant did not have much to do with Shanghai Maling’s investment, but was only a matter of time. Even the workforce had apparently come to accept the inevitable after seeing lamb numbers through the plant decline sharply from more than 1 million in 2010 to less than 500,000 last season and 325,000 in the latest six months.

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Heavy market share losses affect Silver Fern Farms’ financial performance

In recent weeks there has been an exchange of views about PPCS’s acrimonious takeover of Richmond in 2003. Keith Cooper, ex CEO of the renamed Silver Fern Farms, emerged from anonymity in Middlemarch to castigate the appointment of Sam Robinson to the board of Silver Fern Farms as the Shanghai Maling representative. He was critical of Richmond’s rejection of the original approach by PPCS to buy the Freesia Investments shares from the Meat Board in the mid-1990s and Robinson’s role as Richmond’s chairman.

Meat trade unrecognisable from 40 years ago

It is sometimes tempting to think nothing much has changed with meat exports in recent years when you read all the publicity about the problems in the meat industry. Since the beginning of this century the contrast with the dairy industry has been particularly marked, but suddenly this season the positions have been reversed. Sheep and beef farmers can hold their heads high again and it seems likely this state of affairs may even persist for longer than just this season.

Changes at the top for both meat cooperatives and a return to profit for Ferns

The announcement by Silver Fern Farms which signalled a return to profit, albeit a small one, also heralded a changing of the guard. Keith Cooper will retire as Chief Executive at Christmas following Rob Hewett’s move into the chairman’s role earlier in the year.

 

There is a neat synergy about these developments which are mirrored by the changes at Alliance Group where Owen Poole handed over as chairman to Murray Taggart at the last AGM, while Grant Cuff has already announced his retirement as CEO. There will inevitably be speculation about whether either or both have been pushed or have gone in their own good time.

 

The word from the respective chairmen is that both Keith and Grant have gone entirely of their own accord after many years of loyal and competent service in one of the most competitive and bruising industries there is. It wouldn’t surprise me if both, especially Cooper, have decided there must be a less stressful way of spending their working life before they reach the age at which they want to put their feet up.

 

Running SFF during a period of substantial industry change involving seriously reducing sheep numbers, cut throat procurement competition and a perpetually weak balance sheet must have taken its toll. That said, Keith has always been unfailingly prepared to answer phone calls and questions while fronting a lot of the meat industry’s essential public relations issues.

 

Grant Cuff has taken a completely different approach, probably because he is by nature much more reticent than his counterpart; he was also content to take a backseat role and allow his chairman and predecessor as Chief Executive to front the industry restructuring issues. Alliance had had its worst period back in the late 80s after acquiring Waitaki’s South Island assets and under Poole’s management had never allowed itself to fall back into a similarly stressed financial position.

 

While not profitable every year, Alliance has successfully navigated its way through the last 20 years with its balance sheet intact as well as making the right investment and rationalisation decisions at most points along the route. The company remains a genuine cooperative based principally in the South Island. Cuff’s contribution as a manager and more recently as Chief Executive should not be underestimated.

 

SFF has had a much more colourful time over the same period. It entered the 90s as Primary Producers Cooperative Society (PPCS) with no assets outside the South Island, but had a reputation as a hard-nosed, tightly run business that did things its own way without showing any weakness to its competitors. Fortex which collapsed in the early 1990s learned the hardest way of all the rashness of baiting PPCS in its own back yard.

 

By the early 2000s PPCS, under CEO Stewart Barnett and chairman Robbie Burnside, fought a bitter campaign to take over Richmond based in Hawkes Bay. This takeover was eventually successful, although it weakened PPCS which became the country’s biggest, but possibly weakest, meat company. Supplier disaffection saw a steady loss of market share, while the asset base was in need of both rationalisation and reinvestment which has required substantial bank debt.

 

Keith Cooper took over from Barnett in 2006 since when he has led the company through a renaming exercise, the development of a high profile branded consumer meat business (although this is not yet necessarily profitable), sale and closure of a number of assets, establishment of FarmIQ and the conversion from cooperative to ordinary shares. This has been achieved in spite of heavy losses and a weakening balance sheet against a background of rumours about the company’s ability to survive.

 

At the present unlisted share price of just above 40 cents, members ordinary shares valued at $136.5 million in the 2013 annual report, have a market value of a little over $40 million funding assets of $833 million. This week’s announcement talks of debt being reduced by $100 million which will certainly bring down the $35 million interest bill as well as improve the debt to equity ratio, but the real need is for an urgent and significant improvement in equity.

 

According to the chairman Rob Hewett, equity options presented in the PriceWaterhouse Coopers report are still six months away from being able to be evaluated and presented to shareholders. It seems that a further move away from SFF’s previous cooperative status is inevitable.

 

The small $5-7 million unaudited pre and doubtless post tax profit is trumpeted as a $40 million improvement over the previous year’s result, but as a return on the massive asset base it is pretty minimal.

 

Cooper is getting out under better performance circumstances than would have been the case a year ago, but the jury is out on how successful his legacy will be. The new CEO Dean Williamson will need all his experience gained from running Riverlands as part of Brierley Investments meat business 20 years ago, as well as some new skills if he is to return SFF to fully profitable safety.

 

In retrospect and in spite of a much lower key tenure, Grant Cuff leaves the meat industry with a more substantial record of achievement.

Possible meat industry solution proposed nearly 30 years ago

In 1985 the Meat Industry Council commissioned a report from consultancy firm, Pappas Carter Evans & Koop, entitled Cost Competitiveness in Export Meat Processing which proposed a solution to the problems of the industry. Unfortunately, in view of the history of the industry since then, the recommendations were never implemented.