By Allan Barber*
The two biggest meat processors had contrasting experiences during the 2015 season to judge by their annual results and accompanying comments.
There is no doubt Silver Fern Farms found life easier than Alliance, with respect to the year in question.
SFF must also have heaved an enormous sigh of relief after its improvement from the previous three years.
The bare facts of the differing results are NPAT of $24.9 million and dramatically reduced debt for SFF and $4.6 million NPAT for Alliance accompanied by a marginal reduction in equity ratio.
Alliance’s performance was slightly worse than 2014, disappointing as chairman Murray Taggart agreed, whereas SFF’s result was a massive improvement on the previous year. Neither result represented a satisfactory return on assets, but signs for the future are positive.
SFF’s recovery from several torrid years, combined with the JV agreement with Shanghai Maling, lifted morale considerably, as well as removing an enormous degree of stress from the shoulders of board, management and banks. It also clarified the position of cooperative shareholders in their capacity as both suppliers and shareholders. Although there remains a minority not in favour of the rescue package, the vote at the Special General Meeting was very conclusive.
Alliance, with a stronger balance sheet and therefore without such an acute need for remedial action, has taken a completely different course of action. There is no confusion at all about its continuation as a 100% farmer owned cooperative which it is now able to promote as a key point of difference. The new company strategy is clearly focused on delivering value to shareholders.
At the release of Alliance’s latest annual result Taggart made a point of emphasising the company’s commitment to accepting lamb and sheep from farmer suppliers, even in weakening market conditions, in order to reduce exposure to volatile markets and to limit the impact of dry conditions.
He said “The alternative of reducing our processing would not have been in line with our co-operative principles and would have adversely impacted our farmer-shareholders. This is the unique difference in being a 100% New Zealand farmer owned cooperative; we look at things through the lens of what’s important to our farmer-shareholders.”
There are other reasons for the differing performances of the two companies, although it must be remembered both actually made a profit. This has not always been the case.
The main reason is the advantage SFF gained from its spread of plants across different species in both North and South Islands. Cattle made a much greater contribution to profit than sheepmeat as a result of the heavy cow kill and the demand from the USA which pushed beef prices to levels not seen before.
The lamb kill kept going far longer than usual and Alliance ended up processing a disproportionate number of these towards the end of the season when other companies, notably SFF, had basically stopped killing. Consequently Alliance ended up with a large inventory carryover at year end which didn’t help the annual result, as SFF had discovered in the 2012 and 2013 years. However in spite of a weaker trading environment, Alliance has successfully sold the excess inventory and stock is now down to normal levels.
Other negative impacts on profit were difficult weather conditions in key catchment areas for Alliance, like North Canterbury, and the need to cut lambs in less than ideal configurations because of high numbers later in the season. However the company believes it is very well placed strategically and has put a programme in place which will deliver benefits to its supplier shareholders, although the full results of the programme will take two years to take full effect.
Interestingly both companies ended the 2015 financial year with very similar equity ratios: SFF at 59.4% and Alliance at 58% which suggest a solid foundation for future performance. Assuming Shanghai Maling receives OIO approval to acquire 50% of SFF, this ratio will improve dramatically with term debt predicted to disappear. However the new board will have decisions to make about expenditure on plant rationalisation and upgrades which will require a certain amount of debt as part of an efficient balance sheet.
In discussion with Dean Hamilton about the condition of SFF’s plants, he accepts the company has some surplus capacity, although not as much as some competitors like to think, while he asserts plant maintenance has been kept up to date. It will be interesting to observe how the joint board decides to address these issues when the JV partner’s investment becomes available and the ownership restructure occurs.
Meanwhile Alliance is satisfied with the condition of its plants having booked $4.3 million of restructuring costs in the last two financial years. Taggart is confident Alliance is at the most efficient end of the cost curve and will continue to improve as it implements its strategy.
In spite of MIE’s failure to bring about a merger of the two cooperatives, it seems certain both companies will achieve the desired efficiencies under separate ownership.
Because of the differentiated nature of meat processing and marketing, I am convinced the outcome will be good for the meat industry, because it will require companies to become efficient at what they do best, or they will fail. In this way farmers will benefit from improved performance and pricing, while being able to continue choosing where to send their livestock.
The meat industry has long been viewed as agriculture’s ugly duckling, even when it has had good years, but I am optimistic it now has a good chance of achieving its rightful position as a viable alternative to other, more fashionable, forms of land use. Two profitable South Island cooperatives will be a good place to start.
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Allan Barber is a commentator on agribusiness, especially the meat industry, and lives in the Matakana Wine Country. He is chairman of the Warkworth A&P Show Committee. You can contact him by email at allan@barberstrategic.co.nz or read his blog here ». This article was first published in Farmers Weekly and is here with permission.
9 Comments
and there are other ways to "crack the nut"
http://hiltonfoodgroupplc.com/index.php/about-us/history
Hilton's business was established in 1994 to set up and operate a beef and lamb central meat packing facility in Huntingdon, England. This facility has grown rapidly over the last 20 years and the Group has recently entered into a joint venture agreement with Woolworths in Australia.
Following its success in the UK market, in 1999 Hilton acquired a beef and lamb packing facility, in Zaandam, the Netherlands. Since 2005, the product range supplied has been increased to include packed pork products.
The Group subsequently set up a similar beef, lamb and pork packing facilities in Drogheda, Republic of Ireland and Vasteras, Sweden in 2004 and Tychy, Poland in 2006. A new facility in Denmark to supply Coop Danmark was built in 2011.
Each of Hilton’s central meat packing plants are operated on a dedicated basis for Hilton customers. Hilton’s business model has been adapted to meet local requirements with customers in each country.
http://hiltonfoodgroupplc.com/about-us/innovation
and in news from the deep (the poor me routine aside)
He says the Silver Fern Farms deal was similarly complex. Through the deal, announced in September, the Chinese company will invest $261 million for a 50 per cent stake in the Dunedin-based meat processor.
"The number of banks that rolled up to Silver Fern Farms and said, 'You can't raise capital for this business in this condition' was pretty lengthy," Barclay says. "We looked at it with a different view and said that if you do the following things we think you can and we turned out to be right."
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=115…
Hmmmm
Goldman is suffering, as is Morgan Stanley. Rearranging broken corporate deck chairs is a tiresome pursuit.
If Morgan Stanley’s FICC units can only make money when QE is pressing on prices and spreads (or so everyone might believe), then what does it say about QE in Morgan Stanley’s behavior after Q3 2013, especially now when, by cutting a quarter of the staff, that places an exclamation upon the withdrawal? QE was supposed to create a recovery and thus great profit opportunity, but the absence of QE leaves banks to only leave, meaning no profit and thus truly no recovery. This financialism becomes the economic misimpression that “unexpectedly” showed up this year to spoil the self-congratulatory party as the FOMC tries over and over for a lift off.
As this point is pressed home over and over, as each bank cuts back and restructures against FICC, the “dollar” only cuts deeper and deeper into the financialized global economy and makes it only less opportune for what balance sheet resources remain; and round and round we go. The media cannot grasp as to why swap spreads would not only be negative, but quite negative and quite widespread and persistent, yet here it is staring them right in the face. A negative swap spread holds no meaning except to say that there is great imbalance in balance sheet factors on offer to carry out the financial factors necessary for the wholesale system to remain at least steady. You don’t have to know anything about interest rate swaps or dealer activities to see that plainly from what these banks report on their (off) balance sheets and in their own words. Read more
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