Silver Fern Farms Co-op reports positive result, dividend and patronage reward

Rob Hewett, Silver Fern Farms
Rob Hewett, Silver Fern Farms chairman.

Silver Fern Farms Co-operative has reported a net profit after tax (and before losses from discontinued operations) of $7.8 million for the 15 months ended 31 December 2017. After accounting for discontinued operations, the 15-month period was a net loss of $5.6m.

Silver Fern Farms Co-operative chairman Rob Hewett says the accounting result for the first period of the partnership has a high level of complexity to account for the changes in company structure over the period.

“We expected some complexity in reporting for this period as we account for the transition, and it does contain some abnormal factors related to the transaction which we will not see in future years. Firstly, the Co-operative has moved to a December year-end, which necessitates a 15-month result for this period. From now on we will have standard 12-month reporting periods. Secondly, the Co-operative accounted for 100 percent ownership of Silver Fern Farms Limited for the first two months of the result period, and then with the investment by Shanghai Maling in early December 2016, the Co-operative equity accounted its 50 percent ownership for the subsequent 13 months to 31 December 2017. The move from 100 percent ownership to 50 percent ownership produced a non-cash accounting gain which is required to be included in the result for the period, which in part offset the seasonal losses sustained by Silver Fern Farms in the period up to the new investment.”

Hewett states that the Board believed a more meaningful picture of the performance of its investment in Silver Fern Farms Limited is represented by the most recent 12-month result for that company to 31 December 2017.

“For that period, Silver Fern Farms achieved sales of $2.2 billion, earnings before interest, tax, depreciation, abnormals and amortisation (EBITDA) including share of associate earnings of $50.9m, and net profit after tax of $15.4m. The net profit after tax of $15.4m was after abnormal items of $10.2m primarily related to the closure of meat processing operations at its Fairton, Ashburton plant in May 2017. Net profit for the period prior to abnormals was $25.6m.”

Hewett says that the result for Silver Fern Farms Limited was a material improvement on what was a particularly challenging year in 2016.

“We are pleased to see an improved result. This was achieved on similar levels of throughput, and reflected improved in-market conditions for sheep and venison, as well as a reduction in overhead costs following plant closures and management’s ongoing focus on improving efficiencies.

“Net profit benefited from a material reduction in finance costs from $14.8m to $3.3m following the $260m investment by Shanghai Maling – of which $203m was used to reduce debt in the company, and the balance of $57m was paid to the Co-operative.

“The company invested over $21m in capital expenditure for the period (the highest level in over four years) across health and safety, compliance, asset replacement and operational improvement.”

Post balance date, Silver Fern Farms Limited has announced an unimputed dividend of $12m which will be paid to the two shareholders, being the Co-operative ($6m) and Shanghai Maling ($6m).

“This $6m dividend is taxable in the hands of the Co-operative. The tax paid by the co-operative will come back to shareholders in the form of an imputation credit. Given this tax treatment, the Co-operative Board has declared a $4.1m distribution in the form of a fully imputed dividend of $3.2m to all shareholders and a fully imputed patronage reward pool of $0.9m to those shareholders who have met the livestock supply criteria set out in our shareholder benefits programme. This will be paid to those shareholder suppliers with matching shareholder and supplier entities. For the few without matching entities, the patronage reward will be paid as a taxable bonus to the supplier.

“This will represent a fully imputed dividend per ordinary and rebate share of 2.8 cents, and a fully imputed patronage reward (on qualifying shares) of 2.9 cents per share for those qualifying shareholder suppliers.”

The record date for the dividend has been set at 13 April 2018 and the patronage reward is based on shareholding as at 31 December 2017. Payment date for the dividend and patronage reward will be 27 April.

At 31 December 2017, the Co-operative’s investment in 50 percent of Silver Fern Farms Limited was carried at $268m. In addition, the Co-operative had cash on hand of $16.6m.

Co-operative ordinary shareholder equity was $272.2m at 31 December 2017.

“The overhead for the Co-operative for the period was $0.9m. This was mostly offset by interest earned on cash on deposit. The overhead included director fees for Directors serving on the Co-operative Board and for those Co-operative Directors serving on the Silver Fern Farms Limited Board. The balance of costs (such as share registry management) were met by Silver Fern Farms Limited as provided for under the shareholder agreement with Shanghai Maling.” Hewett comments that “it is the intention of the Board to minimise the ongoing overhead costs of the Co-operative so we can return as much of the future dividends from Silver Fern Farms Limited to co-operative shareholders as possible.”

“The Co-operative for the period has been focused on building the partnership relationship with Shanghai Maling, putting in place the shareholder supplier benefits programme in conjunction with Silver Fern Farms Limited, and refining its governance development programmes to establish a pipeline of future interested and capable farmer directors.

“The Board believes that the shareholder supplier benefits programme will enhance the long-term value of its investment in Silver Fern Farms Limited. Currently approximately 60 percent of the livestock processed by Silver Fern Farms Limited, is supplied by shareholders of the Co-op.

“By providing additional value to shareholders who are suppliers we believe we will, over time, create more loyalty from our suppliers which will in-turn contribute to increasing consistency and volume of livestock supply. It will encourage non-shareholder suppliers to become shareholders. We believe helping improve the long-term profitability of Silver Fern Farms Limited (our single investment) will be to the benefit of all Co-operative shareholders.

The Annual Report will be available on 4 April, ahead of the Co-operative’s Annual Meeting which will be held in Dunedin on April 18.

 

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