Category Archives: In The Office

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Silver Fern Farms bullish in spite of $31 million loss, says Barber

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Allan Barber has been speaking to Silver Fern Farms (SFF)’s chief executive Keith Cooper, following this afternoon’s announcement of a big loss for the co-operative for the year ending 30 September 2012. In his latest blog post, Barber reports finding Cooper bullish in spite of the loss.

Cooper confirmed the effect of lamb on the season’s losses, saying SFF had been comfortable with what it was paying for lambs price before Christmas. Market demand had suddenly stopped dead in February because of the market price and companies had all been hit by exposure to expensive stock, unable to reduce the price quickly enough. The net result was too much product going into overvalued inventory which resulted in a write-down of $25.6 million at balance date.

The company’s media release has highlighted the same reasons as Alliance for the loss, says Barber – unjustifiably high procurement cost, high dollar, sudden drop in market demand, inventory writedown – but made very positive reference to the future outlook. It has made significant new investments, including the Te Aroha rebuild, $8 million of new marketing initiatives and $4 million commitment to FarmIQ.

In the current year, SFF intends to invest a further $22.6 million in brand development, marketing initiatives and FarmIQ. According to chairman Eoin Garden, this “clearly demonstrates our confidence in, and commitment to, the growth path we have charted for our company” notwithstanding the poor performance during the year ended September.

High inventories are already being substantially sold down to a point where the company’s inventory level is already much closer to normal for this time of the year, lonely six weeks after balance date. As will be the case with Alliance the equity ratio will have already benefited from this.

The suspicion that SFF’s loss would not be a large as that posted by Alliance because of a greater proportion of beef in its kill proved to be correct. Nor did SFF have to take any plant closures on the chin. CEO Keith Cooper said the company’s footprint was consistent with livestock numbers and no further closures were under review.

In answer to a question about further industry rationalisation Cooper said SFF had already taken over two small companies, Frasertown and Wallace, and he was always in favour of aggregation. This invariably involved smaller companies being acquired by one of the big four. However it was ultimately up to farmers to decide on the industry’s structure, because industry rationalisation only lasted so long before a new processor emerged, which farmers would then typically support.

The general mood in the meat industry, confirmed by SFF, is positive for the new season. Procurement prices are aligned with the market, livestock volumes are stable, even recovering slightly, and capacity is fairly well balanced with throughput.

In conclusion, Keith Cooper said while 2011/12 was a poor year financially, strategically it was a progressive one. “2012 marked a continuation of our unwavering commitment to executing our Plate-to-Pasture strategy. This is a progressive and long term plan, which demands perseverance and determination, to ultimately generate sustainable value for our farmer-partners, by meeting the modern consumer’s requirements.”

This article appears also at Allan Barber’s Barber’s Meaty Issues. Read more …

Silver Fern Farms reports loss, but says strong balance sheet, investment into the future the key focus

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Silver Fern Farms has reported a net operating loss after tax for the 12 months ended 30 September 2012 of $31.1 million (2011 profit $30.8 million) from total revenue of $2 billion.

Silver Fern Farms chairman Eoin Garden says that, despite an operational loss, the company’s balance sheet was robust (44 percent equity ratio); and significant investments had been made in 2012 to underpin future growth, including new marketing initiatives ($8 million) and the new Te Aroha plant ($67 million).

In addition, Silver Fern Farms had also made a significant investment of $4 million in FarmIQ in 2012. Now in year three of the seven-year build timeframe, not only will FarmIQ become the enabler for farmers to deliver the required product to meet Silver Fern Farms’ marketing and sales plans, but it will also empower farmers to identify opportunities on farm to grow their productive capacity, thereby generating more value from within their own farming businesses.

Garden says it is important to highlight the commitment the company had made to forge ahead with the implementation of the business’ overall growth strategy for the future of Silver Fern Farms, its shareholders, suppliers and people, notwithstanding this poor 12-month financial performance.

“In the 2012/13 financial year, Silver Fern Farms plans to invest a further $22.6 million into brand development and marketing initiatives to build brand equity, channel and market development, and FarmIQ. That clearly demonstrates our confidence in, and commitment to, the growth path we have charted for our co-operative” says Garden.

Chief executive Keith Cooper comments that Silver Fern Farms operates in an environment where many outcomes are beyond the company’s control but materially impact on the business.

“Climatically, we went into the 2011/12 season with ideal pasture growing conditions which meant livestock was held on farm for valid reasons. This resulted in markets being short of product versus historical supply patterns. Off the back of this, we saw global prices for lamb in particular, escalate to unsustainable levels, which resulted in a sharp fall in demand and which then led to a significant decline in value. This market correction was subsequently reflected back to suppliers and, in turn, caused write-downs in inventory valuations throughout the financial year of circa $25.6 million.  Through this period, Silver Fern Farms had to manage business continuity – supplying to customers and operating processing assets – which meant we had to compete for livestock at unsustainable prices which further contributed to the problem.”

Cooper reiterated that while this was a poor year financially, strategically it was a progressive one.

“2012 marked a continuation of our unwavering commitment to executing our Plate-to-Pasture strategy. This is a progressive and long-term plan, which demands perseverance and determination, to ultimately generate sustainable value for our farmer-partners, by meeting the modern consumer’s requirements.”

Over the last four years, Silver Fern Farms has invested in designing the brand detail and marketing infrastructure required to drive a greater proportion of its revenue through premium value branded products. “Our differentiated approach means that our brand has now become integrated across all areas of the business – corporate, supplier service, operations, sales and consumer activities – and we are now starting to see the benefits of this throughout the value chain” says Cooper.

While Silver Fern Farms’ final inventory position for 2012 was up versus the previous year, he advises that this had decreased markedly since balance date, with the increased working capital being driven by those higher balance date inventories.

Eoin Garden also advised that incumbent director Angus Mabin, who retired by rotation, has been re-appointed unopposed, which gives the board confidence they have continuing shareholder support.

Silver Fern Farms is New Zealand’s leading processor and marketer of lamb, mutton, beef, venison and associated products to more than 60 countries.

The summary of key financial items for the year ending 30 September 2012, includes:

  • Turnover of $2.03 billion (as opposed to $2.1 billion for the year ending 30 September 2011)
  • Net result after tax of $31.1 million (2011 $30.8 million)
  • Operating cash flow (deficit) in 2012 of ($105.6m)   (2011 [$7.5m])
  • Equity ratio at balance date  44%  (2011 59%)

No leadership?

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Further to the Alliance Group news over the weekend, the Meat Workers Union is also pointing to the previously announced ‘disappointing year’ for Blue Sky Meats, with wage cuts and a loss of $600,000, according to a comment on Radio New Zealand  this morning. The union points to ‘over-capacity’ and National Secretary Graham Cooke says it is felt there is “no leadership in the industry. Read more …

 

Alliance posts $50.8 million loss for 2012

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Alliance posted its annual result on Friday which was every bit as bad as predicted, a net after tax loss of $50.8 million for the 12 months ended September, writes meat industry commentator Allan Barber in his recent blog post.

The result included restructuring costs of $13.5 million associated with the closure of the company’s Mataura sheep and lamb processing operations which followed similar costs of $19.4 million the previous year from the closure of its Sockburn plant.

The 2012 performance saw a $77.8 million deterioration at the operating level compared with 2011 which, despite the $9 million net after tax loss, produced an operating profit of over $20 million.

Chairman Owen Poole expressed his disappointment at Alliance’s first operating loss for 20 years which he attributed to the decline in the sheepmeat market exacerbated by the high New Zealand dollar and the unsustainable level of procurement costs earlier in the season.

In the 2012 financial year, Alliance was hit by a triple whammy of lower sales and product prices, ridiculously high livestock procurement prices driven by short supply pre-Christmas, and the high dollar. The strength of the dollar was in no way reflected in a realistic procurement market. There is a question whether other processors were equally affected or saved to some extent by a higher proportion of beef processing in their operations. This will be at least partially answered when Silver Fern Farms releases its result later this month.

One factor which Poole omitted to cover in detail was the significant impact of the last two years on the balance sheet which he said was “still robust”. Unfortunately, the equity ratio has declined from 81.5 percent in 2010 to 51 percent two years later. Clearly, it cannot keep declining at this rate for much longer, so the company’s board will be hoping fervently that markets will recover and livestock supply at least stabilise in the immediate future.

Poole referred in his statement to the operational upgrades to Mataura’s beef processing, venison processing at Smithfield and rendering at Lorneville which, when combined with the savings from closures, will lead to much improved efficiencies and a significantly better result for the current year. Growth of lamb sales to China, sales to Brazil, the contract with Marks & Spencer and better market outlook encourage some optimism for this year.

Longer-term, the sheep population is unlikely to increase to any great extent, although productivity can be expected to improve with genetics, technology and lambing percentage increases. Whether this will be enough to maintain the industry in its present configuration is doubtful, because individual processors will continue to look for efficiency gains. Silver Fern Farms is already thought to be planning a nightshift at its Gore plant to take advantage of the closure of Mataura.

Meat industry capacity adjustments and potentially company ownerships can be expected to change in response to market conditions. No different from normal!

Allan Barber is an agribusiness and meat industry commentator. This article has appeared at www.interest.co.nz. He writes his own blog at Barber’s Meaty Issues.

New CEO for merged AHB and NAIT

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William McCook has been appointed chief executive of the organisation soon to be formed through the merger of the Animal Health Board (AHB) and NAIT, the National Animal Identification and Tracing scheme.

McCook is currently the chief executive of AHB. The new role was publicly advertised and his appointment followed a highly competitive selection process.

Jeff Grant, chairman of the new organisation’s board, said that while the immediate focus will be sustaining the success of the bovine TB strategy and completing implementation of the NAIT scheme, the new merged entity will be looking to a broader future.

“We recognise the opportunity to apply and extend the abilities of the two existing organisations to other programmes which will benefit and sustain New Zealand’s primary industries,” he said.

“William brings a proven track record of considerable success in leading the implementation of the TB strategy, together with experience in commercial and export industries. This will allow us to develop an organisation which best meets the needs of our industry stakeholders and local government, while working closely with the Ministry for Primary Industries.”

The first tasks for the board and chief executive will be to plan and implement the merger of the AHB and NAIT. This is expected to be completed by July 2013.

Russell Burnard will continue in his current role as the chief executive of NAIT.

No chance government will legislate to restrict meat capacity

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After the announcement the week before last of Alliance Group’s intention to close sheepmeat processing at its Mataura plant, Meat Workers Union representative Gary Davis called for the government to intervene. This was no doubt caused more by frustration over the loss of jobs than any realistic expectation that the government would interfere in a commercial situation.

Industry commentator Allan Barber argues at his blog that there is no chance government will legislate to restrict meat capacity.

Read more …

Season just ended could produce messy results, says Barber

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The season just ended could produce messy results, according to meat industry commentator Allan Barber.

The two largest processors and exporters, Silver Fern Farms and Alliance, have captured the headlines in the last couple of weeks.

Hot on the heels of its announced intention to close its sheepmeat chain at Mataura, Alliance has come out with an offer to suppliers of $20 in November per lamb contracted before the end of October.

From the other cooperative camp Keith Cooper, chief executive of Silver Fern Farms, last week sent an email out to suppliers which highlighted the disappointing financial result for the year ended 30 September because of the exchange rate and declining sheepmeat values in January and February not being reflected in procurement prices.

The final results will be declared in about two months when the market will be able to see just how disappointing the performance of the two companies actually was. Rumours of multi-million dollar losses have been prevalent, but rumour is just what they are until we see the actual figures. There is no doubt the problem has been almost entirely with sheepmeat in spite of the exchange rate, because exporters have been far more successful at reining in beef procurement costs.

It doesn’t take an Einstein to work out that the shortage of lambs for Mataura and the procurement competition are just two aspects of the same problem. The lowest national lamb kill for 51 years at 18.6 million, 15 percent down on the five year average will have made it very difficult for any company to get sufficient capacity utilisation to come close to making a profit. With Alliance’s largest sheep plant outside Invercargill, Mataura just over 50 km up the road was always under threat from declining volumes.

Blue Sky Meats, which balances in March, presaged the 2011/12 season’s problems in its declared annual result – a pre-tax loss of $604,000 and no dividend paid. The company termed this the most disappointing result in its history and drew attention to the excessive prices paid for stock through the turn of the year, both because of the high dollar and the drought in Southland.

It will be interesting to see how successful Alliance will be in securing committed lambs from suppliers stimulated by the $20 cash advance. Keith Cooper’s reaction was to say Silver Fern Farms had tried it six years ago with no success because some suppliers were affronted by the implication they were short of cash and didn’t want to close out their slaughter options. He prefers to rely on the company’s suite of supply plans rather than to repeat the cash in advance offer.

In his email to suppliers, Cooper sounds quite bullish about the new season’s prospects with a ‘fully configured operating platform’ and some exciting new marketing initiatives, even being bold enough to state that realistic livestock values are being established. If that is the case, it will either be because there’s enough livestock around to satisfy all processors or he is confident Silver Fern Farm’s overhead structure is competitive enough to guarantee filling their requirements.

Either way that is a big call in spite of the gains Silver Fern Farms has made in recent years, notably the closure of the Belfast sheep chain, improvements to its Finegand sheep processing and the rebuild of Te Aroha in the heart of the dairy farming Waikato/Bay of Plenty region. There are expected to be another 1.5 million lambs, but not enough to change processing dynamics much, while the market is another factor.

The meat industry is unique in that it has to compete at both ends of its supply chain. While livestock procurement has the most obvious impact on company profitability, demand from the market is also critical. Last season’s disappointments and losses have been as much about carrying too much inventory which the market couldn’t digest as the cost of the livestock to produce it.

When companies fail to manage both ends of the chain properly, things get messy. Just how messy they were last season will become clearer at the beginning of December when Alliance and Silver Fern Farms publish their results.

‘Meating’ the plastic challenge

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A series of challenges has been thrown out to the plastics industry to develop packaging that will help the meat industry maintain high food safety standards, increase shelf-life and develop new products.

The meat industry is one of this country’s biggest users of plastic, particularly in the form of packaging that keeps products safe, fresh and looking great right to through to the customer.

Speaking to the Plastics New Zealand conference in Queenstown in May, Meat Industry Association chief executive Tim Ritchie outlined where he thought future opportunities lay for the material.

He told delegates that the meat industry has been very responsive to market demands and there has been a very significant change in the business model over the last 25 to 30 years. Trade has moved from sending frozen carcases – which, early on, were simply stockingetted and later shrink-wrapped for shipping – to the UK, to now sending chilled and frozen cuts and ready-prepared products to more than 115 markets around the world, with a growing focus on the Asian region, he explained.

“Now, we are in the business of directly servicing supermarkets with quality, consumer-ready cuts of meat, produced and packaged at source in New Zealand.

The industry is now in the ‘disassembly’ process, exporting and marketing the ‘bits’ around the world so as to maximise value, he said, adding that “a steadily increasing proportion of trade is high value chilled product.”

Ritchie said that plastics are widely used in the production process, covering products such as clips, liners, covers, containers, crates and pallets, “ensuring that processes are as clean as possible while meeting the needs of industrial production for items that are lightweight and resilient.”

There is a need to ensure their biodegradability and detectability. “But the greatest opportunities for the future of plastics in the meat industry are probably in packaging,” he said.

Areas of opportunity lie in safety, shelf-life, environmental sustainability and, finally, product quality and presentation. Reducing costs and lifting efficiencies are also part of the equation.

A growing volume of New Zealand meat is chilled and it is vacuum-packaged and sometimes CO2-gas flushed.  “The use of barrier bags and gas flushing were important steps in the evolution of our business.”

New packaging that contains anti-bacterial agents, such as ‘biophages’, and ‘smart packaging’ which can identify changes in the product and alert consumers if there is a problem, are two new areas where manufacturers can assist the meat industry to maintain high food safety standards, according to Ritchie.

Shelf-life is another area which has become even more important especially for the perishable chilled meat trade, as the global shipping industry moves towards greater use of ‘slow-steaming’, which increases transit times and reduces the remaining shelf life of products once they get to market. He noted that packaging companies already working on solutions with shelf-life enhancing properties.

In addition, consumers are increasingly demanding environmental sustainability, which means reduced and/or recyclable packaging. Food waste, identified as a major problem especially by the European Union, is also an issue.

“But a significant amount also occurs after purchase and here packaging can be part of the problem,” Ritchie says. Packaging sizes for single or fewer portions, for example, or re-sealable and compartmentalised packages can help limit unnecessary waste.

“And then there are bio-plastics, such as those being made from meat by-products.”

It is not just being satisfied ourselves that all is sustainable and safe, said Ritchie. “We need to be able to demonstrate it to the consumer and retailer, who is often proxy for the consumer in this business.

“Plastics can play an increasing role in helping with food safety, extending product shelf-life, improving attractiveness and ease-of-use by consumers. At the same time, our industry increasingly needs products that are environmentally sustainable, with recyclable or biodegradable attributes,” he concluded.

“And of course, anything your industry can do to help us take cost out of the system and improve operational efficiency will be welcomed.”

This article has appeared in Food New Zealand magazine (October/November 2012).

First meat plant introduces new carcase inspections

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In early September, Affco’s Imlay meat processing plant in Whanganui became the first plant to introduce the new ‘Ovine Post-Mortem Inspection’ regime.

The new  inspection regime involves company staff, rather than AsureQuality personnel, checking carcases for non-food safety or quality aspects (see Food NZ, December/January 2011). The move came after trials of the new system at the Affco plant proved successful and overseas authorities approved the equivalence of the new inspection regime.. Four other plants  – Alliance Smithfield, Silver Fern Farms Pareora, Riverlands Blenheim and Affco Manawatu – are expected to introduce the new system later this year.

AsureQuality meat inspectors will still be onsite to undertake food safety post-mortem inspections on all meat products. Final oversight of the products remains the responsibility of the Ministry of Primary Industries Verification vets on the plant.

This article appeared in Food New Zealand magazine (October/November 2012).