Silver Fern Farms cites tough sheep market in profit slide

Monday 1st April 2019

Silver Fern Farms says poor trading in its sheep meat business contributed to a 62 percent decline in full-year profit.

Sales in 2018 rose 9 percent to $2.4 billion but net profit fell to $5.8 million from $15.4 million in the 2017 calendar year. The year-earlier figure was reduced by $10.2 million of one-off costs, mostly related to the closure of the firm’s Fairton processing plant near Ashburton.

While the Dunedin-based company had achieved a “back-to-back profit”, chief executive Simon Limmer stated said the level of profitability was not good enough.

“It is acknowledged we must lift the profitability of the business in order to sustain our aggressive capital reinvestment programme, and to more actively progress our in-market investment in sales and marketing to grow value in the market,” he said.

While beef and venison prices had held up, with returns to farmers and processors “equitably” reflecting market realities, profitability on sheep meat was unsatisfactory, he said.

“This was due in large part to strong farmgate prices for sheepmeats not adequately reflecting in-market returns at crucial points of the season when processing volumes were low and eroded our operational efficiency. December 2018 was the worst December result for the company in the last 10 years.”

Earnings before interest, tax, depreciation and amortisation fell to $32.4 million from $50.9 million a year earlier. The 2017 figure had also excluded one-off costs.

Silver Fern is the country’s biggest meat processor, employing about 7,000 staff at 14 plants around the country. It has invested heavily in marketing, processing and packaging technology to help differentiate its products locally and in 60 overseas markets.

But the company has struggled for many years under mounting debt and after PGG Wrightson was unable to complete a $220 million purchase of half the business in 2008.

In late 2016 Shanghai Mailing acquired a 50 percent interest for $260 million, clearing $203 million of debt and paying $57 million to the farmer-controlled Silver Fern Farms Cooperative which owns the rest of the business.

The operating company paid its two owners a total of $1.7 million dividend, in line with the firm’s policy to pay-out at least 30 percent of tax-paid profit. In 2017, when returns on sheep meat had been strong, it paid out $12 million.

Chair Rob Hewett said the cooperative remained strong, has no debt and is determined to support moves to improve the performance of Silver Fern Farms.

The operating company is undergoing a process of consolidation and a period of intensive investment, with capital expenditure increasing to $29 million last year from $21 million in 2017, he said.

“While the level of profitability is lower than desirable as it goes through this process, we have an expectation that we will be in a position to derive future value from our equal share in the company. This is in addition to the high level of service supplying shareholders currently receive.”

The cooperative reported an after-tax profit of $900,000, compared with a $5.6 million loss in the 15 months ended December 2017. Shareholder equity increased to $283 million, from $271 million a year earlier, and the business had 18.1 million of cash and deposits at Dec. 31.

The cooperative has more than 6,200 shareholders and another 15,800 suppliers who earn their shares through rebates on the stock they provide.

Silver Fern ordinary shares trade on the Unlisted Securities Exchange. They last traded at 47 cents, down from 58 cents at the start of the year.

The cooperative is paying out $874,000 as patronage rewards. The rewards, available only to shareholders who provide a minimum level of stock to Silver Fern for processing, are part of a long-term strategy to improve stock quality and ensure adequate throughput for the company’s plants.

Last year the cooperative paid out $3.2 million in tax-paid dividends and $900,000 in rewards.

(BusinessDesk)

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