By 2023 the operating company Silver Fern Farms wants to have five years of earnings totalling more than $150 million, chief executive Simon Limmer said.
The strategy includes a 10% return on equity for the meat processor and exporter, half-owned by Silver Fern Farms Co-operative and half by Chinese group Shanghai Maling.
“These are goals that will stretch us,” Limmer said in the co-operative’s annual report.
“They target a fundamental shift in the financial performance of the business.”
SFF now has a solid platform to work from and the objectives are realistic and attainable, he said.
Meat companies in New Zealand have historically struggled to achieve returns on equity anywhere near 10%.
The report said SFF had shareholders’ funds of $500.7m on December 31.
To get a 10% return on that would have required a bottom-line profit of $50m. The actual after-tax earnings of $5.8m produced a return on equity of just 1.16%.
SFF had sales of $2.4 billion for the year, operating earnings (Ebitda) of $32.4m and a pretax profit of $6.3m. Low processing volumes at crucial times, early 2018 and in December, brought added costs and eroded margins and overall profitability. It was the worst December trading in 10 years.
The $150m five-year aggregate target clearly allows for higher earnings towards the end of the five-year period as the business benefits from capital investment – $50m across the last two years in operating assets, operational and sustainability improvements and IT systems.
“We must lift the profitability of the business to sustain our aggressive capital reinvestment programme and to more actively progress our in-market investment in sales and marketing capability and programmes to grow value in the market,” Limmer said.
A third five-year goal for the business is to achieve industry-leading safety, quality and sustainability.
SFF has continued to pay strong farm-gate prices to farmers across all meat species, Limmer said.
Co-operative chairman and joint SFF chairman Rob Hewett said the operating company is in a period of intense capital investment across infrastructure and systems to ensure it can sustain a high level of performance.
“While the current level of profitability is lower than what we consider appropriate we have an expectation that we will be in a position to derive significant future value from our equal share in the company.”
Limmer led the strategy review, which decided the group’s Plate-to-Pasture strategy is the right one, with the focus being to execute accurately and with urgency.
“The business must be market-led with a strong customer focus essential if we are to respond with pace to changes in consumer preference,” Hewett said.
“Our grass-fed products must reach those conscious consumers who are willing to pay a premium for Silver Fern Farms quality.”
SFF has revised its operating model to aim for greater collaboration, innovation and performance across the business. The six pillars are market and customer-led, efficient and aligned infrastructure, capability, differentiated livestock supply, technical evolution and commercial agility.
Limmer said highlights of the 2018 year include China’s ongoing demand for protein, leading to SFF sales there exceeding $500m for the first time.
It also had a lift in demand from pet food manufacturers for venison trim, especially from the United States where there is an apparent trend towards premium pet food. That kept prices up to some extent following a softening in demand from European consumers.
At balance date, SFF had total assets of $757.85m, compared to $780.4m a year earlier. Total liabilities were $257.1m, including nearly $135m in borrowings, which Hewett said was seasonal debt taken into balance date, a time of high outgoings but not the high point of sales, which comes later in the season.
Total current assets are $429.8m compared to current liabilities of $247.4m and trade receivable at $224.7m were more than twice the $101.7m of trade payables.
SFF’s equity ratio was 66% but that number should be considerably higher now as greater volumes of product are sold.
The co-op’s 50% share of SFF’s assets is worth $250.36m and a $15m of goodwill put its equity at $265.8m. It has total equity, excluding members shares, of $283.3m including cash and near-cash of $18.1m. Total assets are $316m and it has no borrowings.
The co-operative made a pretax profit of $2.4m as its share of SFF’s earnings and an after-tax profit of $0.9m.
After balance date, the co-operative was due to receive $874,000 as a half-share of the SFF dividend of $1.7m. The payout is based on SFF’s policy of paying out at least 30% of after-tax profit.
