Hamilton Logan Richmonds Part 2

Chairman Sam Robinson and Waitotara founder Rod Pearce remain the only two farmer-directors in what was, until 1997, a wholly farmer-owned, unlisted, under-valued and history-bound Hawke's Bay regional meat company.The heavyweight board will want to extract maximum value out of a buoyant international meat trading situation, hoping that Loughlin and his team could shave the cents and make lucrative trading decisions while the sun shines.Future growth will not come from procurement share increases, which may have driven growth in recent years. It will come from continuous improvements in operational efficiency and marketplace performance.The future belongs to processors that can find new meat cuts and presentations to take them to new levels of profitability, for the customers, suppliers and shareholders. These must be branded and differentiated food products, he says, rather than commodity sales. The Brian Richards-inspired re-imaging of Richmond is essential in the quest for added value for Richmond. It has been about unifying the fragmented and often adversarial supply chain and changing the thinking in the company’s business-to-business relationships.Essentially, employees and suppliers have to see themselves putting attractive meal propositions in front of someone on the other side of the world.Recent historyRichmond pottered along profitably for that decade following one of the big industry rationalisations that were a feature of the 1980s. Richmond purchased Dawn Meat and Pacific Freezing and participated in the closure of Whakatu and the purchase of Takapau from Hawke’s Bay Farmers Meat Co, all during an eventful 1986. The closure of Whakatu was the best for all of Hawke’s Bay.To closure Wairoa would have killed Wairoa as it only has its hospital and Freezing works as two major employers. Hastings and Napier while devastating has much better job opportunities for the redundant employees. They still had one Freezing works and lots of other major industries.Faced with two pivotal decisions in the early 1990s, Richmond declined to get involved with the divestment of Waitaki to Affco and Alliance and a possible purchase of cash-strapped Weddel. Richmond was wise because it would have been buying the wrong set of assets and be headed for disaster. These decisions were before his time at Richmond, which began in 1993 as finance manager for the company, after earlier periods as an investment banker and chartered accountant.However, given the acquisitive nature of the times, those decisions could have condemned Richmond to a regional backwater of the rapidly coagulating meat industry or, worse still, a takeover target.Richmond’s big chance came in an offer to sell out of beef and lamb processing by Hawke’s Bay neighbour Graeme Lowe, of Lowe Walker, also strongly positioned in Northland and Taranaki, where Richmond did not operate.The $27-million purchase, completed in March 1998, quadrupled beef processing and focused new Richmond team on making a success of the large takeover, after opportunities for due diligence had been limited.A subsequent rationalisation of beef facilities closed Lowe Walker Hastings, converted Te Kauwhata to deer and then closed Otaki early in 1999.It took out 17 percent of our beef fixed costs while maintaining throughput at Dargaville, Te Aroha, Hawera and Hastings.Our investment adviser said he had never seen such a complementary fit of facilities, which gave Richmond the benefits of great synergies.A second round of lamb-processing facility rationalisation affected three plants in and around Napier/Hastings and one at Hawera while consolidating further processing in the $14-million new FoodTech plant on the Takapau site.Again, this took out 15 percent of lamb-processing costs for a small slaughter capacity reduction coupled with a large further-processing improvement.Next up was the Waitotara Farmers Meat Company merger (in October 1999) which swapped money and shares for the lamb plants at Waitotara (northwest of Wanganui) and Tirau, southern Waikato. It added a million lambs a year throughput, which is disappointing considering the size of Waitotara before the merger, but the focus of this move was to strengthen its geographical position and “bank the synergies”.In a paper called “Pursuing a Food Company Vision through M&A” presented to the Institute of Directors seminar in Wellington on November 3, 2000, Waitotara brought $2 million in EBIT and $8 million in synergies.Candidly, Richmond was exhausted by the time of the Waitotara assimilation and missed some opportunities and disaffected Waitotara farmer-suppliers decamped to other meat companies.Likewise Richmond has not made all it could have from the purchase in July 1998 and subsequent development of the Gourmet Direct upmarket local supply business, now the flagship for Richmond in food service.. Expansion-fatigue may also be indicated in his assessment of Richmond’s size presently as adequate for all that the company needs to do.Neither Loughlin nor, he believes, any members of the board set out deliberately to become the biggest meat company in New Zealand.“But there was a moment during long discussions about whether to acquire Lowe Walker, when one director said, ‘we had better consider where Richmond will be if we don’t buy Lowe Walker’.”The company has made three consecutive increases of more than $200 million a year in turnover, quickly taking it from number four in the industry by size to number one.A period of consolidation is dictated, taking out costs, raising efficiencies and developing new products.Richmond can never drop its risk management vigilance in such a low margin enterprise, he says.When earnings are as low as one to two percent of sales, a few wrong supply or sales contracting decisions can wipe out profit and a number of them can wipe out the company’s $120-million capital base. This has been a sadly recurring pattern in the meat industry.John Loughlin’s second year as Richmond CEO was the beginning of the distracting noises, as PPCS contended with Affco for control of one-third of Richmond being tendered by the Meat Board.When both were rebuffed, the shares went to the supposed Richmond-friendly investor grouping of HKM; three Maori business people.Not deterred, PPCS wooed HKM and in 1999 was again on the brink of control when Richmond’s farmer-shareholders successfully challenged the PPCS processes and repulsed the raider.A company called Active Equities, owned by Paul Collins and Bruce Hancox, rode to the rescue of Richmond, but that horse has also turned Trojan.Third time-lucky in 2000, PPCS purchased 16.7 percent of Richmond shares (10 percent from Auckland farmer-businessman Peter Spencer) and paid $3.65 a share for 49 percent of Hawke’s Bay Meat Holdings, a joint venture with Active Equities to own 35.8 percent of Richmond’s 41 million shares. Should it exercise the right to purchase the remaining 51 percent of HBMH between February and September 2003, PPCS will then own 52.5 percent of Richmond.The drawn-out fight for ownership control was more distracting for company employees who are fixed in the industry and the Hawke’s Bay region.If company executives had got involved in the industry politics then it would have derailed what we were trying to achieve. Perversely, yet another measure of the Richmond success to date has been the persistence of PPCS in gaining control, although the outcome for Richmond is as yet uncertain. PPCS presumably had an opportunity to block Loughlin’s nomination to the board of directors (before the annual general meeting in December) but chose to endorse his promotion in the expectation of further earnings growth. With two good years behind it and one good year in prospect, Richmond directors finally decided to seek a main board listing on the Stock Exchange last February, along with a $50-million capital notes issue.“Since the 1980s there had been a lot of debate as to whether listing was consistent with long-term farmer ownership..“Without farmers and without their stock coming through, any meat company only has a lot of assets in obscure places with redundancy obligations attached.“So we have to ensure returns are sufficient to sustain both the farming community and to reinvest in the business.“For a long time no-one was winning, with farmers and companies scrapping over the crumbs of the cake,” The listing eliminated the secondary market discount (of 25 to 30 percent) by making the market for shares more liquid. Many among 1900 smaller (mostly farmer) shareholders have benefited, and PPCS fronted up with cash to Spencer, Collins and Hancox pushing the share price to $3 briefly before settling down around $2.60.The money raised from the sale of capital notes has retired bank debt and provided funds for further re-quipping, just completed at Oringi, Te Kauwhata and Pacific Beef (Hastings).While they are an expensive substitute for bank funding, capital notes strengthen the balance sheet and may help to secure the company against prolonged downturns.As a substitute for equity, where Richmond trades on a price/earnings multiple of 5:1, [an after-tax cost of equity of 20 percent], then capital notes, with a pre-tax cost of funds at 10.75 percent, plus tax deduction, sit somewhere between debt and equity in terms of cost, strength and so forth.