SFF must solve marketing dilemma

Silver Fern Farms has emerged from its 2009 financial year in buoyant mood, justifiably claiming a vastly stronger balance sheet and substantial progress towards the goal of transforming itself from traditional sales driven meat processor to market led food company reports Alan Barber in his blog. It is also pleased with the capital restructuring programme which reduces redemption risk, enables it to attract outside equity and provides the chance to trade shares, while introducing an enhanced governance structure.  All these developments have happened in spite of global uncertainty, the collapse of the attempted sale of half the company to PGG Wrightson, and the obstinately high dollar. So under the circumstances, it's important to do an objective assessment of just how strong the company's operating performance was, whether the improved balance sheet can be sustained, and how achievable long term the transition to market led food company really is.  As expected the second half year turnaround was significantly worse than last year, producing an improvement in operating performance of $11 million compared with $36.8 million in 2008. This year's volume throughput was lower because of last season's drought and capital stock kill, and the exchange rate less favourable, so the contrast was not surprising. Actual full year revenue was 1.25% higher at just over $2 billion, although the second half sales were $193 million or 17.5% lower than the comparable period in 2008.  This statistic, combined with the dramatic downsizing of the balance sheet, can be seen either positively or negatively, depending on your point of view. The reduced debt, higher equity ratio and right-sized processing capacity are all positives, but the threat to future revenues and ultimately profitability of lost market share is not so favourable. 2010 will prove the success of the new structure because the balance sheet improvements, reduced and upgraded processing facilities, and the procurement initiatives are all in place. Non-recurring items including income from the PGG Wrightson settlement and share sale have all been brought to account, so there shouldn't be any significant adjustments to the P&L and balance sheet, other than those arising from the normal course of business.  The failure to pay supplier rebates because of the reduced operating profit won't make suppliers very happy, although Keith Cooper is optimistic they will understand they were paid well during the year and will accept the need for a long term view. The result from SFF's main competitor, Alliance, in mid November will show whether this perspective is realistic or not. If Alliance's result shows it has paid a competitive schedule through the season with a year end distribution to suppliers, at the same time making an acceptable operating profit, the jury will still be out on the success of SFF's strategic direction.  Having got the New Zealand business under reasonable control, the big task is to continue with the development of the brand internationally and start to make profits from its market led food strategy. I would suggest, despite the difficulty of achieving its processing reconfiguration and balance sheet reconstruction, the international marketing programme will prove to be the biggest challenge of them all.