Alliance Group takes blowtorch to costs to save co-op

Space has been shaved off at Alliance Group’s head office in Christchurch to save money spent on rent.

It is a good example of how hot the blowtorch is on reducing operating costs to revive the company’s performance after a horror season in 2022-23. The country’s largest sheepmeat processor-exporter felt the full brunt of the global crash in sheepmeat prices, which led to the co-operative’s $97.9 million loss before tax for the year to September 30, 2023.

Write-downs on the value of large stocks of stored inventory cut deeply into the company’s profitability and more had to be spent to complete a long overdue upgrade of a new computer system that tracks processing performance.

The result was a more than $214m turnaround on the co-operative’s record result just a year earlier, highlighting the vulnerability of being dominant in sheepmeat processing and lacking the species and regional footprint spread of competitors.

The co-operative’s long serving chairman Murray Taggart was replaced in April by former Ballance Agri-Nutrients chief executive Mark Wynne, and former chief executive David Surveyor left in 2023, replaced by an internal senior executive Willie Wiese.

Wynne’s first task in late April was to announce plans for a compulsory capital raise from shareholders to lift the co-operative’s perilous equity position and reduce the heat from its banking syndicate.

Equity was sitting at 48% in the 2023 annual report, down from more than 70% just a few years earlier.

Shares were increased in value by $3, from $1 to $4, and the number of shares required to be held per livestock unit processed (referred to as the standard shareholding) was raised from 12 to 16 shares.

Alliance is seeking up to $150m from farmers at a time Wynne described as “terrible”. He was confident farmers would support the capital raise but, with the current season all but done, admitted the board would not know the true extent of farmer loyalty until early 2025 when they see how many choose to continue supplying stock to the co-operative.

Wynne said he was encouraged by the support from a small number of suppliers who had chosen to fully share up immediately rather than waiting for it to be deducted from slaughter proceeds over time.

Alliance has no term debt, so its banking consortium only provides operational funding to bridge the gap between paying for livestock and receiving income from customers buying meat.

Wynne said the squeeze hit when the syndicate of banks which funds Alliance’s operational activities learned of the co-op’s record loss and global economic conditions continued to worsen. “We (Alliance) went to our banks in January (2024) and informed them of the change [to no peak in the lamb kill] in stock flows into our plants and told them that by the end of February we would likely breach [the borrowing limit].

“That took some time to work through with our banks during March and April. We couldn’t talk about it publicly and we acknowledge we were less competitive at that time in terms of procurement pricing,” Wynne said. “Our hands were tied. Ideally, we would have done all the communication with farmers about the capital raise upfront, but the board had no choice but to change the share standard and to do that quickly we had to come out with a shareholder deduction.”

“Our hands were tied. Ideally, we would have done all the communication with farmers about the capital raise upfront, but the board had no choice but to change the share standard and to do that quickly we had to come out with a shareholder deduction.” – Mark Wynne, Alliance chairman

Wynne said the moves were permitted under the Alliance constitution and did not require shareholder approval. “The banks forced our hands in the end, and the board had to act responsibly.”

If raising sufficient capital from farmers fails, other options are to either introduce new capital from an outside investor, as Silver Fern Farms did in 2016, or sell the company.

Wynne said raising more capital from farmers and retaining the co-operative model was the board’s preferred option but he said directors would act in the company’s best interests if the capital raise failed.

Alliance Group has assets valued at about $300m (depreciated values) and equity currently of $100m so he believed there would be interest from outside buyers. In early June, Alliance chief executive Willie Wiese said it hasn’t been plain sailing again this season.

With a shift to El Nino weather pattern looming and expectations it would deliver a dry summer for farms on the east coast of both islands, Alliance had geared up its plants with staff to process more lambs through the expected peak months.

However, lamb flow stalled rather than ramping up as rain fell and farmers chose to hold off slaughtering their stock, leaving the company with commitments to staff and costs associated with gearing up plants that were not needed.

He pointed to substantial savings already made across core processing activities, particularly from improved throughput efficiency at its plants and better yields of saleable red meat. Effort is also going into shortening the time between receiving stock from suppliers and being paid for the meat by customers offshore. Wiese says a mid-year visit to Alliance’s key customer in China, Grand Farm, produced a significant improvement in payment terms for the co-operative.

Cashflow ‘run rates’ have a big impact on operational funding requirements that need the support of Alliance’s banking consortium.

Right-sizing plant capacity is increasingly challenging, particularly as climate variability increases and sheepmeat slaughter numbers continue to drop. “Alliance makes its money in six months of the year and then tries to minimise the loss for the other six months.

This year we haven’t seen a peak flow and we’re now slightly behind forecast,” he said in early June. 

Suppliers not holding back on feedback

Mark Wynne has fronted up to hundreds of farmers since taking on the Alliance Chairman’s role and admits plenty of them have been direct in their criticism of the co-operative’s overall performance.

He said feedback fell into four distinct ‘themes’ for the board and management to deliver on. “Firstly, farmers told me we had to simplify our schedule and take the complexity out of our kill sheets,” he said. “Secondly, farmers want us to operate more equitably, like the co-op that Alliance is. Thirdly, farmers told me to get our balance sheet right, and fourthly, they asked for honest communication in future.”

Wynne said in the future he wanted to see the company offering suppliers a quarterly online forum to discuss performance and updates on markets, and a six-monthly financial update with a similar level of detail to that required for listed companies.