Reducing debt main objective

Rob Hewett.
Rob Hewett.
Silver Fern Farms intends to further reduce debt levels over the next two years to drive sustainability into the business and reduce its interest cost.

Shareholders gave a ''very clear message'' to the company's board 18 months ago to focus on paying down debt, chairman Rob Hewett said.

That limited the business in terms of the speed it could be grown and was the reason why the decision was made to embark on an equity raising process, he said.

This year, the board expected debt to continue to be reduced significantly and a ''significantly enhanced'' net profit figure to be posted.

Silver Fern Farms' pre-tax profit of $1.8 million for the 2014 year followed losses of $36.5 million and $42.3 million in 2013 and 2012 respectively, while debt was down $99 million from $387.6 million to $288.6 million.

The company has engaged investment bank Goldman Sachs to advise on capital structure options.

Silver Fern Farms' pre-tax profit of $1.8 million for the 2014 year followed losses in 2013 and...
Silver Fern Farms' pre-tax profit of $1.8 million for the 2014 year followed losses in 2013 and 2012. Photo by ODT.
Increased equity would provide the company with options and, when combined with its debt reduction strategy, would ''turbocharge'' the business, Mr Hewett said.

Last month, the company's new chief executive Dean Hamilton told The New Zealand Herald the company would be looking to raise about $100 million in equity this year to repay debt, upgrade plant, and to accelerate its ''value added'' product strategy.

Mr Hewett said shareholders would be consulted on the equity options available ''at the appropriate time'' and he expected shareholders and suppliers would be asked if they wanted to invest in the company at that stage.

It was up to the board to create a ''compelling reason'' for them to consider doing that, including an explanation of what their investment would be used for, an expected rate of return, and what value would be created for the owners of the business as a consequence of the investment.

That proposition was being developed, he said.

Whatever the outcome of an equity raising, the board's ''strong preference'' was to retain co-operative status, he said.

It was challenging to balance investment in growth while, at the same time, paying debt down with the ''thin margins'' the New Zealand meat industry had historically achieved, he said.

Silver Fern Farms' Plate to Pasture Strategy was working and the company needed to continue to move away as much as possible from the commodity-focused approach to selling red meat protein the New Zealand meat industry had employed over the decades past, he said.

ASB's latest Farmshed Economics report said lamb prices were ''at a crossroads''.

For much of 2014, prices ground higher, as supply and demand factors were, on balance, positive for prices, but now that balance had tipped marginally the other way.

Chinese demand had slowed and Chinese consumer sentiment was at a low ebb.

Low oil prices would reduce incomes in the Middle East, thus slowing demand, while the European economy's struggles showed no signs of abating.

Price strength might return towards the middle of the year, as lower Australian lamb exports and lower fuel prices eventually boosted disposable incomes in Europe and China.

But, in the short term, the bank expected prices to remain below 2014 levels.

Beef prices had descended from their November highs but, despite the recent fall, prices remained high and were expected to remain high over 2015, albeit back from last November's record.

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