How merchant fought back
Interim results from troubled merchant group, Usborne show that the company turned the corner in 1994. Philip Clarke talked to group managing director, Mike Adams
Q. 1994 was a torrid year for Usborne. Interim losses of £8m grew to over £13m by the financial year end in June, as falling pig prices clashed with rising feed costs and poor control of overheads. What have you done to counter these problems?
A. We have now withdrawn from intensive pig production other than at our multiplication units. We have also reduced our herds from 18,000 sows to 10,500 – enough to meet our six-year contract with the Malton bacon factory. Our pigs are run on contract with farmers in three key locations – Hampshire, Norfolk and Humberside. We provide the pigs and feed, they provide the land and labour.
The deal with Malton links the end price with the cost of production rather than the AAPP, reflecting the "welfare friendly" nature of the system and contract. This is more secure for all of us. I should add that the problems of 1994 were limited to pigs, and our grain trading division had a profitable year.
What about the loose management control that was instrumental in the poor performance?
All financial and accounting control has been moved to our Hampshire headquarters at The Barn. This matches the policy for our grain operation. Although it is important to have a local presence through regional offices, all grain trading is monitored centrally, and all our futures and foreign exchange deals are done at The Barn. Im fairly sure we havent got a Nick Leeson at Usborne, but you cant be too careful.
How has your recent experience with pigs affected your trading philosophy?
Our aim now is to do what we know best and not to engage in the peripheral things to which we cannot add value. To this end, we have recently sold our Wallace Clark animal health distribution business and are gradually disposing of certain property assets.
So does this mean a return to profitability this year?
Our interim results for the second half of 1994, which were published last week, show we are well on the way to recovery. The loss of £8m in 1993 has been reduced to just £438,000. But this was always going to be a transitional year. Last years financial difficulties caused problems in terms of some people not wanting to do business with us, although most showed great loyalty. Despite our financial plight, we still delivered on time and paid on time.
You say you got a mixed reaction from your customers. How did your shareholders respond?
When our difficulties became clear in April last year, the major shareholder sold most of his holding to Thompson Investments (London) for 5p/share (compared with a market price at the time of 12.5p). This paved the way to a £10m loan facility from Thompson, who also offered to buy the remaining shares at the same price. This bid was only taken up by a small number of shareholders, and Thompson ended up with just over 50%.
The need for more cash to strengthen the balance sheet and repay debts led to a rights issue in November for £6m worth of new shares which was underwritten by Thompson, and led to it increasing its stake in the business to 75%. This refinancing has left us well placed to develop our merchanting operation.
How are you planning to do that?
We are about to open a new deep water fertiliser terminal at Southampton built by Associated British Ports. We already have a 150,000t business distributing imported fertiliser and blends.
The main reason for this development, however, is that we can no longer rely on getting small 2000t and 3000t loads from Russia and the former eastern bloc. The supply market is shifting to the Pacific rim and the Middle East, and we need to be able to take 20,000 and 30,000 tonners. The new terminal will take vessels up to 55,000t, discharging up to 6000t a day.
And what about the grain side of the business?
We are currently adding another 2000t of capacity at our Andover silos. The 250t bins give us maximum flexibility in targeting specific markets – especially malting barley. Our general philosophy, however, is only to rent storage when we need it. Since CAP reform, more grain is being held on farms longer.
How do you see the grain trade going for the rest of this season?
It is hard to be certain what stocks are left on farm, but I feel the wheat market is finely balanced. Much will depend on how much consumers decide to carry into the new season. But unless we see a significant strengthening of sterling I dont see ex-farm prices dropping.
There is still good demand from the poultry sector and, the constant trickle of smaller vessels to France and Ireland should mop up any surplus.
The barley market is much tighter and we are eagerly awaiting the new crop.
Merchants are often going on about the need to "develop partnerships" in the supply chain and to "market" grain. For some this has meant setting up grain pools in a sort of quasi co-operative venture. Is there merit in this?
Pooling does not sit comfortably with us, despite our recent links with co-op Group Cereal Services. If a farmer wants to pool prices, I suggest he goes to a fully fledged co-op with experience in this field.
But 80% of farmers want to trade independently. However, terms like "marketing" can be deceptive and confusing. Simple principles can be more effective – like remembering who the customer is and what and where the real market is. Too often marketing is confused with the extra 50p on the day. The successful farmer of tomorrow will be wanting more of his merchant than that.