Prior to the meeting, the co-operative released its Annual Report and Financial Statements 2015 and a critical Review of Governance.
NFU dairy board chairman Rob Harrison said: “These accounts are not pretty reading. Put simply, on the basis of these accounts, without a substantial injection of capital or continued long term forbearance by the banks, the future of First Milk is by no means assured.
“Its status as a ‘going concern’ is heavily dependent on support from the bank and/or continuing capital injections from its members.
“First Milk members need firm assurances and clear confirmation from both their board and management as to whether, as the board claim, performance has improved since March and that the banks will extend support past February 2016.”
First Milk’s annual results (to 31 March 2015)
- £442.2m group turnover (but cost of sales at £446m)
- £24.9m pre-tax losses (after tax a loss of £27.5m)
- £60.3m net bank borrowings
- £10m net current liabilities
- £6m increase in the pension deficit
- £8m increase in loan capital (or Members Capital Accounts)
What’s First Milk saying?
First Milk says that its financial performance was materially affected by the decline in the overall dairy market and performance issues. They admit that the level of losses are ‘not acceptable’ and that say that steps have been taken to ensure they do not recur. These include:
- Minimising the level of product manufactured which has not been forward sold;
- Removing the 30 days’ notice of a milk price change
- Introducing a retrospective milk price announcement (i.e the B price)
A number of operational issues also impacted on the business – including quality issues on cheese, processing site breakdowns and the financial performance of CNP. Measures put in place in 2015 to release some cashflow have included:
- Farmgate milk price reductions
- Two-week deferral of January milk payment, with all subsequent payments delayed.
- Increasing the amount of capital to be invested in the business from 5ppl to 7ppl.
- Increased members’ capital investment from 0.5ppl to 2 ppl for milk supplied between December 2014 and August 2015;
- Changes to its milk pricing mechanisms in order to better align markets and milk production.
According to First Milk, these steps have led in an improvement in the financial performance of the co-operative and the level of debt is reducing.
Co-op looks to change structure
Proposed Board changes: The composition of the First Milk Board will be an independent commercial chairman, two external commercial non-executive directors, two farmer directors and the CEO and COO. This will reduce the Board to 7 from 9. Currently the Board comprises of an independent chairman, another non-executive director, five farmer directors and two executive directors.
Proposed new Council: The Area Representatives group will be replaced by a seven-member Council. The Council will also have an independent chair with commercial experience to ensure that it is able to hold the Board to account. Currently, there are 13 Area Representatives representing milk fields across Britain
These changes are to be discussed at today’s AGM with the aim of agreement at a Special General Meeting later this year.
The Review of Governance
Over recent months an independent review has been conducted of the governance and commercial learnings from the business’s recent disappointing performance. Some extremely concerning findings are presented in this report including a lack financial information and relevant skill-set at Board level, a conflict of interest between management and members, no evidence of relevant Key Performance Indicators or sales and marketing plans and a culture that discouraged any questioning or challenge and a general distrust due to a lack of confidentiality.
This review has been shared with members and provides a long list of recommendations for change.
Some of these have already been put in place. First Milk has brought in a new CEO, Mike Gallacher, and a new Chief Operating Officer, Brian Mackie. More recently Carl Ravenshall, with a wealth of knowledge of the UK dairy industry, has been brought in as a non-Executive Director.
NFU dairy board chairman Rob Harrison said: “The Review of Governance has found a number of failings.
“This will come as no surprise to members or the wider industry. What is important now is that we look ahead and implementthe recommendations of the review fully. Some of the changes have already been made – the NFU has met regularly with the new Chief Executive Officer, Mike Gallacher and we understand that some of the changes that have been put in place since his arrival have put First Milk, as a business, in a stronger financial position with a clear plan for improvement.
“The addition of Brian Mackie and Carl Ravenshall to the team is also positive news. Members now have to consider changes to the Board structure and we expect First Milk to explain clearly to their members why this is happening, and how members’ views will be clearly heard in future.”
“Of immediate concern to First Milk members is their own survival. Farmgate milk prices for many of them are off the pace of the market and clearly unsustainable. I understand First Milk to have a plan to bring these prices on par with competitors and we need to see this start to happen in the near future”