Thirty-Three Damned if They Do and Damned if They Don’t 1982

CHAPTER THIRTY-THREE

Damned if They Do and Damned if They Don’t

In July 1982 a full review of the financial returns was placed before the board for 15 months ending 30 June 1982. With better reporting and more attention to detail, trading results appeared to be improving and details relating to turnover, gross profit, expenses and profit attaching to each trading outlet were provided to acquaint the directors with the full picture:

TURNOVER FIGURES FOR 15 MONTHS: Merchandise Turnover: $61,631,230 increase of $10,286,846 – 20.03%. June Turnover: $4,191,432 – June 1981 $ 3,145,327. Maintaining an average monthly T/O slightly in excess of $4m is running ahead by some $600,000 per month. Most branches are maintaining the impetus and branches showing decreases are reducing the deficiency. Any reductions on April/May figures are mainly in fertiliser and some hardware. Ohura is continuing to improve, but Marton is still slow. Motor Division: Turnover figures over the past 3 months are really nothing to enthuse about. Apart from New Plymouth, Service and Accessories is virtually static. Oil and fuel sales are down at all branches except Wanganui. The one redeeming feature is that wages have also reduced accordingly. Vehicle Sales: Both New and Used Cars are ahead of last year, but behind budget. The Used Car market is somewhat depressed, but our stocks are reported to be quite tidy, and we have cleaned out most of the old stock.

Auction: Turnover has dropped from the May result substantially because of New Plymouth. However, there is an improvement in commission and also increased headage from fat stock. Wool Department: The improvement in T/O is not reflected, however, in number of bales sold. Final results show 28,953 bales as against 30,065 1980/81, a decrease of 1,112 — 3.7% and this can be termed very satisfactory in light of seasonal conditions. Other Commissions: Despite the current lull in the Real Estate market there is a slight further improvement brought about, no doubt, with June. July settlements. The drop in other commissions are inexplicable at this stage but will be investigated.

Expenditure: Merchandise: an increase of $770,831 (12.59%) is slightly ahead of the April figure, but an improvement on May. Total increased expenditure of $1,464,869 (13.14%) is also a substantial improvement and not far from the 12-month figure at 31 March. Debtors: At $10,452,380 show a decrease of $1,824,752 [14.86%]. On a monthly turnover (Retail, Motor, Auction 1) of $8,831,146 the current debtor figure represents 1.18 months T/O. The Aged Analysis sheets show a total of $12,654,809 against $14,176,914, an improvement of $1,522,105 (10.74%) on this basis. Aged Debtors represent 1.43 months T/O. Stocks: Estimated stocks at $7,504,000 show an increase of $1,189,700 (18.84%). This is a slight improvement on May, but also reflects the Drapery indent situation. Excluding Fertiliser Sales and converting merchandise sales to an arbitrary cost figure, our estimated stock figures represent 2.63 months T/O. Following discussion on this report on the level of stock holding and the advice that a better coordination between branches was being undertaken, the Managing Director tendered a report on Estimated Profit & Loss for the 15 months to June 30.

Estimated ‘prime’ profit for the period for 15 months to 30 June 1982 was shown at $1,446,094 and with June being traditionally one of the quieter periods of the year the company could derive some satisfaction from the fact that the situation was generally improving overall, although with some exceptions: Wanganui Farm Supplies – increased expenses higher than increased G/P. Feilding – has varied in May, but improved June and it is pleasing to see it now into a profit situation. Marton – although in a loss situation, is very slowly improving. Ohura – although substantially improved on 1981, G/P is not quite keeping pace with expenses. Pleasing to note above average improvement at Opunake and Patea. Motor Division: Wanganui and Hawera are naturally behind the 31 March figure. Hawera has improved on May and the loss at Wanganui is still of major concern. A specifically controlled stocktaking will be undertaken at Wanganui, and certain senior staff have been issued with an ultimatum. Whilst wholesale Motor is also down at this stage, Stratford and New Plymouth are continuing to improve. Commissions: Whilst commissions overall were ahead in May, they have dropped back for June. Other items appear consistent, and it should be noted that the ‘interest paid’ takes into account interest due on O/D and mortgages not yet brought to charge.

In conjunction with this report chairman Reeve Williams advised the board that the auditors had recommended that additional assistance in the form of a finance controller would enable the company to better co-ordinate operations and organise financial resources. The text of the recommendation was that ‘there be an appointment of a financial controller responsible along with the secretary to the board’ and that the controller be responsible for accounting, budgetary and reporting functions. It was determined that a management consultant company be contacted in an endeavour to obtain a suitably qualified person. The secretary, Trevor Pope, and managing director Tom Molesworth agreed that this should be the approach and that someone with the necessary qualifications be sought immediately.

The managing director asked board members to finalise views on the company’s rebate and

dividend policy. It was now a question of how the board would be able to deliver on the recent commitment to retain the co-operative principles and deal with the liquidity problems at the same time without sufficient financial resources. A recommendation of the executive committee to the board was ‘that there be no interim rebate or dividend before the close of the accounting period and that any form of rebate be fully discussed as there is still the continuing problem of funds for survival.’

However, whilst there was general discussion from time to time, the committee had not as yet discussed any formal resolutions and the time was now fast approaching when a decision had to be made. It was fully acknowledged by directors and management that before any distribution could be made there must first be a profit situation: (a) to generate sufficient reserve to fund the necessary stocks and services required by our Shareholders and –(b) to endeavour to give Shareholders a reasonable return on their share investment. The company’s financiers had stated that before outside help was sought for additional finance, shareholders themselves should make contributions. It was also considered that there was little chance of anybody making any substantial cash payments, with the company’s recent policy of issuing additional shares and no cash payment at all. There was a much more significant underlying problem than the funding problem, and that was the possible reaction of shareholders should the same policy be pursued as last year, when fully-paid-up shares were issued instead of cash. The management had received ‘flak’ from a number of shareholders and some sought to sell some or all of their shares to make purchases or to reduce debt. The managing director said: ‘I dread the thought of a run of such approaches, and directors could face a difficult situation at the A.G.M. It would certainly test the loyalty of shareholders.’

It was generally felt that under the co-operative principle and philosophy the options were limited. They would be damned if they do and damned if they don’t. All sorts of possibilities had been considered:

Increase dividend on shares. This would mean a greater tax call, but would make the shares worth more in the eyes of the shareholder. Trading Rebate – vary the proportion of cash payment and the issuing of additional shares and the drain on funds of a direct cash payment is well recognized. Some organisations, e.g. Foodstuffs, have retained a proportion of rebate for varying periods and pay interest on that money, and thus have a gradual and prolonged payment period. In our organisation, however, the cost of administration with so many small accounts could well nullify any advantages of such a scheme.

Attempting to deal with the situation, executive management now suggested establishing a policy of ‘credit payment’ whereby all or part of the proposed cash payment be used as a credit for the shareholder to either assist in making a purchase or for payment or part payment of his or her account. Various methods of allocating rebates and cash were thrashed out by the directors, who were asked to bring ideas to the next meeting. Copies of the method of rebate calculation were provided to directors, so all were aware of the methods used previously. With the annual general meeting date to be confirmed, a decision relating to whether a cash rebate, or the equivalent in shares, or no rebate at all would have to be made. In summing up his report on the payment of rebates, chairman Reeve Williams said: It would appear from the results to date that prime profit for the period ending 1 August 1982 will be in the vicinity of $1.7m, and although it is still insufficient as a return on funds invested, shareholders will be looking for a tangible payment, and with respect I suggest that Directors must determine a policy in the short term so that management can work on the options required.

In the final analysis, although they were not really in position to give anything away, the explanation and end result was:

DISTRIBUTION THIS YEAR: Shareholders have been advised, particularly in recent years, of the effect of inflation on all types of business and our Company is no exception. Just to purchase the same amount of goods in the past 16 months as in the previous period, we had to find an additional $1.2m. Even with the ‘price freeze’ in operation we anticipate the cost of only replacing goods for those sold will cost an additional $3/4m. The money for this must come from retained profits or from the Shareholders.

Directors in their deliberations have endeavoured therefore to strike a balance to encourage the trading shareholder and yet at the same time retain necessary money in the Company for its continued operations.

Because a higher dividend attracts a greater tax payment by the Company, Directors have brought it back to its former level to make more rebate available to the Shareholder. This is to be satisfied partly by ‘credit voucher’ and partly by additional shares.

A 3% dividend totalling $98,560 plus Trading Rebate totalling $850,000 means a 28.87% return on paid-up capital.

In addition to the dividend, the payment in credit vouchers will total $493,000. This means that before a trading Shareholder receives additional shares, the cash return to the individual equals 18% on his/her shareholding. Such return on Shareholders’ capital would equate with any performance of any similar company.

A full explanation of the use of the vouchers will be given when issued, but they can be used to purchase goods or pay outstanding accounts.

This approach, whilst new to FCOS, has had wide use in other areas, and Directors consider it a positive attempt to maintain the co-operative concept and retain some control of funds which are necessary to help finance the future operations of the Company.

The response was luke warm, but shareholders were becoming familiar with the changing trading climate and uncertain future. The past year had been one of consolidation, improving efficiency and maintaining the company’s services while battling inflation. Merchandise turnover for the period was $65m and for 12 months as at 31 March 1982 was 20 per cent ahead of the corresponding period in 1980/81, which was considered a satisfactory result.

On Monday 20 December 1982, the acting general manager advised the board of the sad and tragic loss of Mr and Mrs A. G. R. Williams’ daughter and her fiancé in an accident on Mount Ruapehu on 9 December. The board’s heartfelt condolences were passed to Reeve and Edna Williams. At the very same meeting Mr Trevor Harrop was welcomed to the audit committee and The Farmers’ Cooperative Organisation Society of New Zealand Limited. His employment had commenced on 13 December 1982 and he joined the Farmers’ Co-op at one of the most critical moments in its history, with influences beyond the control of the company thwarting attempts of recovery. Trevor Harrop would play a major part in the administration department throughout the next three decades and survive the turmoil that prevailed in the 1980s. He was a local man, born at Opunake where his parents farmed. His early primary school years were at Ngaire, South Taranaki, and he eventually finished his schooling at Stratford High School. Working for a few years in chartered accountant firms, he then joined Europa Oil Coy, New Plymouth and later attended university in Christchurch. Following his graduation he took employment as a divisional accountant for Andrews & Beaven in

Christchurch. He returned to Taranaki to work for the Taranaki Electric Power Board as accountant for two years and was then appointed as financial controller with Farmers’ Co-op. By February 1983 directors were advised that:

Financial Controller T. J. Harrop assumed his position mid December. Despite the holiday breaks and a natural period of familiarisation, good progress is being made towards the object of the appointment. EDP programming and co-ordination with executive and middle management is now producing forecasts both for sales and expenditure. Whilst it is expected to be somewhat experimental in the early stages, it will give us the opportunity to be fully functional for the coming year.

Challenges lay ahead for the new boy on the block, with turbulent years liberally seasoned with almost every possible commercial concoction that the government of the day could come up with. Wage, price, and interest rate controls were removed and markets were deregulated, the New Zealand dollar was floated, export assistance was removed, import barriers torn down, state trading activities were corporatised, and the process of privatisation began. Top tax rates were slashed, and far-reaching changes were made in the public sector. But that was not all. Major changes in the rural scene were also imminent, with the removal of subsidies to the agriculture sector.

It was indeed a time for lateral thinking, new ideas and the capability to carefully balance the experience of the past with the challenges of the future. There was no doubt that chairman Reeve Williams recognised that restructuring the company’s activities to meet commitments and survive was going to be a battle of huge proportions and much depended on the people around him and the economic developments that would prevail in the coming years. It was undoubtedly an opportune time for Trevor Harrop to establish himself in the company. It also coincided with the establishment of a finance company to handle hire purchase and longer-term loans. Although it was originally intended to use the longstanding West Coast Mortgage & Deposit Co., as the finance company entity, the company was finally established under the banner FCOS Finance Limited.

Although full computerisation of the company accounts was on the horizon, ‘cycle billing’, as it was then known, was still part of the accounting process, with district offices generating invoices on an alphabetical basis to spread the workload throughout the month. There was no comprehensive budgeting or strategic plan in place. One of Trevor Harrop’s first tasks was to set up a budgeting system to collate, co-ordinate and place all data, previously recorded on a district-by-district basis, onto the mainframe computer. From this point on all statements were generated from one source, a significant achievement for the company. Following these quite radical administrative changes much better reporting was possible and comparisons and projected financial results could be monitored. The computer system in use had been designed in 1978 to handle 20,000 account customers.

Unpredicted growth in the company saw customer accounts increase to 43,000 and the computer system suffer severe degradation, necessitating serious consideration of replacement of the existing hardware. A 15-page report from Trevor Pope was tabled at the July 1983 meeting for the board’s consideration. The fact was, however, that computers were still in the embryonic stage and few local people had much knowledge of the capabilities and operational functions of these seemingly complicated devices. There was still a considerable amount of scepticism within the directorate, the rural community and farmers in particular, who were, and to some extent have remained, wary of these number-gobbling monsters. The cost was always going to be one of the main hurdles to overcome. After considerable discussion by the board it was resolved: ‘That the proposal to extend the computer equipment and services at a cost of almost one million dollars be referred to the audit committee for consideration and report back to the board.’

Three months later, following the receipt of an independent report from Arthur Young & Co., auditors, on investigations into Farmers’ Co-op’s computer installation requirements, there was still

considerable discussion and reservation about the cost and advantages of a new computer and what effect it would have on administration and stock control:

Mr Veitch advised the meeting that he believed that while there were obviously advantages to be gained from retail stock control and that this system must come sometime, it must be at a price we can afford. Mr Blyde pointed out that with the additional complexities and range of stock held by the company, we must become more efficient in this area, and that one of the questions was whether we could afford to be without a stock control system. It appeared generally that we had been successful with our computer installation, while other organisations, such as the Dairy Board and the Health Department, had had considerable difficulty with theirs. Mr Rider remarked that he had to go along with Mr Blyde, in that the report gave him confidence in the executive staff’s abilities in this area.

Mr Veitch also said that he believed the cost was still on the high side, ‘taking into account notional interest and depreciation cost of $300,000 a year additional to our present expenses, which would have a very negative reaction on our profitability’. There was, however, no figure he could give for the loss in business, and it was resolved through a motion by Mr Blyde and seconded by Mr Rider: ‘That in view of the conclusions of the Arthur Young report on the computer systems, FCOS management team be instructed by this board to continue its investigations on our future requirements and that in the meantime no further reports be asked from Arthur Young.’

Although it was not entirely what Messrs Pope, Harrop and their team wanted, it was a pat on the back and vindication of the initial report and recommendations. It was also a show of confidence by the board in their ability to recognise the data-processing requirements of the company. Apart from the cost to the company at a time when every dollar counted, it illustrated that caution was still being shown as computer systems were still very much an unknown quantity.

Cash flow was of growing concern during the closing months of 1984, traditionally the worst part of the year for Farmers’ Co-op. The managing director also reported that recent legislation had seriously affected plans for reorganisation and proposals that were under way in connection with mortgages. Ever seeking to reduce overheads, particularly with regard to the cost of borrowing and continuing liquidity problems, Westpac Finance had arranged for the company to meet representatives from CBA Merchant Finance Limited in December 1983 in connection with arranging a loan of $NZ5,000,000 in overseas currency. A $NZ5m Swiss Franc loan was subsequently arranged through Westpac Finance in early 1984 for CHF 7,375,000 at an interest rate of 6.875%. The rate was considerably lower than for a New Zealand loan at that time. Additional accommodation of $1.3m was also sought and received from New Zealand bankers ANZ. However, within six months of arranging the loan in July 1984 the New Zealand dollar was devalued. The exchange rate went against the company and the amount that had been saved in interest rates was offset by the exchange rate movement. This contributed to the company’s worsening financial position. In 1986 Mr P. Taylor advised the board that, the size and difficulty of maintaining the offshore loan at its current levels and the small likelihood of a reduction in the exchange rate between the New Zealand dollar and the Swiss franc required that the company review its situation with regard to this loan, and the company should make provision in this year’s return for losses incurred on the exchange rate and that it may be beneficial to bring the loan onshore.

The loan though, remained intact, being switched into a multi-currency loan in 1986, and preference shares in 1990, and was repaid in 1996.