Agri-Food


Date:

2013 – 2014 (15 months)

Company:

A wholly owned subsidiary of E. D. & F. Man, a privately owned trading house of over 230 years standing. The business, Ukrainian Sugar Company LLC, is based in southern Ukraine on the Black Sea & is one of only 3-4 facilities in the country able to produce sugar from beet & raw cane. The factory is situated well away from the traditional beet growing region & a local supply chain was established via a Joint Venture. In 2014, white beet sugar was sold into the regulated home market for the first time since the original investment in 2007.

Assignment:

To complete the building of the new beet processing facility, commission, produce & sell beet sugar into the regulated home market, having re-structured the business to deliver efficient, world class operational performance to achieve profitable operation over a 3 year time horizon.

Role:

Interim General Director

Assignment Length:

15 months

Background:

Since 2007 when the derelict business was first bought as a JV, over $90M has been invested. In 2009, the group became the 100% owner after difficulties with the local partner & this remains the current shareholding position.

After the group investment, the Ukrainian government changed the law relating to sugar production for export, making it illegal to bring raw cane sugar into the country for subsequent processing, even if identified for immediate export.

This led to one of several business strategy reviews. After a couple of years of uncertainty & false starts, a strategy was developed to build new beet processing facilities, so that the factory could make both beet sugar & refined cane sugar. The CAPEX was authorised at $28M and the project started in earnest in the 2nd half of 2012.

At about the same time, the law was again changed to enable processing of raw sugar cane in Ukraine, as long as the white sugar was exported out of the regulated home market. The process required by the authorities was vague, with no one keen to implement & included a number of steps for permissions, placing guarantee payments with rather suspect holding institutions & monitoring product to ensure it would leave the country. A long list of obstructions effectively made it impossible to operate the system.

In 2012, a Joint Venture company (50:50 share-holding) was established with Continental Farming Group plc (CFG), with the primary objective of acquiring land usage rights around the factory for the production of sugar beet using western intensive farming techniques. The sole customer for beet was to be USC.

Sugar beet is a water-intensive crop. The area benefits from an extensive canal system built in the ‘Soviet era’ that brings water to the fields from one of the national large river systems. This enables water application to the crops throughout the growing season, via suitable field irrigation equipment.

A small, 600Ha area was planted in the first season to establish the approach, with the beet being transported to two factories and the equivalent white sugar bought back.

For the 2013 growing season, 2500Ha of irrigated land was available for planting beet, providing enough material to be able to commission the new beet processing facility & run a reasonable campaign length.

Ukraine has a regulated sugar market, similar to the EU model. As a result, any manufacturer wishing to produce sugar for sale in the home market must apply for ‘A’ quota. This is awarded in the spring each year about the time that seed planting occurs.

At the time that the original group investment was made in the Ukraine, over 200 sugar factories were operating to supply a national demand of c.1.85MT annually. Over recent years, the number of factories operating has reduced very significantly, with fewer than 70 operating in the 2012 campaign.

In 2011 and 2012, excess supply over demand occurred, with 2.1MT and 2.25MT being available from each year. Market prices were low as a result, with manufacturers selling below cost for significant parts of the year.

The Brief:

The Ukrainian organisation was effectively a cost centre that had received a lot of financial support but due to changing circumstances had never been in the position to make a successful transition to being a real profit centre. Additionally, lines of communication were not effective enough between London & Ukraine which needed to improve, particularly given the financial support. To achieve a solid profit performance over the medium term, the complete country value added chain had to be established & the business structured accordingly. It could be argued that the assignment was a very large business start-up.

The Operating Situation:

The major site activity during the first 3 quarters of 2013 was the beet plant construction project. This encompassed everything from beet reception on site, through yard storage, washing & separation, slicing, diffusion & preparation for evaporation. The project also included pulp pressing, transfer & holding in the pulp pit (c40kT capacity), plus the core beet slicing & diffusion process building.

The approach adopted was to use a General Contractor (regulatory requirement) but to contract elements of the overall project a part at a time. This provided tight project cost control & assisted in keeping the contractor to schedule. Overall, this worked effectively, with plant dry commissioning starting in the 2 weeks leading up to the wet commissioning then moving into beet processing in early October. Proving the plant took a further 4 weeks after which normal campaign processing conditions & equipment performance were established.

The capital project was built to time & to budget at a build quality that has been recognised as best in class in Ukraine. This represented the largest capital investment in the industry in Ukraine in 2013 & was formally opened by the Regional (Oblast) Governor with national publicity.

During the campaign, white sugar colour as good as any in the national market was achieved; whilst improving diffusion running conditions c25% beyond original specification. Beet supplied to the factory from the JV (c.150kT gross weight) was delivered up to the targeted rate of 6kT per day to ensure that plant design capacity could be matched. The IT department had implemented a beet supply audit process using bar coding technology. This allowed every vehicle transporting beet from the field to be tracked, real time, enabling fuel efficiency, beet supply security & vehicle usage to be monitored throughout the campaign.

An essential part of upgrading the factory to be able to achieve FSSC22000 accreditation was improving the refinery ‘dry end’ processes & product transfer. A further capital project (c.$1.1M) was designed & implemented to bring this part of the process up to group international standards. This was operational from the end of Q1 2014. The upgrade was the major outstanding item identified in previous client quality audits. The company received very good feedback from key potential clients through the campaign during planned visits, reinforcing the ‘best in class’ construction view.

Group health & safety standards are significantly more stringent than local law. A great deal of work was undertaken to educate the workforce in the matter which allowed the company to demonstrate its commitment to providing the best possible quality of product & service; all part of the USC country strategy established at the beginning of the assignment.

Importantly, the commercial direction for the company was formulated & agreed early on. This provided a balanced approach between the short term establishment of a home market strategy & the longer term ability to supply (refined cane) sugar for export to regional clients. Key elements of building the regulated home market presence included:

  • being awarded ‘A’ quota to cover the business’s campaign output,
  • identifying key targets & building local potential client relationships, pre campaign,
  • building a similar approach on the ground for both molasses & beet pulp sales,
  • ensuring client sugar sales followed rapidly escalating market prices,
  • optimising cash generation for the campaign sugar inventory obtained.

To achieve a successful strategy implementation, a small internal sales & marketing team was put in place, with appropriate training. This proved to be a singular success, achieving better than market prices by c1-2%.

The campaign was conducted in the national context of a much lower harvest, with only 1.2MT of white sugar being produced from 38 factories operating. Sugar carryover from the previous 2 seasons meant that supply would be balanced with the national requirement.

Looking forward, it was recognised that beet pulp drying would be required to increase commercial added value & avoid any potential environmental issues from much larger quantities of pressed beet pulp generated from the forecast bigger beet crops & campaigns. The plant design was produced, costed at c.$7M & agreed, with a 15 month project time plan. The target operation of the facility was campaign 2015.

An integral part of the assignment was to develop & implement a medium to long term organisational re-structuring. The operating team was reviewed & agreed to be maintained for the campaign to establish effectiveness & then review again. Post campaign, it was agreed that the traditional role of ‘Chief Engineer’ would be split to separate the technical engineering functions from production management, plus strengthening of the team in 2 further operational management roles.

In the support areas, the key addition of an HR Director brought strong professional leadership to the function & the business as a whole.

The finance function was reduced in headcount by 20% in the period with no loss of effectiveness. Towards the end of the assignment, the FD was head-hunted away from the business & replaced with an equally capable individual.

A sales & marketing function was set up, using internal resource with supportive training. This small team proved highly effective in dealing with market research, establishing & building client relationships for all products (white sugar, molasses & beet pulp) & achieving better than market average sales prices by c.1-2% across a total sales value of $6.7M during the assignment, projected to rise to $10.1M for the sugar year.

During the beet growing season, a ‘beet development & supply’ function was established so that the supply strategy could be progressed on a timely basis for future years, where independent farmers would be contracted to supplement the JV company core production for the factory.

Post campaign, the senior & middle management of the business undertook the first phase of a change management workshop designed to improve understanding of successful practices & to determine next implementation steps jointly, to meet the business strategy.

The materials required for sugar production are small in number but can represent problematic purchase in the local (national) market. As a result historically, group regional senior management maintained direct control of purchasing. The factory energy requirements are based on coal fired boilers & coal supply is a good case in point. About 4 years previously, the site had refined about 75kT of cane sugar for export & satisfying national WTO (World Trade Organisation) licences that had been obtained. One deal had resulted in c20kT of coal supplied that was unusable & had not been identified as an issue in the legal claim period. This problem was removed during the beet plant build by re-classifying the material as ‘hard core’ & using it instead of purchasing fresh construction material.

Coal supply for the 2013 campaign was subject to local management control & followed an open competitive tendering process, achieving industry best rates & timely delivery to specified quality.

At the end of the campaign, an operating performance review was conducted. This resulted in a list of remedial actions to improve plant efficiencies & product quality conformance especially final sugar colour. The plant energy model was assessed by an independent third party & the outcomes discussed with both local & group technical personnel. The result was an agreed change to the weak liquor evaporation process. Calculations envisage c15% energy saving, along with much better colour control across the production rate range.

The JV & Beet Supply to the Factory

Throughout the assignment, the relationship with the JV partner changed regularly at board level. CFG was an AIM listed business & became the subject of a take-over bid by a Saudi Arabian agri-conglomerate. The due diligence extended throughout the growing season, effectively neutralising the opportunity to obtain further ‘land rights to grow’, to expand the field area for the 2014 growing season. Eventually, at the end of September 2013, the Saudi business completed the deal. The role of the JV within its new owner organisation was clearly ‘non-core’, which resulted in a change to CFG JV directors’ attitudes to the organisation. At the same time, there were a number or group senior management changes in EDFM, including one of the JV directors. At the start of the assignment, there had already been a change to 2 of the EDFM JV directors (the author became a JV director at that time).

CFG personnel were responsible for all the operational activity of the JV, as per the agreement. USC provided office space for the JV at the factory site but no CFG senior management was resident locally, making lines of operational communication less than ideal on a day to day basis.

Although all field irrigation equipment was not in place at the start of the planting/growing season, the final components arrived very shortly after seed planting. Water admission to the canal system was at the beginning of May with the final decision on timing being taken in Kyiv by the relevant authorities. Some seed was planted early April as an experiment & a couple of fields were first watered a few days later than required. Crop emergence was uneven in some fields & this was never satisfactorily recovered from during the growing season. Weed killer application was later in the growing cycle to avoid seedling damage but as the season progressed, weeds dominated in most of the fields & showed uneven application of chemicals. In spite of all this, the yields achieved at harvest were c.55T/Ha net weight, being one of the highest values in the country (average c.35T/Ha), representing a satisfactory first growth for a reasonable quantity of land (2500Ha) & showed the forecast potential for the area was well justified.

Harvesting was conducted with liaison between field & factory, with beet piles being placed at 3 points in the fields (two edges plus a line mid-field: typical field size c.140Ha). This was an improvement over many small piles dropped during the previous season’s 600Ha trial but still led to transport problems as soon as the fields became wet, due to the local soil structure being particularly prone to producing a low friction surface.

Beet reception analysis is often contentious between farmers & sugar factories throughout the world. The situation between the JV & USC was adversarial & subject to rigorous statistical checking & process observation. Independent analyses were also undertaken by the JV & once relevant comparative samples were analysed, beet reception results for sugar content (& dirt tare) were seen to be both reproducible & a fair reflection of the crop.

Achievements:
Key developments in establishing the business from a cost centre were:

  • Delivered $28M beet reception & processing facility, to time, within budget.
  • Built board, HR, Beet Development & Supply plus Commercial functions.
  • Sold white sugar at country market +1-2% selling price.
  • Transacted start up sales of $6.7M & sugar year sales of $10.1M
  • Achieved 1st. +ve cash flow monthly accounts since assets acquisition in 2007
  • Commissioned new beet plant in 4 weeks & ran successful sugar campaign; 1st since 2010
  • Recruited 140 people in the pre-campaign 4 week period.
  • Produced 150kT beet in a region with no current beet growing experience.
  • Grew beet at c.55T/Ha net yield & 15.6% sugar content in the first sizeable crop season
  • Developed efficient beet supply chain from field to factory, up to 6kT/day capacity need.
  • Reviewed & initiated remedial action to save c.15% campaign energy costs (c.$200k in short campaign)
  • Re-built the process dry end to international food hygiene standards: project cost $1.1M
  • Designed, costed, planned & approved a $7M CAPEX project for beet pulp drying
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