Food/Meat Processing


Summary:

To re-structure & turnaround the Hungarian business

Date:

2012 (6 months)

Company:

A wholly owned subsidiary of a Central European based group, owned by a Slovak, PE house. The business is based in Hungary and provides branded and private label processed meat products in various forms to home and export retail markets. Brands are top 3 and top 5 in ntheir categories. Products include various forms of salamis, patés, sausages, hot dogs, frankfurters, virsli and hams. The company is one of only two meat processors in the country that can use an EU area designation on its products (designation analogous to Parma Ham or Champagne sparkling wine).

Assignment:

To turnaround the company’s business performance to bring back to profitability and set the basis for a path to sale for the owner.

Role:

Interim CEO/Country Leader

Assignment Length:

6 months

Background:

The meat processing group is headquartered in Slovakia, with companies also based in Hungary, and the Czech Republic. It is the largest meat processor in the region. The Hungarian business  had a turnover of c.35M employing c.300 people on 2 sites. It occupies the number 3-4 position in the Hungarian market, with particular strengths in paté, spiced sausages and salami production. Key home market clients are Tesco, Auchan, Lidl, Metro, Penny Market and CBA, with exports predominantly to Germany, Russia and the UK. The business produces c.350 SKUs.

The PE house had purchased a Hungarian fresh meat and private label meat processor, then later acquiring branded business operations. The two businesses had been gradually integrated whilst making reasonable but declining margins in a market under increasing price pressure.

In 2010, the PE house commissioned a strategic review of the group (Slovak and Hungarian businesses). This review contained a plan to withdraw from the ‘fresh meat’ side of the Hungarian business completely (perceived as unprofitable and diluting productive activity), closing slaughter house and de-boning facilities and consolidating manufacturing operations from 5 to 2 sites and to outsource finished goods warehousing operations. A number of other aspects were dealt with in the report, including the leveraging of the well-known Hungarian brand with some of the unbranded products.

The Spanish consultancy was retained to undertake the re-structuring of the Hungarian operations and incentivised to achieve completion in very tight timescales. To achieve aggressive programme goals, the operations were put under enormous pressure throughout 2011. When this work was ended in early 2012, a local General Manager was appointed with the remit to ‘steady the ship’ and consolidate profitable operation.

This proved considerably easier said than done.

During the latter half of 2011, there had been significant loss of business volume due to the outsourcing of finished goods warehousing operations and the resultant severe drop in customer service levels. A number of the costs of consolidation had been underestimated and the impact of carrying fixed costs not yet removed from the company’s balance sheet weighed heavy. Much management experience had been removed or lost from the company. In addition, the re-structuring had involved further employee reductions through the complete contracting out of all packaging operations, which also had the ‘hidden’ impact of losing immediate control over the final point of product quality control. Many recipes had been changed to save costs but not all had been formally changed in the system. Supplier bonuses had been agreed but not for payment until beyond the year end.

In Q1, 2012, an arbitrary price increase had been notified to all clients, which resulted in further volume losses to the competition.

From the start of the year, monthly losses were being recorded. Raw material prices had risen c.11% over the previous year, which had been a similar amount higher than the year before. The management team had been strengthened with a new FD and a new Operations Director shortly afterwards. Logistics customer service levels had improved (coming back over 90% ROTD from a low point of <75%) but product quality remained a significant problem both in home and export markets. Much of this had been caused by recipe quality degradation followed by lack of control in production and using lower quality meat products, driven by price.

Inventory level control was minimal at the start of the year but this did improve as the first half progressed. Financial controls also improved from a very low base. The year-end audit confirmed a large loss for 2011, with significant discussion over potential for audit qualification and sign-off not until July.

By the end of May, the PE house CFO had become involved in reviewing the group and securing the services of a turnaround interim CEO to work with the PE house partner responsible for the meat business, and the meat Group CFO, appointed c. 3 months before.

The Brief:

A short preliminary review of the Hungarian business was conducted and on the basis of this feedback, the assignment goal was to produce and implement a turnaround plan to bring the business back to profit, month on month.

The Operating Situation:

At the start of the work, the investor had also elected to recruit a Group Industrials Director. The new local Operations Director had already handed in notice, so it was decided that the new appointee would initially provide a service to the Hungarian business for most of the time. The previously appointed General Manager, after hand-over, took up a group role based in Slovakia

Morale throughout the business was extremely low. The re-structuring activity of the previous 12-18 months had taken its toll, having been driven by an extreme autocratic management style.

From the start of the assignment, a 13 week rolling cash flow forecast had been established, updated fortnightly. At the beginning, a further cash injection was forecast as necessary in week 36. With good cash management, tighter inventory control, better purchasing particularly on auxiliary materials (everything except meat) and longer credit terms on purchases, this need for further cash was delayed into 2013.

At the assignment start, a request for specific time commitment of the new interim meat group CFO was requested to establish the basis for the turnaround plan. No sooner had the assignment started and the CFO was sent to the Czech operation to deal with problems that had arisen at short notice. This delayed some key work by over a month.

In the meantime, it was immediately clear that some basic production principles had to be re-established. This required firm standards of hygiene to  be followed; recipes to be respected, clear quality inspection at goods-in to be adopted; all suppliers to be required to deliver material that was ‘fit for purpose’; all quality control points to be policed thoroughly; good housekeeping to be made an essential part of the work day; contract cleaning and security to be held to account and deliver the required standard; initiating regular product tasting sessions and upgrading certain recipes to achieve the required standard for the consumer, both in home and export markets.

Care with work in progress process control meant better quality through more uniform cooling of cooked products, optimising production efficiencies. Greater care was taken over packaging department output. National law requires an ‘arm’s length’ approach to justify the status of the work being truly outsourced, so daily requests for output by product type had to be made. Direct management control of operatives is illegal in this situation.

Production Planning was a cross functional activity, led by the logistics function. The IT based system used (ESO) is a SAP ‘clone’ which had not been fully implemented at the time of installation. Planning involved an estimate of likely sales 3 months ahead (some salami had a 90 day maturation period), with actual confirmed sales demand notice at 24-36 hours. Production scheduling ‘translated’ requirements for the coming week into materials, packaging and line time where capital equipment produces several product types. Cross functional cooperation was much improved over the period of the assignment, resulting in more robust planning, less wastage and improved machine utilisation.

In the warehousing and distribution areas, improved stock control (both levels and cycling) was achieved. This, coupled with improved housekeeping, made factory space available and allowed the in-sourcing of the FG warehouse operations again. This project was an integral part of phase 1 of the turnaround plan, saving a minimum of 25k/mth. This project was the first successful cross functional high impact activity of the new working approach. Having re-established in-house picking and order ‘build’ the customer service levels, which dipped immediately post transfer (average c. 85%), returned to required levels within a small number of weeks. This project was successful in spite of losing the Logistics Director (headhunted into the pharmaceuticals industry).

In terms of inventory accuracy and control, it was clear that a lot of work was required to achieve a year end result that reflected reality. Monthly stock checks were initiated and increasingly accurate results were obtained. Processes were improved to be able to measure changes effectively and on an on-going basis. It was a key goal to have all balance sheet adjustments made by the year end to allow a ‘clean’ start to 2013. At the end of November, a write-down of c1.2M was identified. Much of this was due to issues from the time of the original purchase, when inflated inventory values had been accepted during the due diligence process.

In the first 4 months of the assignment period, total inventory value fell from 6.3M to 5.25M, based on a 25% reduction in FG; 33% in meat; 14% in all other materials and 10% fewer ‘empties’ crates and pallets.

Once factory and product fundamentals had been re-established, the margin enhancing aspects of the turnaround plan could be engaged. The work was considered in 2 phases as only so much could be done at a time and certain elements needed to be in place for a 2nd phase to be possible.

Phase 1 of the plan consisted of 5 operations based projects; 4 S.G.&A. and 2 commercial activities. In summary, they were:

For operations:

  • in-sourcing the FG warehouse
  • in-sourcing the packaging activities
  • reducing customer returns
  • rationalising some auxiliary material procurement
  • minimising stock control losses.

S.G.&A. work was:

  • reducing payroll
  • halving legal service costs
  • re-focussing and reducing marketing spend
  • planning the interim CEO’s successor.

The commercial projects were:

  • to eliminate the poorest margin SKUs and
  • replace the next poorest margin products with better margin volume.

This phase of the turnaround plan was implemented effectively, with full monthly impact to occur from early 2013.

During the period of plan implementation, the annual price negotiations were being conducted across the sector. An overall 5% GSP increase was achieved, with some variation across SKUs. Poor performing products were given particular focus.

The Hungarian market for processed meat had been suffering an exceptional period of stress over the previous 12-18 months. No significant player on the market had made a profit in this time and to make matters worse, meat prices increased to world record highs (pork is an internationally traded commodity): rising 12-15% in August alone. Given that meat price represents c.40-50% of total costs, this presented a serious additional challenge to the sector as a whole.

During the assignment, one of the main competitors (Gyulai) went into administration, after some weeks in discussion with various government departments regarding a potential ‘bail-out’. Further public announcements were made regarding 3 other significant competitors in the market, all in financial difficulty. This encouraged the business to re-double efforts to get through the turnaround and prepare for the coming market opportunity. The first fruit was the placement of a large regular requirement for paté (c.150T/mth). The commercial team was briefed to establish new business at good margin, so that factory capacity was optimally utilised. The paté order was managed by a combination of installing additional capacity equipment from previously shut down old sites, plus losing low/negative margin business to free up production.

Towards the end of the assignment period, the budget process was undertaken. This was finally approved at the end of November and showed the month on month improvement to break even by end Q2. The overall performance for 2013 was in positive territory, with only 3 of the 20 improvement activities built into the figures. Those actions built into the plan were:

  • reduction in customer penalties (due to poor customer service)sales price rises, conservatively estimated
  • sales price rises. conservatively estimates
  • car fleet reduction (to fit new requirement after the phase 1 changes)

The remaining projects in phase 2 are as follows:

For operations:

  • distribution cost optimisation
  • packing department efficiencies (once brought back in-house)
  • further auxiliary material procurement improvements
  • Meat cost savings
  • Direct labour cost reductions
  • Factory indirect labour cost savings
  • Further ‘fit fir purpose’ recipe re-formualtions.

For S.G.&A. area

  • Energy supply cost competitive tendering
  • Energy conservation/cost savings
  • Sale of old company assets
  • Labour cost savings
  • Planning system process improvements.

For commercial area

  • SKU simplification work
  • Client partner strategy – by major client
  • improving ‘trade marketing’ value added
  • Partner absolute NSV development
  • Beyond budget (new) product development

Having established the budget and ‘below the line’ turnaround activity as described above, a successor had been identified for the client to continue the work.

Achievements:
Key improvements to the company were:

  • Built & ran Turnaround Plan ϕ1, with €141k/mth savings & €169k/mth better NSV
  • Set up Turnaround Plan ϕ2, giving €114k/mth savings & €395k/yr better NSV
  • Reduced gross inventory €1.05M (20%)
  • Cleaned up balance sheet with c.€1.2M write-down, ready for the year end audit
  • Managed cash (13wk rolling cash flow), moving ‘cash cliff’ from wk36 into 2013
  • Stabilised factory output quality after previous major re-structuring work.
  • Enabled factory standards to improve to operate to Tesco Quality Audit levels
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