Examination of Witnesses (Questions 680
- 696)
WEDNESDAY 3 FEBRUARY 2010
MR STEPHEN
YATES
Q680 Dan Rogerson:
Thank you very much. My apologies for not being here at the beginning
of the session. You commented about farmers having a long-term
vision for a top quartile milk price. With your experience in
hindsight, as you set out for us, do you think there was a tension
between that and the sort of medium-term viability of the company,
that you were pushing too far too fast on that?
Mr Yates: I think the farmer directors
exerted a pressure on the board as a body to build a milk price.
That was an unfair pressure, but—and I know they are behind
me—First Milk have got exactly the same pressure now and
if you yield to that pressure and pay more milk price than you
should, you damage the business. If you don't yield to that pressure,
you damage the membership and once you've got a member's notice
in you've got a problem because when your next milk year starts
you can't put your volume in your volumes going forward, so that
is the bank covenant. You have to repay his capital. I don't know
what First Milk`s terms are, but with us it was 10 years down
the line and we knew we were looking at having to pay, if we had
remained in business, in 2015, the first year of pay out we would
have had to find £8 million in capital to pay out to the
members. The truth of it is that we wanted to be in dairy processing
but we didn't want to pay for it. We wanted to own the business,
but we didn't want to pay for it and the price of building—I
don't think anybody should underestimate the massive challenge
for the three—First Milk, Milk Link and Dairy Farmers of
Britain. The challenge of building a modern processing business
in this environment with no capital whatsoever to start with is
massive. It is an enormous challenge and the mentality behind
it of farmers wanting a business but not being prepared to pay
is very, very difficult.
Q681 Dan Rogerson:
And in the long-term building a culture of co-operation?
Mr Yates: Absolutely! Well, have
we got a culture of co-operation?
Dan Rogerson: That is what I am saying,
if the members are pushing in that direction there might be tension
there, of course.
Chairman: David, I think we have covered
a fair amount on that, but there are one or two things you might
want to raise.
Q682 David Lepper:
I want to just take up a point you have just made. There is perhaps
also the problem of having a business model which did not allow
the members of the organisation necessarily, even if they were
able to, to invest sufficient amounts of money into that capital
development?
Mr Yates: Apart from the retention
money, which is the compulsory investment, you could buy the investment
bonds as well, so you could over-invest if you wished to, and
a small number did, quite substantially. I can think of one who
put in over £100,000 because he believed in what we were
doing and he also saw it, when he was promised 7.5%, as a good
investment. It doesn't look so good now! Sorry, I shouldn't be
facetious.
Q683 David Lepper:
I want to also ask about the acquisition of ACC, which you have
already dealt with, but if I could just ask one or two extra points
about that. I gather there was a series of regional meetings over
the weekend prior to the special general meeting of the Council?
Mr Yates: Yes.
Q684 David Lepper:
The directors and the executive management team attended those
regional meetings?
Mr Yates: Yes.
Q685 David Lepper:
What kinds of information were available at those regional meetings?
Mr Yates: They took two forms.
At very short notice, indeed on the Friday night, the regional
chairmen was rung by a board member and told, "Get all your
district chairmen together on Sunday at one o'clock at this place
and they mustn't tell their wives or anybody where they're going."
So we went to a clandestine meeting. People turned up, left family
christenings, left this, left that. In fairness to the Council,
every single Council member turned up at his respective meeting
and we had probably a two hour presentation with an executive
and a director and they took us through the broad picture, some
detail about the sort of factories we were acquiring—and
I should say we had to individually sign confidentiality agreements
at this stage before we even were allowed in the room—a
few pictures, not many. So we had the concept and we were then
told to go home, talk to the cows and only the cows, and then
we were called into a full council meeting the next day when we
had presentations, they built on what we had been told the day
before, primarily by Malcolm Smith, and then there was a fairly
long and detailed questioning session and then a straightforward
vote and I have to say only one member of Council voted against
it.
Q686 David Lepper:
So the timescale of that and the mood in which those meetings
took place was one that suggested a kind of inevitability?
Mr Yates: Actually, what I missed
out is that we were put on red alert the week previously and that
was cancelled, and we were never told why. It was because one
of the bankers had pulled out, because Rabobank pulled out. Subsequently
we found that bit of history out, but we weren't told why.
Q687 Chairman:
Why did they pull out?
Mr Yates: Rabobank? You're asking
the wrong guy. You should have asked Mr Moody that. There were
two arms of Rabobank involved, weren't there, and if the banking
arm didn't follow the management investment arm, I would have
thought that was quite a clear sign that there was something not
pretty good about this deal, and in fact what happened is the
Co-operative Bank stepped into their shoes. It was £11 million,
I know what the figure was, and the Co-operative Bank funded that
£11 million slice of it and they were the first to be repaid
and come out of the syndicate, but I don't know the reasons for
Rabobank pulling out and we weren't told at that stage that a
banker had pulled out and that had caused the delay. We weren't
told that.
Q688 David Lepper:
You were anticipating my next question. So that was not known?
Mr Yates: That was not known,
no. What was known was—they gave us a reasonable description
of the properties and the customer base. There was no mention
of this Medina contract that proved to be so damaging. I have
to say they gave us an impression, the board certainly gave the
impression they had seen most of it. I think that was a false
impression. I don't think they'd seen very much of it at all.
Q689 David Lepper:
You did not know that the due diligence was vendor due diligence?
Mr Yates: We were not told. We
categorically were not told it was vendor due diligence.
Q690 David Lepper:
Therefore, my assumption is that members of the Council did not
see the due diligence report?
Mr Yates: No, absolutely not.
Q691 David Lepper:
You only knew what you were told about it?
Mr Yates: Absolutely! Absolutely!
The words Malcolm Smith used were, "When the deal is complete,
then we will send a team in to lift the manhole covers."
That was his terminology.
Q692 Chairman:
I can partly respond to one of the challenges you threw out. As
I say, the Committee has many and various ways in which it can
find out information and run a cross-check on what people say
to us, and we have been given on a commercial in confidence basis
the reasons why Rabobank did pull out. I was just interested to
know whether you knew that. That was the reason I asked that question.
One of the things that comes across from what you were saying,
if we just go back a little way, you made it very clear that you
on the Council, and therefore reflecting the members' view, were
absolutely clear that you wanted to get into the processing business,
you had made it absolutely clear that you felt this was the route
to a higher milk price. I just wondered whether you reflected
at all, because you also made another comment earlier on about
the very competitive nature of the world into which you were going
and the difficulties financially that that was presenting, because
one of the things, again with the benefit of knowing what happened,
was that when it came to sustaining the business that was ACC
(i.e. supplying the Co-op) the package that Dairy Farmers had
acquired was not capable of being sufficiently competitive when
that business was put to the test in the commercial market place
because it would appear that when bids went in for the Co-op's
business, if you read their evidence they had four different tests
by which they were judging who was going to win it, but ultimately
they accepted a more competitive bid for their milk business than
Dairy Farmers was able to make and given—
Mr Yates: "They" being
CRTG you are talking about, the Co-op Retail Trading Group?
Q693 Chairman:
Yes. I was just wondering, because you have obviously got, and
a lot of the other members have got, a very good feel for the
milk business, because that is what you are in, did it ever occur
to anybody that there was a potential vulnerability in terms of
competitiveness, reflecting on the point you made a moment or
two ago about the nature of the assets that you were acquiring?
In other words, if you were up against people like Arla and Wiseman,
who have got an enormous amount of investment in brand new kit
and were obviously aggressive in the way they were pursuing business,
did anybody actually think, "Can we keep up with them? How
vulnerable is this business?" because it seemed to be like
a pack of cards? Once the Co-op business had gone, then the rest
just fell down around it.
Mr Yates: Very much so, and we
devoted a lot of time to talking about this. The great strength
of ACC was that it had a distribution network. Malcolm Smith's
words were, "The jewel in the crown is its distribution network."
The Co-op CRTG, the Co-op stores, at that stage none of them had
central distribution, it was all delivered direct to store. To
deliver direct to store you can't do what Mr Wiseman does, which
is to back a 39 tonne articulated lorry and shoot the milk out.
You have to have 39 tonners, 20 tonners, 7.5 tonners and dot those
here, there and everywhere, and we had that. One of the things
that CRTG told you was we delivered a brilliant service to them
and we thought—the business believed—that the service
would maintain it whilst it developed another customer base. We
knew we were vulnerable from day one. The Co-op was taking 600
million litres a year, or 400 million. The Co-op were taking 60%
of the volume out of the factories. That was too big a chunk,
so we had to win business elsewhere, and I remain very supportive
of our ambition to get into Tesco and the Local Choice scene.
That was a deliberate strategy, to reduce our reliance on the
Co-operative and get into another major multiple. But sticking
with the Co-operative, when we bought ACC Robert Wiseman had not
got planning consent to build his new factory down in the South
West at that stage, so there was no significant competitor down
there at that stage. The day he got planning consent we knew we
had a problem, because we knew that Robert Wiseman gets his efficiency
by filling his factory, full stop, and we knew he would compete
for volume at any price to fill his factory, and that's exactly
what he did. When the first term of the contract came up he tendered
1.34 a gallon and we tendered 1.40 a gallon and we couldn't do
it for less, so he got it. The second lump of CRTG business, which
was in the South East, at that same negotiation Andrew Cooksey
negotiated with the CRTG Group that they would build a central
distribution centre and they would take on the distribution, so
we would deliver milk in the artic lorries and that had a cost
in that region of circa £10 million a year. Twelve months
into the contract, which would have been in August 2008, Andrew
went to the CRTG and said, "Where's your central distribution
depot, which is part of the deal, and if you're not going to build
it we need £10 million quid more," but of course by
then you've got Robert Wiseman who still wants to fill his factory
further, so we got knocked out there. The last third, the third
that killed DFB—and let's be under no illusion about this—the
last third that CRTG took out they took it knowing it would kill
DFB and that was tendered by DFB at £1.60 a gallon. Sorry
about the imperial thing but that's how the trade worked, metric
going in and imperial coming out, probably to obfuscate it so
that none of us can find out what their margin is!
Q694 Mr Drew:
The missing money!
Mr Yates: Yes, but we tendered
£1.60 a gallon and just to give you a marker at that stage
Local Choice milk was making £2.70 a gallon out of our factories.
We tendered £1.60 and in the December knew that we had not
got it. Gerry Smith went back to the Co-op, to CRTG, and said,
"Look, you know, the loss of that volume will be fatal to
us. If it's a couple of pence we'll have to come down a couple
of pence," and the headshake, "No, it isn't." So
that tells me that Robert Wiseman took that at £1.55 a gallon.
Nobody could have lived with that. Robert Wiseman couldn't, but
it gave him his factory efficient because it was that last 15%
that filled his factory up, so he's got the efficiencies, full
stop. This is not a criticism of Robert Wiseman. I wish we had
such a ruthless bastard on our side, but we didn't! Excuse the
phrase.
Q695 Chairman:
It is important that we understand and you have given us, if I
may say, a very helpful chronology of the ultimate removal of
the business that finally caused, if you like, the financial pack
of cards to fall down because in listening to what everybody says
we have been trying to establish where did it go wrong? Did it
go wrong because there was something fundamentally flawed in the
co-operative model? Did it go wrong because there were certain
suboptimal commercial decisions that were made? Where did it go
wrong? Because if you are going to draw any conclusions out of
this exercise it is how can you prevent it going wrong again for
others who have a co-operative style of doing business as opposed
to those who have a more normal commercial style of doing it?
So we are very grateful to you for having shone some more light
into the way this particular problem occurred.
Mr Yates: With respect, Chairman,
it doesn't really matter whether it's a co-operative, an individual,
a plc, it is about who leads it and how they lead it. That is
all it's about and once again with hindsight, the NFU talked to
you about how we need to have better performance benchmarking,
we need to have an independent financial scrutiny of the business,
reporting to Council. Nonsense, absolute nonsense! How on earth
could you do that? Where councils need help is in making sure
that the people who run that business are the right people and
I would never again be involved with a business where somebody
walked in the door and said, "This is your chairman,"
or, "This is your CEO." If I was in a position of responsibility
I would pick that person up, shake his pockets out, say, "Why
you?" and when he told me why I would say, "Well, prove
it," and when he'd proven it I would take him out and get
him drunk and see what he told me then! I would be much more thorough
in the choice of the individual. It all, at the end of the day,
comes down to one or two key people at the top.
Q696 Chairman:
Mr Yates, thank you for your candour. It has been extremely refreshing
to have some straight answers to some questions we have been able
to put. I am glad you have been able to come back and join us
again this time on the record. We very much appreciate your patience
with us. I think you have genuinely given us some extremely helpful
insights into what occurred and I suppose we do have the luxury
now of being able to compare and contrast what you have said with
what others have said as well, but nonetheless we are very grateful
to you for coming in and giving evidence to us again today. Thank
you very much.
Mr Yates: Can I, in closing, just
say that when the decision was taken to close the business down
can I commend our staff? What happened from 2 June, on through
June, was a formidable task to get every farmer away to a safe
home with no loss of milk. Thanks to the receiver for the way
he acted and the HSBC, who funded that, but predominantly to our
staff, not to those rats in the top offices but the people on
the ground floor, the people on the end of the phone. Our membership
team were fantastic because you can imagine what happened, what
the phones were like, and not a one ran, not finance, not membership,
not anybody. They stayed there and did their job until the receiver
said "Enough" and I can't praise them highly enough
for that because it would have been so easy to say, "I don't
want any of this," because you've got mad farmers screaming
down the phone at you. I absolutely commend what they did. If
our leadership had been half as good as the rest of our staff,
I wouldn't be here today.
Chairman: That is on the record. Mr Yates,
thank you very much.
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