Dairy Farmers of Britain - Environment, Food and Rural Affairs Committee Contents


Examination of Witnesses (Questions 820 - 839)

WEDNESDAY 10 FEBRUARY 2010

MR MALCOLM SMITH

  Q820  Lynne Jones: Did you omit certain things?

  Mr Smith: I am not a liar by omission.

  Q821  Lynne Jones: You still gave a presentation which gave them the impression or you felt at the time that the purchase at that price was something that was reasonable at the end of the day?

  Mr Smith: They wanted us to get into liquid. We got into liquid. I told them at the time we paid a lot of money for it, but that was the only way we could get it. It transpires that maybe it was not the case but I did not know that exactly at the time. I found out more later.

  Q822  Lynne Jones: Why do you say it was the only way? Earlier on you were talking about the Co-op and the fact that the implication was that there was some discussion with the Co-op about paying a lower price. You implied that the price for the deal of having the loan was that in effect you paid more.

  Mr Smith: No. That is not the case at all. You are mixing everything up there. The reality is I told the acquisition committee I thought they were paying too much. That information was not conveyed to the Co-op by Philip Moody at all, ever, and the Co-op extracted the additional loan because we could not get that money from the HSBC.

  Q823  Lynne Jones: I think in the discussion it was implied that you only got that loan because you paid more than it was worth.

  Mr Smith: In retrospect, I suspect that is the case.

  Q824  Lynne Jones: The way you gave evidence implied there was some discussion over that point.

  Mr Smith: No. That is not the way I gave evidence. I did not imply it.

  Q825  Lynne Jones: You said at the start of your evidence session that you were sacked, and you just repeated it, although on your CV I think you write that to the surprise of the industry Dairy UK was born and unified the dairy sector for the first time since deregulation in 1994. "My work being done, the board agreed a generous exit." That is a somewhat different gloss on the situation than being sacked.

  Mr Smith: I got a lot of people writing to me in the industry at the time, including the Wiseman brothers, asking what was going on. Also, I got a nice letter from Sir Ben Gill, who I had worked with at Westbury, and various people were ringing asking what was going on. I did not think it was very appropriate for me to rubbish Dairy Farmers of Britain, which had been my employer, and the chairman and the board to the industry at the time. I think it is appropriate now because you have asked me a direct question. I did not know at the time, when I originally wrote that, that of course Dairy Farmers of Britain was going to go down the tubes.

  Q826  Lynne Jones: You also say in your CV that DFB posted record profits in 2003-04 and a turnover of £550 million and you also say with an employee base of approximately 3,000. That must have been before the acquisition.

  Mr Smith: No. We employed about 400 people before we bought ACC.

  Q827  Lynne Jones: That was 2003-04. You talk about an employee base of approximately 3,000. That must have been the period before the purchase of ACC.

  Mr Smith: I would have to look at the numbers again. We had Lubborn. We had Nene Valley Foods. We had a lot of drivers. I would need to look at that.

  Q828  Lynne Jones: That is not actually accurate.

  Mr Smith: In your opinion it is not. I will have to check that.

  Q829  Chairman: She is only reading out what is written down here.

  Mr Smith: Her opinion is not accurate. I am saying I do not know. I will have to check the exact numbers.

  Q830  Lynne Jones: You also earlier on implied that Mr Knight was somewhat overpaid for the work that he did. I presume both the chairman's and the CEO's salaries were on public record?

  Mr Smith: Yes.

  Q831  Lynne Jones: You also referred to a generous payout that you received. I am not necessarily asking for the exact figures, but in terms of the orders of magnitude what was the proportion of the chief executive's salary that the chairman was receiving and what was the proportion of that, in multiples perhaps, that you received in your generous exit?

  Mr Smith: It is a matter of public record. It is in my contract. I got a year's pay. I say "generous"; it was what I was due really. It was not an issue which caused any atmosphere.

  Q832  Lynne Jones: As a proportion of your salary, what was the chairman paid?

  Mr Smith: The chairman was earning at least as much as me by the time I left.

  Q833  Lynne Jones: Mr Moody?

  Mr Smith: An awful lot more than that.

  Q834  Lynne Jones: He was earning more than the chairman?

  Mr Smith: I would think so.

  Q835  Lynne Jones: I think we had the figures from him.

  Mr Smith: He got five million I think over a five year period. Not him personally, I have to say, but his company. However, he was the lead partner and he would have had a rather nice bonus out of that.

  Q836  Mr Williams: In evidence he said he had a salary, he was a particular type of partner and his remuneration was not dependent on either the income or profit of the business.

  Mr Smith: It was unique in my experience but I have no reason to doubt his written word.

  Q837  Chairman: Just help me to understand what happened after you had acquired ACC. You had these assets of various efficiencies and vintages. What did you then do with ACC?

  Mr Smith: That is an altogether more interesting question and I think it is very germane. I have a policy of visiting every company that I run, even when I had an international business. I visit them all to get a feel for it. With Llandyrnog immediately I just knew there was a major problem and that frankly we were being misled at the DD. I believe to this day we were misled at the DD. Proving it is one heck of a thing to do. We did try to prove it. Once again, fair play to the chairman, he did do his best to try and get reparation on that, but we did not get very far. You tend not to. We decided to shut it and we got on with it. I employed a guy called Gerry Smith, who was a very experienced operator, who did a great job in a difficult circumstance. I wanted to close Whitby, but I was prevented from closing Whitby by the chairman who felt that the farmers would revolt if we closed that too soon. I said, "What is the point in not closing it? I will go to the farmers. I will explain why we are doing it. I will take the rap". He still would not do it, so there was an element of not biting the bullet going on here, which I have to say was a bit disappointing. Frankly, I could see his point but he was wrong. Economically and in every other sense he was wrong, but he would not let us get and do it. I was keen for taking the knife out because I did not see an alternative. It is not because I like sacking people. I had no choice. The farmers' money was just disappearing down the drain and, frankly, Whitby was a hopeless asset anyway. There was a wee bit of vacillation about making tough decisions, and that is a fact. I think the board was at fault in allowing that to carry on. I think they should have actually just taken our advice and done it because that is what it is all about. That is what I do for a living. I had previously turned round two other assets which were losing wadges of money by taking some difficult decisions and I felt there were political considerations starting to come into play which had no part to play in making hard business decisions. I was disappointed in that.

  Q838  Chairman: You really left the business before the radical plans. I think we heard that towards the end there was Project 523 which had begun. Supposedly, profitability had returned to the business but at the end of the day the customer base had disappeared. You did not really advance the rationalisation agenda very much for ACC.

  Mr Smith: I was not really allowed to get on with that in the way that I thought was appropriate. I brought in a really good guy in Gerry. He did a pretty good job in difficult circumstances subsequent to my departure. He was a very experienced operator. They brought a guy called Andrew Cooksey in, a nice young lad but not fit for the role he was given. They interviewed Gerry for it and they interviewed Andrew for it. Andrew was given a job way beyond his competence, I mean way beyond his competence. I could speculate on the reasons for that but it would be really rather pointless.

  Q839  Chairman: One of the things which I probed about a little bit earlier, but perhaps we could just revisit so that we really understand it, is this question of the bidding for the Co-op's business. In terms of the diversification strategy, you had had very good support, it seems to us, from Tesco. With their local milk initiative, they strike me as having gone out of their way to try and be helpful. When things went wrong they accepted some difficulties in then developing what they wanted to do, but they still stuck by you as a supplier. On the other hand, the ruthlessness of the bidding process for the contract for the Co-op's business obviously was the undoing of ACC. It still bothers me that, for better or worse, there were a lot of people who knew something about the dairy industry who would have realised that when it came for that contract to be renewed you would have been up against people like Wiseman, who had an awful lot of capacity to fill. Seemingly, their reputation is one of getting business to fill up their factories because obviously it makes sense so to do. There is a strong probability that they are going to bid you down to the last whatever. Perhaps you did not have the necessary assets and efficiencies to rival the Wiseman's of this world. Did that kind of analysis go on when, if you were like, you were saying, "We have ACC but its wellbeing is going to be dependent on keeping the customer base alive"? The only way to do that was to be as efficient as the best in the industry because, by definition, if you were not you were going to lose out in a contract bidding war.

  Mr Smith: As I said previously, you are absolutely right. Your analysis is spot on. We were never going to win that one. That was why I said, "Look, there is only one thing to do here. We have to take the next step and consolidate with another co-op." The DFB board was known as the £1 million board in the industry because of what was being taken out of it by one means or another by the board. One of the reasons for my final departure was I strongly objected to the chairman's budget. I said, "Look, at a time of stringent operations when you are asking us to take the costs down on everything, I notice the board budget has gone up". He told me to get lost; it was none of my business.


 
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