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The New Zealand Farmers Weekly - Scales Corporation 100 years celebration.
16/07/2012

Used to beating off adversity

Alan Emerson

The last few years have been volatile and extremely challenging, but Scales Corporation goes into its centenary celebrations this weekend in as strong a position as it has even been. Except perhaps for a brief period after the Great War when the then chairman accused his own company of profiteering.

About 400 people will be at a dinner in Christchurch celebrating the achievements of a business which began as a protest by sheep farmers in the late 1800s against the freight costs imposed on them by shipping companies to carry wool to the United Kingdom. In 1898, they engaged a Wellington auctioneer and trader, George Herbert Scales, to organise a competing service for them.

In 1912, the business was incorporated as Geo H Scales Ltd, a shipping company, and only sheep farmers were allowed to be shareholders. Scales died in 1928, but the business lived on, and some of his descendants will be at the dinner.

Shipping was the sole business for a long time and a milestone was being appointed as shipping agents for the Soviet Union in 1941.

Geo H Scales Ltd still exists but is more of an honorary entity these days, with the shipping business operated as part of Scales Logistics. "We send out 11,000 twenty-foot equivalent containers a year, and if George Scales had thought we'd be doing that, he'd know we were a big part of the shipping scene,'' says managing director Andy Borland.

Now it also has bigger businesses - including apple growing, packing and exporting through the Mr Apple subsidiary, and the Meateor pet food manufacturing operations, which supplies frozen ingredients to end product manufacturers in the US and Thailand. It is also a substantial land owner.

Scales' first move into other business was the 1983 acquisition of the Polarcold Stores, which has grown across several parts of the country to be a major part of its operations. Scales stores its own apples and petfood but most of the coldstore space is for use by external clients, storing dairy, meat, vegetable and fruit products.

It also leases out industrial sites adjoining its big storage assets in Dunedin and Hawke's Bay - both former freezing works sites. Borland envisages the sale of some industrial land, leaving Scales with the big stores, to fund further investment in the primary sector activities.

Along the way, Scales withstood a takeover bid from Brierley Investments in 1971. Timaru accountant the late Alan Hubbard, who is believed to have been a shareholder since the 1950s, played a major role in seeing Brierley off. From then on Scales became a Hubbard interest more and more, eventually being about 79% owned by his South Canterbury Finance (SCF).

Scales got into financial strife in the late 1980s, after the big market crash of that era, and again in the late 1990s, coinciding with the centenary of the very start of the Scales business.

Hubbard ensured it survived those scares but another decade on and greater challenges loomed ahead.

A global financial crisis, a high currency impacting on export returns, SCF being put into receivership, and the Christchurch earthquakes damaging the head office and important cold storage assets.

Those elements were the backdrop to Scales Corporation in centenary year 2012, but Borland, who joined as chief executive in 2007, says that right now the business is in a "pretty good spot''.

Ownership is at the core of that. The SCF receivers sold the controlling shareholding in Scales to Auckland-based Direct Capital in 2011 and a rights issue completed in May has increased its shareholding to 83%. About 460 shareholders own the balance.

Borland had made due diligence presentations to about a half dozen potential buyers and welcomed the Direct Capital involvement. For a start, it was a New Zealand owner.

He ticks off the new positives:

# A rock-solid cornerstone shareholder.

# A very clear strategy of diversification within the primary sector.

# An improving balance sheet.

# Bringing proven people into governance roles. Jon Mayson, who as chief executive turned Port of Tauranga into the success it is today, is the new independent chairman, and also chairman of Polarcold. Melbourne-based Tim Goodacre, former chief executive of Zespri, is now chairman of Mr Apple.

Borland adds these factors to the group's existing strengths, including what he calls a passionate and experienced workforce.

He has a cheerful sense of optimism, despite saying that "nothing is easy when the currency goes through the rise it has''.

A special challenge is in Europe, the biggest market for Scales' biggest business, Mr Apple. The European economy is poor, and the kiwi dollar is at record levels against the euro, but, helpfully, the in-market prices are actually very good this year.

Operating excellence is a key focus. A new defect sorter at the Waipawa packhouse in Hawke's Bay allows Mr Apple to directly bag 4.5 million apples a season for a European client. Their next step is to supply directly to the supermarket shelf, avoiding expensive repackaging in Europe.

Another efficiency example is Meateor running its own logistics right to the nearest coldstore to the offshore manufacturing site. "It means we can control the quality of the logistics right through,'' Borland says. "You can diversify a commodity by offering more services and options.''

There are challenges ahead, notably to make apple exporting more profitable.

Scales is one of the producers registered to export to the newly-opened Australian market, but getting established there means taking on a very rigorous and expensive testing regime.

And more specifically, the group has taken a 10% shareholding in fellow apple exporter Turners & Growers as a pathway to greater industry collaboration to lower costs and improve returns. T&G is completing its own industry review, but Borland says its initial reaction to his suggestions has been positive.

Scales also has to bed down a permanent home for its small head office team and the shipping business crew.

They are in their second temporary offices, after the central Christchurch base was damaged in the February 2011 earthquake. The building has been demolished, but Borland says insurance cover will allow building of a substantial replacement office block, most of which will be able to be leased out to other tenants. That will be a year or two away and it is likely that a third lot of temporary offices, this time back in the city centre, will be taken up in the meantime.