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Te Awanui Huka Pak Ltd

Background

Te Awanui Huka Pak Ltd (Huka Pak) was incorporated on 28 November 1991. The two founding shareholders are Te Awanui Huka Pak Co-operative Ltd (the Co-operative) and Coolstore Management Services Ltd (CMS).

The Co-operative commenced operations in 1986. It comprises a number of hapū based trusts and individual Māori growers from the Bay of Plenty region, who have shares according to their kiwifruit orchard interests in the Co-operative. In 1991 the control of the orchards was handed back to the owners as part of a nationwide regime involving the devolution of powers back to the owners of Māori land from the Department of Māori Affairs.

CMS was established in 1986 after having successfully tendered to lease and manage the purpose-built 5500 pallet static capacity transit coolstore situated on the wharf at the Port of Tauranga. Since that time CMS has developed an integrated kiwifruit management team able to handle the fullspectrum of activities on the orchard, post harvest, in logistics and marketing. The company's primary focus is its investment in, and management of, Te Awanui Huka Pak.

A subsidiary company Coolstore Management Services Logistics was formed in 1998. It organises the supply of around 11% of the national kiwifruit crop of which Te Awanui Huka Pak is the main supplier. CMS manages the contract with CMS Logistics.

Huka Pak's assets comprise a five million tray kiwifruit packhouse and coolstore facility situated on 3.33 hectares of prime industrial land in Mount Maunganui. The company also owns Omega packhouse and coolstore in Te Puke.

The mission of Huka Pak is "to maintain a highly efficient fruit growing, processing, storage and logistics operation which delivers a preferred product to customers, resulting in superior orchard gate returns to our growers, whilst achieving optimum financial returns to shareholders".

Structure Diagram

The Joint Venture

In the early 1990's horticulture was in a depressed state and the banks were nervous about the kiwifruit industry. A serious crisis in the industry developed in 1992 when supplies from several countries flooded the world market and prices fell sharply.

This made it difficult for the Co-operative to find the necessary cash injection it needed to help it out of this crisis. The Co-operative also needed the capital to repay a loan from the Māori Development Corporation. It was decided that a joint venture partner was the ideal solution to the problem. The idea was to bring in a partner with strong management experience and capital to purchase a 50% stake in the business.

Once CMS was aware that the Co-operative was looking for a partner, it indicated its interest. The two entities got together to discuss andidentify any common interests and shared visions they might have. CMS also had the advantage of understanding the viability of the business. John Burke, currently General Manager of Huka Pak, was working as a private rural consultant in 1992 and he had completed a viability report on all Co-operative orchards for the Department of Māori Affairs during the devolution process.

A due diligence process was carried out over a short period of time by each of the partners and then a heads of agreement was drawn up. The due diligence involved accessing all the information from the Māori Development Corporation which held all the books. CMS conducted its own internal SWOT analysis, looking at the strengths, weaknesses, opportunities and threats to the business.

John says they were right on the button in this analysis. CMS understood the Co-operative's business well, and identified that it had good resources including early and late producing orchards. CMS saw that these resources had to be strengthened through strong management, and increased crops and capital. These were all things that CMS could supply, since CMS already knew how to run the business post-harvest, they knew the numbers and the industry. After the due diligence CMS also knew that their input would create a viable business.

Business Environment

Packing and cool storage of kiwifruit and avocado are the core business activities of Huka Pak. The company also manages and leases 108 hectares of kiwifruit and avocado orchards, including a 15-20 year development lease of 57 hectares. Further activities include the export of kiwifruit and avocado (inclusive of the Kiwifruit New Zealand approved collaborative marketing arrangements to India, Malaysia, Indonesia and North America), and cool and dry storage of dairy products for Fonterra.

The kiwifruit industry must sell its fruit through Zespri, which is the only remaining Government established primary producer monopoly in NewZealand. The growers who process their kiwifruit at Huka Pak are set up as a collective under Te Awanui Huka Pak Growers Ltd (Te Awanui Growers). There is currently an equal mix of Māori and Pakeha growers involved with Huka Pak. Some growers are large corporate growers in their own right, such as Ngai Tukairangi, Poripori, Tauwhao, Te Ngare, Mangatawa Incorporation and Ranginui 12. Most of these growers are trusts created under Te Ture Whenua Māori Act 1993.

The growers contract the packing, coolstoring and logistics of delivery to Huka Pak via a packing and coolstorage contract. The administration of Te Awanui Growers is also managed by Huka Pak. The contract between Te Awanui Growers and Huka Pak is renewed each year, with most changes relating to the pricing or to the terms and conditions that change depending on the arrangements with Zespri. Huka Pak likes an 'open door policy' provided by the annual contract, which gives its customers the choice to use its services rather than tying them into a long term contractual relationship. Huka Pak has a number of advantages over other packhouses. For example it has two weeks of extra processing time over competing companies, because of the earlier start to the season for the growers. There is also a focus on maximising the utilisation of the plant by having it run 24 hours a day, seven days a week, during the peak season.

The throughput of kiwifruit has increased in Huka Pak from 400,000 trays in 1991 to over 4 million trays in 2004. It is the third largest packhouse in NZ in terms of kiwifruit packed on a single site. At the moment there are long-term expansion strategy plans being researched, as the current site of the company is working at its full capacity. The research is considering the optimal size of the company. The question for Huka Pak is how big can it go on a single site? Quite recently the company restructured. It wanted to introduce its growers into the shareholding as individual shareholders. The company has allocated 20% of the shares to growers. The JV has retained the majority of the shares to ensure it retains control of the company. The capital raised in this exercise has been tagged for the expansion project.

Governance

The Board of Huka Pak has seven directors representing its shareholders. CMS and the Co-operative both appoint three directors each and the third shareholding (Te Awanui Growers) appoints a representative. The governance Board has a range of skills that are complimentary; all members have a grower background. The Co-operative provides growing and cultural expertise and CMS provides growing and management expertise. The currentnumber on the board is optimal.

The various directors' interests are declared in the Annual Report. John remarks that in an organisation where there are so many vested interests, total trust, honesty and integrity are paramount. There are good controls through contracts that clearly outline where everyone's interests lie and this provides a point of reference as a basis for a person stepping aside from the decision-making process in the event of a conflict of interest. While Huka Pak understands that there should be a separation between governance and management, it nevertheless has continued to retain the managing director position.

However, the Chairman, Mahaki Ellis points out that there have never been any disputes between the parties since Huka Pak was established in 1991. John Burke, the Managing Director adds, that he "hasn't even purchased director indemnity insurance because there seems to be no need. The point is that with all these vested interests there is a real push by everyone involved to increase the profitability of Huka Pak, including theindividual growers who also own shares".

John sees Huka Pak as a premium example of a solid partnership which can operate between Māori and Pakeha in New Zealand.

The Board policy is that all decisions must be reached by a consensus. There is no casting vote. If there is no agreement then the plan is required to be modified. As a result of this process the partners work in unison rather than as representing separate entities.

The meetings are open to all the directors from each of the parent entities. This saves a lot of time required for reporting back. The parent companies also have an input into the discussion but have no voting rights. This provides a transparent and informed process and it also helps to educate them on the nuances of packing and cool storing. At these meetings the board looks at:

• Management reports;
• Financial reports (the report versus budgets set at the beginning of the year);
• Strategic planning (a strategic planning meeting usually occurs in March for the year ahead);
• Key objectives and strategic moves Huka Pak want to make (report on progress).

The Huka Pak Board tries to operate on as few meetings as possible, usually about 4-5 a year. This is workable for the Board because all three CMS appointed directors are also managers at Huka Pak and the Chairman visits the business weekly. Through their involvement the Board members are kept informed on what is happening at Huka Pak.

The key to the organisation's success is the stability of the Board, which hasn't changed for the last 5-6 years. It currently has no policy in place for induction of new governors but if a new director was going to be bought in, the Board will implement an induction policy. The Board believes its success is directly attributable to the continuity achieved. Succession planning is seen as an integral part in moving forward because it is about selecting the right people in the first place. These are people that have to want to have a career within the company.

The preference for Huka Pak is to have the ability to promote from within its ranks rather than seek skills externally. This is demonstrated by the Co-operative, which has begun training a new governor for its Board. This has involved training with the Institute of Directors and attending conferences such as the 2005 Hui Taumata and FoMA conferences. Mahaki Ellis explains that this person will have opportunities within the Co-operative, and in the future, for holding directorships in other companies that the Co-operative has interests in.

Huka Pak has recently returned from a successful marketing visit to Malaysia. All Co-operative directors were invited to join them to see first hand what the company actually does on these marketing and business relationship-building trips. The trip was all about investing in the building of international relations, so carvings were gifted, and a kapa haka group performed in Malaysian supermarkets, in a bid to draw attention to Te Awanui Kiwifruit.

Ad hoc committees on projects are set up on an as required basis by a delegation from the Board, which sets the parameters, timelines and specific goals to help the Committees to work to meet the Board's objectives. The Board carries out appropriate consultation when it recognises the need. An example of this occurred when it went through its re-branding exercise. To bring everyone along the journey with Huka Pak, the Board sought thefeedback of employees and growers to ensure the brand aligned with their identification of the company.

All non-monetary aspects, such as cultural and environmental issues, within the operation are dealt with at the Co-operative level where it has relevance. The Huka Pak Board conducts its own reviews and likes to get feedback from growers and other industry participants of their perceptions of the company. Te Awanui Growers Ltd is a good sounding board for the Co-operative.

Strategic Thinking

At the beginning of each year the Board holds a strategic planning meeting to outline the key future objectives. Huka Pak does all of its own strategic thinking but hires consultants and expertise when required. The focus for Huka Pak is on good business strategy, and its measure is financial success. Huka Pak has been a huge promoter of de-regulation as it believes that competition improves performance. Huka Pak would like greater opportunity to use its competitive advantage. Despite this, strategies have been implemented to build a strong and healthy relationship with Zespri. The Board's stance on deregulation does not interfere with its relationship with Zespri, which it sees being maintained in a deregulated environment. The General Manager states "identifying the possibilities of change has led Huka Pak to restructure the business to support itself should the anticipated de-regulation change occur, and has therefore established a shipping and marketing capability".

Under the regulatory framework controlling kiwifruit marketing there is a scheme called 'Collaborative Marketing' where it is possible to apply for a kiwifruit exporting licence (but not for Zespri Gold). To obtain a licence you must be able to differentiate your marketing approach from what is already occurring by showing you are supplying parts of the market that Zespri cannot. For example you must show that the idea is new; the customer is new; and that it will add value to the overall returns of NZ kiwifruit growers.

Huka Pak is currently the biggest collaborative marketer of kiwifruit and is beginning to reach into North America. Its biggest export market is Malaysia, where it has a bigger share than Zespri. The current process is that:

• Te Awanui Huka Pak sells the fruit to customers offshore;
• These customers then make the payment to Huka Pak, the licence holders;
• Huka Pak then charges a commission and pays the balance to Zespri.

The industry is predicting de-regulation in the next few years and in preparation for this Huka Pak is building off-shore relationships. Working with New Zealand Trade and Enterprise, research was conducted which identified alternative offshore customers, the main ones being in Indonesia and Malaysia. As a result Huka Pak created its own Te Awanui brand. Huka Pak is currently developing an indigenous branding strategy, which it intends to use alongside, and possibly in partnership with, Zespri. Huka Pak believes that if Zespri can see the potential it may help market the brand and it is Huka Pak's intention to create a complimentary relationship. Huka Pak is focussing on the indigenous branding research in Malaysia by looking at theimpact of direct customer branding exposure through the Kapa Haka group, which is a unique marketing strategy because the Kapa Haka is linked to the hapū growers, and to the growers co-operative.

Risk Management

John and Mahaki are of the understanding that you can never tie down a relationship with words. The true test of a relationship is in its action. Therefore, the contracts and agreements that are in place are only there for when things go wrong and usually operate benignly until a situation presents itself. The Board always discusses issues as they arise and will discuss an idea until everyone is ready to move forward, otherwise it is deferred until everyone is ready. There is the risk of getting bogged down in the detail of matters, which can detract minds from the important issues.

Huka Pak has a number of different manuals, including those governing operations, environment and OSH requirements. Contained within these manuals are procedures, which also outline training requirements. Huka Pak is ISO accredited and uses an insurance broker to identify the necessary policies it should have in place. Until recently there has been no director indemnity insurance because the business has always been sound and the organisation healthy. Now that the business is growing Huka Pak may look into it further.

Huka Pak operates a modest balance sheet. It likes to keep borrowing at a low level. For any projects with a high level risk a SWOT analysis is conducted. All reporting is measured against a budget. There are also physical performance measures such as the number of trays processed. While this has been climbing, Huka Pak aims to get to a point where it is processing 7 million trays per year. Huka Pak also has a Relationship and Finance Manager who is responsible for keeping the numbers in check and relationships maintained.

Operations

CMS has a perpetual management contract with Huka Pak. CMS is answerable to the Huka Pak Board under that contract which contains exit provisions for non-performance and negligence. In the first year of the management contract an external advisor was bought in to review the performance of CMS under the contract. However, after a year, confidence in the joint venture partner had been established and CMS has not had a performance review since.

CMS uses an auditor who reviews all financial calculations. Management performance is reviewed by comparing the performance of Huka Pak to equivalent companies. It is easy to compare Huka Pak's profit margins with other companies and to set benchmarks to obtain the level of profitability that wellperforming packing and cool storage kiwifruit companies are achieving.

Huka Pak contracts CMS to provide management services. CMS employs the General Manager or quasi- CEO and eleven managers operating in specific divisions who are paid a salary. The management services contract provides a base management fee but it also has a profit incentive. All managers have key performance indicators specific to their areas of responsibility, and tied to their salaries. An additional 10% of their base salary is offered as an incentive to drive the profit of the company.

The General Manager's role is to provide reports to the growers and Huka Pak by being an interface between Huka Pak and its interests. The General Manager also provides CEO resources for the Directors of the Growers Cooperative.

Financial Summary - Te Awanui Huka Pak