Case Study: Dairy and Cheese Manufacturer Turnaround Advisor

Overview

Cedar Croft Consulting, in its capacity as Turnaround Advisor, assessed the finances and operations of the company, and worked with management to develop a recovery plan that improved operating performance by $13 million per annum. The recovery plan was approved by the Company’s Board of Directors and supported by its senior lender.

The Company

Based in the US Midwest, this cooperative-owned Company purchases raw milk from local dairy farms, including its member owners and performs milk processing and cheese manufacturing in two facilities located 180 miles apart. This business was founded in 1908 and employed 250 persons, and annual revenues were approximately $250 million.

Situation

Three years prior the Company purchased a decommissioned whey processing facility and planned to restart the facility and transfer certain processing and manufacturing operations from the existing facility. Capital expenditures relating to the recommissioning of the new facility exceeded plan, and transportation costs for the movement of raw materials and finished goods between the two facilities were excessive. These factors, and unfavorable movement in the commodity pricing of milk and cheese caused the company to incur significant losses in the prior two years. The capital expenditures and operating losses exhausted all of the members’ equity, and the Company found itself in violation of covenants with its senior lender, and in an over advance position.

A new General Manager had been engaged by the Company three months prior and expressed uncertainty in staying once he became aware of the financial situation.

The senior lender entered into a short-term forbearance agreement with the Company, with one of the conditions that an appropriate turnaround management consulting firm be engaged to assist the Company in dealing with the existing financial and operating challenges, and to assist in the Company in developing a plan to restore viability. The Company interviewed a number of firms, and selected Cedar Croft Consulting.

Cedar Croft’s Approach

To commence the engagement, Cedar Croft conducted a Rapid Business Assessment of the Company, which included an overview of the purchasing, processing and manufacturing, materials handling, sales, and finance operations at both facilities and discussions with all key management and personnel. Within two weeks, Cedar Croft’s initial findings and recommendations were presented to Company’s management and Board of Directors, and shared with the senior lender.

The key recommendations in the Rapid Business Assessment were:

  1. reduce raw milk purchases from non-member providers;
  2. enter into swap purchase and supply agreements with other dairies to reduce transportation costs;
  3. reduce the production of natural cheese to customer demand levels and sell off excess inventory;
  4. implement manufacturing best practices to improve quality and yield metrics in cheese production;
  5. assess all sales channels and make revisions; and
  6. develop a detailed recovery plan to implement these recommendations, and identify the financing required.

The recommendations were approved by the Company’s Board of Directors and endorsed by the senior lender. Cedar Croft continued to be engaged to assist in the development and initial implementation of the detailed recovery plan, and the forbearance agreement with the senior lender was extended.

Over the next three months, Cedar Croft worked with the Company’s management team to implement operational improvements, manage the cash, maintain communication with the senior lender, and to detail a recovery plan that would restore viability to the Company.

At the end of this three-month period, Cedar Croft and Company management presented a detailed recovery plan to the Board of Directors mapping a path to annual profit improvements of $13 million achievable over the next eighteen months and identifying the financing requirements to support the plan. This recovery plan was approved by the Board of Directors, and adopted by the senior lender, allowing the Company to enter into a long-term financing agreement with its lender.

Engagement Key Steps

  1. Implemented a weekly communication protocol to provide continuous updates to the Board of Directors and the senior lender throughout the engagement.
  2. A 13-week cash flow forecast was prepared, and procedures put in place to update the forecast each week.
  3. Cash conservation policies were developed and implement to allow the Company to comply with the forbearance agreement in place with the senior lender.
  4. Negotiated revisions to the forbearance agreement with the senior lender when required.
  5. Coordinated implementation of manufacturing and material handling best practices to achieve immediate operational improvements.
  6. Transferred certain processing activities from one facility to the other to achieve improved efficiencies.
  7. Established purchasing and selling price parameters pegged to the public commodity prices of milk and natural cheese.
  8. Optimized quantities and pricing relating to the swapping agreements with third party dairies.
  9. Conducted a gross profit review by major customer and built a sales forecasting and production scheduling model.
  10. Worked closely with Company management to develop a detailed recovery plan with identifiable milestones that had the buy-in from key management and staff.
  11. Ensured the recovery plan was supportable by the senior lender.

Results

  1. The Company’s operations were stabilized, and financing put in place to support the Recovery Plan, ensuring continued employment for 250 persons.
  2. The cooperative members were able to continue to sell their milk to the Company at competitive prices.
  3. The revised positive prospects for the Company convinced the General Manager to stay with the Company long term to implement the remaining steps of the Recovery Plan.
  4. The Company ultimately completed its Recovery Plan and expanded to become a profitable $600 million cooperative employing over 500 people and led by the same General Manager.