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    Perich family pays high price for Freedom

    The billionaire Perich family installed one of their own this week as chief executive of Freedom Foods, which is trying to get to the bottom of a $60 million inventory bungle.

    Michael Perich was this week made interim chief executive of Freedom Foods. Supplied

    Aug 8, 2020 – 12.00am

    Even in the midst of a major corporate clean-up, flying in a team of Sydney auditors to a regional Victorian town just as Melbourne's second COVID-19 wave gathered pace was a sure sign this was not business as usual.

    The Sydney-based PwC team, all braced to quarantine on their return home, were headed to Freedom Foods' Shepparton warehouses, just two hours from Melbourne. They were on a mission to find out exactly how the ASX-listed company let $60 million of UHT milk and cereals go off, forcing the company to destroy the stock.

    That's half the company's inventory, making it arguably the biggest stock bungle since Brambles lost million of pallets in 2002.

    Freedom, backed by the billionaire Perich family, is handling the mess as quietly as it can after admitting very publicly it had a big problem.

    The company is suspended from trading until October 30, and it has engaged lawyers, accountants and bankers to comb through its accounts and warehouses.

    There are some big questions surrounding this bungle: if the board didn't know about the piles of old stock, what else might they have missed? And how did it take until 2020 to realise out-of-date stock from 2017 was clogging the warehouses?

    Billionaire Rich Lister Tony Perich: "People have to be patient. The Perich family is 110 per cent behind Freedom Foods." Rob Homer

    Company insiders who spoke to AFR Weekend are divided on exactly how these thousands of pallets of out-of-date UHT milk and cereals piled up without being noticed, bypassing basic inventory controls, pest management protocols as well as both the internal and external audits.

    Freedom is now without a permanent chief executive, chief financial officer and much credibility.

    There's plenty of speculation and finger-pointing going on. Much of it is focused on departed CEO Rory Macleod and CFO Campbell Nicholas and their bonus structures, though others say executives further down the chain, who remain at the company, must also come under scrutiny.


    At the heart of it all is the billionaire Perich family, ranked 36th on the Financial Review Rich List, who built their fortune developing land around south-western Sydney.

    The family, which owns 54 per cent of Freedom, put their trust in a handful of long-serving executives and board members. They're now telling investors they are embarrassed, they got lazy and they can fix the company.

    (In fact, Tony Perich was previously so hands-off that proxy adviser CGI Glass Lewis recommended investors vote against his re-election as a director partly because he missed too many board meetings.)

    They are facing at least one unfair dismissal claim, a potential class action and a looming capital raising to underwrite. They are also in the uncomfortable situation of recommending to many family and friends a stock that lost nearly a quarter of its value in less than a week before being suspended amid concerns of accounting issues and mismanagement.

    They now must turn their minds to cleaning up, hiring a new executive team and rationalising business units on top of the very messy job of physically disposing of millions of litres of milk and tonnes of expensive packaging.

    On Thursday, Michael Perich – a former Freedom alternate director and executive at the family's dairy operations – was installed as interim chief executive on $750,000 a year.

    It's a move that shows the Perich family aren't backing away from the mess. The new interim chief is telling investors he's open to staying on if he does a "good job".

    It's hard to know where to start with Freedom's unravelling. In the final week it traded, things went very wrong, very fast.

    After Freedom said its chief executive would take a leave of absence, just a day after its CFO resigned, more than 21 million shares changed hands. (That compares with 1 million shares on a typical day.)

    Despite the rapid and concerning executive exits, a company spokesman said the board, chaired by Perry Gunner, didn't request a trading halt until it became aware on June 25 that there was information required to be disclosed to the ASX.

    But with hindsight, investors say red flags were there well before the executive shake-up.

    On its share price alone, Freedom looked like a winner. Shares had risen from about 35¢ when the Perich family bought in back in 2005 to above $5 a share, fuelled by a series of acquisitions and capital raisings.

    Its products, including Messy Monkey kids snacks and So Natural soy drinks, popped up on major supermarket shelves, and the company seemed to have successfully found a market in Asia. It went from a small company to a much larger one very quickly.

    Not every decision was perfect. Much has been made of the decision to sell a minority stake in The a2 Milk Company, but it seemed to be delivering on its core strategy and there was little attention given to whether its internal systems were keeping up with its growth.

    But despite the outward success, institutional investors were relatively scarce, quietly questioning the company's lack of cash earnings for at least two years, despite an impressive and growing brand portfolio, which also included Blue Diamond almond milk and Milk Lab.

    More recently, there were two more specific red flags.

    One, in mid-March, when the company announced it hadn't properly handled some options issues to executives, and then, in late May, when the business revealed it had written down $25 million of inventory, briefly explained as being due to obsolete and discontinued stock uncovered as the company consolidated its warehouses at Shepparton.

    Both suggested something wasn't quite right with Freedom's reporting systems.

    Freedom Foods chief executive Rory Macleod resigned on June 29 and left the business immediately - just days following the resignation of the company's CFO. Peter Braig


    It didn't rattle the market too much, nor apparently the directors. In early June, Ron, Tony and Michael Perich spent nearly $3.8 million buying more stock via Arrovest, their entity which holds their 53 per cent stake. Alternate director and Perich Group chief executive Tim Bryan spent more than $24,000 increasing his holding.

    But inside the company, then-chief financial officer Campbell Nicholas was warning that jobs would be lost unless the reason for the oversight could be uncovered.

    By June 23, Nicholas' warning proved prophetic. Freedom issued a four-sentence statement announcing that its CFO was resigning, effective immediately. There was no further explanation.

    The next day, the company said its long-serving chief executive, Rory MacLeod – described variously as "controlling", "personable" and with a "short temper" – was on leave, pending a further announcement.

    On June 25, another corporate update came through flagging an additional $35 million in obsolete stock – taking the total to a massive $60 million. The company also flagged the old stock couldn't be repurposed, and raised some accounting issues. The cost of goods had been carried forward as a capital item, when it should have been included as a cost of sales.

    At 5.15pm the following day, chairman Perry Gunner – now executive chairman – held an investor conference call, on which he admitted several times the company had no idea the extent of the problem. The call left the clear impression that Gunner, at least, was scrambling to understand what had happened.

    On the call, a shareholder accused the board of being "asleep at the wheel", to which Gunner replied that directors were expected to be able to rely on management, and certainly didn't do stocktakes themselves.

    Investors asked many questions that day but the board, which has since brought in PwC and Ashurt and Moelis, says it needs until the end of October before it will have the answers.

    Now, the focus is on how quickly the company can turn itself around. The questions still being asked are: Did the structure of the executive bonuses encourage management to focus on the wrong outcomes? Do the asset values on the books need to be recut? Have the plants been producing far more inventory than the company was actually moving?

    And, as the company is raked over, there's plenty of questions cropping up around culture, and what it says about how the company was led from the top.

    Several former staffers say Freedom was a strange place to work, where things operated quite differently from other companies where they had worked.

    One says that it was widely known that a senior executive's American Express credit card details were used by a number of managers to make purchases directly, and not put through normal purchase orders.

    The same source also says that a small IT company –without a formal contract – stores Freedom's data and has full domain access, leaving the company open to hacking or misuse of data (such as legal documents or recipes for its brands).

    For all its mistakes, Freedom still has its supporters, many of whom say its strong brands led by the right executives can perform.

    New independent director Jane McKellar, the head of the people and culture board committee, is officially leading the search for a new CEO.

    But really, it comes down to the Perich family.

    And Tony Perich, who has retreated to the cane sugar capital in Mackay, Queensland, to escape the NSW winter, tells AFR Weekend he's looking to the future and is prepared to fund it.

    "We are right behind it and it will get there, but people have to be patient," he says. "The Perich family is 110 per cent behind Freedom Foods. We will put some more money in it."

 
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