By Roger Armstrong
Tuesday 1st April 2003
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Think back to the old Fletcher Challenge, which destroyed huge value through expensive acquisitions (UK Paper was the worst) and then preoccupied itself with complex financial engineering to compensate. Carter Holt Harvey, before the involvement of International Paper, arguably was also poorly run. Top management at one stage instructed its divisions to behave "as if" the currency was significantly lower than the actual rate. Who knows how much product was sold for less than cost as a result. Both Fletcher Challenge and Carter Holt Harvey took themselves to the edge of solvency a couple of times.
The errors of Brierley Investments are well documented and in more recent times Air New Zealand and Telecom have skewered themselves with bad acquisitions in Australia. Large investment/property companies such as Equiticorp, Chase and Robert Jones Investments, as well as many smaller such companies, self-destructed. BNZ and NZI didn't fare much better in the same era.
It's not surprising that New Zealand managers were not up to much. We had a heavily regulated economy, so key skills were sucking up to politicians and working around regulations. Deregulation and the accompanying euphoria unfortunately created a large dose of overconfidence among our limited managers. Many New Zealand companies headed offshore where the realities of buying bad businesses at big prices soon hit New Zealand shareholders hard.
The good news is that there is a new breed of capable manager in New Zealand who appears a lot more focused on shareholder value - driving down capital employed, reducing costs and pricing - and who is more cautious with the company chequebook. The import of overseas talent has helped, but we have also much home-grown talent emerging.
Here are the guys who have caught my attention recently (apologies to those good managers I haven't stumbled across):
John Fellett, Sky TV managing director, is originally a US import but looks to have settled into the Kiwi way. He has brought a strong value focus to the pay television company, which previously appeared to chase subscriber growth through heavily subsidised deals at the expense of shareholder value. Subscriber growth has prospered even with higher install and subscription prices, largely because of improvements in the product and its image. Fellett is thought to be a hard nut in negotiating lower prices from content providers - a key determinant of value for shareholders. The share price has floundered due to deflation of media and technology stocks, but the business has been much improved.
Mike Daniell at Fisher & Paykel Healthcare hasn't enjoyed share market success as a separately listed company either, but blame that on the currency. Look at the long-term record that saw EBIT grow from $3 million to $80 million in a 10-year period under Daniell's stewardship. The company continues to power along in a sales sense, with US revenues up 19% in the latest quarter. The success is due to a great two-pronged strategy. First, FPH largely controls its own distribution, which has brought increased penetration. Most importantly, it has developed innovative products in profitable niches. Sleep apnoea products, which the company did not make 10 years ago, now account for 43% of sales.
Alan James has overseen fantastic shareholder returns at carpet manufacturer Cavalier (up fourfold in the past five years) through the winding up of the poor-returning E Lichenstein wool trading business and weaving improved profits out of the core carpet operation. By introducing extra brands at both the top and the bottom of the market, the company has increased its market share. Tight capital management has seen returns on shareholder funds move up from around 13% in the 90s to over 30%.
Jon Mayson's arrival at Port of Tauranga corresponded with the port's scalping of its Auckland's neighbour in the container trade. The implementation of the inland port strategy in South Auckland was probably the key move, but generally Mayson has shown ability in his structuring of the workforce and relationships with key players such as Fonterra, the shipping lines and the forestry companies.
Ralph Waters joined Fletcher Building in 2001 and has taken the share price from $2.35 to $3.60. He stopped the pattern of stupid acquisitions, concentrated on reducing costs and bought a good Australian business, Laminex, at an attractive price, with synergy benefits available.
Stephen Barrett, managing director of energy company Contact, has kept a low profile but Contact's strategy has been spot on. The most notable success has been the ongoing building of the retail client base through sensible positioning of the tariff structure. Contact has avoided high-priced acquisitions, and the recent purchase of the Taranaki Combined Cycle generating plant together with gas entitlements off NGC adds further certainty of supply.
Stephen Tindall deserves huge credit for The Warehouse's dominance in the New Zealand retail market. He had vision and balls (he added 50% to the discount retailer's total floor area in one year when he saw Kmart coming) and one unheralded skill was collecting an extremely capable team of individuals. Neil Plummer, Glen Inger, Brent Waldren and later Greg Muir were a hugely talented group of executives during the company's development.
Evan Davies headed Sky City Casino during its boom period. Arguably some of the acquisitions have been a little disappointing (see "Taking a punt", March), but the company has run its core Auckland operation superbly. One suspects close attention to detail in the selection and layout of gaming machines and tables plus the cunning use of promotions and loyalty schemes to stimulate off-peak periods have been major drivers of success.
Ross Green, since taking control of innovative electric motor company Wellington Drive Technologies, has overseen a huge improvement in the intellectual property, focused the group on the big opportunities and adjusted the licensing strategy to move into small-scale manufacturing with some success.
Other newcomers starting to fashion a strong record are:
John Bongard at Fisher & Paykel Appliances has kept tight control on capital expenditure, lowered costs and improved distribution reach in the US and Europe.
Kevin Kilpatrick at manufacturing systems designer Scott Technology has moved to work capacity harder and improve turnaround times. The diversification of the Dunedin plant and the recently acquired Auckland business away from the white goods industry appears sensible and well executed to date.
Ralph Norris appears to have done a great job implementing Air New Zealand's new budget strategy domestically, and, from the shareholders' point-of-view, you can't argue with his courting of Qantas.
Rod Duke has produced nothing but positive surprises since listing retailer Briscoe. His key skill appears to be in keeping the retail offer interesting.
While the New Zealand share market has had a poor performance record over the past two decades, a good percentage of the under-performance can be put down to big management stuff-ups. With the improving talent base we are now seeing, there is every indication that investors will fare better in the years to come.
Roger Armstrong is an independent financial analyst. Disclosure of interest: Roger owns shares in Wellington Drive Technologies
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