Player: Peter Mountford
Company: CEO, Super Group Holdings
Awards: EY Southern Africa World Entrepreneur Award 2016
Group Turnover: R30 billion for the 2017 financial year
Market Cap: R12 billion.
When Peter Mountford was asked to return to Super Group as CEO in 2009, it was to help the holding company regroup and find its way back to profitability. The business had lost its way. Super Group itself had annualised pre-tax losses of approximately R1,5 billion. Its borrowings had escalated to R4,3 billion and there was virtually no shareholder equity left in the business as a result of aggregated losses.
Something had to be done if the group was to survive. Sharks were circling the waters, looking for opportunities for a hostile takeover. Attrition and even death were imminent. The whole situation was a lesson that even large, profitable businesses can lose their way. It was time to make some changes.
Q: How did Super Group find itself in such a precarious position in 2009?
In a sense, the group had lost direction from 2006 to 2009. Our core businesses are supply chain, fleet lease and dealership businesses. We had lost sight of that and expanded into a series of industrial products businesses, which were importing and assembling a range of Chinese trucks, material handling equipment and so on. These businesses had underperformed and were losing R1 billion per annum.
We’d also gone into a number of retail and panel beating-type investments, which were also underperforming. Revenues were down, borrowings were up, and many of the group’s businesses were experiencing a cash squeeze. The group found itself under enormous pressure as a result.
Q: Why were these businesses performing so poorly?
Each of the businesses needs to be looked at in its own right. The material handling and trucking-type businesses were entering a highly competitive South Africa landscape.
Super Group entered the market through businesses that largely imported and assembled products, but were competing against strong manufactured products and brands in South Africa. They just weren’t getting critical mass. This resulted in overstocking issues, which meant the businesses in that space were in a cash squeeze.
In the retail environment, Mica hardware had seen a failure of systems, and in response to that the business had moved to a royalty-based model. The value proposition for a franchisee is central procurement, administration, stock control, creditors and payments and collections.
A royalty model didn’t add value for us or them. Mica had a loss level of R500 million. We focused on turning that around, and managed to do so, but we knew a change in direction was necessary as well.
We realised reasonable value on the sale of Mica, and the business could have worked within the group, but we also recognised that our core interests weren’t in franchised brands that had building material retail interests.
In coming back to the group we did an environmental scan that pinpointed Super Group’s core competencies, and these were supply chain, fleet leasing and dealerships.
Q: What were the key elements of the turnaround strategy?
In a nutshell, you need to reduce costs, bring down — or even eradicate — debt, increase cash flow and improve your focus.
We placed significant emphasis on cash generation and the need to get our balance sheet back to where it should be. At that stage, Super Group’s asset value was largely held across 16 lending banks. We needed to re-establish ownership of the underlying net assets of the business, which meant we needed to start making a profit.
We spent three years focused on regenerating our three core business pillars, highlighting the importance of cash generation. We managed to turn the group around to modest profitability — R150 million pre-tax profit by 2010. By 2012 the core group businesses were starting to perform well, and we had paid back all of our borrowings, were in a net cash position, and had managed to re-establish ownership of the underlying net assets of the business.
Q: What did rebuilding your core competencies entail?
First, and most importantly, it meant exiting areas that were not part of our core competencies. We immediately exited the industrial products division. This was a massive burning platform for us, losing over R1 billion per annum.
We were then able to realise some fairly reasonable cash injections via the disposal of AutoZone, which yielded over R400 million, and Mica Hardware, which over time realised over R230 million.
After we jettisoned some of our underperforming areas, we could now focus on rebuilding our core competencies.
We recognised that while the dealership model isn’t the most profitable area of our business, it does have an important role to play. In a mobility sense it’s complementary to both supply chain and fleet lease operations.
Focusing on driving operating margins
We had a strong management team in place and so we focused on driving our operating margins as a percentage of sales from lagging areas of 1,5% up to where we are today at 3,2%. We chose one area to focus our attention on, and that was it. We paid attention to the numbers, and how we could achieve the numbers we were looking for.
Within this context the dealership model becomes good. It’s relatively modest in a capital intensity sense, and we could leverage our other businesses off the dealerships. As a result, we’ve grown our dealership interests quite nicely.
By 2009 our supply chain businesses had lost a significant portion of their customer base. They had a failing fleet scenario, with large elements of their fleets parked off.
We needed to re-establish some of the management levels and layers that no longer existed — starting with marketing and new business development departments. At the time we hardly had the ability to respond to tenders. Because of cost-cutting a lot of those elements had fallen by the wayside.
Q: Once you had regained a measure of control over the business and were back in a cash positive position, what was the next step?
By 2012 we were in a position to enter a more expansionary phase, which gave us the ability, with a very strong balance sheet, to start looking at what new business areas we wanted to enter in South Africa and abroad.
We did not repeat Super Group’s mistake of the past, which was to enter into completely new territories. Instead, we focused on opportunities that played into our core strengths.
In South Africa we identified four key growth areas.
- Fast foods distribution. This is a high-growth area. Our first acquisition was Digistics, a company that provides end-to-end supply chain solutions to many of the major fast food distributors in South Africa, from procurement to freight forwarding and clearing, warehousing, distribution and even collecting debtors’ book on behalf of the franchisor. This was absolutely within our core.
- Fuels, hazardous chemicals and bulk powders. Up until that point we had largely left this environment unchallenged and in the hands of our competitors, who had a very strong position in this sector. We invested in Haulcon, which at the time was a failing group, rebranded the business as SG Bulk, and have built that up into a successful bulk cement powder, hazardous chemicals and fuels distribution-type business.
- The bottom end of the retail market. Most of the supply chain players in our environment are focused on top-end and mid-trade distribution. Top-end encompasses the big five retail groups, and mid-tier retailers like 7-Eleven and Spar. We felt there was an opportunity to focus on effective distribution into the garage forecourts, cafés and spaza-type environments. The initiative has worked well, and really got legs from 2009 onwards. Today it’s a business that does R2,3 billion annual turnover.
- Pharmaceutical and medical distribution. This seemed like a major opportunity for us, given Super Group’s market-leading technology capabilities. One of our businesses has promoted and implemented a range of warehouse management, transport planning and optimisation, and visibility systems that enable our clients to have complete supply chain visibility of their products, right down to any performance against a standard activity-time specification.
This capability is important in the pharmaceutical environment. We apply it in the automotive parts sector, but it offers huge value in pharmaceutical and medical environments, where lot, batch control and visibility of a product is essential.
This is an area where we see huge potential, but of our four growth areas, has been the least successful to date. We haven’t achieved the traction we expected, as we’ve only been able to grow organically, and have not made acquisitions in the sector.
A few acquisitions have come to market, but they’ve been priced at very high and, we believe, unsustainable multiples by some of our competitors. We continue to grow those businesses organically and that remains a strategic agenda item for us but we’re also vigilant in recognising when PE multiples aren’t working for us. Experience has taught us that you can end up over-investing in a business that doesn’t perform.
Q: How do you determine whether a business is a good investment or not?
One of the realities of the new accounting standards is that purchasing businesses at investment value above net asset value sets off an intangible, and those intangibles have to be amortised to the income statement over the useful life of the technologies in those businesses, or over the average life of contracts in those businesses.
There are no free lunches in the acquisition space now, and we will not look at deals that are diluted in terms of our earnings per share, or that look unsustainable relative to the underlying core contracts and outstanding periods on those contracts.
The same is true of dealerships. We will not buy dealerships through a multiple of economic cycles; there are sensible price-earning multiples for these types of businesses and we will stick to those parameters.
Q: What has been Super Group’s international growth path?
We’ve grown Super Group’s fleet in Australia, New Zealand and the UK, and invested into supply chain and dealership environments in Germany and the UK, respectively.
We’ve focused on areas we understand, and that require core time-critical distribution solutions, such as the automotive and medical industries in Germany.
Having an international footprint also mitigates our risk, from a currency perspective as well as market cycles.
Q: You’ve said that you believe in a small business culture with decisive business capabilities.
To be successful, I believe you need to retain a small business mindset. You need to be quick, decisive and entrepreneurial in your decision-making processes. We’ve resisted bogging the organisation down with administrative processes and documents, such as daily sales forecasts, daily order covers and daily cash flow forecasts.
We run a small executive team at group level, and keep our decision-making process highly efficient. We do read our financial dashboards carefully, but don’t get bogged down by bureaucracy for the sake of it. We’ve had a long and strong relationship with our non-executive directors, and have developed a mutual trust and understanding of our strategy and modus operandi, which has worked well because it allows us to make decisions quickly.
We’ve also carefully ensured that absolute management control is retained over all of the businesses within the group. Each business has a CEO who is directly accountable for all aspects of the businesses, removing the danger of a centralised decision-making process that undermines the entrepreneurial capabilities of businesses in various territories.
Bureaucratic matrix structures tend to be removed from the coal face; when that happens, the wrong decisions are made, which ultimately hurts the business.