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Monday, November 23, 2015

The Incredible Peter Muntford

Meet Peter Mountford: SA’s most underrated CEO, from R350m to R10bn in 6yrs

Nov 23 2015 06:58 
The most valuable accolades for any CEO are those spontaneously offered by investment professionals. Over dinner last week, two of SA’s leading money managers,Cy Jacobs (36One) and Duncan Artus (Allan Gray)named Super Group’s Peter Mountford as SA’s most under-rated CEO.
To find out why, we invited Mountford into the Biznews studio to tell us his story – one which explains how, in just six years, he managed to transform a near bankrupt business capitalised at just R350m into a group now worth R10bn.
It’s a tale of a business scientist backed by a visionary directorate drawing on dollops of wisdom generously shared by business giants Meyer Kahn and Bill Lynch. – Alec Hogg
Alec Hogg was in Cape Town last week, he chatted to two of the biggest asset managers in the country and they were, without question, singing the praises of the man sitting opposite him – Peter Mountford, Chief Executive of Super Group. Doing the research into what he has achieved at the company in the last six years, leaves him in no doubt that they weren’t fibbing in their view that he is the most underrated Chief Executive on the JSE. Alec Hogg finds out more about Peter Mountford, who previously worked at SABMiller.

Correct. That’s right Alec, and thanks for the kind introduction. Yes, I did. The bulk of my career post the profession was with SABMiller. Initially, in Group Financial-type roles, and then, when we purchased Lion Match I was down in Lion Match as a Group Financial Director.
I ultimately ended up as CEO of Ancilliary Beverages, which was the Appletiser/Ceres (in those days)/LiquiFruit/Valpré type of array of products.

It’s a good learning school, isn’t it?

Fantastic. An absolutely, fantastic organisation and some wonderful people that led it in those days.

It would be interesting to find out how many of the CEOs on the JSE are ex-SABMiller. Someone who comes to mind is Kevin Hedderwick. He said he learned everything he knew from SABMiller and then applied it to Fast Foods. Is there much that you learned there, which you applied to supply chain management?

Yes. Absolutely. There was a lot. I was very lucky in my time at SABMiller to almost, have two mentors. Laurie van der Watt whom, in the early days headed up the beer division and later on, headed up all the industrial interests of SAB when they included Afcol, the [inaudible 01:38], Edgars, Southern Sun, Lion Matches, and the other one of course, was Meyer Khan. A lot of what I think I am today does emanate from those days, absolutely.

I remember Meyer Khan in the engagements I had with him before he retired – first, as CEO and then as chairperson – as always being really funny. He always had a turn of phrase. Was he like that ‘outside of the media eye’?
Absolutely, he always had a sense of humour. He always brought a lightness to the occasion. A great businessman. I enjoyed every moment with him but we had fun and that, I think was one of the differentiators at SAB. It was a great family, great culture, and a lot of fun was had, particularly under Meyer.

This is your second spell at Super Group but you left SAB to go to Super Group. What was created or what opened up for you there?

I think in the early days of Super Group, in the late 90’s when I was there, there was a strong move towards a fourth party logistics-type solution, which inherently is a technology type solution, without investing in underlying assets per say.
In a sense, I probably disagreed with that strategy, in a very nice way, and I had met Bill Lynch and he made an offer to go and join Imperial, so for my sins – I did go to one of the competitors for an 8 year-odd period.
But, the move from SAB to Super Group in the first place.

Yes, so post SAB, I was with the Rand Merchant Bank and Super Group was going through a listing. I met some of the management at Super Group.
They felt they’d like to bring in some more financial skills and I decided this looked like a very interesting opportunity, to go with something that was a fairly, newly listed at that stage.
We jumped the gun a little. You went into Super Group at the listing, or around listing time, you didn’t like, in time, what strategy they were taking. You moved off to a competitor. Worked with Bill Lynch.

Yes, I did.

World Entrepreneur of the year in 2006.

Absolutely.

Again, I knew him as a person who engages a lot with the media and engaged a lot with me. What was he like outside of the spotlight?

Also another wonderful man. Obviously, a more serious character than Meyer Khan, in a sense, but I think one learns a lot from all of these individuals, and there are many things that we do, to this day that do emanate from Bill.
Bill was a strong believer, ironically, in the investment and underlying assets and liabilities.
Personally, I’ve always believed property is an important core within all of that, and I think eventually towards the end, Bill agreed with that very, strongly too but there are elements to our acquisition strategy that derived from Bill and some of the views he held, at that stage.

A fascinating mentor that you had through your career.

Yes.

Then off you go, back to Super Group in April 2008. What had changed to make it attractive?
Well, I think the opportunity. Super Group had expanded quite significantly. They had got into difficulty across some of their retail interests, which was Auto Zone and Mica. They had gone into the importation assembly of a range of Chinese trucks, material handling equipment, and the like.
That wasn’t performing well and I think the shareholders were looking for change, in terms of management. I think there was a fantastic opportunity to rebuild the business. My initial focus was in supply chain but of course, the opportunity did really exist to regenerate that business.

Was Larry Lipschitz out of the picture at this point?

No, Larry was there, initially and it wasn’t clear whether Larry would stay or not, at that point in time. There was a possibility, (I guess) that he might have even stayed on in a non-executive role into the future.

Was he missed or was the board very happy to get rid of him?

I think it was a very difficult time. I think it was very difficult to blame any one individual on the situation that arose there but we did go through significant change.
Shareholders were very disappointed. The business was losing significant amounts of money. We had got to a highly leveraged balance sheet and I think shareholders were looking for a significant change across management.

Well the share price had tanked. It got down to as low as 50 cents, at which you did the rights issue.

Correct.

At that time, according to your annual report, going back to 2009 when you took over. The market capitalization was R350m. Now, by way of context, I see the deal that you’ve just secured is R1.1bn (the German deal).

Yes.
You’ve come an enormously long way in those six years. Did you think it was possible that you would be a R10bn company, from R350m, just six years ago?

You know, at the end of the day I really did believe everything was possible but it was a long, hard road ahead. Clearly, as you say, our market capitalization was R350m. We had R4.6bn of borrowings at that point in time. We had significantly underperforming businesses.
The loss in the year to June 2009, I think was about R1.5bn (pre-tax), so there was a huge emphasis on turning around the businesses. Selling underperforming assets, optimizing cost structures, regenerating marketing capabilities and many, many other aspects. Yes, absolutely I believed we could get there.
What made you confident that you could do it because you became CEO, on the 29th July 2009, so the ball was passed to you? Some would have thought a hospital pass. Clearly, you felt it wasn’t.

No, I really believed, at the end of the day we could exit the underperforming assets. I thought some of those assets would have keen purchases, where perhaps the businesses are more focused in those particular niches.
There was a very definite strategy to exit those assets, optimize cash flow, regenerate the supply chain business, and I really believed we had the right management in many of our divisions, and we still do have those individuals today.
You could see we had a very, small dealerships division but a very, strong management team and they’ve proven it. Growing from 15 dealerships with an operating margin percentage of sales of under one-and-a-half percent then, to three percent today and they have 64-odd dealerships that they manage, really on a worldwide basis.

Generating about half your turnover already.

Yes, they of course, are very big in turnover. The high-ticket value of the underlying vehicles but you know the same applied… We had a very, strong management team in Fleet Africa. We had a good management team in SG Fleet in Australia and we’ve really managed to grow that very nicely, so there was a strong belief that we could turn it around.
Anecdotally, my son said to me, “Why didn’t you buy more shares, dad? Did you not believe in yourself?” I said you know it’s not as simple as that. There’s always luck. Of course, there is luck. We might not have been able to get the industrial products division away.
We might have struggled with some of the sales on Auto Zone, Mica or other, and things could have taken a lot longer. I inherently did believe in it, yes.

You looked at the business you said the old chestnuts of fix sell or close.
Correct.

Of the business that existed, (that you took over), compared with the business that exists today, what percentage of what was around then is still there now?

All right, so at that time there were probably five divisions. The industrial products division, which was building and assembling a range of Chinese trucks and material handling equipment and the like – it doesn’t exist today. That was the significant loss leader.
The retail interests, in the form of Auto Zone and Mica – we did sell those as well, so we really focused on three core divisions, the supply chain, fleet leads, and the dealerships.
Those have grown obviously, significantly over the last three or four years, and I think certainly the cornerstones of those businesses existed right back in those days but there were many strategic directions we wanted to enter.
Such as distribution of fast foods, which is such a high-growth area worldwide, the pharmaceutical distribution, growth in industrial products distribution, and the like?

You’ve spoken about the management teams there. You did bring, however, a new chief financial officer.

Yes, we did.

How is that important to have the bean counter at the top of the pile because you do work very closely, being a chartered accountant yourself, but the person who runs the financial division. How important is it in a turnaround strategy to have the right person in charge there?

It’s absolutely, essential. I think one of the things that, in the early days, I think it took us almost six months to get annual reports out. It was very, difficult to see a dashboard in an adequate time, and on a monthly basis. Colin Brown has done an absolutely, excellent job, literally.
We have dashboards where we can see our turnover, forward sales on a daily basis. We can report within a few days a month end and obviously, we get our get financial statements out within two months, of year-ends and half years.
I think he’s made a huge contribution across every other area of administration, including IT, tax returns, and etcetera. Today we are fully up-to-date and we were a long way off that point six years ago.
Just to have a look at the way the market cap has grown over that period. We did mention R350m. In 2010, a year into your running of the business, you went to shareholders and you asked them to put new money into the company.

Yes.

In fact, to put in R1.2bn in a company that was worth only R350m at the time. That must have been a tough sell.

That was a very, tough sell and I guess in many ways, looking back we probably undervalued Super Group significantly, within that rights issue. It did make a significant contribution but at the same time, we also realized about R1.6bn out of disposals of the industrial products divisions, and the retail interests, and various other smaller interests.
Of course, by that time we had driven significant costs out of the business. By way of example – we had an African logistics head office that we cascaded totally into the South African management team, and that knocked R90m of overheads out, in an annualized basis.

Why wasn’t it done before?

I think the Group probably had a very, high growth vision and I think probably, the under-performance that came through in the industrial products division caught the Group a little bit by surprise. A lot of the structures had been set up for something that was just so much bigger than it was, at that point in time.
In a sense, philosophically, we have a view, certainly as a logistics Group that you almost have to be absolutely optimized and hopefully best of class, in technology and efficiency.
You also have to be a low cost producer, and that’s a very, big part of what I believe in – is to drive the cost out of the organization and make sure that you are competitive. In logistics, ultimately the price is what matters.
Peter, an interesting theme that goes through this is the chairman, Phil Vallet.

Right.

He’s 69 years old, so he’s been around the block a number of times, but he was there before and after.

Yes.

When you talk to him around the time of this is the turnaround strategy that I want to put in place. Was he a driver of this through the board process? Was he frustrated at the way things had been going before? Quite often one underestimates the role that a chairperson would play.
Yes, one of the things I really admire about Phil, as you say he was there in the times that were difficult. Phil appointed me, largely, to this position. Obviously, in conjunction with shareholders – he was fantastic. Phil was absolutely, supportive from the first day. He’s been an absolutely, brilliant chairperson.
I think much of what we have achieved to date is as a result of his support and belief in the management team, so that has really been the catalyst that has made this turnaround possible.

What makes him a brilliant chairperson?

He’s one of the really, nice human beings in the world. I think he’s a person that handles people very, very well. He handles conflict well. He’s a person who’s pragmatic. He’s prepared to back people and stand by them. He’s a person that, quite frankly would die in the trenches with you.
I think those are all of the things that have been my primary motivation. My loyalty to Philip is huge, and he’s become a very, good personal friend and I just don’t think our road could have been anything like as efficient, without Philip’s support at board level.

It was interesting too that the board brought in another old bullet, and I’m sure he won’t mind me calling him that. John Newbury. He’s 73 today.

Right.

Who used to run Nissan, or as it was called Automakers back in those days? Was this with the intention…? Did you already know when John came in that you were going to drive more aggressively into the dealership area, which has been so successful for you?
Yes, we weren’t absolutely definitive as to the strong growth we would in fact, drive into the dealerships division but we certainly saw John as bringing a wealth of motor industry experience and obviously, he’s highly supportive to that type of direction.
I think people would argue – we brought a few sort of wise heads to the table. The other one, of course, was Neil Davies. Quite frankly, across David Rose, Neil Davies, and John Newbury, and you could argue all of them are of the older members of our board.
Their contribution was huge. Neil was, in the early days, a colleague of mine at SAB. I don’t know if one knows, Neil was a sort of Group financial manager in SAB in his early days, before going to Altech, and I think he’s always brought a lot of wisdom to us, in terms of deal evaluation and the likes. Again, a massive contribution from all of those people.

You had support at the board level. You had good management teams in between. It seems the only thing that was wrong then, was the strategy.

Correct, I think so. It was clear that we had to get out of those underperforming assets very quickly. I know very little about the building industry but as an example, a very quick analysis of Mica at the time showed ‘here’s a business that’s 80% DIY and 20% building material’.
The successful businesses are the inverse. Here’s a business with very expensive leases in core major shopping centres such as the Morningside Wedge or Tygervalley, whereas the successful competitors were in adjacent, ancilliary, and far cheaper areas.
In addition, we had a strong reservation about the strategy that then came out, which was purely a royalty as opposed to a central procurement strategy. Looking at some of those businesses, we just did not see a strategic fit at all or necessarily, a strategic advantage in the business model. The exit of those businesses became very important in the solution.

Peter, you strike me as a business scientist rather than somebody who likes to fly by the seat of their pants. How do you weld the entrepreneurial requirements, which are really needed in this business with business science?
You mentioned one of the people in my life – Bill Lynch. He had a significant influence. At the end of the day, Bill was a scientist. Bill was probably one of the strongest financial people you could ever meet and I don’t think you can avoid those disciplines.
Yes, I am entrepreneurial but I tend to go back to the financial fundamentals in every sense of the word, in all of our analyses. Hopefully, we’re relatively conservative. We have huge reservations about overpaying in these acquisitions.
We have a strong belief in cash generation capability. We have a strong belief in return on net assets and we do place store {perhaps not as definitively as Bill did in its time) on the underlying net asset value in relation to deals of this sort. In the final analysis, we’re probably a very financial/commercially-driven business about decision-making.

It’s also interesting that you started doing share buy-backs, which can be a very strong [and a very good] thing if you’re buying those shares back cheap but of course, the opposite occurs if you overpay for it. How do you work through your business in order to know that the time to purchase is now?

You’re absolutely right. One of the things we did realise is once we got the business portfolio stabilized, exited the underperforming businesses, and optimized our cash-flow performance we got to a situation where we were getting to very low leverage.
Eventually, after three/four years of the cycle, we had zero borrowings and that’s before we went into the acquisitive cycle. Looking at those types of fundamentals, we have placed significant emphasis on growing into businesses, which all support that type of growth into the future.

That is interesting. R4.6bn…

R4.6bn at the peak, yes.
Debt that you inherited… You worked away at that, sold off things, and had the shareholders help you out by injecting a little bit of new capital. You got to a point where you had no more debt. You used the cash to buy back your own shares and then, moved into the cycle you’re in right now, which is buying companies. The first big one was (and I think we need to spend a bit of time on your globalization) the R614m that you paid for a company in the UK last year, called Allan Ford).

Back to your question on share buy-backs: I think what we’ve said in our capital rationalization/allocation process is that our first opportunity is to look at suitable acquisitions.
In a scenario where they are not necessary there or we believe that our own share represented the obvious value opportunity, we’ve purchased back our own shares.
In the early days (as you rightly say), I think of times where we bought shares back at something like 80 cents and then later on, R8.00/R16.00 etcetera. Today, those look like really good calls but of course, at the time that’s where the share price was running.

Where is the share price at the moment?

It’s at R35.00 – just over R35.40 today.

That’s probably the best investment you could have made at 80 cents vs R35.00 today. You get to a point though, where the shares start getting properly valued and then you have to look at different options.

Correct. In a sense, that’s what I’m saying. We tend to look at our share, the underlying value that we understand so inherently within our share versus opportunities to expand and really, do optimise across those two capital allocation models.

Tell us about how you found, and why you decided to buy, Allan Ford in the UK.
One of the things we had said is, “We are ambitious about growing three core pillars of our business.” We describe ourselves as a mobility business with core pillars in supply chain fleet lease and dealerships, and we were always ambitious about growing those three elements across Australasia where obviously, we have a significant business base as well as the UK and Europe.
We had a really good look at Australasia and in our assessment, concluded that realistically, we’d prefer to grow our fleet lease businesses there with the possibility of supplementing with supply chain businesses. We were not convinced about the necessity of a dealership-type business model in Australia, per se.
Looking at the UK, the other conclusion that came to mind is that we would probably focus on growing our fleet lease businesses organically in the UK, but dealerships represented a very interesting opportunity.

We looked at a lot there and we really did want to focus in mainstream brands so when Allan Ford and Kia came up, that was exactly the type of profile in terms of brands, which we’re after.
Obviously, Ford has the major market share in the United Kingdom and Allan Ford and Kia really does run in the heartland that runs down from Birmingham, Warwick, and Coventry down into Essex, which is the heartland of Ford in terms of head offices and Dagenham and the old factories.
Across to Swindon and Bath as well. It was very strong territory in terms of brands of that nature. It suited our model perfectly and of course, it always does come down to management – a strong management team that we believe will deliver and grow that business.

They’ve been with you for a few months now.

Yes, they have.

Any nasty surprises?

No nasty surprises. They’ve performed above expectation, since we acquired the business. A very strong financial director in place, very strong management, and quite frankly, we would like to build on that business base. The business will generate cash and represent an opportunity to grow in the United Kingdom, from that management base.

It’s quite incredible to think that, as we mentioned right at the outset of this interview, that you’ve also just concluded [this month, indeed] a more than R1bn acquisition in Germany. Not in dealerships, though.
Right. A lot of the focus for us in South Africa and internationally, has been supply chain. When we identified Europe as a market of interest (and most particularly, German for obvious reasons – by far the strongest economy), we sat down with Macquarie Bank.
We worked through an analysis of everything we could see that literally moved in supply chain in Germany and as long as three years ago, identified In Time Express Logistics as a really good fit for Super Group.
Fundamentally, doing time-critical delivery services for the automotive industry, hospitals, blood banks, and military users across Germany and Eastern Europe as well. We in South Africa, serve many of those clients and some of our supply chain businesses in South Africa do exactly the same business as In time does. At that time, it wasn’t for sale.

It was in a private equity fund, called Equi-stone, which is the old Barclays Private Equity. We approached them. They took note of our interest and when their fund lives came up about 18 months later, they started talking to us and we were thrilled to get the business across the line.
Very important for us in international investment is that the management stay on board and that they have a very significant equity stake. In the early days of that transaction, it was 100% disposal.
At our first meeting with management, an item I raised with them is that ideally, we’d like them to stay with a significant portion of their investment. Within ten minutes of that meeting, they said they wanted to stay with all of their investment. That was very heartening and everything fell into place on that transaction.
What is it about Germany that so attracts South African logistics companies? We’ve seen Imperial are very big in Germany, as you’re well aware. Bidvest are big there as well and now you’re doing this sizeable transaction. What is it about that geography?

I think it’s an obvious economy in Europe. There’s obviously such a massive manufacturing base in Germany and therefore, logistics is such a big part of their economy. What you’ve seen as well is that Germany’s probably a gateway to Eastern Europe and a lot of manufacturing facilities have moved into Czechoslovakia, Hungary, and Poland etcetera.
In fact, In Time Logistics have moved branch offices with those expansions where major motor manufacturers and component manufacturers have moved to Eastern Europe. I think Germany represents a very strong manufacturing base and a strong portal entry into Eastern Europe and therefore, is an obvious logistics environment.
The other element for South Africans – and we’re an interesting mix of First and Third World – is that I think Germany ticks all the boxes in terms of efficiency, work ethic, and many of the things that quite frankly, do exist in South Africa and exists strongly in Germany.

There is a very good cultural fit for us there as well.

Work ethic. Is this in South Africa?

I like to think so. It’s not an all-encompassing comment, but I like to think it is there in many sectors still.

You have a lot of people who work at the Group (more than 8.5-thousand). We often hear from South African business leaders that they don’t like the labour legislation, etcetera. How do you work around those challenges?
We haven’t had too many problems in terms of labour legislation per se. We’ve had a fantastic relationship with our employees in South Africa.
Quite frankly, across many of our entities, union representation is way below the parameters that you would normally negotiate with, but our core businesses are part of the Road Freight Association (so they’re part of the Bargaining Council). We’ve been very happy with our staff in South Africa and have tremendous relationship, to be honest.

How do you do that? How do you make it so that when there are these destructive strikes, you aren’t singled out for treatment?

Obviously, it does come back to a mutual respect for the staff concerned. It comes back to the type of remuneration levels that we apply. We’re way above the minimum, etcetera. It comes back to the type of culture that the organisation has in terms of respect for people.
We did quite an interesting broad based black empowerment deal where our South African businesses were all wrapped into a single entity. We issued 20.1 percent of the shares in that entity to our formerly disadvantaged staff, and so they are stakeholders today.
The other day, it was heartening to look at the valuation. I looked at the valuation when these shares were issued, which was all of about two years ago to where it is today and it has grown by R78m-odd. I think it’s a fantastic scheme for the individual concerned. That’s the net equity in terms of value over borrowings.

I think it’s about the culture of mutual respect for those people and a drive to a common goal, which has served us very well.

It’s interesting that that’s worked for you. Again, Imperial (your old stamping ground) – Bill Lynch’s Ukhamba was something he felt very strongly about and that has also been extremely successful.

Yes. I think it has. In many ways, Imperial and Super Group are in the same boat in a labour sense, in that most of our businesses are part of the Road Freight Association and therefore, subject to the Bargaining Council. I think that both of those organisations make significant contributions to the wage negotiation, as does some of the superb risk resources in the Road Freight Association.
Perhaps in some ways for us, as challenging as the elements of BEE have been, which as you know, some aspects of those are making things a little bit difficult in South Africa… Again, we embrace it conceptually.
Some quick answers. Your favourite role model.

It would probably have to be the traditional Warren Buffett because I think he’s a fundamentalist and his assessment of business really does appeal to me.

Capital allocation is clearly something that’s uppermost in your thoughts.

Correct. Absolutely.

Your favourite vehicle/motor car. A tough one, this one.

We have so many dealerships. I can’t go for one but I really love the Mercedes Benz products and of course, the Landrover products are fantastic, as is Audi.

Favourite book.

I tend to read novels so I’m a bit of a Wilbur Smith fan. I rather enjoy some of Wilbur Smith’s works and then a mixture of business books as well. ‘How to succeed’ and others.

Favourite leader: living or dead.

I’d say Margaret Thatcher.
That’s an interesting one.

Yes. I just think she did such a fantastic job. I think she took a British economy that was really in tatters and turned it around. I think the saddest thing today is that she’s not adequately respected for what she did in Britain and that really was to turn that economy around and turn the culture around. She’s probably the world icon whom I most admire.
Favourite holiday destination.

St. Francis Bay in South Africa.

Do you have a property there?

Yes, I do.

Do you know Mike Wylie who has a property there?

I do know Mike Wylie. Yes.

A very small community there.

Yes, it’s a very small community but it’s very close to my heart and certainly, my favourite destination in the world.

Your favourite rugby player.

Ever – Danie Gerber. In my assessment, the greatest centre that I ever saw. Then I have to go with one of my good friends Garth Wright, as a great favourite because I think he’s such an awesome human being as well.

Of those who are playing at the moment…

Eben Etzebeth. I think he’s absolutely fantastic. Damian De Allende is looking really good at the centre. Generally, the younger group currently in the Springbok team, really looked fantastic at the World Cup.

Apple or Android.

Apple.

Laptop-wise: do you use Apple products or do you use Windows?

I use Apple products.

If you were to say ‘Steve Jobs’ or ‘Bill Gates’…

Steve Jobs.

Peter Mountford, it’s been a privilege. Thank you for joining us today.
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