IN 2001 Elders had net equity of $741 million and generated earnings per share of 13.2 cents, representing 11.1pc return on equity. The company’s market capitalisation was $734 million.
A decade later (2011) net equity was $605 million while earnings per share were -88.1 cents (ie. a loss). Return on equity, obviously negative based on statutory profit, was just 0.7pc on underlying earnings. Market capitalisation was $166 million. Allowing for aggregations and new issues, the share price declined 99.1pc over that period.
Since then the share price has continued to fall, bringing market capitalisation close to $100 million. Most shareholders have lost a very large proportion of their investment. Interest on hybrids has not been paid for almost three years.
Quite a lot of people are asking whether the company can pull itself out of a death spiral. The first half of the current year was barely profitable, with cash flow reliant on a successful tax case and asset sales. Suppliers are wary of default and report the company is slow to pay. A couple of weeks ago Elders retrenched 75 people and announced a drive to reduce costs.
Even more are asking whether Malcolm Jackman is the right man to lead the company, given its performance since his appointment (October 2008). There are certainly plenty who don’t think so, including many investment analysts.
No doubt Jackman inherited some problems. There was a grab bag of unrelated businesses and too much debt, plus external issues such as the prolonged drought, floods, the live cattle export ban and appreciating dollar.
But chief executives are employed to succeed in spite of problems, and variability has always been part of the rural scene. If the job was easy, anyone could do it.
Jackman has mostly concentrated on returning the business to its rural services core, selling off non-core assets and reducing debt. With the exception of the automotive parts business and some remaining forestry assets, that process is largely complete.
But the automotive and forestry assets are not the cause of the company’s current poor performance. Rural Services’ EBITDA in 2011 was just $13 million, against $101 million in 2001. Even if the automotive and remaining forestry assets were sold and the company was exclusively focused on rural services, it would still be a basket case.
The best explanation I have seen for this is a continuation of a longstanding problem at Elders - unsuitable people making poor decisions.
Just how longstanding is clear from a quick look of history. In 1981 John Elliot’s Henry Jones was merged with Elder Smith Goldsborough Mort Ltd to form Elders IXL. Under Elliot’s leadership the company took over Carlton and United Breweries, Courage and Grand Metropolitan in the UK, and Carling O’Keefe in Canada, to become the fourth largest brewer in the world and Australia’s second largest company (by revenue).
Profitability was a different matter – the company lost more than $1.5 billion in 1990 and Elliot finally departed in 1992 (after his buyout vehicle, Harlin Holdings, collapsed) and the company announced its third successive loss (of $951 million).
Elders was a low priority during that period and emerged in poor shape, which enabled Futuris to gain control at low cost. The CEO of Futuris, Alan Newman, then began collecting unrelated businesses in an attempt to emulate the Wesfarmers model of a diversified industrial conglomerate.
But Newman also had the sense to appoint some sound people to lead Elders and support their strategy. This was to rely on branches delivering services to farmers using an account management approach, backed up by product and technical support. It was customer oriented with experienced management at the client interface (State and branch) plus a blend of experienced and new specialists.
A lot of costs were removed from the business with management reverting to states instead of regions. The result was a tenfold improvement in Elders’ performance over the period 1998 to 2008, with respectable return on capital.
When Newman was replaced by Les Wozniczka in 2003 the vision of an industrial conglomerate gained momentum, with investments in telecommunications, timber, beef farming and financial planning. Elders’ profits were used to support these and the business suffered from significant under investment. With most of the board lacking agriculture experience, opportunities to invest in agricultural enterprises that complemented Elders’ existing business were rejected. There was tension between Elders and Futuris management, including over AACo (which competed with Elders’ clients).
That led to the removal of Elders’ Managing Director, Greg Hunt, in 2007 with most of the senior management team following. Hunt’s replacement, Mike Guerin, a former banker like Wozniczka, reintroduced a regional structure and proceeded to remove all the experienced State management and most of the Adelaide procurement and logistics team, while making a number of doubtful appointments.
Jackman eventually got rid of Guerin and took over management himself amid hopes it might signal a return to former glory, but the opposite has occurred. Some suggest Jackman, a former New Zealand Navy captain, lacks a background in either retailing or agriculture and thus relies too heavily on senior staff, most of whom similarly lack experience. Others claim organisational changes disrupted too many relationships between staff and farmer customers, a key aspect of any service business, which could not be restored.
And of course there is the obvious lateness of the focus on cost reduction, presumably because of a persistent belief that a big rise in revenue was imminent once it rained, stopped raining, the dollar fell, or input prices and/or commodity prices rose.
No company has a right to remain in business or make a profit, even after 150 years. That right must be earned every day. And yet it is tragic to see what has happened to Elders. Shareholders, loyal customers and field staff have every right to feel betrayed.
Meanwhile Elders’ competitors, Landmark, Ruralco and various independents, are loving it. Ruralco has even taken the opportunity to grab 12pc of Elders’ shares at a bargain price, giving it a strong say in the company’s future.
Elders would not be in this situation but for unsuitable people making poor decisions. Two of Elders directors have resigned and will not be replaced. The rest need to call time on Jackman and his approach, while also considering whether they themselves are suitable. Elders should be led by people who know what they are doing.
David Leyonhjelm is an agribusiness consultant with Baron Strategic Services. He may be contacted at email@example.com