Delivering good growth in tough times – ARB Holdings shows us how it’s done
With the collapsing rand and the many challenges facing emerging markets, it's not an easy environment for a company like ARB Holdings, which imports and distributes electrical products. yet, despite conditions, the company has managed to deliver really solid results – a 35% increase in headline earnings, double-digit revenue growth, and good cash generation. The markets rewarded the company; its stock gained 7% with the release of its results. In this interview, ARB CEO Byron Nichles explains just how his company has been able to deliver great performance in adverse circumstances. He also gives us his economic wishlist for the upcoming national budget. – FD
ALEC HOGG: We have to ask you about ARB Holdings, your company, and the one that went up seven percent today. Ian Moir's company went down three percent today, so you're in the right place – good numbers – 35 percent headline earnings.
BYRON NICHLES: Yes thanks, Alec, we're certainly happy with the numbers.
ALEC HOGG: What would make you unhappy?
BYRON NICHLES: There's always a little bit to work on but certainly, the numbers were good. The market out there is tough – no secret about that – so, for both our divisions to be firing on both cylinders…double-digit top line growth, cost control, bottom line growth, and cash generation's still strong…I'm certainly very happy.
ALEC HOGG: It's a long-term process. You don't just get to 35 percent headline earnings improvement in a six-month period, just out of the blue. There's a lot that goes into it. In your case – I've been following your company for a few years – there's been a lot of work behind the scenes, and it seems to all be coming together.
BYRON NICHLES: We certainly believe so. As you say, it's a five-day game. It's not a one-day game or a T20 – that's certainly our view. We've been working hard to make sure we get the operational efficiencies right. When we make acquisitions, we understand why we're making those acquisitions. We make them on terms and on prices that make sense to us, that are attractive to us, and I think it's about maintaining that discipline that sees you through the tough periods we're seeing now in terms of the market environment. Certainly, this last period bore fruit.
GUGULETHU MFUPHI: You say 'improving operational efficiencies'. What exactly does that mean…cutting costs or getting one person to do more work?
BYRON NICHLES: It's not so much about cutting costs as it is about… In a trading and distribution business, you typically have a very high proportion of fixed costs. People are by far our biggest costs: salary bills, rent – the physical space that we occupy, and it's about making sure that… Those costs are difficult to flex. You own a property or you rent a property. You have to pay the rent, regardless of what the market does, so it's really about making sure you're driving the volumes and the top line of the business. As you drive the top line of the business, because your costs are largely fixed, you see an amplified effect on the bottom line. Some of the efficiencies we've done: obviously, when we take on our acquisitions, what we do is we look to get the efficiencies where there may be some cost savings. We've certainly seen that in acquisitions that we've done, because many duplicated costs in a standalone business we already have in our business that we don't need to duplicate/replicate, so we take those costs out. However, it's really about the efficiencies across our branch networks. On the electrical side, we have 18 branches. It's about making sure that we operate a very highly centralised back office model, so HR, IT, insurance, and finance…we're going to have that representing all our branches. We keep those centralised at the core, and it's really those efficiencies that help us generate those results. That's really the efficiencies. It's not so much about cost cutting.
ALEC HOGG: But it's an interesting business in that you had an entrepreneur who founded it and built it up for a period of time. Is he still the controlling shareholder?
BYRON NICHLES: Alec, he is still our controlling shareholder. He's our non-executive Chairman, and holds just on 50 percent of the company.
ALEC HOGG: Is his spirit in the business? Often, when you corporatize and you do acquisitions as you've done, you can lose that.
BYRON NICHLES: Yes, I think that's one of the challenges of any entrepreneurial business that goes public. I heard Brendan speaking about it in Italtile. We've certainly retained the entrepreneurial ethos in the business. An entrepreneurial ethos is not about taking risks. It's more about taking ownership and feeling a sense of ownership of the business, and making sure that when decisions need to be made they're made quickly. There isn't too much bureaucracy. At the same time, being a public company there's a certain amount of governance, process, and protocol that tends to fall on my shoulders. We try and keep our operational management quite shielded from that, but absolutely, that entrepreneurial ethos and spirit I think, is what allows us to find the opportunities in the market, perhaps quicker than what a larger/more corporate-sized business would.
ALEC HOGG: You mentioned Brandon. We've seen, in the last few months, the Rand taking an awful hiding. You do import a lot, so I guess the Rand is important to you. They got lucky, he said, but including their stock by about 500 million. Your worth in capital investment went up. Is that also a little bit of a punt on the rand, perhaps?
BYRON NICHLES: Like Brandon, I'd like to say that we had great foresight and knew the Rand was going to fall out of bed. It isn't. I think the investment in our working capital and our stock, in particular, was partly to fund the growth we've seen. They always say in trading' you don't sell what you don't carry in stock'. Secondly, in anticipation of some of the projects and the rollouts that we have on both the electrical and the lighting side…so that was the one side. In terms of the Rand and the impact on the business – because that's something we've been asked a lot – on the electrical side, 95 percent of the product that we source is actually sourced locally. Although there's an indirect impact…ultimately it's all manufactured in the East or Europe etcetera, it's not as pronounced. We tend to buy in Rand and sell in Rand. On the lighting side, it's the exact opposite. That business imports 95 percent of its product, but is shielded in the sense that there is no local manufacturer, or locally manufactured product available. All our customers and competitors are therefore in exactly the same space in the sense that all the product has to be imported. When the currency moves out, we have to pass those increased cost onto our customers – being the retailers. Sadly, from a consumer's perspective, it obviously filers through to the consumer in the form of increased prices.
ALEC HOGG: So if you want new lights, like these beautiful lights we have here, just know it's going to cost you more whereas on the electrical side – how much of that product – you did say you're buying in Rand. However, the people you're buying it from… How much of that product would be imported?
BYRON NICHLES: I think the bulk of it. If you look at something like cable, which makes up approximately 50 percent of the electrical division's revenue, we're well represented locally in terms of cable manufacturers, so that product is sourced locally. Of course, the copper or aluminium that goes into that cable is bought in dollars on the LME, so there are indirect price influences, but it's not as direct as on the lighting where we're paying hard currency to bring the product in directly.
GUGULETHU MFUPHI: Coming back to lighting, is renewable energy and the development in that space, an opportunity for your business?
BYRON NICHLES: It certainly is. On the lighting side, the migration to LED lighting is certainly starting to gather some momentum. The price points from the consumer are still fairly high and the Rand isn't doing us any favours, but we supply the full basket from old incandescent lamps, which are in the process of being phased out, through to compact fluorescents and ultimately to LED's. On the electrical side is where renewable energy is perhaps a little bit more interesting for us. I've always said our business isn't about the power thats generated. As long as power is generated, it needs to be transmitted or distributed. It needs to find its way from…whether it's a solar farm, a wind farm, or a coal power station in Medupi, it still has to find its way into your house or into your factory. It's how it is transported that's really our game, so as long as electricity continues to be generated, we'll benefit from an increase in the grid.
ALEC HOGG: Just a quick one Byron: what is the payback time on switching from a cheap old in terms of electricity, to an LED, which is more expensive to buy upfront?
BYRON NICHLES: It varies across the actual products. It varies across your domestic, commercial, industrial, and your top end premium stuff, but those payback periods are coming down quite significantly. On a domestic down light, your typical LED, you're probably looking at less than two years. As you go to the more sophisticated, it will be longer, but obviously coming down very quickly. On the one hand, you have the cost of electricity increasing significantly, and on the other hand, as the technological curve in advancement happens and the volume of LED's picks up – as you've seen with many other products – the price will start coming down. Those periods are getting shorter. I don't think they're quite at the point from a consumer, where we've bridged the gap, and where everyone is rushing out.
ALEC HOGG: It's still a good investment. If you're going to get your money back in two years with cheaper electricity, it's a 50 percent return.
BYRON NICHLES: Absolutely
GUGULETHU MFUPHI: It's quite a good one. My producer's going to kill me for this. However, what are your expectations for the budget speech later this month?
BYRON NICHLES: It's very hard to say. I think I'd rather be talking about ARB's results than the national budget, so I don't envy Pravin Gordhan. I think we have to see continued cutting in public sector spend. It's going to be very interesting to see the Minister and Treasury's outlook in terms of inflation, and what the Rand is doing. We've started seeing the monetary policy in terms of interest rate increases. I think it's going to be a very difficult budget to drive the balance between making sure that we maintain some semblance of economic growth on the one hand, and on the other hand, reigning in fiscal deficits.
ALEC HOGG: You're talking like an economist. We want something from your business side.
BYRON NICHLES: From our side, all we want to see is the NDP implemented and see the infrastructure spend activated. That certainly, will benefit both lighting and electrical, so we look forward to structure spend.
ALEC HOGG: That's the sound byte you wanted.
BYRON NICHLES: Thank you.
ALEC HOGG: Exactly – NDP on our radar. Thank you so much. That was the Chief Executive of ARB Holdings.