Fighting for survival

Grave error of chasing sales at any price helps to create disastrous situation

Stephen Connelly has his work cut out as acting CE of Distribution & Warehousing Network (Dawn). Connelly, former CE of Hudaco, faces the daunting task of restoring the building material manufacturing and wholesale group to good health.

Dawn, a one-time sector superstar, has come dangerously close to foundering. Reflecting a dire situation, there has been a wholesale purge of top management this year.

It started with the departure in February of Gerhard Kotzee, CE of the infrastructure and Africa divisions. He was followed in May by Derek Tod, CE for 18 years, and CFO Collin Bishop. The latest departures are financial director Dries Ferreira and risk compliance officer Jan Beukes, both in July.

They left under the shadow of a disastrous set of results in the year to March.

Headline EPS collapsed, coming in at a loss of 65.6c. It followed a 28.1c loss in the nine months to March 2015.

Huge damage was done in the second half of the latest year.

“Sales were chased at any price,” says Connelly.

It was a grave error. Far from the strategy succeeding, volumes continued to fall. It left secondhalf sales of R2.33bn down 12.7% from the R2.67bn recorded in the first half.

It plunged six key subsidiaries into losses. There was also a serious setback in 49%owned associate Grohe Dawn WaterTech (GDW).

GDW was formed in June 2014 following Dawn’s sale of a 51% stake in its plumbing equipment and sanitaryware unit to Grohe, the German subsidiary of Japanese group Lixil, for R880m.

The core of the unit, Cobra, is by far SA’s largest plumbing equipment manufacturer.

Ostensibly the deal was to provide GDW with access to a wider spread of markets, especially in Europe and Asia. But it smacked of an act of desperation to eliminate a huge debt burden, which topped R500m in Dawn’s year to June 2011.

“When Dawn sold Cobra they sold their crown jewel,” says Evan Walker of 36One Asset Management. “It was a strategic error.” GDW has failed to live up to expectations. For Lixil, Grohe too has been a disappointment, following the collapse of Grohe’s Chinese subsidiary. “Lixil took a US$1bn hit,” says Connelly.

For Lixil, GDW became a minor issue — so much so that GDW was left with no working capital. “It was disastrous,” says Connelly. “Dawn sells half GDW’s output.”

Connelly, acting CE since June 1, has taken an axe to valuations of Dawn’s subsidiaries and GDW with impairments and write-downs totalling R637m.

It sent net tangible asset value plunging 48%.

Connelly believes Dawn can be resuscitated.

“Dawn used to do well,” says Connelly. “We have to ask: what was it doing right that it stopped doing?”

One thing is certain: Dawn will no longer chase sales at any price. “Margins must be lifted back to where they used to be,” says Connelly.

There is arguably a bigger challenge.

“The corporate culture must change to one of accountability,” he says.

Connelly comes with a formidable record as Hudaco’s CE for 22 years, prior to retiring in 2014. But time is not on his side. He has agreed to be acting CE for just 12 months.

Disturbingly, Connelly says: “I am still uncovering issues.”

Dawn chalked up another loss in the first quarter of its new financial year.

For investors wanting exposure to building sector suppliers there are far safer bets than Dawn. Among them is Cashbuild, which Alec Abraham of Sasfin Securities believes will report a 10%-12% rise in HEPS in its year to June.

Of some concern is a slowdown in sales growth in Cash-

‘‘ DAWN USED TO DO WELL. WE HAVE TO ASK: WHAT WAS IT DOING RIGHT THAT IT STOPPED DOING? STEPHEN CONNELLY