When the going gets tough

Wednesday, 28 October 2009 09:35

The mood of road freight transport operators ranges from despair to opportunism

When the Road Freight Association (RFA) held its convention in May this year, representatives of seven top logistics companies held a panel discussion on how to survive the economic recession, the first in 17 years. Tito Mboweni former Reserve Bank governor, had just revealed that based on economic data for the first quarter of 2009, the country had plunged into a 6.4% economic contraction and that, perhaps, the country would get out of the recession only by the end of the year or early next year.

Compared to the first contraction of 1.8% in gross domestic product during the last quarter of 2008, the severity of the plunge – according to Reuters, the worst in 25 years – came as a shock.

After Mboweni’s speech, the seven men sat down and agreed that the best way for transport operators to survive was to cut off non-core business, get back to basics and cut costs wherever they could – even if it meant mothballing vehicles.

They talked in detail about optimising remaining vehicle and driver productivity. It was quite a pessimistic but most interesting discussion, as it involved the likes of Thinus Erasmus from Imperial Logistics Transport and Warehousing; Garth Bolton from Cargo Carriers; Peter Mountford from Super Group; Steve Gottschalk from Value Logistics; Barloworld Logistics’ Eric Gower-Winter; Crossroads Distribution’s Gerhard van der Horst; and Unitrans’ Jo Grove.

As I write, there have been three consecutive quarters of economic contraction since 1 October 2008. The latest, a 3% contraction for April-June 2009, suggests the economy may have gone through the worst but that recovery will be slow, as stated by Finance Minister Pravin Gordhan to Parliament on 1 September.

Severe pressure

The South African road freight industry is still under severe pressure, with many operators having gone out of business or facing that fate. Exact figures are not available, but according to the RFA, whose members move about a third of South Africa’s freight, quite a few small independents, sub-contractors and owner-drivers have fallen by the wayside.

Somehow they lie buried in monthly liquidation and insolvency figures released by Statistics South Africa. Last year alone saw 3 157 liquidations; for the first seven months of this year, liquidations increased by a staggering 35.8% (from 1 752 to 2 379) compared with the first seven months of 2008.

Banks, which raised lending criteria to the transport industry considerably last year, have confirmed the many defaults.
In fact, the mood in the transport industry ranges from one of despair, mostly among small operators with limited access to credit and debt-servicing problems, to a ‘wait-and-see’, if not opportunistic, attitude among several of the aforementioned companies, some of which reported their interim and financial year-end results to shareholders and the press recently.

These listed companies have practised what they have preached. Imperial was the first to go on a non-core business-shedding drive.

Last year, it unbundled Equestra, primarily a construction vehicle leasing business, which is battling with worsening trading conditions, declining earnings and high debt levels.

It also sold Tourvest for about R1 billion in a private equity deal that narrowly beat the contraction of the private equity industry. Then it sold its aviation-leasing business for R852 million when the aviation market was declining.

In addition, the problem CVH trucking business of Navistar International, DAF and Renault distribution, which had lost about R800m, was liquidated.

More recently, Imperial sold its remaining banking business to Nedbank for R1.8bn.

“We are back to our roots,” said Imperial Holdings CEO Hubert Brody. “We focus on businesses we understand well.”

That business is its core business division, specialising in logistics, road freight transport and warehousing, within which numerous well-known transport companies operate – Fast & Fresh, Kobus Minnaar Transport, Tanker Services, Forest Services, Truck Africa and Javelin Trucking, to name a few.

Companies well established in the FMCG sector, such as Fast & Fresh, have been doing fairly well despite reduced disposable incomes and fierce competition.

It is in the export and internal distribution of bulk freight commodities and containerised freight that companies have been bleeding. In the commodities sector alone, volumes were down between 20% and 30%.

It could worsen, with China announcing recently that it would reopen its coal mines after a spate of accidents had closed them down. This, however, will not affect local coal distribution for Eskom (by operators of some 5 000 trucks in Mpumalanga alone).

Apart from facing volatile fuel costs and higher labour bill, some road freight operators have also been hit by South Africa’s Transnet Freight Rail (TFR) increasing the number of container trains from six a day to between 16 and 22 trains a day since the inception of its national control centre about a year ago.

TFR says that its market share for long-haul cargo moving between Johannesburg and Durban increased to 30% in July, compared with 17% previously recorded, owing to its superhighway efficiency programme.

The programme aims to alleviate congestion on South Africa’s roads and reduce the costs of logistics. The first phase of the superhighway project is focused on volume growth and the second phase on profitability.

South Africa’s biggest shipping and logistics company, Grindrod, which derives 80% of its business from moving iron ore, coal and fuel, said in August its earnings were hit by recession, lower trade volumes, declining commodity prices and continued lack of credit.

Grindrod, which has its own road freight division, posted a 56% fall to 105.7 cents in first-half headline earnings per share as the global economic slowdown hit cargo volumes and rates.

It now expects improvements, but full-year earnings to be lower compared to the previous year.

Grindrod CEO Alan Olivier said the company had seen an improvement in commodity demand since last year, with China’s current appetite for iron ore and coal higher than it was in 2008. However, traditional markets had not yet returned to anywhere near their pre-crisis levels. He added that he did not know whether China’s increasing commodity demand was simply a matter of restocking or whether it was a sustainable trend. “We’ll have to wait and see,” he said.

Cargo Carriers has had to streamline its operations by dropping sub-contractors and owner drivers in its cargo trucking division, which specialises in the transport of sugar and industrial goods such as chemicals, fuel, cement and steel. “Our industrial activities were going great until October, then everything fell off the precipice,” said Bolton recently.

“Tonnages halved over the next few months. We trimmed back our capacity significantly in the industrial sector. March was the worst, but though we’ve seen a pick-up since then, revenues are still down 30% on this time last year.”

In the past financial year to February 2009, JSE-listed Cargo recorded a 14% turnover increase to R483m. Bolton believes industrial (in)activity has bottomed out and transport operators can expect a gradual improvement in business.

Van der Horst, CEO of Crossroads Distribution, also confirmed in August that business conditions were still tough, but said the market was stabilising.

Most transport companies, listed and unlisted alike, were struggling to survive the recession. Some transport and logistics companies would not survive, as they did not have sound balance sheets, he said.

He also said high fuel costs, lack of credit availability and declining volumes of goods such as commodities would keep such companies under immense pressure.

Crossroads had not been left unscathed. Van der Horst said mining companies, for example, had cut back production, hitting transport operators. But Crossroads, whose clients include Anglo American, was diversified and operated in many sectors such as the courier industry.

Acquisitions

A distressed market like this often presents acquisition opportunities, prompting companies with strong balance sheets to engage in risk-taking. Recently, at least three of the big operators mentioned before have openly stated they are on the acquisition trail in local, African and overseas markets.

Crossroads Distribution is on the lookout for acquisition opportunities. Van der Horst said his company would target businesses that would add value to the service it offered and would increase its geographic spread. He added that Crossroads had a strong balance sheet, with gearing close to 50%.

Cargo Carriers is also on the acquisition trail with joint CEOs Garth and Murray Bolton hoping the purchase of recession-hit competitors will enable Cargo to achieve its ambition of becoming a R1-billion turnover company within five years.

It would need to more than double its size, and almost triple its fleet of nearly 300 vehicles to service the R1-billion turnover target. It has R60m cash immediately available, but Murray expects that would not come close to covering the eventual acquisition bill.

The prime consideration in selecting takeover targets will be the accompanying transport contracts. He would prefer them to be in product sectors in which Cargo specialises, “though we would consider others if we get immediate critical mass”. Cargo previously considered branching out into coal and vehicle transport, but decided against it. Cargo Carriers is not limiting its search to southern Africa. For sugar, it wants to diversify out of the regional harvesting season.

Malawi and Tanzania are potential expansion targets – with small growers particularly in mind – but Bolton is also looking further afield. Illovo Sugar, one of Cargo’s existing clients, is expanding into Mali. “We’ve also put out feelers in Angola.”

Industrial acquisitions across the continent are also possible. But Bolton insists there is no rush to spend.

“Though we have cash available, it is not burning a hole in our pockets. To be rushed into acquisitions for the sake of growth is dangerous.”

Imperial has its eyes on Europe. Brody said there were acquisition opportunities, but low earnings visiblity made it hard to value businesses. Imperial would consider growth opportunities overseas where these could be placed under the ambit of its European subsidiary in Duisberg, Germany.

However, any overseas opportunity had to be related to the group’s key logistics and freight focus.

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