STRATEGY Feltex Repiled: A yarn about board and executive harmony

From the moment brokerage firm CS First Boston (CSFB) bought its initial stake in Feltex in 1996, it had one eye on grooming the carpet maker for its eventual return to the New Zealand stock market. Having proved to itself through the swift up-take of its $60 million bond issue in April 2003 that the iconic status of its brand was alive and well -and with the market looking decidedly friendly for initial public offerings (IPOs) – CSFB decided the time was right to go public this year.
CSFB would have preferred to unlock the return on its eight-year investment in Feltex much earlier than its June 4 NZX listing, says chief executive Sam Magill. But the Feltex offer – the country’s biggest float since Contact Energy five years ago – only came to market once the benefits of some hard yards on internal restructuring and expansion were clearly behind it.
So how, exactly, did Magill and his board go about revitalising Feltex after the company was rendered basket-case by Alan Hawkins’ and his Equiticorp band back in the 1980s? It was, he says, case of not trying to run until they had learned how to walk.
And when it came to building the right foundation he looked to rival carpet manufacturer Cavalier, an exemplar of niche market operator with stable ownership that got the basics right.
Magill brought in external consultants to help overhaul the business soon after he took over the reins at Feltex in 2000. He also de-regionalised sales and marketing resources and refocused people on individual business segments according to profitability.
The board then embarked on dual strategy that complemented change in commercial focus while reducing exposure to any single business cycle. “We knew that once restructuring was complete, we’d see an acceleration of the results and that changed the strategic approach,” says Magill, who joined Feltex Australia 36 years ago when he was just 18.
The board realised four years ago that the sea-change in market dynamics meant major refocus away from just being carpet business. Taking its cue from high-margin niche players like Cavalier, Feltex de-emphasised its exposure to the less profitable new residential starts and apartment markets.
While residential carpet sales still represent around 70 percent of sales, it’s now less significant segment of Feltex’s business. Underscoring the company’s push into the refurbishment and commercial markets is an expected boom in this sector over the next three to four years.

Foundation for growth
Refinancing, supply capacity and distribution had to be set in place before Feltex could grow its business and increase market share. Once additional supply and new distribution channels were opened up, Magill and his management team started focusing on the investment decisions needed to support the brands within the Feltex stable. Feltex’s money-oriented board made significant contribution to the process. “CSFB went out of its way to put people on the board with strong functional experience in both New Zealand and Australia,” says Magill.
Magill believes the relationship between the executive and board is strengthened by their longevity in this industry. Feltex senior executives have been involved in four major carpet company mergers and restructurings over the past 18 years. And senior management and directors share mutual personal interest in Feltex’s success. The 1996 buyout from BTR – which took control after Equiticorp’s collapse and was orchestrated by CSFB – left management with sizeable stake in the business. Post listing, management and directors control around five percent of the ordinary shares.

Corporate governance
The board’s pragmatic approach to governance underscores the company’s strategic direction according to Magill, particularly in relation to future growth and valuations. When he took over as Feltex CEO Magill recommended $6 million be shaved off valuations to cater for aged stock being moved out of the business.
The board works closely with management on strategic direction and monitors management, financial performance, compliance and risk very closely. The board has also been involved in establishing and monitoring health and safety policies, ensuring the implementation of succession plans for senior managers, and has adopted effective disclosure policies and procedures.
To leverage the most input management can get from the board, directors have totally open access to all six sites in New Zealand and four in Australia. Unlike some boards where directors only interact with the executive via the CEO or chairman, the Feltex board has direct access to the company’s senior management and external advisers and auditors.
Directors also have the right, with the approval of the chairman or by resolution of the board, to seek independent legal or financial advice at Feltex’ expense to support the proper performance of their duties. Feltex is currently implementing range of formal and informal compliance programmes, procedures, training initiatives and audit processes to manage compliance and other risks.
Given the board’s intimate knowledge of the carpet business and its long-standing governance culture, Magill believes Feltex was well placed to comply with the new regulations and rules. The board now plans to develop code of ethics and process for measuring its own performance.

Strategic direction
What strategic direction is the board currently taking? Rather than being cast in bronze, Magill’s big picture strategy is more blue-print for where the business is headed. “We put down on paper where we’d like to be in five years. But that’s balanced against where we are at any given time,” he says.
One of his overarching goals is for Feltex to become the preferred choice beyond carpet. “Instead of being just carpet seller, we see ourselves as an interior solutions business,” says Magill. The company’s 15-year supply agreement with its US-based former shareholder Shaw Inc gives them access to the world’s cheapest raw materials and finished flooring products. “We can enter alternative flooring markets that have reduced the potential gains in the size of the carpet market. We couldn’t do that until the financial structure was right.”
Magill now plans to capitalise on his manufacturing base. He’s done this by moving significant capacity from Australia to New Zealand’s lower-cost operations over the past few years and upping the ante on sales and marketing. “Now it’s time to accelerate the difference between ourselves and our competitors,” he says.
Feltex was primarily trade seller in Australia. It has now upped its spend on market research to “half million dollars” this year to find out if the appropriate resources are being allocated to each segment. The research will, says Magill, help to reallocate the marketing spend into more recognised brands.
Feltex is back on TV for the first time in four years, and is planning to spend four percent of revenue promoting recognised brands like Redbook and Invicta.
By upping brand spend Magill expects to close the gap between Feltex and Cavalier, and to recover market share lost during the restructuring. “Our strategy is to build, within our overall residential sales, segment that will produce an EBITDA earning stream at 18 percent of sales. In some areas we’re delivering higher than that now.”

Tough restructuring
US-based Shaw Inc, Feltex’s former shareholder, sold up in May 2000. But, says Magill, the company laid the initial recovery foundation through the $30 million it spent re-equipping the business in the mid 1990s. Nevertheless, it took some “tough restructuring decisions to deliver the most significant turnaround of any Australasian carpet company in the last 20 years”.
The company’s turnaround, after two years of losses following the acquisition of Shaw Industries’ Australian operations, has been impressive. The company has, since the integration of Shaw Australia in 2000, realised around $13 m

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