After banqueting for a quarter century on other transporters, does the sourness of Toll Holdings’ latest profit result point to a case of indigestion?
In today’s business environment, where listed companies are judged, sometimes harshly, on short-term results, Paul Little stands out.
When Toll’s share price was punished earlier this year following an unexpected sharp drop in revenue and profit, Little didn’t flinch.
The company rejected criticisms of its failure to keep the market informed of its trading performance — even in the face of a near 20 percent slump in its share price in the days following the announcement.
And despite its shares now trading 40 percent down on their 12-month high, Little has subsequently maintained his relentless focus on growing Toll into a “global forwarding empire”.
In the past year the company has executed a spate of acquisitions, including China’s ST-Anda Logistics, leading Indian logistics provider BIC Logistics Ventures, Summit Logistics in the US, Japanese forward Footwork Express, Logistics Distribution Systems in the United Arab Emirates, New Zealand’s Express Logistics Group, South East Asian logistics providers Deltec, Kwikmail and Skynet, and northern Australia’s Perkins Shipping.
In just two years Toll’s international arm, Toll Global Fowarding, has grown to boast annual revenues of $1.5billion and a network of 100 offices employing 3,000 people across 30 countries — with a “phase one” revenue target of $3billion, executives told a recent investor conference in Singapore.
At the same time, Toll has maintained its focus on continuing to grow its domestic business, in mid-May announcing the acquisition of Concord Park, one of the country’s largest carriers.
In an interview with SupplyChain Review following the half-year result presentation, Little dismissed any link between the revenue drop and acquisitions.
“The 16 percent drop in revenue and the acquisitions are not related,” he says.
“But it is still a fair question to ask, why was the revenue down?”
Little says the revenue fall is simply a result of customers moving less stock due to the global economic slowdown.
“Our major customers were suffering because of the GFC (global financial crisis). Toll’s major customers represent 50 percent of our revenue so when they are down, it is doing to be a tough time,” he says.
And he adds that in the face of “one of the toughest trading environments for the logistics sector in many years” Toll’s focus on growth combined with “disciplined cost control” has it “extremely well placed to benefit from a return to more normal global trading conditions”.
“Much of the revenue shortfall generated a disproportionate impact on EBIT as our key express networks were unable to completely defray the impact of revenue shrinkage,” he said when unveiling the half-year result in late February.
“As volumes return, however, these higher-yielding businesses will move quickly to higher levels of profitability.
“Each of these acquisitions positions us well for growth throughout the rest of the year and beyond.
“The strategy we have been following for several years now is continuing to come together well and while volumes are down in some sectors, it is certainly a good time for companies with strong balance sheets to be pursuing acquisitions.
“Whilst some of Toll’s businesses fell short of their half-year targets, volumes now appear to be improving and the company is well placed to take advantage of anticipated more buoyant economic levels.”
Little points out that Toll is at the mid-way point of a five-year plan to build a “global supply chain business”.
“It started from basically nothing and today has revenues of basically $2.5 billion in it. We believe those revenues need to be closer to $3 or $4 billion. We are arguably half way through this building program. It was always going to take four years.
“And here we are two years into that and things are going okay. Did we need the GFC? No we didn’t, but Summit is part of the plan to grow this global empire. So really the acquisition and the profitability and timing of it are totally unrelated.”
EXECUTING THE STRATEGY
In building a global forwarding empire, Little says the key is picking businesses under pressure.
Since his 1986 appointment as Managing Director, Toll has acquired at least one company a year. The acquisition tally, 24 years on, sits at 81 companies — lifting group revene to just under $6.5 billion in the 12 months to June 30, 2009.
“I think Toll has acquired businesses that have been under quite some pressure — and pressure coming from quite a few areas. So we come along and there is a clear way forward,” he told SupplyChain Review.
“Summit is a good example. Two years ago, Summit went through a ‘Chapter 11’. Summit had not been performing in terms of its profitability.
“And then Toll comes along with a strong balance sheet, and offers the opportunity to become part of a larger, stronger thing.
“In regards to shareholders, it can be quite seductive in many ways. And it isn’t like against like. There is usually a sense of belief in Toll’s ability to add value.”
But he adds that Toll reaches above the ‘low-hanging fruit’ provided the acquisition will build on the supply chain model it is creating.
“We are not frightened of buying a good business but we do buy businesses that are at different stages of being distressed,” he says.
“Two-thirds of the businesses are weakened when we go ahead, but we bought the ships that run across to Tasmania from Brambles when Brambles did a lot more than just Chep and we paid up for it because it was a [strong] business.”
KEYS TO THE TOP
As with many businesses that rely, in large part, on acquisitions for growth, Toll often finds it difficult to merge the businesses.
Little says compromise is the key.
“Quite often there is quite a need for compromise. There will be a company that has some really strong cultural aspects that should be acknowledged and used when possible, but the acquisition needs to work [financially] on some level,” he says.
On top of this is a methodical, systemised approach to acquisitons, adds Little.
“There are pages of checklists when considering acquisitions,” he says.
“But we do have a template that we use when considering a takeover that we go through before we even go to stage one.
“The most important thing is that it needs to be part of the strategic direction that Toll is going into. Summit did, and all of the other companies did as well.”
Conversely, Little says stevedore Patrick and rail operator Pacific National — since spun off and trading as Asciano — didn’t fit into Toll’s strategy.
“When we spun Asciano out of Toll we really took the decision not to be involved in the ownership of infrastructure, such as port infrastructure, rail infrastructure, airports and roads,” he says.
“We want to be users of the infrastructure and leverage our size and scale using that strength, but we don’t want to be owners of it.”
But, he adds, Chep did fit the bill.
Although he says “it’s old news” and that “Toll isn’t interested in Chep” anymore, Little adds: “Our view was that Chep was losing marketshare. They had a passing parade of executives. Our view was that if you don’t address the fundamentals then the rest of it doesn’t matter.
“Chep pays very poorly to the people that cart empty pallets, but I’m talking about the whole Chep model globally. Australia accounts for only about 15 percent of its revenue.
“We were concerned about Chep’s whole approach with regard to how the pallet fits into the supply chain. We felt the company’s ability to get a margin is reduced.”
THE IMMEDIATE OUTLOOK
Despite signs of improving revenue across its businesses, Toll expects trading results in the second half “to be in line with the first half”.
This relatively sombre outlook is reflected in its current share price of $5.43 (as at June 30), well down on its 12-month high of $9.33.
But given Little’s — and Toll’s — track record, and their unbridled commitment to continued growth, its fortunes are highly likely to improve in line with a recovery in global and domestic economic growth.
Recent company and contract acquisitions alone are forecast to add around $1.7 billion to group revenue on an annualised basis — on a business as usual basis.
Concord Park boosts this by another $90 million — and is expected to make a positive contribution to earnings per share from year one.
And with a gearing ratio of 22 pecent as at December 31, 2009 — and $564million in cash sitting on the balance sheet, there’s still plenty of room for more acquisitions, small and large.
Roll on the Toll juggernaut.