Some months ago, I read an article in the Business Day newspaper saying that South Africa's road infrastructure has gone to pot. Could you please give us an introduction to the transportation logistics sector in South Africa? What sort of challenges do you face as a company challenges that might be specific to South Africa, seeing that it is such a vast country compared to its market?
If you backtrack to 15 years ago, South Africa had a very developed and comprehensive road network, comparable to many countries including Australia. Certainly, an article saying our road infrastructure has gone to pot, is a bit harsh. It is true that there has been inadequate expenditure in our road infrastructure in the last 10-15 years and that has manifested in declining conditions in certain roads. Allied to that, there has been a substantial increase in road freight on those routes and the country is trying hard to catch up with that. Our rail infrastructure does move a large number of commodities, but the bulk of product movement in South Africa is on road. There is definitely a significant need for investment right now, but I perceive that as happening. I certainly would not say that our road infrastructure has gone to pot. It works adequately for us.
You say that the road infrastructure worked well until 15 years ago.Could the reason be that it was geared towards a smaller part of the population, whereas now it is under extra pressure with having to serve the needs of 45 million South Africans?
No, I think the road infrastructure always had to be geared to the full population. The impression that it has gone to pot, could be referring to the fact that we have probably lagged on road maintenance, which we are trying to catch up on. Overall, I think there is a very good infrastructure in place with ample opportunities for expansion. A report done by the CSIR, indicated that there is over three billion rands' worth of damage being done to commercial vehicles per year, as a result of poor road maintenance.
So road maintenance should be given a little bit more priority?
It is getting the priority. It is just indicative of the great need for maintenance.
I interviewed Mr Ali of the South African Roads Agency sometime ago. He seemed to believe that toll roads are the answer to funding road maintenance. Would you agree that toll roads are the way?
My personal view is that toll roads ultimately increase the cost of goods to the consumer. Toll roads are expensive already. For example, to haul products from the DRC to Johannesburg, costs 72 cents per running kilometer in toll fees. We have a significant and comprehensive network in place comparable even to countries that are not third world. I don't believe that toll roads are the answer. All we need is to have a maintenance plan in place and to ensure that ongoing routine maintenance is done.
Turning to Supergroup, you describe yourselves as a global logistics group, could you give us an introductory background to the company?
Supergroup began in 1986 with the acquisition of Super rent, which is a short term vehicle rental and logistics business. The group listed in about 1996. It is a diversified mobility group in that we are invested in three core areas.The first one is in supply chain where we provide integrated end to end supply chain solutions, literally from procurement, through to freight forwarding and clearing; through to primary transport between manufactures of ports and distribution centres; management of distribution centres and secondary distribution into the retail sector in South Africa; into auto parts environments such as automobile garages, pharmaceutical distribution and so on. We are trying to offer the customer an end to end solution underpinned with strong technology and visibility in real time, online, through the delivery cycle and also through the dealer network. This gives the capability of optimizing stock. For example, if you are short of a prop shaft in Port Elizabeth and there is one in George, we will pull from George and fill Port Elizabeth later on.
Part of the supply chain division includes what we call cross border. We are the largest Sub-Saharan African long distance fleet. We run about 450 vehicles in Zimbabwe, Malawi, Zambia and the Congo. Those vehicles are used mostly for the haulage of commodities out of those environments; commodities such as building materials, mining equipment, food and so on. That is our first division, the supply chain.
Our second division is the fleet management division. It operates in South Africa as Fleet Africa and it operates in Australia with SG Fleet. It offers long term vehicle solutions to corporates, parastatals and individuals. Here we provide the underlying lease or asset-based finance as well as procure the vehicles, maintain, schedule and track them. We also dispose of them and optimize that whole process. In the South African environment we also do driver training. We are quite large in Australia we have 72000 vehicles.
The third division is the dealerships which are complementary to our business and are performing really well. As a huge mobility and road transport group, dealerships are a natural extension for us. We are invested in 19 dealerships, most of them, major international brands such as Mercedes benz, Toyota, Nissan and Land Rover, with Land Rover being one of our most popular brands.
You mentioned that you are the largest cross border company in Sub-Saharan Africa. Does being a South African company give you the edge and help you to be more competitive in this region, compared to one of the huge global players?
Yes, definitely. Wherever you operate in the sub-region, there is a need for strong local management and partnerships. There is a need to understand the prevailing trading and operating environment and we understand this environment. We have exceptionally strong management skills which are crucial for success. These environments are exceptionally challenging unless you've got the local presence and the local knowledge. You hear that South Africa can be the locomotive and entrée to Africa and that is the reality. You need the outbound volumes out of South Africa to make those regions payable. We certainly have the client base in South Africa that enables us to move north bound volumes and perhaps that is what gives us the edge. South bound volumes are largely commodity based in those sub-regions at present. So, yes, South African businesses are strongly positioned to optimize in that region. Africa is a particularly low cost, basic operating environment. In dealing with cross-border situations, you have to ensure that within your structure, you have local knowledge beyond South Africa. We also run a comprehensive network of clearing agents through all our borders.
In your last annual report, I read that things have been somewhat difficult for the group in recent years, with operating profits down. In the same annual report, you say that the group is getting ready to be taken seriously as an investment opportunity. What sort of changes have you made to Supergroup itself to convince people that you really can be taken seriously as an investment opportunity?
Supergroup got into significant financial difficulty in about 2008.The group had expanded beyond its mobility and supply chain capabilities. It had invested in an industrial product division, assembling Chinese made products.It had also gone into retail in the form of Autozone and Mica, a major hardware group. The group had major cash flow problems and made huge losses in excess of 1.3 billion rands on the industrial product side and over 500 million rand in the Mica Hardware chain.
In July 2009 we went through a complete change in top management. On the business side our turn around strategy was to focus on Supergroup's core competencies, namely the supply chain solutions, fleet management and dealerships. We disposed of the industrial products division and we disposed of Mica, Autozone and Hermans, a truck repair business. The combination of those activities took away about 1.8 billion rands of losses and alleviated pressure on our cash flow substantially.
Within one year we had a turnaround and showed a modest profit and that has grown in the current year.The group is now well positioned to grow within its core capabilities. Cash flow is excellent; we generated over 1.1 billion rand in net cash flow last year and we will do a similar figure this year.I will be very careful to seek growth within our core capabilities of competency, being cognizant of the mistakes of our predecessors. It is a tough trading sector here in South Africa and it is a tender based environment, where you are only as good as your last tender and price is always a major factor in securing business.
How would you sum up your new approach towards growth which would ensure that five years from now, the same mistakes are not made as were made in the past?
My initial focus in this role has consisted mostly of damage control in terms of re-organisation, rationalization and cost-cutting. We took 50 million operating overhead out of our supply chain division; we reduced the group salary bill from 43.8 million to under 17 million; cut one third of operating overheads out of our dealerships and disposed of the divisions I mentioned earlier. We got our gearing to interest bearing debt to share holders' funds to below 30%. Now that we've got the balance sheet we need, we need to become more customer concentric. We have always performed well in service and we have always had market leading technologies in logistics. Supergroup has always been at the market forefront of technologies and has always used that as its unique selling point. How do we complement that growth? We need to achieve organic growth, hence the current emphasis on customers; customer service levels, customer relationships and the expansion of our customer base.
Allied to that, are certain synergistic acquisition possibilities. For example we have just expanded our Land Rover dealership network aiming for 25 dealerships rather than 17 or 18. We are getting represented in Audi and Volkswagen which is new for us. There is also 90 million rand worth of courier work which is currently sub-contracted to third parties - which we could profit from in the future through synergistic partnerships or acquisitions.
In my interview with Mr Marius Swanepoel from Imperial Logistics, we spoke of CO2 emissions within the logistics industry. He said they see a desperate need to reduce CO2 emissions and this is an area of priority for them. Is there some sort of competition among the different logistics groups to become a bit greener than the other?
I would not describe it as a competition.What we are proud of, is to have come out as the top economic empowerment company in the last year out of the list of logistics companies. We achieved this through the development of our previously disadvantaged employees and also through enterprise development.The Stop-wash system where people at shopping centres offer to dry wash cars is one of our initiatives.
As part of the sustainability approach of the group, green issues are important to us.We have looked at what is best practice with regards to the reduction of CO2 emissions and we found that Japan is in first place, followed by Europe, with America lagging far behind. Can our efforts to reduce these emissions and global warming make a difference, without America's buy-in? We believe they can, especially in view of our government's stated commitment to reduce CO2 emissions by 42% by 2025.We have looked into Japan's Blue 2 solution, where you fill up with urea injected fuel, which largely eliminates any carbon emissions.It would be a great challenge, though, to get this urea injection system adopted in South Africa.Currently we run the latest generation engines which meet the latest European standards of emissions control and we monitor our emissions output across our fleet. We will always run a concurrent fleet and ensure that maintenance is in place.
We have had very successful and constructive interactions with Eskom, on cutting back our electricity usage.Eskom has funded us to move to low wattage nationally.We are also looking into the use of biodiesel in our trucks. Currently we are analyzing our carbon foot-print with a view to reducing it.
Why bother with all this? Where does this pressure to become so green come from? Is it a corporate image drive?
First, I think, it is a moral commitment a commitment to be a good citizen of the world and a good corporate citizen. Being green may be viewed as a 'nice to have' by some in our organization, yet it is important to our international clients and is an important consideration in international tender processes. It is important to many of the major South African groups consider responsibility towards green issues in their tender process. It is important to us as responsible corporate citizens and is in line with our economic empowerment activities and sustainable environmental use. There are definitely cost benefits and savings that derive from being a good green citizen.
You are a cricket fan. With the recent football world cup and the film and book Invictus, do you think sport plays a unique role here in South Africa and can it play a lasting one in bringing the nation together?
Sport is an important part of the nation's psyche, much like in Australia and I think it is a very unifying factor. 2005 was singly the most exciting moment of my life as a South African. It was not so much winning the rugby world cup that was exciting, it was seeing the unity that arose from winning the world cup; and seeing people of every colour celebrating together here in Johannesburg and that carried this country for a good many years.Obviously, Nelson Mandela was a big part of that.
As for the recent Fifa Soccer World Cup, as South Africans we were very proud to be hosting it and I am over the moon that the world saw it as a success. I think that was also a massive unifying factor and you can see it in that, strangely yet perceptibly; there was less crime in that period.There was always risk in this environment, but it is not an environment that every one that gets off a plane is going to get mugged.Hosting the soccer world cup was such a proud and unifying factor and in a strange way, I think South Africa and South African people need those goals.2010 wasn't just 2010 it was lovely to have that goal for about seven years and I think they need another goal.The Olympics, ultimately, even if it is 20 years from now, should be the type of goal that South Africa works towards. Such a goal unifies the nation; it makes it proud of who they are and gives it the opportunity to showcase South Africa to the world.
South Africans need a goal.What about Supergroup do you have a goal? You have helped oversee an impressive transformation. What is your goal for Supergroup going forward and where do you see the group in five years' time?
I think the last two years have been about regenerating Supergroup, eliminating loss activities and getting the core performance right and I think, this year we will achieve that.Into the future we would like to grow Supergroup to a position where it can rightfully say, it is one of Africa's logistics giants.Our goal is to be a significant, highly effective logistics operator in Sub-Saharan Africa.
We are looking at taking advantage of opportunities beyond our borders, especially in the Middle East.South Africa already has a strong logistics presence there, especially in the skills base.We would be careful, of course, to invest where we have adequate control mechanisms. We would also look at opportunities with trading partners, where multinational clients have brought us into logistics solutions beyond South Africa.To be one of South Africa's major logistics operators would be our vision, in the next three years.