Sunday, January 20, 2013

Courtaulds Strategy and the Role of Fibres: Part 1 (1997)

From 1997 WORLDWIDE FIBRES CONFERENCE - Hotel Byblos, Malaga, 30/1/1997

Points to note:
  • "Acrylics (1986) generated an enormous amount of cash... and was the reason we could develop Tencel... without that we would probably not have Tencel today"
  • "Viscose (1989-91) poured in  an enormous amount of cash ... was a money printing machine ... it wiped out all the problems of acquiring businesses in the USA." (Ironic this: the new US businesses were bought to replace loss-making Fibres)
ln 1980 Courtaulds recorded an operating profit of break-even and a loss after
extraordinary items of £160m. lt was from that base that Courtaulds started to pull out from a horrendous position. The first part of the 1980s was trying to grind outmargin improvement. The only thing that mattered then was how much cash togenerate. We achieved it. People sold businesses, company names and did anything to hit the cash target. That started to take Courtaulds up. During the mid to second half of the 1980s Courtaulds had a very strong reputation for the quality of its management.

Then we demerged Textiles. The strategy was to drive for growth in businesses that were broadly management intensive rather than capital intensive. Our acquisitions in the US could have been damaging but for Viscose. A major competitor in viscose went out of business in the US. The combination of that and a fashion swing meant that Viscose poured in an enormous amount of cash from 1989 to 1991. To some extent we let that fool us and Viscose was a money printing machine. We were so successful it wiped out all the problems of acquiring businesses in the US.

In 1986 more or less the same thing happened in Acrylics. lt was described as our single most important business and also generated an enormous amount of cash. The cash generated by Acrylics in 1986 was the reason we could develop Tencel. Without that we probably would not have Tencel today.

The problem is some of these businesses are cyclical. Cash generation can be
followed by long periods of decline and we have seen that in the last three years. The other factor that has occurred is the long term decline in Courtaulds turnover. ln real terms it is lower today than it was in 1980, even allowing for demerger. That long term decline in turnover has to be reversed. lmproving margins won't be enough. We have to reverse the long term decline in top-line sales.

Why? The object of managers is to increase shareholder value. We have to
improve shareholder value. That is what persuades our shareholders to invest in Courtaulds and it is what affects our share price and affects our ability to fund growth. The issue is that what our investors are looking for is a better return from Courtaulds than they can get from another company.

So we have to reverse the trend from falling sales into growing sales. Because no matter what we did during the 1980s in improving margins - and we certainly have to do that in Fibres - ultimately we have to grow the business if we are going to create shareholder value.

(More to come)

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