One year after Wesfarmers secured Australia's largest takeover, the investment market is unsure of the company's prospects.
One year after Wesfarmers secured Australia's largest takeover, the investment market is unsure of the company's prospects. Mark Pownall talks to CEO Richard Goyder.
FROM his vantage point above much of the daily traffic of Perth's central business district, Richard Goyder appears as relaxed as any chief executive can be in the middle of a market meltdown.
And while the Wesfarmers Ltd boss believes this is a time for strong businesses and good management to shine, he admits that his executives have not ignored the possibility of things getting much worse and are working on contingencies should it come to "armageddon".
Mr Goyder considers that point, if reached, would be in late 2010 when the company must refinance $5 billion in debt, on top of the $3 billion it has to find by the end of 2009.
If debt capital markets are still in turmoil two years from now, the meltdown would have gone much further and deeper than Wesfarmers is anticipating at the moment.
"We are developing a plan internally for a really serious global economic scenario," Mr Goyder said.
As businesses go, Wesfarmers can touch the global meltdown in more ways than most companies in Western Australia.
First and foremost, from the investment markets point of view, is Wesfarmers' net debt, which stood at almost $9.28 billion at June 30, around 47 per cent of equity at the time.
"On any measure our balance sheet is strong," Mr Goyder said.
"But we are in extraordinary times and, therefore, just the quantum of debt, rather than looking at the ratio, and particularly debt to be rolled over, has had an impact on our share price."
Mr Goyder said he was not concerned about what needs to be rolled over this coming year and is confident that finance will be obtained and capital needs will be reduced.
"I think we'll pull some capital out of the business," he said.
"In various businesses we are holding some assets like property that you don't need to hold.
"Also in some of the businesses we have too much working capital."
For instance, Mr Goyder said that in some of its operations, its terms of trade with suppliers were not as good as some of its competitors.
Mr Goyder's comments on this sensitive topic came just one day after Australian Competition and Consumer Commission chief Graeme Samuel warned big business that there could be legal implications for those that used their market power to delay the payment of trade debts.
The Wesfarmers' chief has taken that on board and agrees with the ACCC's sentiment.
"I think business has an obligation to treat suppliers fairly and in an appropriate way," he said.
However, he points out that improving terms of trade is not just about the time taken to pay suppliers.
"We have some systems inside Coles that means we pay people early," Mr Goyder said.
"That is a bit of an internal crime, it is not about being bullies."
Managing inventory in a large business can also have a marked effect on working capital.
In Coles, in particular, Mr Goyder sees significant upside in these areas because Wesfarmers is changing the goals of the business unit.
For instance, some Coles' trade creditors were paid earlier to obtain a discount because the objective was earnings growth.
"Coles was more focused on profits than return on investment," he said.
Clearly market observers are watching what Wesfarmers does with all the various Coles units.
Mr Goyder is confident that the management is right, an improved culture is starting to pervade the organisation and fresh formats, where needed, are taking shape.
But, with the wreckage of a meltdown surrounding him and many vultures waiting for what is expected to be a buyers' dream, does Mr Goyder regret making Australia's biggest takeover at the top of the market and potentially leaving his hands tied at such a priceless moment in history?
"There's no benefit in looking back, nothing stays the same," said Mr Goyder, who is more than aware that the whole of Wesfarmers is now worth, in market capitalisation terms, less than the $20 billion it paid for Coles.
"I don't and never have regretted taking over Coles.
"It is a brilliant business.
"I can't think of a better opportunity than to turn around Coles and turnaround shareholder value."
And he doesn't rule out further acquisitions.
"Who knows, there may be opportunities coming up and we'll look at them as a group," he said.
"There are other ways of doing that without debt funding."
In operational terms, Mr Goyder is braced for the financial turmoil to hit the company in various ways, though he points out that it hasn't stopped capital expenditure - such as $130 million committed to improve its coal operations.
In recent years it has ramped up production to take advantage of strong mining revenues, with hard coking coal contract prices hitting $US300 per tonne.
But the trebling of these prices may be short lived and they are expected to wane as coal contracts succumb to price falls, which have already hit other spot commodity markets.
Mr Goyder simply states that he remains a believer in the Chinese story and that all business decisions are based on long-term price trends.
Retailing is something of a different story.
It may be a cliché that everyone still needs food in hard times, but there is no doubt that supermarkets are more insulated than many other sectors that rely more heavily on the discretionary spend.
"We expect supermarkets to trade very well through any economic environment, though there will be a flight to value," he said regarding shopping habits.
On the local business front, Mr Goyder said he noticed a sharp change of sentiment in WA just two or three weeks ago, when the previous feeling of immunity clearly evaporated.
He very much backs the Australian government's reaction to guarantee deposits and welcomes the fiscal stimulus package, pointing out that: "if you act quickly and decisively you will always have things to clean up."
"This is a crisis of confidence," Mr Goyder said.
In the interim, Mr Goyder said Wesfarmers was focused on prudent management and did not believe in simply making cost cuts.
"I am not one for arbitrary targets, like taking 10 per cent of costs out because you hurt your business," he said.
"You have to be alert and looking for opportunities.
"I think we have a fantastic portfolio of business through any cycle, but particularly this cycle."