F&P: Back from the brink

Stuart Broadhurst says Fisher & Paykel's job now is to convince the markets it has the right strategies. Photo / Paul Estcourt

Ask Fisher & Paykel Appliances' new chief executive, Stuart Broadhurst, how close his company came to folding last year and he says it's a question only the banks can answer.

It's an honest answer, because he genuinely believes F&P got a rough ride at the hands of the banks. His reply - "ask the banks" - also acknowledges the fact that the company's fate was not in its leaders' hands during those terrible months early last year.

So a lot was riding on the balance sheet numbers that Broadhurst unveiled last Friday. And despite the $83.3 million full-year loss, the result surely draws a line under a period in which F&P came within a whisker of joining Craig Norgate's corpse in the graveyard reserved for clever but indebted New Zealand innovators.

After all, F&P's bankers had imposed the sort of stringent monthly reporting requirements usually reserved for delinquent companies, and will not release it from those obligations until it has proven itself creditworthy.

Also hanging on Friday's result were the analysts. Poor numbers would further alienate people F&P needs on its side to arrest and improve the share price, now 55c, an eternity south of the July 2006 price of $4.80.

"A lot of them voted with their feet, took their money and ran," commented Broadhurst ahead of Friday's announcement. "Our job is now to convince them that our strategy is right."

Mission almost accomplished on the latter point. "Appliances getting back on track," wrote Goldman Sachs JBWere's Adrian Allbon in his commentary.

Allbon highlights the recovery of market share in Australia, the sale of more than $180 million of inventory, expanded distribution in the United States and the completion of restructuring as reasons for his qualified optimism. Buy shares is his recommendation.

Forsyth Barr's Andrew Harvey-Green was slightly less convinced, with his "Still in a Spin" headline. Even so, he recommends investors "accumulate" F&P shares, singling out the significant reduction in debt to $172 million from its high of $502 million.

If anybody was in a spin last year, it was F&P's bankers, who, Broadhurst concedes, were all but having kittens about spiralling debt, plunging sales volumes, the relocation to Thailand still in progress and the "for sale" signs accumulating cobwebs outside the company's surplus properties.

At that time the company still had more than $75 million of its debt facility to draw down but it had just downgraded another profit forecast, causing the share price to plunge from $1 to 65c.

"The banks got nervous and said, 'Wait a minute, come in and talk to us and we'll just hold on to that $75 million until you've convinced us you've got a viable business'," is the way Broadhurst describes events.

Fisher & Paykel had recruited Deutsche Bank's Matt Orr as vice-president of corporate planning. Orr says: "We'd actually forecast the level of debt to them, the bankers had that in front of them; we all knew it was coming and it was just the earnings [that concerned them]."

A well-placed source has a slightly different version of the February High Noon meeting, although revenue was still the primary concern.

"The banking syndicates went in, as we normally do in a distressed situation, and simply said, 'Okay, give us your next month, or six-week or two-month cashflow so we can see how big a problem we have and how quickly we have to act'," says this person. "[They] were greeted by blank looks by the board and senior management until someone coughed and said, 'Well, we don't do [short-term] cashflow forecasts at Fisher & Paykel, we're sort of big enough not to worry about that sort of thing."'

Scuttlebutt is the best word for that," Broadhurst declares. "It's absolute rubbish. Our management systems are as good as anyone's. We're doing forecasts, complete profit and loss, and balance sheet forecasts every month - and that's been the case for decades."

It certainly beggars belief that F&P would ignore the basics. But giving weight to the almost unbelievable accusation is the punishment the banks meted out to the company after the meeting.

A budget performance test stipulating specific earnings targets, repayment of $235 million within 10 months and monthly reporting all suggest a distinct lack of confidence in F&P's financial situation.

"They panicked," Broadhurst says of the bankers' reaction, still palpably angry at the treatment. "[They] treated us like other businesses and wanted to make sure they were going to get their money back."

He renegotiated the banks' initial reporting requirement, settling on a deal where the company has to report monthly, until the overall leverage ratio is less than 2.5 times average 12-month ebitda, for three consecutive months. Once it can meet that obligation, it is required to report quarterly, with overall leverage of less than three times ebitda. Broadhurst won't comment on how close the banks might be to unleashing the company.

"The banks were concerned about the execution risk," he says of F&P's global marketing strategy and new manufacturing bases in Mexico and Thailand. "Remember they had no security over the business at all - $500 million and we hadn't given them any security.

"They were saying to us, 'You've got a plant, one of your key product lines, packed in containers on the water somewhere - what if it doesn't get there?' They go, 'You won't sell that land, you won't sell Dunedin [F&P's former site, which they did]'.

"A banker takes that view. There's no certainty about it.

"You don't have the cash until it's in the bank."

The discussions were held during the height of the global financial crisis, when markets seized up, funds were being frozen and finance companies were dropping like flies. "And we got put in the same basket," Broadhurst says with a genuine tone of grievance.

Orr adds: "We sat down with the banks and clearly worked through a plan, which involved equity raising, property sales and inventory reduction."

The equity raising, of course, involved Chinese whiteware knight Haier, which acquired a 20 per cent stake worth about $80 million, part of a capital raising that brought the company back from the brink.

Fisher & Paykel has had a long relationship with Haier and, concedes new chairman Ralph Waters, there has been flirtation in the past. Whether it was F&P who were "fluttering their eyelashes", as Waters puts it, or the other party, is neither here nor there, he says. The coquetry came to nothing until May last year.

According to an industry insider, Haier first made an approach to F&P in 2006, using UBS as an intermediary, back when the share price was $4.80 and the offer was on much better terms than they were when F&P went cap in hand to the Chinese in May.

Even a 10 per cent stake would have shored up F&P's position ahead of the most challenging two years in its history and, for this source, the decision to turn down Haier then was a huge mistake by the board.

Waters, who succeeded Gary Paykel as chairman in November, initially refuses to discuss the accusation, comparing boardroom discussions to a government's privileged Cabinet debate. Then he explains that hypothetical discussions have occurred between all of F&P's commercial partners (Haier, Whirlpool, Ercelik) but "it wasn't Haier, by the way".

Asked directly about a 2006 deal, Waters says any formal proposal would have required disclosure and that did not occur.

Then there is the question of Waters' ascension to the F&P chair after saying he was going to leave. Another source insists this relates to the board disagreement over the 2006 deal.

It was only when Waters got his way over Haier that he agreed to stay is the suggestion - one that is dismissed by Broadhurst.

"There was discussion and communication about Gary [Paykel's] desire for Ralph to pick up the chairmanship. Only when it became clear [Waters had a clear run] did he say, 'I'm here to see this business out the other side'."

Former chief executive John Bongard described the Haier deal, which provided F&P with access to China's burgeoning middle class, as the "low-hanging fruit", which begs the question, what's on the upper branches?

Fisher & Paykel has opened its first store in Hangzhou, near Shanghai, and three more are planned for Beijing, Shanghai and Guangzhou. At the same time, the company will jointly develop whiteware product for the Asian market.

"You will find different versions," Broadhurst explains. "You might have a cabinet skeleton and then morph that framework into a Haier version and an F&P version on a new-generation washing machine, or dryer or whatever it might be."

The company has opened a store in Vietnam and one is planned for Hyderabad, India. "The product we develop for China," says Orr, "we can also distribute to other parts of Asia."

As a giant global manufacturer, Haier also represents a huge opportunity to share procurement of raw materials and components at a significant discount to what F&P pays, although Broadhurst concedes that the amount to be saved is difficult to define at present.

Haier is growing fast and, he says, will need to reinvest in new plant. The company already produces parts for US companies GE and Whirlpool, and "there's an opportunity there for us to build manufacturing lines for Haier", a potentially massive money-spinner.

Its Chinese partner also wants to get its hands on F&P technology, which, Broadhurst assures, will be commercialised and will deliver a return to shareholders.

"It's all about building a long-term relationship, understanding each other and the synergies will continue to flow," he predicts. Such is the bonhomie that Haier's Asia-Pacific president, Philip Carmichael, was prompted to deliver this hilarious soundbite at the Hangzhou store opening: "We speak a similar language in terms of appliances."

High-hanging fruit is for the future, however, and Broadhurst says there are still matters left over from F&P's near-bust episode last year to tidy up.

Further lowering its leverage ratios is on the agenda, which will be greatly assisted when it manages to sell its properties in East Tamaki (lot 2) and Cleveland, Australia.

Then there are the much-publicised quality issues in the US. On the website consumeraffairs.com, the litany of woes involving F&P products runs to 16 pages.

Broadhurst denies the problems are related to the Mexican plant. "We're on [DishDrawer] version VI and most of the issues that are being surveyed are products significantly older than that, five years plus," he says.

The DishDrawer remains the "future for dishwashing" but he concedes the brand has been damaged.

"I'm starting to wonder whether we've done something wrong with the branding of the DishDrawer. The concept is great but it's now tainted with some of the initial quality problems we had with versions I, II and III."

To address this, the company is starting to build its own service structure in the US, with its own people to back up its products in this important market. The American service structure was hamstrung by unfamiliarity with F&P technology and a lack of parts.

"We need to look after those customers and the only way to do that is to get service people," says Broadhurst, "and sometimes you've got to do that yourself."

It certainly must be one of the few global manufacturing companies to maintain its own domestic call centre, not one based in the Philippines or Bangalore. And, adds Orr, despite moving operations to Mexico and Thailand, refrigeration manufacturing remains in Auckland.

The company is also boosting its promotional spending - slashed by 40 per cent last year as it desperately tried to reduce costs - which will help the sales drive now that a new agreement gives F&P access to Sears' 944 stores.

Fisher & Paykel is now back to something approaching normality. Asked to provide an overview of the tumultuous past 18 months, Broadhurst says, "This is where we got ourselves, we're not going to go there again and this is how we're ensuring this isn't going to happen again."

The benefits of cheaper Thai and Mexican supply are now coming through. F&P had built up a huge amount of stock to see it through the set-up stage of its new factories. Unfortunately, the global financial crisis hit, causing a catastrophic collapse in consumer demand, leaving it with a peak of $400 million of stock, which has taken the best part of a year to sell.

Broadhurst has instituted a massive change to F&P's global structure, eradicating management duplication and shifting from a country-based focus to a function focus. Instead of all the sales and marketing teams reporting to the manager of an individual territory, for instance, all the reporting will go to a global sales and marketing officer.

"The moving factories, the ramping up [of production lines] is all done and the quality is better than ever," he insists.

"We've got the banks out of the way and now it's back to normal business activity."