Adcorp’s new start (again)

The past five years have been pretty awful for staffing and training group Adcorp. Relentlessly high unemployment in SA, a bad call on a major Australian deal and persistent management turmoil have combined to knock Adcorp’s shares down 89% over the period. We asked newly installed CEO Phil Roux, former head of Pioneer Foods, what exactly needs fixing now.

PR: It’s always difficult to pronounce too early but there are some glaringly obvious things that have gone wrong. Importantly, structural changes: when [labour] legislation kicked in [it] created havoc in the industry per se and not only here.

So the kneejerk reaction of corporates, the clients that Adcorp would serve, was to rush into "permanentisation" — that is, where you rush to make people permanent. Alternatively, you’d find ways to evade the legislation … so companies were toying around with how to ameliorate the situation and the people that felt the brunt of this were companies like Adcorp. And it’s taken really a long time to wash out, and I would say only now are you starting to see a level of stability, but then along comes Covid.

Even when I was Pioneer CEO, none of us understood what this sector’s proposition was other than a purveyor of warm bodies. Now that I’m closer to it and have seen the extent of Adcorp’s brand tapestry, as I put it, and how those roll up into a parental value proposition is quite unbelievable. Yet as a CEO in a fast-moving consumer goods firm, no-one ever came to explain this to me.

What else went wrong?

PR: [Besides] the structural element, you’ve seen the recurring theme of changes of leadership and cost savings and reorganisation and it leads to such disconnect in a company and you become inward-looking. Also, the wrong business model was imposed — the right thinking, but the organisation wasn’t ready for [it]. And then just mismanagement in any number of areas. I turn over stones every day and find worms underneath and then there are also some boulders on my way, so of all the transformational work I’ve done it’s been by far the most challenging.

It’s a shift from managing Pioneer Foods to this. Has it been doable?

PR: Initially I found it quite daunting and I was reluctant to take on the position. But there are universal business truths that kind of transcend industries and whether you’re a purveyor of Weet-Bix or Black Cat peanut butter or people, for that matter, the nuts and bolts of running an organisation are consistent. I’ve identified eight value drivers and I’m going to manage the hell out of those over the next 12 months. It’s unfortunate that we’ll do all of this in a very, very difficult environment.

Is it actually possible to right Adcorp, given the trajectory that SA is on?

PR: The company’s got a significant debt burden, so the divestitures will go a long way to creating more balance sheet reprieve. And then if you couple the cost-cutting I’m involved with, a margin upliftment programme, and you eradicate these inefficiencies that reside in the company — of which there are plenty — you certainly will have an organisation 12 months from today that looks fundamentally different, notwithstanding the double jeopardy effect of a contracting economy and Covid.

I don’t want to oversell it but if you can’t look fundamentally different based on what I’ve encountered, then we must pack it in completely.

And are you having to sell off decent assets just to settle debt, or are they really noncore — like the financial services business, or the Australian group Dare?

PR: Well, there’s a case to be made that if something’s making money and it’s noncore then, so what, maybe keep it. But the reality is that the financial services business in SA is really unrelated to anything that we do and it also meets the twin objective of bringing cash in.

Australia is really a commodity sort of driven entity, it hasn’t matured at the rate that SA has in the sector, and again it’s not a firesale. We’re trying to sell the entire entity, in addition to Dare. If we don’t get the right multiple we’ll truck on with it, and just run the business better, though it would be helpful if, in addition to Dare, we do get the whole of Australia offloaded.

Then we’d have practically an ungeared balance sheet this time next year and that gives you great degrees of freedom; whether you do a share buyback at this kind of price or simply keep a lazy balance sheet for a bit, while we consolidate our position in SA.

So you’d be happy to exit Australia and put all your eggs into fragile SA?

PR: Australia has been contributing a third of the profit to date but I can’t see the growth prospects … it’s quite sterile and very commodity driven.

It seems counterintuitive only until you really look at the quality of the earnings in Oz.