Is Metair in the worst sector at the worst time? The maker of automotive components is stuck between a rapidly shrinking local car manufacturing sector, an onslaught of imports, a stronger rand, an absent government and its own debt mountain. Little wonder its shares have fallen 78% over the past five years. But Metair caught the interest of activist shareholder Value Capital Partners, which now owns almost 20% of the business and installed former Eskom FD Paul O’Flaherty as CEO two years ago. He speaks to the FM about the year-end results.
It’s not obvious whether Metair is moving forward or backwards, given the many variations of earnings you’ve just reported. On a scale of dire, bad or improving, where are you?
Definitely improving. It’s been two years in the turnaround and there are two very unusual items: the one is the Rombat fine [a R413m penalty imposed on its Romanian subsidiary by the EU] and the other is a pure accounting entry; R300m reflects losses in [Hesto] that were never previously accounted for so it comes through in our income statement.
That’s good, in light of how the influx of Chinese vehicles is smashing local vehicle manufacturing …
We mainly supply parts to Toyota, Ford and Volkswagen, we don’t serve the others, so we’re very dependent on how stable their production is. Overall, the South African market had 600,000 vehicles of production, way below their capacity and ours. So we’ve spent the past two years restructuring our plants: all the overheads, the people, the shifts, to make ourselves flexible to those volumes. If this coming year is still around those volumes, we should still see good performance. But we have to pivot into the aftermarket business, and we have to do it quickly. That is our big strategic play.
You bought Autozone as part of that strategy, but it’s six to nine months behind where you’d hoped it would be, financially. What happened there?
Unfortunately it comes down to people, and we’ve had to completely change the entire leadership to get into an aggressive phase of build. We bought these 180 stores, we were disappointed with the pace last year, so there’s a new leadership team with fresh eyes, all industry veterans. We’ve also put our battery retail business into this sector. [The battery market] is highly competitive; we do manufacture them but we’ve got to really push the retail side of it. There are lots of imports ... but the market’s big and it’s fragmented, and if we can hit our sweet spot, we should do well.
Is Autozone actually the future of Metair?
Aftermarket — not just Autozone. At the moment it’s 30% of our revenue; we’ve got to get it up to 40% and ultimately if there’s no relief for the original equipment manufacturers, it needs to be 50% at least.
Can you do that, though, with your debt where it is? At R3.9bn is it an intractable problem or a solvable one?
It’s a solvable problem. We’re also discussing with the funders how we restructure our debt again given the fact that we hit every single one of their covenants last year. We’re in a better position to negotiate, but you’re right, the debt is heavy and we need to grow into that debt, and you do that by improving ebitda.
Are you at all confident that the government sees the urgency of offering support to local carmakers?
As you know from my Eskom days and my ArcelorMittal days ... I’m always disappointed at the pace and the ability to make decisions quickly. There’s a lot of pressure on them from the OEMs; labour is very active, but it takes time — and the industry doesn’t have time.
Does that mean there’s an apocalyptic scenario for the auto industry?
If you look at the master plan on automotive this year, we should have been at 930,000 production vehicles and we’re at 600,000. Morocco has overtaken South Africa and is at just under 1-million — what is it they’re doing that we can’t do? So government support needs a relook as to how we improve.
Are you a bit of a masochist, that you’ve ended up in all these incredibly tough sectors?
These are foundational industries, right. I work with 13,000 people at Metair, and that’s worth saving.
You’ve said already it’ll be a tough year, but is there reason to be hopeful?
Yes. I think ultimately the OEMs and government and ourselves can find good solutions; Toyota in particular is doing well and is optimistic. As for the aftermarket: there are 13-million passenger and light commercial vehicles on the road in South Africa, and [they are] getting older. Autozone has to attack that market. People are spending money, and people want quality, so we really have to win those customers.