Feltex chief on a rough carpet ride

Sam Magill. Pictures / Dean Purcell

Slashing $9 million off Feltex's profit forecast last month was one of the hardest calls of Sam Magill's career.

This week, the chief executive of the carpet company still cannot believe what happened as a result.

He had just returned from holiday in March, scooped up an extra 40,000 Feltex shares, which had dropped to $1.47 each, and headed into the office - little knowing what the next 40 hours had in store.

Fresh data showed a dramatic downturn in the Australian consumer market, pointing to an unmistakable sting in the company's profits.

The consumer confidence index - a lead indicator to the future demand of carpet - was at its lowest level in 30 years.

Feltex's sales team was cutting back its forecasts and a major supplier for synthetics had just served up an 8 per cent price rise, compounding those made late last year.

"When we looked at all of that and put it into context, we had to go for a profit downgrade," Magill says.

Coming so soon after such positivity in February, many have struggled to understand how management failed to see the magnitude of the downgrade.

But Magill, who had been travelling on business for most of the first quarter, said it was based on new information.

He thinks Feltex got clobbered as one of the first companies to downgrade profits this year. (It was the fifth).

"I think the issue was, 'What are they on about? The market's strong in New Zealand. It's buoyant.'

"At the time, there weren't any indications from any other carpet companies as far as profit downgrades were concerned. (This week, Cavalier joined Feltex by also announcing a profit downgrade). So what's wrong with Feltex?"

Magill feels there is a lack of understanding, particularly among smaller shareholders, about the nature of the company today.

"Feltex is not the public company it was in the market previously, which was a multi-industrial company. It's a carpet business now and the bulk of our business is in Australia, so that's difficult.

"The business in New Zealand and the local economy can be strong, but it is only 30 per cent of our revenue stream and about 40 per cent of our profit. So a change in dynamics in the Australian market has more of an impact on our business today than what it would have had in the past."

His decision to board a plane to South Africa the next day to take 15 carpet dealers on a 10-day, all-expenses-paid safari, leaving his chief financial officer to field the questions, is one he staunchly defends.

"With those 15 dealers being such a significant part of the biggest part of my business, I took the view it was better for me to make sure they understood the position and that they were on-side, because they are the people that can help Feltex going forward."

On Magill's return, he flew to Sydney to see major shareholder Hunter Hall and others in the investor community who had by then had time to absorb the information.

He spent three days in New Zealand this week to get around the factories and talk to employees.

"I'm a bit cheesed off with the view of the missing chief executive," he said.

"The missing chief executive is a function of making sure I put my time to the best effect for the shareholder - and that is, protecting my customer base.

"And, as soon as I had done that, I was on a plane talking to my investors and all the institutions, and my major shareholder - who has total confidence in the Feltex management."

Magill would not put a price on the safari, or comment on the figure the Business Herald believes to be $400,000, saying it was paid for out of growth in sales from those retailers.

The safari's timing was unfortunate but unavoidable, as it was arranged one year earlier.

"They'd achieved their targets, so am I going to turn around to the bulk of my customer base residentially and say, because of this situation - 'I'm sorry, it's off.'

"Do you think those customers would have continued to support me? No way.

"I don't think the market actually understands the dynamics and the strength and importance of those relationships."

Magill is not fazed by calls for his resignation.

"That's up to shareholders at the end of the day and the board in the second instance. At the end of the day, it's my responsibility and I'm accountable.

"I'm not going to make excuses. It's up to me to restore shareholder value and re-establish the business. I'm confident we can do that.

"I still believe this business is in the best shape in the market environment it's in than it has been at any time in its history.

"We've already made the investments to position it for where we think the growth's going to be going forward."

In the past 18 months Feltex has spent $15 million on new commercial tufting equipment, which it sees as the best growth scenario in the months ahead.

Magill is not happy about how the company is being seen in the marketplace now, especially after all the media attention.

"The image out there with all the headlines is Feltex is a loss company. We're even getting comments, 'How will you be able to pay your bills?'

"This company is paying cash for its wool at the moment."

But the 36-year carpet industry veteran is backing himself.

"I believe I've got the experience and knowledge to - in a market that is changing quickly - adjust the business as quickly as possible.

"Market conditions are the market conditions.

"What we've got to do now is take share of the market.

"The market's going to come back. We've got to improve share and I believe with the expenditure we've made we're in the best position for what's in front of us."

But for Magill, the carpet ride is bound to be rocky for some time.

BEFORE AND AFTER

* June 2004: Feltex floats at $1.70, forecasting profits for the year to June of $23.9 million.

* August 2004: Shares hit a high of $1.75.

* February: Claims on track to meet net profit forecasts.

* April 1: Slashes forecast of net profit to between $15 million and $16 million. Shares crash 46c to $1.04. They have slumped even further and are now trading around 69c.

* April 13: Reverses profit for the three months to March from $2.4 million into a loss of $888,000.