F&P Appliances: Caught in the wringer

The past few weeks have been hellish, but F&P chairman Gary Paykel says the company has seen tough times before. Photo / Paul Estcourt

I suspect Gary Paykel would rather be having a lobotomy right now than leaning against a big shiny fridge just to please the media.

He said as much when I phoned to ask him for an interview. "Oh goodness, I need that like a hole in the head," he harrumphed.

But he was only pretending to be dismayed because here he is, the next day, in a slightly awkward pose in one of the many grand corridors that traverse the Auckland headquarters of Fisher & Paykel Appliances (FPA).

Thanks to a few loose words from the Prime Minister, the media have been asking quite a few questions about FPA of late - like whether its 75-year legacy might be about to come to a pathetically tragic end.

The Herald photographer urges Paykel to relax.

"If I was any more relaxed, I'd fall over," he exclaims.

Oddly, that does seem to be the case.

It's hard to describe exactly how Paykel comes across in person. I don't imagine he'd be much good on radio, unless you got him to talk about sailing. His somewhat old-fashioned stiff-upper-lip demeanour would come across as just a little too gruff. But in reality his growl is more like that of a teddy bear. His eyes have a sparkle that reveals his enthusiasm for other people and - I suspect - for business in general.

The past few weeks, admits FPA's chairman, have been hellish. "It's been very, very tough. And tough for a lot of people, not just me. It's been tough for all the stakeholders in the company."

More than $100 million was wiped off the company's value in just one day last month after a market update revealed sales had fallen significantly in the wake of the global economic crisis.

Not only that, but the cost of moving its plants offshore and getting caught at the same time by a plunging kiwi dollar, made its debts swell to more than half a billion dollars, compared with only $16 million five years ago.

The fact that the company still managed to make a $27 million profit somehow got buried amid a frenzy of speculation that the Government might need to step in to prevent its bankers from pulling the proverbial plug.

The question now is how - or if - FPA can raise the estimated $100 million to $150 million it urgently needs.

Paykel is, of course, well aware of the Faustian pact you strike with public money markets - where the bottom line becomes absolutely, negatively everything and the human side of doing business becomes nothing more than "an articulate cost base" (as, I swear, one prominent private equity player recently described employees).

And there is always the threat that as a listed company FPA could become a takeover target, especially now that its shares have halved in price in just a few weeks, to around 50c. With the Fisher and Paykel families holding a tiny percentage of the company between them and no single large investor in control, it wouldn't surprise anyone if a much larger competitor, like Chinese appliance manufacturer Haier for example, suddenly launched a hostile raid.

But as Paykel notes, such speculation has been around almost since the day Fisher & Paykel listed on the sharemarket in November 1979.

As it happens, most of FPA's competitors are also struggling with the global recession and are not likely to be keen to add to their own debt.

But Paykel's loyal lieutenant, chief executive and managing director John Bongard, probably let his true feelings slip during a radio interview recently, when he referred to the Government being wary of FPA "falling into the wrong hands".

In any case, Paykel appears confident the company's famously cosy culture is so entrenched that it would survive a change in ownership. And he appears equally unconcerned about who might eventually replace him as chairman.

While he is clearly proud of his son Andrew, who has spent the past year establishing FPA's new factory in Thailand, Paykel insists he's no Murdoch and that the decision on who will lead the company after he is gone will be based purely on merit.

Not that the 67-year-old expects to be gone any time soon. And critics who hint that now might be a good time for a board shake-up are also likely to be disappointed, it seems.

While Paykel has clearly got the message from some institutional investors that the board could do with more financial expertise, he defends the age and experience of its directors who are all male and mostly retired chief executives.

Ralph Waters, who Paykel spotted long before Fletcher Building nabbed him, knows the appliance industry as well as anyone from his time as head of Aussie appliance maker Email, Paykel suggests. Peter Lucas is an ex-chief executive of Heinz in New Zealand, while Norm Geary is an ex-chief executive of Air New Zealand "and a very good financial man". John Gilks ran his own finance company and Lindsay Gillanders is the company's in-house lawyer, who has been responsible for securing its numerous patents.

They might not have too many strands of hair among them, "but if you want experience and intellectual rigour and the ability to speak their minds with a broad knowledge of what's happening offshore, then I'm very lucky to have it", Paykel insists.

FPA's current financial pickle is not the first major crisis to hit the company.

Back in the 80s, a much younger Paykel had to deal with the fallout from the Equiticorp debacle. Equiticorp's Allan Hawkins, who later did time in jail for fraud, owned nearly a third of the company and had persuaded it to buy a 20 per cent stake in New Zealand Steel.

Paykel had only just taken over as chief executive of Fisher & Paykel when the '87 crash occurred. Equiticorp collapsed and NZ Steel nearly went with it.

"One thing at least I can feel very, very pleased about is every time I take off from out at Mangere there, I look out the window of the plane and I see the smokestacks from NZ Steel still. In '87, that was within an ace of the doors going bang and the chain and padlock being put on it.

"Today there are 1700 or 1800 people out there in a very, very modern steel mill. That helps to keep you grounded."

If Paykel or his minders were inclined to check, they might also find the public's comments, on the internet and in other forums, a rather more brutal way of keeping the soles of their feet dirty.

While John Key might feel an obligation to protect the remaining 1600 or so jobs at FPA, it would appear that some people are much less sentimental after the company's controversial decision last year to shift most of its manufacturing from New Zealand and Australia to Thailand, Mexico and Italy.

On the Herald website alone, readers have left 20 pages of comments on the company's current predicament, most of which are in general agreement with "Ray" from Auckland, who wrote: "I am not opposed in principle to the bailout of companies who have been loyal to New Zealand and where the alternative will result in local unemployment. However, Fisher & Paykel have shown no loyalty and therefore should expect to receive no help whatsoever."

Or as "Plumduff Annie" from Houhora rather more bluntly put it: "Why the hell should we pay taxes that are wasted on those crooks."

Even motorbike enthusiasts have been keen to have their say, as a sample comment in a lively thread on the Kiwi Biker forum demonstrates: "They will end up tits up. And there will be no tears in my heart for them," wrote "Firecracker" from Matamata (who admits he is an L-plate rider).

Brokers and institutional investors, whose main criticism of the company until now has been that it waited far too long to shift production overseas, also seem keen to vent their frustration.

"I have never seen more off-the-record comments - ever - about a company," says Brook Asset Management's Chris Gaskin. "It's just phenomenal how many people are willing to stand up and bag the company and the management and the board."

Gaskin's take is that most of the comment is coming from investors who are keen to see the company's share price stay low so they can pick up even more shares at a bargain price. His rivals counterclaim that the only reason Brook has been so supportive is that it already has a significant stake in the company and has been left looking silly as a result.

Gaskin insists Brook's stake in FPA is not crucial to its portfolio. But even he admits to some misgivings about the way the company's finances have been handled.

Investors were not surprised by the sales slump as other appliance companies had already indicated similar falls, he says. "What was surprising was the level of debt that the company announced, compared to what was forecast, and that the board was comfortable with having that level of debt in this environment. That, to us, was a clear error of judgment."

By the end of this month FPA's debt is expected to hit $570 million - at least $100 million more than investors had been expecting.

It was also surprising, says Gaskin, that the company got caught so badly by the sudden drop in the NZ dollar. Curiously, the company itself seemed surprised that investors were surprised.
The main, and urgent, task for FPA now is raising more cash to keep the banks at bay. Bongard has outlined plans to sell land it no longer needs in Australia and is attempting to sell and lease back its East Tamaki headquarters.

The company hopes to benefit from the rapidly falling costs of its raw materials and has also noted it has plenty of fridges sitting in Thailand waiting to be unleashed on the market. Altogether, it hopes to reduce its debt by up to $230 million before the end of the year.

Some investors would also like it to have another go at selling its finance arm, although Paykel doesn't seem particularly keen. Critics say the board should have sold it when it had previous offers on the table but Paykel insists he has no regrets. "Finance is a very strong contributor right now. Thank God they're there."

Another option is to seek a cornerstone shareholder but most investors believe Paykel would prefer to ask existing investors for more money than dilute his own de facto control.

Paykel is reluctant to be drawn into specifics on the subject, but none too subtly notes that shareholders have done extremely well out of Fisher & Paykel over the past 30 years.

"Those shareholders that were with us before the company was split into two, they did pretty bloody well. They're still doing very, very well and will continue to do very, very well ... Since 1979 we've paid a lot of people a lot of dividends and we've never asked for one cent back from the shareholders - and people forget that very, very quickly."

One investment bank analyst has calculated the company will need to raise up to $150 million - roughly equivalent to its entire market capitalisation at the current share price. The same person believes it will be lucky to raise half that from existing investors - leaving it in a tricky position.

"We always think of these things in terms of: 'How far back from the edge of the abyss are they?' Once the amount of capital you need to raise passes or approximates your market cap, things get very difficult. These guys are at $150 million and they need a minimum of $100 million to $150 million, so to us it's on the cusp of something which cannot be done."

Rickey Ward, from Tyndall Asset Management, agrees the situation has the potential to get sticky.

"If the numbers they need to alleviate these concerns are as big as some people are suggesting, then it could be difficult. It would be one hell of an interesting scenario."

The role of its bankers could yet be crucial. ANZ National is understood to be involved. While banks are understandably reluctant to strike risky deals right now, they will also be acutely aware that the Government has stepped in to guarantee their own deposits for at least another 18 months. It might not be politic, therefore, to allow a company like FPA to collapse. Or at least that's what investors are hoping.

And it is still possible the Government could be part of the solution, perhaps by deferring tax or offering other indirect help. But few people seriously believe a taxpayer-funded bailout is on the cards or ever was.

Paykel won't talk about the Government's involvement so far but confirms Bongard has been friendly with Key for some time.

"He mentioned very freely there was a meeting with Mark Weldon and John Key and they talked about the footy and fishing, as you do, and whether the beer is cold or not, as blokes in this country tend to do."

For his part, Bongard confirms the company's senior executives are working "feverishly" on all the documentation that will be required to raise more money. They are also putting together a new business plan, he says, and hope to release the details within days.

"We worked very hard on one just before Christmas but [given the slump in sales over summer] we had to tear it up when we got back."

Until then, and maybe even afterwards, its critics are unlikely to keep quiet.

"They've been too slow to move," says the investment bank analyst. "Too slow to move on overseas relocation, too slow to move on cost, too slow on reducing inventories. I think Gary and the executive would like a capital markets solution where they get a bit more money to keep running their 'She'll be right strategy'. Unfortunately the 'She'll be right strategy' didn't work. So it's kind of at an interesting crossroads."

The same person is sceptical as to whether any cornerstone investor - Whirlpool is seen as one of the most likely contenders - would be seriously interested in the company.

"No trade investor is going to come and cornerstone them on the back of 'You've done a great job, Gary' because he hasn't ... I think the board has been very cosy. It's really Gary's company. It's not a healthy dynamic."

Even Rickey Ward is prepared to say he thinks the only thing preventing a board shake-up is the fact that so many of the company's shares are held by Australian investors, rather than locals.

"I think a lot of directors are going to be found wanting during this period. It's sad but they're going to be replaced [eventually]."

So far, says Paykel, no one has had the guts to make such complaints to his face. And he's certainly not going to respond to anyone who isn't prepared to be named.

"Some of the anonymous critics couldn't run their own bread shop," he snorts.

While he concedes that the latest economic crisis could yet turn out to be worse than anything we have lived through, he is clearly comfortable with his own conscience. "At the end of the day you're paid to do the best you can."

Some critics wonder, though, if Bongard in particular isn't paid a little too well, especially in the circumstances.

As part of its cost-cutting measures FPA has announced that Bongard will have his pay cut by 7.5 per cent this year. Senior executives will face a 5 per cent cut and other staff have been asked to take one day off a month.

Although the cuts are said to be unprecedented in this country, Bongard's pay packet will still amount to more than $1 million a year.

FPA has often been held up as a model employer by unions but it appears even they are not as sympathetic as they once might have been. Some found it more than a little galling that Key personally invited Bongard to attend last week's Jobs Summit, for example.

Paykel affectionately refers to his chief executive as "Johnny Bongard", as though he was 9 years old. But perhaps it just feels that he has known him forever.

Although Bongard has worked at the company for more than 30 years, Paykel makes a point of mentioning that he won the top job because he stood "head and shoulders" above all the other candidates shortlisted after an international search.

Like Paykel, Bongard agrees that the previous week was "not one you'd want to relive". However he won't tolerate any talk of it damaging the Fisher & Paykel brand. For all the moaning on internet chat forums, the fact remains that FPA has maintained or increased its share in almost all of its markets, including New Zealand, he says.

While critics point out that in the past FPA has benefited from some extraordinarily restrictive dealership arrangements, these days the brand faces plenty of competition, he insists. That said, when Harvey Norman dropped its exclusive arrangement with FPA last year, the Noel Leeming group was happy to pick it up instead.

Its decision to buy Italian appliance maker Elba also appears to have paid off, with the no-frills brand now accounting for half of all FPA sales in New Zealand.

One decision Bongard happily admits the company was slow to make was its decision to move most of its production overseas.

"Good Lord yes," he agrees. "The thing that was so disappointing at the time of making those decisions was that our own staff tried enormously hard with us - it wasn't 'them and us' on this one. We were really trying to prove that we could keep everything here in New Zealand. But it just wasn't to be."

Although it is widely believed that it was largely cheap labour that drove FPA to follow its competitors to warmer climates, it was a lot more complex than that, says Bongard. One of the main reasons behind the move was a massive increase in shipping costs.

When you are transporting big, bulky goods that are essentially commodities halfway across the world, shipping costs are significant. It is one of the main reasons FPA's sister company, F&P Healthcare, has been able to keep its production staff here - because its products are comparatively tiny, are much cheaper and quicker to freight, and can be much more flexibly priced.

FPA knows only too well that for all their talk about loyalty, customers would almost certainly stop buying its appliances if they became significantly more expensive than their competitors. And almost without exception, its competitors are already making almost all of their products in Asia.

Bongard believes many customers are still under the illusion that Bosch dishwashers, for example, are made in Germany. But it's simply not true. "Ninety per cent of them are made in China. That's the reality and it's exactly what we've had to do to survive."

But given the way the NZ dollar has since dived and raw material and shipping costs have fallen, does Bongard regret not hanging on just a bit longer?

"I think probably the contrary. If we'd delayed it even longer I think we'd have even bigger problems than we have right now. We're very confident of that.

"In actual fact, when I say that, I think we can speak with some authority because we have already seen the results of the move of our laundry and electronics facilities offshore and we've exceeded our expectations with those moves. So I don't think there's any doubting that the strategy is workable and will last a long time into the future."

As for other decisions, such as whether it should have asked investors for more money much earlier, as it had previously suggested it might do, or hedged its bets on the NZ dollar, Bongard admits that in hindsight his critics appear to have a point. But doesn't everyone - in hindsight?

"I wouldn't mind their rear-vision mirrors, to be honest. But I think you have to cop some of that. And just say: 'Well that's other people's opinions.' We could argue the contrary if we chose to do so but I don't think that's really going to help anyone."

Back at Springs Rd in East Tamaki, Paykel seems genuinely pleased to be given the opportunity to show off parts of the empire he and Bongard have helped build over the past three decades - even if it is for the benefit of the misery-guts media.

As corporate headquarters go, FPA's is not likely to win any major architecture awards. Nevertheless, it seems a pleasant place to work.

The corridors are lined with the clever and stylish mass market appliances for which Fisher & Paykel has become well-known, such as the ceramic hotplate that turns into a gas hob at the push of a button and the under-bench drawer that can transform itself from a pantry to a fridge to a freezer in just a few minutes.

As the world folds into an apocalyptic fug, it pays to remember, says Chris Gaskin, that F&P Healthcare is thriving and F&P Appliances is still profitable.

By continuing to focus on innovation, it has managed to sell its high-cost appliances at a premium throughout the world for many years now. With lower costs it should thrive if it manages to steer its way out of its current predicament, says Gaskin.

"You've got to step back and see what Gary Paykel and John have managed to build in terms of a business over the last couple of decades. The reality is they've taken the products to market and built a global business and that's exactly what we want New Zealanders to do ... If we don't have people making things out of New Zealand and doing the R&D here and designing goods and selling them to the rest of the world, then what are we left with?"

Naturally, Paykel agrees. The same culture pervades both Fisher & Paykel companies, he insists. "It's the same engineering excellence; it's the same clever young people; it's the same universities that power up both these companies."

While many of the factory jobs are now gone from F&P Appliances, fridges and process machinery are still built here. The economics still work in New Zealand's favour, apparently.

But the real heart of the appliance company, Paykel insists, is the huge cafeteria, where staff continue to enjoy subsidised meals. "I'm sometimes asked why we still subsidise it, but for some of our people this is the best meal they'll have all day," he enthuses.

The financial world may be imploding, but you get the impression things will have to get a lot worse before Paykel will allow another 1600 staff to lose their meal tickets.

"There hasn't been this sort of comment on the company before so, no, it's not nice," he muses. "I think the people, the stakeholders, deserve better. And it's not easy for me personally. I've got a job to do and I get on and do it and I don't take any notice of it. But I think for other people in the company, yes it's been hard."