Mr Fix-it Man

By Fiona Rotherham

Tuesday 1st October 2002

In Ralph Waters' sun-strewn Penrose, Auckland, office, the 53-year-old has a less-than-friendly look on his face. The article, he's been told, is a profile about him rather than the company and he doesn't believe in "personality CEOs". He isn't reticent about saying he wants the credit to fall on his management team rather than himself, and he points to corporate downfalls where the chief executives took themselves too seriously.

"Some people change the shape of a nation, some people start things like being able to transplant hearts and some people invent things like electricity. But in the scheme of things, very few people are important - least of all CEOs of small public companies."

Full marks so far, Mr Waters. As Jim Collins points out in the top management book Good to Great, chief executives of the best companies tend not to like talking about themselves. Instead, they prefer to talk at length about their companies and the contributions of other executives. Waters fits that mould. And if results so far - and the opinion of analysts and colleagues - are anything to go by, he is the calibre of chief executive that could turn Fletcher Building around and into one of New Zealand's best companies.

Yes, okay, improved demand lifted the result. Market dominance and a quality management team helped as well. But senior executives credit their new leader - the former chief executive of Australian appliance and metals company Email - for a cultural shift that turned an average result into a good one. The culture is now tougher and more disciplined.

"You can see an organisation change around the personality of the chief executive," says an executive, who did not want to be named. "The style here has changed to be more open ... more focused on getting results." While there is still work to be done, Waters has reversed years of declining profitability, posting a $93 million net profit for the June financial year compared to a loss of $272 million the previous year. He's improved margins across all divisions, boosted the company's asset base by at least $300 million, sold off some non-performing assets and repaid a big chunk - $126 million - of debt.

The company's share price has risen from $2 when it listed as a standalone company in March 2001 to $2.30 when Waters took over in June last year to $2.85 as Unlimited went to press.

What is he doing?

Sacred cows

Waters took over the role from interim chief executive Michael Andrews three months after the company split from Fletcher Challenge. His "roll up his sleeves and get on with it" management style is said to be poles apart from former management. In part, that was why he was chosen for the job.

Roderick Deane, Fletcher Building chairman (and former Fletcher Challenge chairman), says the board was keen to have a fresh face. "We thought it needed to be reviewed in depth and reinvigorated, and that fresh management would help us with that process. That has proven to be the case."

Bruce Wallace's book Battle of the Titans points to the fundamentally different approaches to business between Fletcher Challenge founders Hugh Fletcher (who is still on the Fletcher Building board) and Sir Ron Trotter. In the book, Wallace says the pragmatic Trotter was more operator than strategist, whereas Fletcher was a visionary intent on globalisation. What emerged, arguably, was a disconnection between the two.

It is clear which camp Waters sits in. He sums up the difference between the old and new management with a military axiom: "My instinct is at Fletcher Challenge there were a lot of brilliant plans poorly executed. We've gone for more modest plans well executed."

Macquarie Equities analyst Warren Doak says most people thought the company needed someone from outside the Fletcher group who didn't have any sacred cows. "He's delivered people a fresh approach and done everything he said he would do." And he's done in one year what he originally thought would take him two.

Andrew Reding, chief executive of Fletcher Challenge's building products and steel group, says Waters is absolutely upfront, without hidden agendas. "You don't have to watch your back here. Fletcher Challenge historically had a political bias and I'm happy that is not here."

The Australian has a straight-talking style, bordering on blunt, Deane says. A long-time secretary to Email chief executives once said to Waters about his management style: "They'll never die wondering, Ralph". But Deane says that has been helpful in the tidy-up of Fletcher Building.

"No one will die wondering here, either; we don't have time," Waters says. "I think some people appreciate that. People around here say the old style was that you were either sent to Coventry or just not included [if your bosses didn't like what you were doing]."

Waters' plain speaking inspired human resources manager Peter Merry to leave Clear Communications to work for him. "What you see is what you get and that is refreshingly appealing in these days of charismatic talkers. He clearly knows what he is doing and cuts to the chase."

Not everyone appreciates it, however. Some managers have complained about his habit at company presentations of singling out people who have underperformed. Waters doesn't lose any sleep over it, and mutters about thin-skinned Kiwis: "They're big blokes, they're being paid serious money to run a big business. I'm not out there to belittle them in front of people but if it is a fact of life their competition is doing way better than them, why should we be ashamed about saying that to them?"

Similarly, Waters' remarks have seriously offended some former Fletcher people. Take his comments in the Fletcher Buildings' 2001 annual report: "It is vital that for all general management positions and above there be a greater degree of ownership of, and accountability for, their results than might have been the case in the past," and, "Despite an over-reliance on external advice in the past, there is too little success to show for it," and, "It is difficult not to conclude, given the large scale of write-downs on previous capital projects, that the review, approval, monitoring and post-implementation audit processes were not operating effectively."

Again, Waters is unrepentant: "I don't give a stuff." If anybody could have been offended, he says, it would have been the board, yet it approved the annual report copy. More important in his mind was delivering a message to the 8000-strong Fletcher Building workforce.

When Waters came in, analysts expected Fletcher Building to either be taken over or for a whole lot of assets to be sold quickly to "stop the bleeding". Waters was headhunted primarily because he had already been through a similar paring-down exercise at Email. Trouble was, Waters found the things people expected him to get rid of most quickly were unsaleable at their current profitability level. They either had to be shut down at enormous cost or fixed up. "The quality of the assets, broadly speaking, was a lot better than I had expected; they were just operating well below their real potential," Waters says. "The priority became how to lift the performance of this company, rather than how to quickly restructure and reshape."

The most extreme example was its South American operations. Losing $15 million a year when Waters took over, they have been turned around to just below break-even for the year. Waters, who loves underpromising and overdelivering, gave a small grin of satisfaction when announcing the surprise sale of the Bolivian assets for $US10 million at the annual results briefing last month.

The kangaroo

As one executive tells it, when the Wallabies beat the All Blacks recently Waters, a former first division rugby player, wandered around head office nonchalantly clutching a rugby ball with a kangaroo on it.

He might not have lost his Australian patriotism, but fears that Waters would Australianise the management have failed to materialise. He was surprised at the quality of the top people in Fletcher Building, saying it equals anywhere he's worked.

Following a strategic review by McKinsey, Waters' predecessor had put in place a temporary management structure. Waters completed the executive clear-out, splitting the company into four key divisions: concrete, building materials including steel, construction and distribution.

Waters declined, on competitive grounds, to be too specific on what management strategies he's introduced but here are seven key steps taken:

Choosing the right people: Chairman Deane says Waters brings out the best in his staff. The seven managers in the executive committee have mainly come from within the company, with just two outside appointments. "It is not just what he has done, he has chosen the right people to help him do it," Deane says. Waters has the practical EXPERIENCE TO ACT AS A MENTOR and help his management analyse their businesses to deliver the results he demands. Geoff Lorigan, associate dean at Auckland University's Business School, says while picking talent is fundamental, creating and nurturing that talent is something Kiwi organisations are not usually very good at.

A culture of discipline: Waters has a hard-headed approach to costs and insists on people meeting budget. He also insists managers do their own jobs - there were some instances where managers contracted out most of their work. He has slashed the use of outside consultants, some argue by too much. But, he says, in some years up to $5 million had been spent on consultants. It is a move supported by Lorigan, who says the New Zealand business trend is to outsource more to experts, which can often lead to value being destroyed rather than created unless the strategies devised are well implemented. Some 50% of strategies fail on implementation, he says.

As part of this cost-cutting, Waters cut his head-office team nearly in half, laying off 25 people. He shares a secretary with three other managers, handles media communications and investor relations himself and answers his own phone.

Attention to detail: While he gives his managers freedom to operate and doesn't believe in breathing down their necks, he has a strong focus on day-to-day operations. "He's one of those disarming people who when you hand him a spreadsheet of figures he'll stand looking at it for a minute and then stab his finger right in the middle and say 'that's a wrong figure' and he'll be right," says Merry.

Non-centralised business: Waters' predecessors centralised functions, believing shared services would deliver lots of savings. Waters disagreed. The company simply couldn't afford an exercise that was going to have benefit such a long way down the track. And besides, he believes diversified businesses need to be as self-sufficient and accountable as possible and not have their responsibilities shifted to a central office. "[The policy reversal] was easy to get accepted because none of the people in operations were very committed to it and that was another reason why it wasn't going to work very well," Waters says.

Capital expenditure processes: Waters introduced a disciplined review process for investment decisions - what he calls an imperative of all well-run businesses. It puts the accountability back on operational management and is something the company is said to have lacked in the past. "How can you not say the review approval, monitoring and post-implementation audit weren't operating effectively when the company has had to write off hundreds of thousands of dollars?" Waters says.

Collective decision-making: Major decisions are vigorously debated by the executive committee. Several proposals, including an acquisition put forward by one manager, have not gone ahead after committee scrutiny. "When I say to these guys, 'How did you sit idly by and not object to this happening [the South American acquisitions in particular]?', they say there wasn't an appropriate forum or opportunity to voice that view," Waters says. And while Waters has strong opinions, executives say he listens to other views and is swayed by logic. 'We're not going to turn around and make a stupid acquisition. We all remember UK Paper (a financially disastrous Fletcher Challenge investment) and we're not going to make that mistake with Fletcher Building," Reding says. Collective decision-making bucks the local trend towards "John Wayne-style" bosses whose senior managers only tell them what they want to hear, Lorigan says. "There are some large organisations in New Zealand where the focus is on the hero at the top, with no proper decision-making processes in place underneath."

Good board and investor relations: Over the past year, Waters initiated a number of site visits so board members had a better idea of the business. And although commentators called for radical changes on the board when Waters arrived, he says that wasn't necessary - he has a good rapport with directors. He could also give a number of other companies a lesson in how to manage the investment community, says Salomon Smith Barney analyst Blair Cooper. Waters gained investor confidence early on and has done nothing to tarnish that view. "He doesn't draw lines in the sand, he doesn't set many deadlines and he delivers what he promises." Waters has forecast another satisfactory result for the coming year, with strong demand continuing through the first half before easing in the second half. Given his track record, the market is hopeful he'll deliver more.

So far, Waters seems not to have taken a step wrong. But the acid test of his leadership and his management team is whether they can transform the cyclical stock into a growth one. In particular, one that can buck the trend and make successful acquisitions. Risk-averse institutional investors were spooked when the company started looking to growth through an Australian acquisition this year. Many of the Kiwi investors would rather see a share buy-back as expansion into Australia historically proved unsuccessful, analysts say.

This reaction from Kiwi investors clearly rankles with Waters, who says growth is the major issue for the company, now virtually 100% reliant on the small New Zealand economy. "As well as we manage the business, if this country has a downturn we're vulnerable to feeling some of the pain of that downturn." The stock lacks liquidity because nearly all the New Zealand institutions are overweight in it and an Australian purchase would help put the company on the radar screen for Australian investors, he says. His primary duty to shareholders is to find more appropriate things to do with the company's capital than to hand it back to them, Waters says.

The cautious Waters has reassured investors by outlining strict criteria for any purchase. The criteria include having local management prepared to stay on, being a number one or number two player in the market, and having the right industry structure with few threats to dominance. One of the many problems around Air New Zealand's purchase of now-failed Australian airline Ansett, Waters says, was that the New Zealand company failed to look carefully at the industry structure. Although buying the number two player, they underestimated the impact of new entrants coming into the market.

A fourth consideration is not buying something that would invoke a competitive response by an Australian rival into New Zealand.

"Investors aren't likely to throw up their hands and sell stock the day the company announces it has bought something. [Waters has] earned the benefit of the doubt based on what he has said about the Australian purchase," says Cooper.

Then there's the all-important question of price. Fletcher Building has identified a number of potential acquisition targets during the past year but made only one bid, and that failed on price. Waters says the company could spend $300 million within its existing debt facilities and has the capacity to raise an additional $200 million by increasing the debt and issuing new shares. The hunt is still on but Waters emphasises there is no deadline. "We demonstrated that by walking away from an opportunity that in every other regard, apart from price, would have suited us."

The only deadline is a self-imposed desire to bed down any acquisition before Waters leaves. He has indicated to the board he will stick around for another couple of years, but he has made it no secret that New Zealand tax laws make it unattractive for him to stay longer than four years, after which he is taxed for unrealised gains of his superannuation assets.

More fool New Zealand.

Waltzing Matilda

Ralph Waters was born in Queensland. He studied mechanical engineering under a Royal Australian Airforce cadetship before shifting to private industry and quickly moving up the ranks in Carrier Air Conditioning. He resigned suddenly at age 27 and went to England with two kids, two suitcases, a cricket bat and no job. Once there, he played English league cricket and worked as an oil industry salesperson for Carrier's parent, United Technologies.

His four years in the UK were a valuable learning experience for the energetic young engineer, not least the realisation that he could foot it among the best in the world at an executive level.

After returning to Australia, Waters worked for appliance and metals company Email for 18 years in a variety of roles ending as chief executive, and was pivotal in turning that company around before it was finally taken over last year. Former Email chairman Chris Roberts says he was a good manager who didn't suffer fools. "I don't think he would take you outside the square too far but he is a very good thinker, sensible, honest and hard-working."

When initially approached about working in New Zealand, Waters said it was unlikely. He changed his mind after recruiters booked him and his wife a trip to New Zealand. The only thing he insisted on in his remuneration package - which included one million Fletcher Building stock options - was a golf club membership. He's now a member at the same club as Gary Paykel - a long-time competitor in the appliance business. Paykel invited Waters onto the Fisher & Paykel Appliances board when Fisher & Paykel split last year.

Paykel says Waters has made a huge contribution at the boardroom table. "He's very competent, straight to the point, has a detailed knowledge of the appliance business, knows the Aussie scene backwards and the machinations of government. That makes him very useful for us."

And as for the golf? "He's bloody competitive. He's a typical Aussie and he's getting better all the time; that's disconcerting, too."

Waters has bought a further 100,000 Fletcher Building shares since he started and hasn't done too badly out of them, either. Since listing in March 2001, the share price has risen from $2 to a high of $3.13 this year and is now trading at around $2.85. That's still at a huge discount to most analysts' valuations - ranging up to $4.09 - and one of the reasons why most brokers are recommending the stock as a buy.

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