Ceva has faced financial difficulty for the past two years as it coped with debt and recession. Whilst the debt has not gone away, the company is now sufficiently profitable to look at growth. Thomas Cullen has been talking to Ceva’s CEO John Pattullo and considers the company’s options
Ceva Logistics is one of the automotive industry’s largest independent logistics companies but is also a big player in sectors such as consumer electronics and air freight forwarding. It is easy to think of the company just as ‘the old TNT Logistics’ with EGL bolted onto the side. This is understandable but increasingly inaccurate.
That Ceva has the ambition to progress to being both a global logistics company and a broad-based provider is not in doubt. The acquisition of the American air forwarding company EGL was a clear indication of this. However, the company has been distracted for the past two years by the business of survival. The fall in EBITDA (earnings before interest, depreciation and amortisation) of 28% in 2009 was a serious issue for a company with debts of €2.5bn ($3.1bn). From the middle of 2008 Ceva was in crisis mode cutting costs and trying to refocus its business.
Now Ceva has emerged blinking into the light, leaving the company’s CEO John Pattullo to take stock of his options. He has already sought to re-orientate the company through initiatives such as Project UNO, which is designed to improve its freight forwarding operations. He is also looking to pull the company’s management structure together, for example through its key customers’ ‘Century Account Programme’ to form a more coherent whole, with more integration across countries and sectors, which had been previously a Ceva weakness.
But it is on the strategic level that Pattullo faces the biggest questions. He wants to drive the growth of the company and is identifying which markets will help him achieve it in the long term. He is also looking at expanding the businesses of the company, possibly by acquisition. So what are the problems that Pattullo is confronted with and what are his solutions?
The first thing that must be remembered about Ceva plc is its financial position. The issue of finance is of even greater importance to Ceva than for most companies because of its €2.5 billion burden of debt. The Ceva of today is very much the creation of Apollo LLP, a private equity company run by the American banker Leon Black. Already owning the US intermodal business Pacer, Apollo bid aggressively for the logistics business of TNT in 2006 paying what was regarded by the industry as a generous price. The same again happened when it bought the EGL forwarding business for $1.5 billion.
These purchases were financed by an ambitious programme of bond issues. Apollo extracted a huge dividend from the business after the EGL acquisition leaving Ceva with a tail of bond-debt, much of it on quite demanding terms. Indeed, so aggressive was the leverage on Ceva that it was forced to reduce its bond issues and turn bridging loans from its bankers.
During the financial crash Ceva was regarded as a prime example of a company that had borrowed too much and was heading for the rocks. Its bonds traded at a third of their face value during much of 2008 and 2009. Yet the company has performed an impressive turnaround. John Pattullo’s people have squeezed €100m of cost out of the business, vital to a company where cashflow will decide its future.
The recent restructuring, which prolonged the maturity period of much of Ceva’s debt, is an important move. It gives time for the business to grow. And that raises the final issue. Apollo, on buying what was then TNT Logistics, stated it would look for a sale in three to five years. That appears to have changed. Possibly Apollo feels any sale in the current climate will not achieve a high enough price. Apollo, however, is sending out discrete messages that it is looking for a longerterm ownership of Ceva, and as such is looking to provide a financial platform to do so.
Within this strategic context Ceva must now consider in what markets it should develop and how. Here the issue of the company’s automotive business is central.
The appointment of John Pattullo (left) to head Ceva in 2007 came as something of a surprise. The previous CEO, Dave Kulik was a respected leader who had done a lot to pull TNT Logistics around as well has having steered its sale to Apollo. His subsequent ejection from Ceva was unexpected. Pattullo was less well known despite a long career in both Procter & Gamble and DHL. Judging by the results, the decision to give him the job was a correct one.
By the end of 2008 the corporate bond market, which holds the key to Ceva’s future, thought the company was on the edge of insolvency. That Ceva avoided this must be credited to Pattullo’s leadership. Able to be ruthless if necessary, he sacked his chief financial officer, amongst others, and also enabled Ceva to suffer less in the recession than it might have done. He squeezed costs hard, yet Ceva’s market performance does not seem to have deteriorated. So the record suggests he is a man who knows how to manage in a recession. Now, however, he is faced with the challenge of steering the company to growth, which is a distinctly different issue.
The issue of the automotive sector is a paradoxical one for Ceva. It remains the largest market sector for the company accounting for 28% of revenues in 2009. Ceva has a strong portfolio of customers and some high quality business. A lead logistics provider relationship with a resurgent Fiat is rare in the industry for an independent logistics service provider. Its relationship with Honda is also strong and the company has won a new contract for the OEM’s assembly plant in the UK.
Half of Ceva’s automotive business is also in the aftermarket, which is both more stable and more profitable. Yet a question mark does still hang over the automotive business. The past year has shown how unstable the car industry has become, with extensive over capacity and poor profitability in much of the world. So is the automotive logistics a good market to be in? John Pattullo’s answer is yes.
He cites the rapid growth of Anji-TNT in China, of course, but also points to the potential of the aftermarket. Emerging markets need a scale of aftermarket logistics infrastructure that the vehicle manufactures just cannot provide themselves. He is even optimistic that Ceva can continue to grow its aftermarket business in developed economies.
The problem is other sectors may look more enticing. The fast moving consumer goods (FMCG) sector in particular offers huge potential in the medium term and during the recession it has proven to be very stable. Despite being dominated by a few very large companies, it is also quite profitable for many big providers. In comparison with Ceva, around half of DHL Supply Chain’s business is made of consumer-related logistics services.
Pattullo recognises that the “consumer sector is the largest outsourced supply segment globally and is virtually untapped by Ceva”. Electronic consumer goods are also an enticing growth segment. However, this market is characterised by a number of powerful new entrants including the likes of UPS SCS, which has invested heavily in infrastructure to serve mobile telephone customers in particular.
It is a classic ‘stick-to-your knitting’ dilemma. Should Ceva concentrate in areas where it is strong or diversify into market segments which might appear to offer faster growth but where its competitive position is weaker. John Pattullo’s emphatic answer is that Ceva can do both, but the danger he must avoid is to dilute the company’s market focus.
Another big opportunity for growth is China, yet here again it faces complex decisions. Clearly its Anji-TNT business is an important and lucrative asset, but it is a joint venture with Shanghai Automotive Industry Sales Corporation, not a wholly-owned Ceva business. Perhaps this limits what Ceva can do with Anji-TNT because Pattullo is keen to emphasise other parts of Ceva’s China presence, such as the new Ceva Ground China freight service.
Pattullo hopes to use this to focus on many sectors across China, including automotive. But he expresses frustration about the business’s performance so far. “That’s something we really have to work on. I am not satisfied that we are getting the performance out of that business that we ought to,” he says.
This is hardly surprising. China road freight is a mine-field illustrating how difficult it is for western providers to succeed in the Chinese domestic market. It appears that Ceva has not yet cracked the problem of how to make money in China.
Another key ambition for Ceva is the growth of its sea freight forwarding business. This remains modest at present, but guided by the new chief operations officer Bruno Sidler–a former CEO of the large Swiss forwarder Panalpina–Ceva is looking to capture more business. It is here that the company is particularly focussed on what John Pattullo calls “using process to drive profit margins”. This approach is being used throughout the company to improve profitability, but it is in forwarding that things appear to need to greatest attention. The EGL business that Ceva bought in 2008 was largely an air freight forwarder; therefore Sidler has had the opportunity to build the sea freight business almost from scratch. However, in the past Pattullo has commented that efficient processes were not an EGL strength, so it is possible that Sidler will be able to continue squeezing profit out of the air freight business as well.
Whilst such capable management may be able to build an effective organisation internally it surely has its work cut out capturing business for the big beasts of the sector who are past masters of the art of beating shipping company’s rates down. Patullo comments that Ceva has already grown this market by offering more integrated door-to-door services. He cites the fact that Ceva continues to outperform the market not least because of its ability to integrate contract logistics and sea freight forwarding. But will the bigger customers, such as the big vehicle manufacturers, who are notoriously cost-focussed, buy this?
Another aspect of Ceva’s emerging strategy is the continuing interest in buying companies. Pattullo rules out any new major purchases but he hints that there may be smaller ‘bolt-on’ acquisitions. These may be in the area of freight forwarding, bolstering the company’s drive into maritime forwarding. That said, surely the financial position demands that most value creation will emerge from its existing businesses.
Ceva is a company with an interesting future. Its huge debts restrict its options but there is still enough room for the company to grow. It is more focussed than the German giants but of sufficient size to be regarded as a global player. It has some great businesses but faces some tricky problems as well. Despite its good results Ceva badly needs strategic direction. John Pattullo is grasping at such a direction but the next year or so will see if he can deliver.
