Diversification and vision drive success in a crisis

Diversification and vision drive success in a crisis

SHV Holdings was founded in 1896 when eight coal traders merged operations to expand their business across the Netherlands. The combination led to innovations in how coal was traded, including the invention of the first mechanical coal transporter. One hundred and twenty-four years later, the company, which is headquartered in Utrecht and remains family owned, is still in the energy business. But it has gone global through more than a century of investments and diversifications.

Today, SHV is made up of seven distinct businesses; in addition to oil and gas concerns and an investment arm, there is Makro, a food cash-and-carry company started in 1968 (Makro operations have been sold over the years, but SHV Holdings still retains ownership of operations in South America); ERIKS, an industrial services provider acquired in 2005; Mammoet, a heavy lifting and transport company, which was bought the following year; and Nutreco, which was acquired in 2015 and specializes in animal nutrition and aquafeed. These businesses operate in 58 countries and employ 55,000 people. The total group revenues in 2019 were just over US$22 billion (€19 billion).

In 2016, Jeroen Drost, after more than 25 years in banking, most recently with NIBC Bank, joined SHV Holdings as CEO. He inherited a decentralized management structure in which each operating company was independently run and reported to the SHV executive board. Although the death of conglomerates has been predicted over the years, Drost believes that SHV’s diversified portfolio and its corporate structure will give it an edge as it takes on the challenges of a global recession and tumbling oil prices.

The company has a clear purpose statement, emphasizing integrity, trust, professionalism, and investment in people; it also stresses common sense and simplicity. These core values give Drost optimism, even in the face of unprecedented challenges. In September, he joined a video call with strategy+business from his home in the Netherlands to explain what SHV has learned in 2020 and why he remains positive about the company’s long-term outlook and the global economy.

S+B: Can you give us an overview of how the events of 2020 have affected SHV Holdings?
DROST: Similar to 12 years ago when the financial crisis hit, we — I — could not believe COVID-19 would spread into a worldwide crisis like it has today. With hindsight, we should have realized that this had the potential of spreading quickly and affecting all industries.

One of our advantages is that we have a widespread range of activities, and we learned pretty quickly from our businesses in China. Each [subsidiary] managing board is supposed to handle the coronavirus crisis in its own way. But we do have very frequent contact. We exchange best practices, but the impact to a business [such as] our Makro food cash-and-carry business is different from the effect on a business like Mammoet, which is in heavy lifting and transport. So, there’s not one solution to fit all.

We quickly set up daily calls with the managing boards of the group companies. We had daily calls with the holdings executive board, and I also had, at least three times a week, calls with the chair of the supervisory board. We learned that you can’t communicate enough. I’ve actually never been as informed as I was in those first couple of weeks about our businesses, but it was very much focused on dealing with the crisis as it evolved. First was the health of the people, which is the most important thing. Then looking at supply chains, but very much focused on the short term.

That crisis mode settled down a bit around the summer. China was actually back to normal pretty quickly. Around April, business there started to bounce back to 90 percent of what it was before [the pandemic]. Then obviously Europe was pretty hard hit at a time when America and Latin America were still relatively unaffected. By the time Europe got a grip on things, the U.S. and Latin America were heavily impacted. The advantage and the knowledge, which was built up worldwide, but also in the organization, was handed over to the next geographical area. We were much more prepared and sophisticated in our response in Latin America than we were at first in China. But that’s because we learned, like everybody else.

S+B: What were the key lessons you learned?
DROST: What we learned the hard way is that some of our businesses are pretty dependent on supplies from a single country. For example, we get nearly all the vitamins for certain animal feed products from India. We knew this, but when you’re confronted immediately with a complete lockdown in India, you’re faced with the reality. A border closing is where the biggest risk is. We quickly started to find other sources to make sure we could continue supplying customers, and now we’re not dependent anymore on one location for the majority of our supplies.

There were some scary moments that had more to do with closure of borders, but in the end, I don’t think the supply lines were that much disrupted. Safety stocks are now being held everywhere in the organization, which I understand on the one hand, because if I were in management, I would probably do the same. On the other hand, [doing so] eats into your liquidity because you’re building up a huge amount of working capital. We’re now focused on bringing that down again.

An unrelated topic is Brexit, but that also doesn’t help, because in that area we need to prepare too [for the change in trade regulations]. I think there is a growing realization that [relying on] 100 percent just-in-time deliveries around the world might not be the best model.

S+B: How quickly can that model change?
DROST: Never underestimate a good crisis. Remarkably quickly. People are pretty creative at adapting. There’s now much better cooperation between industries, suppliers, clients, and governments in dealing with the shortages.

For example, within the group we have ERIKS, which deals in safety equipment and had sources for face masks. So we could help each of our businesses within the group get masks. We shipped masks to Makro in Latin America, for example, but we also helped supply other businesses outside our industries.

S+B: What about changing your own production lines to help?
DROST: Yes, that’s happened. In ERIKS, people started working on ventilators. There was a huge shortage [in the Netherlands], and components were not allowed to cross borders. Everybody was convinced that we needed to, as a country, build our own ventilators. That was the challenge — both for us and for others. In ERIKS, people started working with the Technical University in Delft. It wasn’t the best ventilator on earth, but it worked.

People become creative in a crisis. I’ll give you another example. In Colombia, mobility restrictions made it very difficult for shoppers to reach our Makro stores that were located a bit farther from the central areas of the city. People had to go to the local mom-and-pop stores on the corner, and these ran out of supplies. And we had a lot of supplies, but in the wrong locations. So, together with the government and local municipalities, we made hampers with all the basic foods and started distributing them to neighborhoods where people couldn’t get what they needed at local stores. So, from a cash-and-carry model, Makro quickly turned into a type of food service organization. It’s simple things like that, but they’re really nice to see.

S+B: You have referred to SHV as the “King of Niche.” In the past decade, there’s been a lot said about the death of conglomerates. What’s your view?
DROST: Conglomerates actually do work in difficult times. We have seven groups in totally different industries. We are probably too dependent on our oil and gas businesses, but we are pretty well spread [out]. And that’s on purpose. We are a privately held company. We have permanent capital from our shareholder base, for whom we work hard to generate returns and to have cash to reinvest in building long-term sustainable growth companies that are in a good position to pay some dividends.

Cash in hand is king — you can’t lie with cash. So, we are, on purpose, spread over various activities and geographies, in order to be fairly certain of generating cash flow. And that’s a big advantage in this crisis. For example, the animal food business is hardly affected. That might change moving forward, because due to the pandemic people can’t eat out so much and consumption of foods like shrimp, salmon, and luxury meats goes down. Because of that, maybe the herds will be smaller, so producers will buy less feed. So we may expect an impact. For now, it is still doing well. The LPG (liquefied petroleum gas) business SHV Energy, which is for home cooking and heating, was not heavily impacted either. People still need to cook, and people still need to eat. And, if anything, they cook more at home. And Makro, obviously, in certain countries where it remains open, was not affected.

Other businesses were impacted. When the oil price dropped [in the spring] from $60 or $70 a barrel to the $20s, that affected the business. New projects are being stopped, ongoing projects are being delayed or derailed. COVID-19 compounded that. All the big projects, if they were in locations where there were outbreaks of the virus, are either postponed or stopped. ERIKS supplies the shale industry in the U.S., which dropped to zero [because of the oil price collapse]. And in ONE-Dyas, which is in oil and gas exploration, we had to shut down some wells. Mammoet transports large industrial equipment, and project cancellations affect that.

S+B: Is there an advantage in being a family-owned, decentralized holding company?
DROST: It’s a very powerful model if everybody does what he or she needs to do, and we keep each other well informed. We can make very quick decisions based on long-term views, and they are informed by our values. We have zero tolerance for nonintegrity and noncompliance. Our people know this very, very well. And we strongly believe bad news should travel fast. You need to know immediately if there is an issue.

The advantage of not being listed is that there is not much inside information. I can talk freely to my shareholders; I actually know my shareholders. I know my supervisory board, of course. You can phone them, and that helps if you have a difficult situation. That’s why I come back to “bad news travels fast.” If you can avoid surprises and keep people informed, you can deal with pretty bad situations and still stick to your fundamental values. I’m not happy about bad results, but we’ll deal with it as well as we can.

S+B: How are you viewing your workforce strategy across the group?
DROST: People have always been at the heart of what we do. We very much rely on having great people, and that is the strategy: having good people who deal with the situation and drive decisions locally. What we’re missing at the moment is traveling and visiting our facilities, our factories, and our stores to see what’s happening. But digital transformation is happening with enormous speed. And from a standing start, I think we are getting used to digital meetings and the digital exchange of information. Also, [this digital transformation] is not only internal, with the workforce — it’s also in our interactions with clients. We’ve made a huge leap forward. It’s quite efficient, to be honest, and will be a lasting consequence of the pandemic. I don’t see us going back fully to the way it was before.

But virtual exchanges and contact will be supplemented with physical contact, both with your own staff, and also with your clients and suppliers. I find it difficult to foresee how we would have a total virtual world without having physical meetings, visits, town halls. Look at the office. People will be going back to the office. When they did start to do that before the latest restrictions [in the Netherlands], I ran into a colleague who told me that in his R&D department, everybody wanted to be back at work. Why? Because somehow creativity works better if people are physically exchanging ideas.

S+B: Do you see differences in how your companies in different countries are behaving, for example, in Latin America?
DROST: Latin America has always been a pretty mixed environment. You can’t compare Brazil to Venezuela or Colombia to Argentina. They are really very different economies, in different phases of development and with different rules and regulations. And in a crisis, you see those differences getting bigger.

Brazil is not doing well economically. But our businesses are doing reasonably OK, and that’s because we’re in the food business and people need to eat. And for Nutreco, the feed business, it’s the same: The herds need to be fed. In Argentina, it is difficult for other reasons, because of hyperinflation. And on top of that you have COVID-19. Another extreme is Venezuela. We have a couple thousand people [working] there, and we are keeping our stores open. The economy is at a complete standstill, but the people there need food — and money, as well. And that’s an advantage of being a family-owned company: We can actually continue to do this, because we think it’s the right thing to do, because we care for the people.

S+B: Your company is committed to sustainability, yet you have a concentration in oil and gas. How are you squaring that circle?
DROST: There will be less demand for fossil fuel, but the world cannot function without oil and gas. And therefore, we need to produce it in a less pollutive way, making sure to minimize [environmental] impact, and at the same time work on alternatives. But it’s an illusion to think that the world could do without oil and gas.

Every household client we convert from heating oil to LPG reduces the CO2 footprint. Now, you can argue LPG is still a fossil by-product and therefore it’s not renewable, but it is much less polluting. I think everyone you can convert to LPG helps reduce pollution until we have a sustainable, nonpolluting source of energy and we don’t need oil and gas, but that’s going to take a long, long time.

At the same time, even within LPG, we’re very focused and committed to making bio-LPG, and our goal is to supply 100 percent renewably sourced energy by 2040. At the moment, that’s just not possible. There are not enough refineries, not enough feedstock and the like, to do all of that.

S+B: Despite this crisis, how do you look at the next 12 months, and then the next three years?
DROST: I think that if you start losing your optimism, it’s harder to go on. You need to be convinced that tomorrow will be a better day than today. We came quickly to the conclusion earlier this year that annual plans or long-term plans are pretty useless in crises like this. We introduced a methodology in which we take 18-month rolling forecasts in all the groups, which are updated every quarter. We don’t just take the results from a year ago. Obviously, that’s all ridiculous in today’s environment.

On top of that [change], we asked everybody to go into scenario planning: Based on the rolling forecast, give me the worst-case scenario and your nightmare scenario. It’s not that I want to have these figures, but it’s forcing people to think about what can happen, and what would trigger these scenarios. And we saw in various groups that initially people were running forecasts and planning for [sales] of minus 5 percent and minus 10 percent. And then obviously it became clear that sometimes it’s going to be minus 40 percent.

It helps you to plan if you think through: “What would be a trigger for me to believe that my industry is going to go down 40 percent, and what do I need to do now? If it’s not going to get any better, I need to stop investing, or I need to look at my cash position.” The type of rolling forecast that looks at scenarios and triggers allows for a better debate, so you have a better chance of at least dealing with the next 12 months and the next three years. We can spot signals that the market is picking up or is going down further, and then we adjust.

I’m pretty confident that in a couple of years’ time, the economy, by and large, will be back on its trajectory: less steep, less global, and maybe less interwoven or more balanced. I don’t think it will be completely back, because I think there will be a couple of fundamental changes in global trade. That has [mainly] to do with the impact of geopolitics, local politics, the closing of borders, and introducing cross-border taxes.

I fundamentally believe that the world became a better place once we opened up and created a global economy. And yes, there are some extremes that exacerbate problems, like tax evasion and inequalities, and we need to deal with those. But having a peaceful global economy helps everyone. We should focus on what we can be together, rather than emphasizing the differences between businesses and between people. Good things will come out of this crisis if we unite and see how we can make things better.

Published at Thu, 05 Nov 2020 06:00:00 +0000