Who is the outsider CEO? A term coined by William N. Thorndike Jr to describe the likes of Warren Buffet, the outsider CEO is exceptional at using permanent cash flow streams to fund a countercyclical acquisition strategy.

While the majority of our holdings can reinvest capital in their existing business for growth, we make an exception for companies that operate in mature industries if they are run by an ‘outsider CEO’.

Who is the outsider CEO?

A term coined by William N. Thorndike Jr to describe the likes of Warren Buffet, the outsider CEO is exceptional at using permanent cash flow streams to fund a countercyclical acquisition strategy.

In his book, ‘The Outsiders’, none of the CEOs controlled businesses which were unique or rapidly growing, but they all generated excess capital.

Because successful acquisitions are not the norm and repeated successes even more rare, there are not many of these companies around. However, when the right businesses are paired with an exceptional capital allocator, the result can be a remarkable compounding of shareholder capital.

An outsider CEO can transform a mature company into a leading franchise

“We at the HQ essentially hold capital allocation responsibilities and have a special dislike for bureaucracy – return on capital employed should be at the heart of everything we do.”

So began our recent meeting with Simon Crutchley, CEO of South African Anglo Vaal Industries, or AVI.

Although the roots of AVI can be traced back to South Africa’s mining industry in the 1930s, the current shape of the company only emerged in the late 1990s when Simon Crutchley joined the company and initiated a focused divestment program, thus starting the transformation into what has since become one of South Africa’s leading consumer franchises. With roughly 60% of sales coming from beverages and snacks, another 25% from footwear and apparel and the remainder from a legacy seafood business, AVI is a market leader in a broad set of categories.

The outsider CEO’s secret is in the structure

The overall structure of the organisation is similar to most other businesses stewarded by an outsider CEO – the HQ consists of Simon Crutchley and a small team around him which centralises and controls all capital allocation decisions, while the operating companies are decentralised and run autonomously by separate management teams. The overall principle guiding management decisions is return on invested capital as a way to maximise cash flow, which in turn should lead to strong returns for shareholders.

A true understanding of value

Given the maturity of most of AVI’s categories, combined with its already high and dominating market share, Crutchley has consistently used other capital allocation tools to enhance shareholder returns, often in a counter-cyclical manner. For instance, he initiated a buy-back program on two occasions – once in 2008 and again in 2011 – when the share price was trading at a significant discount to what Crutchley thought was the underlying intrinsic value of AVI. Similarly, in 2005 AVI went on to buy the footwear business, Spitz, despite investors and analysts warning against this perceived non-core acquisition strategy.

The share price underperformed in the following years but Crutchley was eventually vindicated, as the brand has grown at an annual rate of 16% since 2006 and turned out to be an extremely profitable business unit with a 26% operating margin and high returns on invested capital. By contrast, when Tiger Brands became available for sale in 2015, he chose not to acquire all or part of it as the price was not right. Similarly, AVI has never looked to foreign markets such as Europe as a way to hedge the volatile South African rand, or to the rest of Africa for that matter, as sources of growth. Crutchley’s view is that the “rest of Africa” pitch makes little sense from a returns perspective and that most countries on the continent are quite uninvestible from a governance point of view.

The reward for shareholders

As one would expect of a business run by such a CEO, AVI generates a high return on capital employed of nearly 30% and keeps growing steadily. Since 2005, operating profit has compounded at 15% and the total cash yield returned to shareholders, including special dividends and share buybacks, has averaged 6% over the same period. AVI should continue to be a steady compounder in years to come, with the added benefit of adding insurance in challenging markets as Simon Crutchley’s capital allocation skills work their magic. If Thorndike was ever to write a book about great capital allocators in emerging markets, we would not be surprised to see a chapter on Simon Crutchley.
 

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