Boom to bust: What really happened to Sumo Visual
Of the three high-profile eight-figure printing collapses of 2014, Sumo Visual Group, which was Australia’s biggest display graphics printer, might have the worst tale of woe. While the massive disaster of Focus Press seems to have been driven by a badly executed shift away from cut-price offering exacerbated by difficult market conditions, accounts of Sumo’s sudden demise are as detailed as they are depressing. An investigative report by administrators into Sumo’s operations, and first hand accounts by former senior managers, paint a picture of poor executive decision making and private equity interference derailing a profitable business in a growth market in just 18 months.
The 39-page report by administrators Craig Crosbie and David McEvoy at PPB Advisory details the $23m turnover company’s decline from profitability in FY13 to debts of more than $12.6m when it went into administration last October. Frustrated former senior managers, who spoke to ProPrint under condition of anonymity, fill in the blanks.
The downward spiral began with founder Matt Huber’s heart attack in June 2013. Though he had sold the business to American private equity firm Harbert Management Corporation, and a silent co-investor, for $18m in 2010, he had remained at the helm as chief executive, and by all accounts kept the business going strong. When it was clear he was not going to be able to return to work, Harbert replaced him with its own man, Robert Read, as interim chief executive. Opinions differ over whether he, his successor Ken Swan who took over in March 2014, or Harbert itself are most to blame, but all the senior managers agree there is plenty of blame to go around. In the time since Huber’s heart attack, Sumo managed to accumulate debts of more than $7.5m.
It took a lot of factors working together to topple the established, successful retail signage business, boasting some of the biggest retail contracts in Australia with clients including Target, Dan Murphy’s, Masters, McDonald’s, and Red Rooster. The administrators identify a long laundry list of causes and contributing factors, many of which begin with words like ‘failure’ or are attributable to key executive decisions – and most of which it says were largely avoidable.
As with any business doing wide format properly, Sumo historically operated with high margins, even with big corporate clients and tight deadlines. It did not underprice work to win tenders or chase the high-volume, low margin work that is killing so many commercial printers. However this began to change as executives pursued lower margin work, increased outsourcing, and cut prices to win the jobs Sumo would have let go in the past. Gross margin plummeted from 32.5 per cent in FY13 to 16.5 per cent in FY14, and for the few months of FY15 before administration Sumo was losing 11.5 per cent on every job. According to senior managers, the most egregious example was a Woolworths contract that began in June 2013, and due to faulty costing is projected to have made a loss of at least $1m a year. After an analysis discovered the scale of the problem early last year, an alternative plan was not presented to Woolworths until July, and the pricing terms were never actually renegotiated.
The falling margins were coupled with significant expenditure on supervisory staff and extra layers of management, including a new chief financial officer and increased account managers and IT staff, increasing employee costs by 23 per cent between FY13 and FY14. The administrators say they were brought in to resolve inefficiencies that had caused ‘significant issues around production performance (ie rework) in Q1 FY14’, but former staff claim they new people brought ‘no value to the company’. The staff also say the firm spent $800,000 developing an in-house MIS system called Sumo Tools that ‘was never designed for manufacturing’ and did not have the required functionality – at a time when the company could least afford it. This though was the only significant asset of the business the administrators managed to sell, for an undisclosed sum.
Former senior managers say decision making began to happen in secret between a few high level executives, and they say this led to significant budget shortfalls because budgets were based on sales that were only vaguely discussed with the client, such as $500,000 for trailer advertising for major client Masters which did not eventuate. The administrator’s report found forecasts differed wildly from actual results, expecting 30 per cent revenue and 215 per cent EBITDA growth in FY14 ‘based largely on unidentified business, assuming that an expanded sales team would generate new business’. In reality, revenue was below budget by $7.5m and EBIDTA lost $3.4m. The managers say the unrealistic and secretive decision making meant the company was unable to adapt to market changes, and left managers in the dark about expectations, strategy and company direction.
Those previous senior managers say it also led to ineffective strategic and service changes. They say under the new executive regime the company inexplicably moved away from its customer-focused, end-to-end service model and implemented textbook corporate processes that split up each part of the design and manufacturing process into different areas with separate account managers. Clients did not react well to the changes and left in large numbers ‘disillusioned’. The managers say the company moved away from its retail printing base to focus on external signage, and pursue a longer-term goal of offshoring most production to China, neither of which was financially successful. “There was no strategy for the print business and new business was not being chased or generated. Digital was another good opportunity that wasn’t pursued,” one says.
Staff lost confidence in management to the point where the sales and accounts teams had a more than 80 per cent staff turnover in the last six months, and the company lost senior figures, like head of design and innovation Robert Grosso, who left about seven months before the end and eventually joined Carlton and United Breweries, and sales director Gary Fawcett who left for OPG Global in October.
The situation became dire in the second quarter of 2014 when Sumo’s biggest client Masters announced a five-month hiatus from May, that senior managers say executives failed to adequately prepare for. Masters was easily the printer’s biggest client, making up 30 per cent of turnover, and the company had become so dependent on large contracts that this blew a massive hole in the balance sheet and effectively sealed the company’s fate. The managers says that while executives knew this ahead of time there was insufficient planning to account for it, or to drum up new business to see the company through. Later in September Sumo lost a tender for another major client Cotton On, the final nail in the coffin. Administrators say Sumo ‘relied solely on retail sector to generate sales’ and that 15 retail customers accounted for 80 per cent of its revenue. In addition to losing $7.2m since July 2013, EBITDA fell from $1.2m in FY13 to negative $3.4m in FY14, and was negative $2.4m for the first quarter of FY15 alone.
By March 2014 Sumo was losing tens of thousands a day and was being propped up by Harbert and the unknown co-investor, with three loans totalling $3m between May and September, plus $413,000 from chief executive Ken Swan and other executives between July and September. Sumo also took out $2.2m in debtor financing from Scottish Pacific from April onwards. Senior managers estimate Harbert and the co-investor loaned $5m-6m plus losses to Sumo over the time of their ownership. The administrator’s report shows the co-investor is still owed $2.79m but does not say exactly how much Harbert is out of pocket.
It was during this time that administrators say Sumo was likely trading while insolvent – from July 2014, and possibly even from January – based on preliminary investigations that indicate Sumo showed 10 of the 14 ‘general indicators of insolvency’ from at least July and would likely have been insolvent much earlier if creditors owed almost $1m in overdue bills had not agreed to extend payment terms. In July the ATO also agreed to defer an overdue debt of $617,000 on a six month payment plan. Sumo’s working capital ratio was also in the red from FY14 onwards, crashing from $1.2m to negative $3.2m in 12 months. The ratio was only 0.46 by September 30.
The administrators say during the time Sumo was likely insolvent it amassed $2.5m in debts. An insolvent trading claim could be pressed by creditors, but administrators caution that such claims are ‘difficult and costly to pursue, and even if successful they may not generate an additional return’. They also found that during the final year of its existence, the company was preferentially paying 30 unnamed key creditors $800,000 to stay afloat – a claim senior managers agree with. These payments are voidable by law, but the chances of recovering them are slim to none. The administrators say they have not conclusively identified any offences by the directors or others, but ominously add that ‘if a liquidator is appointed we consider that further investigations are warranted’. If found guilty of trading while insolvent, or other related offences, company directors can face fines of up to $200,000 and up to five years in jail.
Both Harbert and the co-investor eventually lost patience and began to investigate ways of offloading the company or cutting their losses. Company sources say they were already discussing options with administrators from October 15 and an overseas buyer, which according to administrators was wide format printer Colorlux Philippines, offered to buy the company for $1 and take on its debts, which he was told were about $1.5m
Senior Sumo managers say a top executive from Colorlux, possibly the owner, came to Australia to see facilities and meet staff, and it was only through the acquisition process that Sumo’s true financial position was uncovered and the debts turned out to be closer to $5m. The sources say he ‘had a real desire’ to buy the company until then, and walked away when Harbert declined his request to chip in $1.5m towards the sale.
With the eleventh hour bid dead, Sumo was put into administration on October 29. Administrators immediately shut the business down due to overheads of $170,000-190,000 a week and insufficient funds to keep trading with rapidly diminishing goodwill. All 80 staff, including then chief executive Ken Swan, were terminated when the administrators came in and discovered there was nothing to pay them with. Those sacked employees included one worker who had just showed up for his first day on the job with no idea it no longer existed.
All told, Sumo had amassed debts of $12.6m by the time it collapsed. They include $2.5m to trade creditors, almost $900,000 to statutory creditors like the Australian Tax Office, and $1.5m to employees. None of these creditors will get anything, as even the biggest investors will get close to nothing back. A sale of all Sumo’s kit and other equipment netted only $800,000 in a bargain bin auction that saw numerous pieces of printing equipment sell for paltry sums.
With Sumo now in full-scale liquidation after creditors quickly accepted the administrator’s recommendation, it remains to be seen if anyone will be held formally responsible for yet another tombstone in the seemingly endless graveyard of fallen print firms – many of which have left hundreds of other responsible companies out of pocket with no chance of return.
Matt Huber founded Sumo Visual Solutions in 2003 as a retail signage specialist and targeted big companies, mostly for point-of-sale advertising.
By 2010 it had grown into an almost $20m-a-year company riding the wave of profitable wide format and non-stop outdoor advertising growth. The company’s margins were mostly above 30 per cent.
Huber sold Sumo to American private equity firm Harbert Management Corporation and an unknown co-investor for about $18m in December 2010. At the time of Sumo’s collapse, Harbert owned 28.9 per cent and the co-investor 48.2 per cent. Huber stayed on as chief executive.
Things were looking good in February 2011 when Sumo won a huge contract with beverage producer Masters. It became by far its biggest client, worth 30 per cent of turnover.
Huber had a major stress-related heart attack in June 2013 and resigned in October after it was clear he could not return to work. Harbert appointed Robert Read as interim chief executive.
Soon after, Sumo won a big contract with Woolworths but had underpriced the tender and made servere costing errors, to the point where it lost the company $1m each year. This was not rectified by the time Sumo collapsed.
Sumo leased a new HP Scitex FB10000 flatbed printer in December 2013 – the FB10000 is the big daddy of wide format printing – and in March 2014 claimed it had been so swamped with demand that it had to turn away jobs because it machines could not cope without a major upgrade.
The volume of work was on much lower margin jobs that halved Sumo’s margins between FY13 and FY14.
Ken Swan replaced Read as chief exec in March 2014.
In April 2014, Sumo established debtor finance with Scottish Pacific. Sumo got $2.2m in following months and still owes $1.5m of it. In the same month, Masters announced it was taking a five-month hiatus from May, blowing a huge hole in Sumo’s books.
Sumo was given more than $3m by Harbert and the secret co-investor in May, July and September to cover its compounding trading losses. The company lost $7.5m between July 2013 and October 2014.
Sumo was likely trading while insolvent from July, administrators say. It lost $2.5m in that time.
Colorlux Philippines began due diligence for acquisition of Sumo in early October. Senior managers say this uncovered the true extent of Sumo’s financial woes.
Both Harbert and co-investor advised they would stop supporting Sumo in mid-October and in late October Colorlux pulled out when investors refused to put up $1.5m to help cover debts. Sumo’s fate was sealed and it was put into administration on October 28.
This Feature appeared in the Feb 2015 issue of ProPrint Magazine