Vehicle Aftermarkets


Summary:

Turnaround of a: Private Equity funded, complex, nationwide, 56 branch network supplying specialist parts and services to a range of market sectors, establishing profitable growth trend with a view to sale.

Date:

2006 – 2007 (12 Months)

Company:

An ‘MBO’ from Finelist plc, whilst in administration in 2000/01. Established in April 2001 with private equity fund backing.

Assignment:

Turn round of one of two nation-wide UK companies providing parts supply, distribution and specialist workshop services; establishing profitable growth in anticipation of selling the company.

Role:

Interim CEO

Assignment Length:

12 Months

Background:

The business had 56 sites across the UK, mostly consisting of branches that provide parts distribution to a range of clients and operate specialist workshops. Company sales are c.£55m with c.700 employees.

The heritage of the business is considerable, being able to trace its roots back to the 2nd half of the 19th century. For many years it was part of a major UK group; a first tier automotive parts supplier. It was eventually sold as ‘non core’ activity in the late 1990s after the parent group had been bought by TRW. The business became part of a highly acquisitive listed ‘cash shell’ (Finelist plc) which went through a period of very rapid growth. The Group’s efforts to consolidate the new businesses profitably were not as successful as planned and this resulted in the receivership of 2000.

The senior management team at that time proposed an MBO that was successfully P.E. backed by NBGI.

From 2002 onwards, the financial performance of the company was poor, with losses being sustained in most years. For example, for year ending March 2005, a PBIT of (£1458k) and a PBT of (£2155k) was suffered, followed in 2006 by a PBIT of (£837k) and a PBT of (£1679k).

Between 2001 and 2006, there had been a succession of industry experienced Managing Directors as a response from the P.E. fund to inadequate performance but this resulted in poor continuity of approach and no expertise in re-structuring or turn round being available either at board level or anywhere else within the company.

By the end of 2005, a review was undertaken by the fund and the Non Executive Chairman, which resulted in the search for an experienced interim with successful turn round credentials.

The Brief:

Preliminary meetings with the P.E. Fund and the NEC were clear: the assignment was to turn the business round. The operations were highly distributed which introduced increased levels of complexity to the situation. The fund was a very patient shareholder but was looking to realise its investment in about a 2 year time horizon, which applied clear pressure to achieving the turn round and establishing a profitable growth phase.

With the agreement to enact what was necessary to achieve the transformation, the assignment started at the beginning of June 2006.

The Initial Position:

From the beginning, it was clear that the way the business operated had remained essentially unchanged for many years, extending back to the time that it was still part of the original large UK based parent. This was reinforced by the preponderance of very long serving people and the ageing core computer system (installed in 1989). In-house skill and experience to operate a medium sized distributed company, without access to large company finance to cover poor years, did not exist. Line management practice was poor and unacceptable performance was tolerated. There had been little investment in people, in terms of training and development, recruiting good quality individuals or actively paying for performance. Poor, or no, processes existed across the business to ensure consistency of approach and reinforce appropriate management control. There were significant skills shortages in key areas of the business, with either inappropriate or no people in place.

Having said this, two senior Operations Heads were recruited about a couple of months before the assignment started. They were reporting directly to the NEC, who had taken on executive responsibilities for several months as the previous MD had left towards the end of 2005.

From the start of the assignment, the Chairman stepped back into his NEC role, having run the budgeting process for the year then underway from April 2006. This budget was deemed to be quite ‘do-able’ by the longer serving board members, with a deliberately ‘soft’ start to the year being built in.

Having sustained losses for a number of years, cash was very constrained and VAT payments had become the subject of revised monthly instalments to HMRC. There was no managed process for monitoring cash flow on a weekly or daily basis at that point. Stock levels in the company were high at c. £10m in the balance sheet and debtors appeared to be under control at c. 55 days. Creditor days were quoted at c. 95 but there was a great deal of supplier pressure for payments.

On the plus side, the business had secured the AA contract for the supply of parts to their roadside rescue vans at the start of the calendar year.

The Achievements:

Cash and Working Capital

  • Increased Net Worth to £3.4m from previous year’s negative value
  • Re-negotiated ability to utilise ‘allowables’ with Venture Finance (invoice discounter and loan provider) from 52% to 62% initially, rising to 70% later
  • Agreed the sale of 3 freeholds, releasing £1.6m ‘transformational cash’ for the turn round.
  • Reduced gross margin variance from over £1m end of year negative adjustment for y/e March 2006, to c.£0.4m for y/e March 2007
  • Settled c.£230k old debt claim on the business for £80k without suffering court proceedings.
  • Resolved aged debtors from c.£1m to under £300k, with the rest in court proceedings
  • Reduced stock holding from c.£10.3m to £8.8m, delivering a c.30% stock turn uplift and stock write-off of c.£1m.
  • Obtained procurement cost savings of £0.4m in 3 months for budget preparation
  • Required change of debtor and creditor day calculation to conform to external practice, producing real improvements of debtor days 61 -› 55 and creditor days 120 -› 103.
  • Agreed a new core IT system Implementation (£0.75m CAPEX)
  • Found £3.5m funding cover to replace the very old vehicle fleet (c250 vans and 150 cars)
  • Ran the property portfolio personally through a peak of lease renewal and rent review

New Business Development

  • Achieved a c.15% increase in sales over the year (£49.5m to £56.8m)
  • Attracted several new national accounts in key market sectors, including Stagecoach and Lantern Emergency Vehicle Recovery.
  • Built a new business pipeline (c.£7m) with potential well beyond the budgeted £1.9m
  • Established the first new trading site since the company start up.
  • Increased client retention via more contract deals and better service (40% churn to 30%)
  • Increased the volume of business from the AA by over 25% cf. budget
  • Initiated a nation-wide Public Service Vehicle (PSV) sales drive, lifting income by c.£1.5m
  • Won new 3 year contract with BNFL (c.£0.6m per year)
  • Targeted gross margin improvement of minimum 2% in the year
  • Built broader and deeper relationships with key plant hire clients (Hewden and A Plant).
  • Set up workshop development plan for beyond budget performanc

People Changes

  • Achieved an overall headcount reduction from 717 to 685 in 10 months, whilst additionally replacing a number of key staff.
  • ‘Retired’ the (unqualified) FD of 37 years service and brought in an interim FD (Sept. ’06)
  • Promoted the new Operations heads to s.288 directors and moved existing Operations Director to a Non Executive role
  • ‘Retired’ the Head of IT of 39 years service, replacing with the existing Financial Controller.
  • Initiated the replacement of a number of non performing branch managers.
  • Removed and replaced ineffective internal audit team
  • Recruited a new permanent Financial Controller and Director.
  • Recruited the company’s first Head of Procurement and Product Management
  • Set up a new HR function, including a Head of HR.
  • Recruited a new national account new business development manager

Organisation Structure

  • Re-structured the board to facilitate the turn round.
  • Established Procurement, Product Management and HR functions
  • Re-structured the Operations function from 3 to 2 divisions, covering the UK
  • Expanded the National Accounts function and revised the senior Operations management focus to invigorate all sales activity
  • Re-structured the finance and IT functions to support the turn round.

Management Processes

  • Devised new business pipeline process for Operational and board review
  • Outsourced IT servers, negating need for CAPEX and upgrading performance significantly
  • Outsourced the credit control function, improving debt collection rates in the month, reducing the aged debt profile and eliminating 6 roles from the business
  • Set up central procurement processes to optimise purchasing (£30m material spend)
  • Streamlined company year end audit process, cutting time to ARA issue from 9 months to 3
  • Produced a company CAPEX procedure, including investment review
  • Ran employee communication process on a monthly basis
  • Established refreshed internal audit procedures
  • Initiated the use of KPIs, job descriptions, salary scales, and performance reviews
  • Set up functional goals monitoring process, used quarterly by the Operations Team meeting

The Outcome:

Value (y/e March) 2005 2006 2007 2008
Sales (£m) 46.6 49.5 53.2 56.8
G.M. (£m) 17.4 17.6 19.3 21.7
PBIT (£k) (1458) (837) (416) 936
PBT (£k) (2155) (1679) (908) 700
Sales/head (£k) 66.5 69.7 79.0 84.8

The net effect of the work was to reduce the cash consumption year on year markedly and improve the cash flow into the company at the same time. The budget produced had all members of the board committed to its delivery and the commercial functions had work in hand to significantly reduce the risk on budget failure at both the sales and GM level. In fact, there was sufficient ‘below the line’ activity to give confidence that the budget would be beaten.

A final and important point is that the net worth of the business went negative at the end of the financial year ended March 2006. To avoid complete decimation of the company’s credit rating, negotiation took place with the major shareholder to agree to consolidate an outstanding £3m loan plus unpaid interest into the Net Worth of the company. To facilitate this, the shareholding was re-structured in a ‘debt for equity’ swap and the event was included in the submission of the accounts to Companies House in December 2006.

Finally, the assignment was brought to a satisfactory conclusion with the agreement to re-deploy the interim FD to the role of interim CEO, introduce a new permanent FD with company sale experience and reduce the NEDs by one

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