With debts of £91.5M, White Young Green has come close to breaching its banking covenants. Its profits are down and its share price has been decimated. The consultant is down, but is it out? Antony Oliver reports.
Accepted wisdom in business would suggest that even coming close to breaching your banking covenants is a very bad thing. It can be the first step on the slippery slope to financial collapse and something to be avoided at all costs.
The reason is simple. Once a company breaks its pact with its funding partners by failing to deliver expected minimum levels of business performance, all bets are off. Change is inevitable.
If you are running a company in such a situation, you might at the very least expect to have to renegotiate the terms of your loans. And you could well expect to lose autonomy and experience increased scrutiny of every decision you make.
Close to the worst-case scenario
At worst you can expect the banks to move in and run the business for you as they seek to protect their investment. Leeds-based consultant White Young Green (WYG) finds itself very close to this scenario.
“There is a possibility that the group will breach its net debt to earnings before interest, tax, depreciation and amortisation (EBITDA) bank covenant when it is next tested in June 2009,” it warned investors in February. The covenant relates to its £91.5M debt. Nonetheless, chief executive Paul Hamer remains remarkably positive.
“We are not in intensive care yet. Our lenders can see we are profitable and that we are generating cash.”
Paul Hamer, WYG
“We will continue to be profitable and cash generative going forward so we are not in intensive care yet,” says Hamer. “Our lenders can see we are profitable and that we are generating cash.
“They want their risks minimised and their liability reduced. But we both want less debt on the balance sheet and so there is a mutual objective that binds us together.”
Group finance director David Wilton agrees and says that although the publicly listed company is certainly not fully stable, there is now a clear path to recovery.
“Lots of companies breach covenants and survive and we are clearly expecting to survive,” explains Wilton. “There are challenges but they are all capable of being resolved so we are optimistic about the future.”
He adds: “The banks clearly want to get their money back and the question is: over what period of time? We are in dialogue with them, they are busy and it’s a long process.”
Implementing a recovery plan
Hamer joined WYG as chief operating officer in July 2008 having worked previously in the petrochemical and nuclear energy sectors. He was elevated to chief executive following the departure of Lawrie Haines in January. Wilton was brought in to strengthen the management team in February.
Together they are in the final stages of implementing the recovery plan they revealed to the City last February. When completed this week, 800 of its 3,200 staff will have been made redundant and a new strategic direction will be in place.
Hamer and Wilton say the challenge is to get the business back into shape, with good profits and growth, by first getting costs under control and introducing better systems to drive efficiency and effectiveness.
“Next year is about stabilisation, repairing the business and having an uneventful year where we deliver for our customers and shareholders.”
Paul Hamer, White Young Green
“The company has been through a tumultuous year. It has never experienced anything like what it has been put through and it has been very painful for us,” accepts Hamer. “Next year is about stabilisation, repairing the business and having an uneventful year where we deliver for our customers and shareholders.”
WYG has already warned in May that pretax profits for the current financial year will be around the £12M mark, down from £22.2M last year. It also expects that revenues will be down on last year’s £282M − a figure that is likely to keep falling next year as WYG focuses on profit rather than revenue.
This desire to maximise the firm’s ability to generate profits is core to the first plank of its three part strategy and a vital step towards bringing its £91.5M debt mountain under control.
The debt was racked up primarily from the firm’s extended buying spree which saw it take over some 18 firms in the last five years bringing total acquisitions in the last decade to over 35. Turnover has rocketed from £30M to nearly £300M in the same period.
“We have an ambition that our debt will be no more than two times EBITDA,” explains Hamer, stressing that he is talking hypothetical figures. “If that is, say, around £20M going forward that gives you the quantum of the challenge to get that debt down. But having restructured the business we think that we can make good inroads into that over the next 12 months.”
Hamer’s new strategy appears to have calmed the banks for now but he and Wilton continue to emphasise that there is still much to discuss, not least how the cash will be raised to refinance the debt. And having seen its share price plummet from a high of 496p in January 2007 to a low of 4p in April and around 25p today it is unlikely to come from existing investors.
The good news is that they now have a coherent story to tell. It starts by being very selective about the choice of workload.
“We have to aggressively and organically reduce our debt and that means getting customers to pay us.”
Paul Hamer, WYG
“We are interested in cash and profit rather than earnings,” says Hamer. “When we look at earnings we now inspect the quality of those earning whereas in the past I think there has been an ambition just to look at the quantity.”
Perhaps just as important is the renewed emphasis on chasing payments and recovering costs − a culture, he says, that hasn’t really existed within the firm before.
“We have to aggressively and organically reduce our debt and that means getting customers to pay us,” explains Hamer. “People now understand that the start of a project is when we initiate discussions with a customer and the project is fi nished when we have turned the work into an invoice and have been paid cash.”
In the past, he says the technical experts focused just on delivering technical excellence for the client and left the credit control and finance teams to chase payment. This has to change, he says.
“It’s an education process that will take time and will be a very painful process for many people. But they either engage with the process or leave.”
Yet Hamer insists that despite having to lose a huge number of staff, retaining capability is vital to the firm’s future. Redundancies are the very last resort.
He points out that he has had great support from staff throughout the process with people volunteering for flexible working arrangements, short weeks and reduced salaries rather than seeing colleagues lose their jobs.
Trench warfare mentality
“It’s actually very nice to see that there is a real trench warfare mentality,” he says. “People are saying rather than lose numbers and capability we’ll keep working five days a week but take four days’ money. Teams understand that we are all in this together.”
And Hamer and Wilton are prepared to bear the pain themselves, having agreed to voluntarily cut their own salaries by 10% and rule out any performance bonuses this year and next (News last week).
“We feel that [it is appropriate] from both a responsibility and integrity perspective,” explains Hamer. “The business has gone through some pain and David and I believe that visibly we should demonstrate that we are willing to share in that pain.”
So having got the basics of the firm back into shape, Hamer’s second strategic goal is to become more geographically diversified. Only around 17% of revenues come from overseas now and Hamer’s ambition is to see this figure rise to 50% by 2012/13.
“It is a big jump,” he accepts.
“We have selected five key regions and are already seeing return with a record order book in our international business of €111M (£95M) − in 2007 that was €65M (£55.6M).”
The plan is to build out from WYG’s existing beachheads in Poland, Turkey, Romania and Bulgaria to focus on five key regions of Africa, Balkans, Commonwealth of Independent States, Central Eastern Europe and the Gulf.
Crucially, regional heads have also now been relocated from the previous international headquarters in Nottingham to live in their regions. The whole international division will also be integrated with the rest of the business thus increasing the talent pool available on projects by making all staff available.
Peaks of excellence
The final part of the firm’s new strategy is described by Hamer as ”peaks of excellence” and will see WYG attempt to focus on fewer core markets in a bid to differentiate itself in the crowded multidisciplinary consultancy sector.
“WYG probably offers too many services,” he says. “I don’t think our focus is tight enough.
“WYG probably offers too many services. I don’t think our focus is tight enough.”
Paul Hamer, WYG
The company has grown and become much larger but it doesn’t dominate any sectors. Our ambition is to be number one or two in our selected sectors which will then define our identity.”
Finding the right sectors is about understanding current skills sets and client relationships. It is also about working out where the long term workload will be.
Energy, education and healthcare are strong areas in the WYG portfolio and Hamer expects that environment and transport planning will also be in the mix.
“We are currently recognised for being good but we need to be recognised for being the best,” says Hamer. “And in sectors that are sustainable going into the future. You will see our focus shifting up the value chain − sitting at the table and helping clients define what good looks like.”
Chief executive officer. Joined WYG in 2008 as chief operating officer from VT Nuclear Services
- Experience 20 years in business management, leadership and project delivery
- Qualifications MSc (Dist) in engineering project management.
Group finance director. Joined WYG in February 2009 from Adler and Allan Holdings
- Experience 25 years financial management
- Qualifications MA from Oxford in politics, philosophy and economics and is a fellow of the Institute of Chartered Accountants