Fountains Plc

Source: Stock Market Digital

Date :26/07/2007 14:23:26

Fountains PLC is a long-standing AIM listed company, having floated nine years ago. It had an enviable market but lost direction Matthew Turnock explains how the firm restored its self confidence.

Written by John O’Hanlon & produced by Kiron Chavda

In April 2006 things looked bleak at Fountains. The company had had to issue three profit warnings, it was under an improvement notice from the Health and Safety Commission, and its shareholders were distinctly unhappy – a revolt was looming. Had there not been a radical change, there is every chance that the company would have gone to the wall and I would not be writing this.

Fortunately that change happened, as we shall see shortly. The business was incorporated in 1957, explains Matthew Turnock, who joined the Fountains main board as Finance Director in 2000. “This company did very well in the 1970s and 1980s when the tax regime was favourable to forestry,” he explains. “But that market declined from the late 1980s, so the business sidestepped into other areas that used the same core skills. It repositioned itself into vegetation management for infrastructure and utilities customers who needed grass cutting or tree management.”

Thus Fountains became a leading player in keeping leaves off the line, preserving the sightlines for motorway signs, and making sure trees couldn’t come into contact with cross-country power lines. There have always been a lot of players in this industry, but Fountains was and still is the only one that has a nationwide ‘footprint.’ It had also acquired a forestry operation in the United States, which was able to mirror its services in that very different market.

So far so good. Railtrack, the Highways Agency and the National Grid will always have to keep nature from encroaching on their operations while landscaping their estates agreeably. The market was secure, so why should an established player like Fountains be unprofitable. The HSE notification on May 27 2005 was an indicator. No company that undertakes dangerous operations should have to be told that “Arrangements on multi team sites [were] not adequate to ensure control. Roles and responsibilities [were] not clarified leading to confusion on site.” The second half of that points to organisational rather than merely local problems.

New structures

It was at this point that Richard Haddon, an experienced senior executive at the National Grid and serial turnaround agent, was approached to reform the situation. He found a company that was losing £2.5 million on an annual turnover that had plateaued at around £35 million, with a declining forestry business and an over dependency on a few long term customers. “All the losses were on a few large contracts. At the time we were structured into divisions, which served established customer groups. The danger of that is that you only look for work with those customers, and that is a high risk strategy because if those customers turn of the work they could turn off your company!” says Richard.

The rail industry was moving towards a national procurement policy, something that should have favoured a national player but was a problem for Fountains because of the way its workforce was structured. “We have to have the labour ready to do the work when the customer wants it done, but because we mostly employed our own workforce, when the work was not there we had an overhead and no income, when it came in volume we found it difficult to find the resources to get it done.” This was affecting the company’s standing and image in the eyes of its customer, he says.

The strategy he decided on was to broaden the service offering to enable Fountains to move into other ‘familiar’ markets. The focus was changed from the old divisions to a regional strategy that kept the national footprint but could concentrate on deploying its core skills in known geographical areas.

“The other issue we had was that we were going for subcontracts, not head contracts, which meant that we were potentially losing margin and losing the opportunity to make customers aware of our brand,” Haddon continues. If you are not dealing direct with the end customer they might not even be aware of you. “Our ambition was being thwarted by going for small contracts with a short time frame. That put the order book at risk because it didn’t have many years of longevity in it, and that is not comforting to shareholders! So not only did we go for a geographical strategy we went for bigger contracts, in which we could be the main service provider, and to go for longevity.”

Going for the headline contract

As he analysed the old model, he found that the cumulated value of business in the sectors Fountains served was in the region of £875 million. “Say we could win ten percent of that, it would take our business to £87 million. That is not big enough when you are hovering at £35 million already. When you move to geographical alignment and have a broadened managed service strategy you open your market potential to multi-billions. To have ten percent of that is a lot more attractive.”

However there are very few contracts on the larger scale that would be restricted to vegetation management in, he points out. “They are normally of a support services or common services type. So we were looking for market and customers that would have a large element of familiar work but would also include other services that are basically lower-skilled and for which we could either hire in the people or the skills.”

At the same time, he says, they needed to address the problem of the labour portfolio and make it more flexible. “We needed to bring in more contract contractors so that we could benchmark our internal costs against what we were paying in the external market.” Using contract labour would address the problems of seasonality, with which the company had been struggling.

The change of policy soon delivered results. The company started to win local authority work. “We have had lots of wins but the two major contracts that we have won recently were with the London Boroughs of Tower Hamlets, and after that Wandsworth. This work has broadened our service provision portfolio by 50 percent.”

It’s a principle of Richard Haddon when he comes into a company to take everybody into his confidence. “If you tell them nothing, then it will be business as usual. If you tell the truth about the losses and the profit warning and the H&S notification then they will be as motivated as you are to turn things around. I believe in giving strong support from the top team, and giving people help if they need to improve their performance, recognition if they don’t, and in either case the tools and resources they need to do their job.” Staff number initially dropped by about 14 percent, everybody was put through competency-focused interviews, and development plans and succession planning were brought in to ensure that the right levels of competence were there.

“As a result of that, we actually grew our sales, in my first six months by 15 percent.” To put that in context, this was the first increase in turnover for 14 years. The half-year figures to May 2007 show an 11 percent increase in turnover to £21.4 million, an order book worth £88 million, and profits around £700,000.

The proudest achievement

What particularly galled Haddon when he came was that safety notification. “Since my arrival lost-time injuries have reduced by over 78 percent. That is my proudest achievement. Everybody will be glad their shares have risen from 60 to £1.25, but I personally am even gladder about the fact that fewer people get hurt and I will not be satisfied until nobody gets hurt working for Fountains. I know we can deliver that.”

Safety is the first of Haddon’s ‘boxes’ by which he judges the business. The second is customer satisfaction. “If we are not delighting customers we will not win work. Once people really understand that they start to go the extra mile. We do not leave work that is unfinished or not acceptable. On a recent survey we have had from a customer on quality last May we scored 58 percent non quality and this year 98 percent. In all my years I never got a company to such a high score.”

The third box is finance. “That speaks for itself,” he proclaims. “We have cash in the bank now, are making profit, have a fantastic order book and longevity in our contracts. Following more than a year without a single profitable month, since the day we got together as a management team, every single month has been profitable.”

Carbon neutral services

It is important to state that the company has not by any means abandoned its origins in forestry management. While the vegetation management business is now sustainable and growing fast, the really big profits in the future could come from a market that is only just coming into existence. “I believe we have the ability to move into new consultancy and knowledge based businesses with our existing skills. We have excellent knowledge in how to do carbon offset, for example. We can help corporations satisfy their green agendas! We are working on products where corporates could actually earn money out of being green. This is something I find very exciting, and I want to develop that business both here and in the USA.”

He intends to develop a turnkey service, advising companies on what they should be doing to offset the carbon they generate, consulting with management on green initiatives, and managing those initiatives on their behalf. Fountains is uniquely placed to deliver tree planting programmes or carbon offsetting though its planting schemes in the National Forest and elsewhere, and can then produce the reports and the branding that proclaim these companies to be carbon neutral or better. This is a global opportunity and we are investigating all options,” he says. “But we will pick the low hanging fruit first – we won’t send teams off to South America when there are quality customers in the UK looking for our services.”