WASHING MACHINES and wallpaper, bread and jeans, laptops and diesel; almost everything you buy for your home and workplace passes through a complex supply chain. In many cases, that supply chain is operated by Wincanton.
The FTSE 250 logistics business started life delivering milk in 1925 and although it still transports milk daily, it now provides a kaleidoscope of goods and services as complex as the supply chains it operates.
But despite the complexity of its offering – Wincanton delivers and stores everything from food and documents to materials for recycling and provides consulting, record management and vehicle maintenance services to sectors as diverse as construction, defence, energy and retail – it operates using a “reasonably classic” corporate structure, explains chief financial officer Adrian Colman.
Wincanton’s financial structure is aligned around operational segments, with finance teams supporting sector heads and a central finance team providing group reporting where business is related to Wincanton and closed-book contracts. At the same time, financial analysis has to be provided for open-book contracts.
“They have a tough remit and have to serve two masters,” Colman says, adding that his finance team has to deal with his “control freak” nature: needing to know what is going on anywhere in the business. “As my colleagues would tell you, I am an incredibly nosey and nit-picking person,” he says. “I like to be in control of operations and I expect to know the big contracts inside out.”
Those contracts include ones with the likes of Proctor & Gamble, Asda, Morrisons and Waitrose, which recently extended its contract for the storage and distribution of wines and spirits to its UK outlets. The extension was awarded, in part, for Wincanton’s ability to deal with the huge spikes in demand for fleet that are necessary to deal with volume fluctuations, which vary by as much as 100% depending on the time of year.
Given the breadth of Wincanton’s business and customer segments, finance plays a key role in meeting volume demand for its fleet, whether by using its own fleet or finding sub-contractors to pick up the slack. “We build a business case and will add back some fleet to deal with demand,” he explains. “It varies by industry. In some areas, like FMCG, we find we have a core fleet and demand doesn’t change very much, but in volatile areas you want to flex your fleet for seasonal and boom and bust cycles.”
Managing balance sheet risks
The strong performance in contract renewals contributed to a solid financial performance for the group, with overall sales rising 1.1% to £1.02bn, while operating profit grew 6% to £48m. Arguably more important to Wincanton’s improving fortunes than client renewals has been its focus on managing balance sheet risks, with the closure of the defined benefit section of the group’s pension scheme to future accrual at the end of 2013.
According to Colman, closing the scheme was a “significant but necessary action” for the group to take to mitigate future volatility of the deficit and the income statement charge to give “greater financial certainty” to the business.
“Finance played an integral part in the modelling of the solution, information to the solution into the consultation process with colleagues, and accounting for the impact of the closure in the financial statements,” he says.
Since Colman joined Wincanton in January 2013, the company has been through something of a transformation. There has been a drive to make cost reductions and improve cash generation – something in which the finance function has had an important role to play. Indeed, Colman himself brings considerable experience to bear, having been responsible for delivering successful cost reduction and working capital improvement programmes when he was FD at Psion.
Colman continues to drive cost reductions across the business, which lowers costs of operation in open-book contracts and improves the margins of closed-book work. This was evidenced by the improvement in Wincanton’s underlying operating margin from 4.2% in 2012/13 to 4.4% in 2013/14.
Having a stable balance sheet has made the company more competitive when it goes for renewals. “Clients are asking to have more for less. You have to respond to that,” Colman says, and adds that efficiencies are managed on a group-wide basis and at an individual contract level.
“The big three asset pools are people, property and vehicles. We share resources across multiple contracts and have an efficiency programme around driver behaviour, reducing damage to fleet and MPG impact,” he explains.
Finance has also had to tackle the group’s net debt position. The group has reduced the level of closing net debt to £64.9m from £107.6m in 2013 and the average level of net debt to £168m from £201m as a result of the focus on cash generation and improved working capital management.
“It was over-leveraged; there was too much bank debt and pseudo-debt. The balance of company value to the proportion of debt is more sustainable,” he says. “The focus has been on generating free cash to reduce debt and keep payments down.”
Refinancing has also been on the agenda. The group refinanced its main bank facility in November 2011 and at the time of its half-year results for the six months ended 30 September 2014, it had just renewed its main bank arrangements with a new £170m facility for a five-year term to June 2019. In addition to the main bank facility, the group’s facilities include £75m from the Prudential and M&G UK, with four equal repayments commencing in 2018 and the balance of a US private placement debt of £54m.
The decision to diversify away from pure bank debt was “partly around terms”, Colman says. “Typically, if you go back to 2011, three- and four-year facilities were awful for ten-year money. We timed it well in the market.”
Three-year turnaround plan
The business retains a “substantial historical pension deficit” but the outlook for Colman and co appears bright. There has been a rebound in construction – a key sector for Wincanton – with more people moving house. “We see an opportunity to invest in the household and home sector. In the construction recession in 2008, we took the right action and took out operational costs to not have too much fleet so the group has not been standing idle,” he says.
Indeed, confidence across the supply chain logistics market, which is estimated at £36bn of expenditure, continues to improve, with 80% of respondents to the bi-annual UK Logistics Conference Index anticipating improvements in both sales and profitability.
“We have a three-year turnaround plan and when we refresh it each year, we also refresh at an industry sector level. We look at the dynamics and trends in the industry such as GDP and house-building stats,” he says.
As a result, Wincanton has increased its investment in marketing activity, which relative to a consumer product company is “small in terms of underlying spend”.
In terms of ROI, Colman says the business tracks how many leads turn into tangibles, while also evaluating client relationships at the beginning and end of marketing campaigns. “We are quite granular about how we build relationships,” he says.
But where will the group focus its resources in 2015? The business, Colman explains, is relatively capex light as it chooses to use most of its property and fleet assets under finance leases. Nevertheless, he expects some significant fleet renewals to take place through leases and some additions to the fleet, principally in the construction sector.
In December, the business announced the addition of 80 new vehicles and more than 270 trailers to its fleet of over 4,000 vehicles as part of its drive to increase the efficiency of its transport network and reduce the environmental impact of its operations.
The expansion follows its investment in 150 vehicles for its container fleet in 2013. The new-specification vehicles boast significantly improved fuel efficiency and reduced emissions in line with the latest European Union standards, which cut particulate emissions by 66% and nitrogen oxide by as much as 80% compared to their predecessors.
More than 80% of Wincanton’s vehicle fleet is now Euro 5 specification or above. And, like other logistics businesses such as Interserve, sustainability is a key component in Wincanton’s corporate citizenship agenda. “It’s good business as there is often a good efficiency case and a lot of clients with customer-facing businesses have [sustainability] as part of their strategy,” concludes Colman. ?
IN BLACK AND WHITE
2013 – present CFO, Wincanton
2011 – 2012 CFO, Psion
2008 – 2011 CFO, London City Airport
2005 – 2008 Group financial controller and head of investor relations, QinetiQ
2002 – 2005 CFO, Numerica Group
2000 – 2002 M&A integration, KPMG
1994 – 2000 Audit and transaction services, PwC
1991 – 1994 Accountant, Morely & Scott
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