In 2004 Sheffield Forgemasters, a more than 200-year old, multi-million pound steel company and mainstay of Sheffield’s economy, faced financial ruin. Graham Honeyman led the changes to turn the business around. Will Stirling finds that courage and faith in making the right product can go a long way.
The name Sheffield Forgemasters International has a strong resonance in Sheffield. “I believe there’s something special about our company,” says chief executive Graham Honeyman. ”It is a highly technical place, we’re exporting around the world. We make interesting things like reactor pressure cylinders for nuclear submarines, tension leg components for oil rigs in the Gulf of Mexico, or bridge components bound for Hong Kong. It has a romantic feel – we work with fire and steel.”
An advanced steelmaker and iconic Sheffield company, it supplies high quality steel components to the steel processing, offshore, nuclear and defence industries.
It turned over £120m in 2008 and employs about 800 people. It now takes on about 30 apprentices a year, “for which we receive between 200 and 300 applicants,” says Honeyman. “It’s heart-breaking to turn them away, many of whom are excellent candidates.” Diversification into overseas markets, a strategy focused on high quality, specialist product and the united dedication of the workforce has made Sheffield Forgemasters a great success.
But six years ago it was on its knees. The story of how it recovered is a testament to the dogged self-belief of Honeyman, his management and shop floor staff that a broken company can work again.
Graham Honeyman began his career as a research metallurgist with Parsons Turbine Engineers in the North East. He moved to Sheffield from his native Teeside in 1988 – “when I first came here, I was coming to the Deep South,” he says – to take the job of technical director of one of the group companies. He was made managing director of one company, Forged Rolls, in 1996. In 1998 the group was then sold to Atchison Castings Corporation in the US. His first turning point came in 1999. He disagreed with the strategy of the company going forward and was fired.
“Because of my technical background I wanted us to be in a different, highly technical arena,” says Honeyman. “The US owners and a few of the senior management wanted us to be in lower quality, high volume product, which was totally against my principles. I believed we wouldn’t be able to survive competing against low cost competitors on a much lower technology level.” He left Forgemasters in February 1999.
Having pursued an evidently unsuitable strategy, soon after the CEO left in 2001 Atchison invited Honeyman to come back to solve the company’s problems. Why return to the scene of the crime? “I came back because I have a strong passion for the company and the people that work in it. That’s what motivated me to return, initially as a consultant later as MD of one of the two group companies.” In a volte face, in May 2002 the US parent asked him to stay permanently. “When I looked at the bottom line then, this company was losing about £750,00 a month. We had no intention about doing an MBO at that time, it was all about making sure the company got itself solvable in that relatively short period of time.” At first the banks weren’t convinced about lending as they didn’t know who Honeyman was. But within seven or eight months, by early 2003, the company had made a very small profit, about £30,000-£40,000 a month. “The banks were astounded that we were able to turn things around to this point, so they began to give the company more support.”
This took nerves of steel. “I was very nervous for the company – we were reliant on the banks and every day we had a deteriorating cash position.
There was also a huge company pension deficit of £65 million and several big loss-making contracts at the time.” There was a general view that the business would not survive. “It was probably the most difficult period of my life,” he adds.
The rot had to stop. This meant cutting costs and unfortunately involved making 60 people redundant.
The loss-making contracts were disposed of, the worst example of which, a submarine component, was operating at minus 178% profitability, and the collapsed sales pattern had to be reinstated so there was a clear corporate direction. The entrenched company culture was another problem. “Crucially, we had to reconnect with the shop floor staff who were seriously disenfranchised. Over a period of a year or so we were able to engage with everybody, to unify the company and give us a direction.” But the main problem they faced was the owners’ high volume product strategy. The owners were bombing prices in the US, eroding the stable US market and taking on contracts at Forgemasters that were hugely loss-making. “The view they took is make your assets sweat; if you put more volume through your assets that’s tantamount to making them cheaper,” Honeyman says.
Where did the new profits come from? The business model was then what Honeyman deems a “pearl necklace”, a string of non profit-making contracts that held the company together, plus some pearls with significant profits on which were rare. “We had to develop those markets more and have less string, effectively.” They devised a two-edged plan: hire more technical people to control product quality, plus develop much higher quality components, to regain Forgemasters’s reputation as a quality-led company.
“I knew this would take two or three years. Production costs in the UK are much higher than in competitor countries so we had to be right on top our game on quality so people would naturally come to us, which they’d be willing to pay a premium for.” During this interim period, there were nervy moments. At the end of 2003 the 15,000 tonne press cracked due to a lack of maintenance, putting the press out of commission and the banks got cold feet. “We really had to convince them we’d be able to manage our way through it – which we did.”
One rocky road out
In 2003 several big concerns converged. The US parent appeared to be heading towards Chapter 11 bankruptcy. “If they went bust there was a very real chance we’d have gone down with them.” This galvanised the management team to separate Sheffield Forgemasters out. At the same time another part of Atchison, a cast rolls company , had serious financial problems too.
There was a heavily underfunded pension deficit and other liabilities to consider which included the £10m potential clean-up costs for a foundry in France that Atchison had imposed upon them, plus inter-group debts of £10m. Sheffield Forgemasters had to break away so they discussed a management buy-out. It was decided to take the cast rolls business in Crewe into administration. It was important at this stage, Honeyman emphasises, that any actions augmented the legal separation of Sheffield Forgemasters from Atchison before they went into administration.
The Enron accounting scandal meant many companies had started posting their accountancy problems on the internet in the interests of transparency. “When Atchison did this, some of our customers were reading and getting nervous about placing contracts, and our suppliers were getting nervous which further forced our hand.” At this point, the management had the choice of putting the company into administration and buying the assets at a discount. “Our supplier base would have lost money had we pursued this route. We had to find a different way,” Honeyman says.
The MBO had to be put on ice for about a year once the owners’ permission was acquired because of the legal difficulties involved. When the two companies were legally separated, PricewaterhouseCoopers became the shareholders and the legal administrators. “Even though our company was not in administration itself, we were ringfenced from the administration process – because they [PwC] took over the group companies they were our legal owners so we had to negotiate with them,” says Honeyman.
At the time, the Government had just introduced the Pension Protection Fund to help resolve pension liabilities at risk from companies in administration.
Forgemasters was the second company to join it. “We said to government; let us carry on, and take over our pension scheme without waiting for us to go out of business. We were making money, we were just saddled with this enormous debt.” The Government agreed and took over the pension deficit.
Government took 30% of the shares, with 70% retained by the management. In addition, the management took on a company voluntary arrangement, or CVA, where all parties consented to the administration terms. By employing the PPF, total debts of £85m were compressed, Forgemasters paid something to the company that owned the debt on the French foundry, and PwC took on the remaining £10m. With a big majority shareholder vote and supported by the banks and PwC, Honeyman orchestrated a legal MBO and they were separated from Atchison in early 2004.
Teamwork and success
Honeyman brought in Peter Birtles, previously his managing director at Forgemasters Engineering.
“I needed some gravitas in the company, and his experience has been essential to moving us forward.” When the firm’s financial director left, the Government volunteered ex-CEO of Corus Tony Pedder to support the MBO. “The three of us worked hard together in our different ways to secure the company’s future.” Birtles and Pedder remain on the board. Honeyman also praises the support from junior directors “who stuck the pace through difficult times and are now consequently shareholders.” Today the company is 70% owned by the original management team, and 30% by other employees comprising some managers and shop floor staff.
Thirty eight per cent of employees under-20 bought company shares just a few months after the flood in 2007, a sure sign of the new spirit. Sheffield suffered a very bad flood that year which destroyed much of the electrics in the south machine shop. This was a watershed in more ways than one. “The flood united everybody. Key customers helped us through it, pushing their own staff over here to help get the machines back online. It was a rally of support that exemplified the new belief here.”
The PPF was a crucial component of the MBO. Before, retiring employees would have received only 20% of their pension, where the Government scheme guaranteed about 90%. In addition, Forgemasters was given £2m by Yorkshire Forward to support the MBO, much of which went to help pay for the legal process. “The process needed 250 to 300 legal documents,” – he indicates six fat books – “but we did it.” In 2003, Forgemasters turned over about £38m; last year it was £120m. “Some of that is because prices have gone up, the rest is because we’ve switched to much higher technology product therefore has a lot more added value.”
In 2006 the company became Sheffield Forgemasters International Ltd (SFIL), merging the Steel, Engineering, Vulcan SFM, Euro SFM and American divisions of the business. It has won numerous awards, including the Queen’s Award for Export and The Manufacturer Export Manufacturer of the Year 2009. Returning to traditional markets and exploiting new ones has been key.
“We’ve gone back into nuclear now, making products for Babcock and Wilcox, and Westinghouse, for whom we’re the sole supplier of cast pump casings. These are traditionally a forged product with a lot of waste in manufacture – we worked out a way to cast them which is less wasteful.” The foundry is now making hydroelectric components, selling to Brazilian clients which is a new market. “This company is 80 per cent export, we don’t have enough of these engineering components in the UK so we’ve had to fight our way overseas and we have fierce foreign competition.” Research and development is very important to both SFIL and Honeyman.
In 2009 it spent more on R&D than in any previous year. “Yorkshire Forward has been tremendously supportive along the way,” he says. “We’ve signed our second research and development project with them which supports us financially, because they’ve seen how important our R&D is in winning overseas business . And the Advanced Manufacturing Park in Rotherham is interested in our work.” Examples include SFIL’s R&D into ingot technology covering the development of hollow ingots, for e.g. nuclear applications, and on new forging techniques to improve productivity and quality.
“For us to survive, from where we’ve come from, is an amazing thing. We’re in a deep recession, we’re still making profit and I think we’re doing better than virtually all our competition. When you see devastation on some steel companies in UK we’re overriding that and doing reasonably well.”
At one point in 2004, Sheffield Forgemasters was only three hours from closure because the banks wanted a signature from the US owner to support the separation of the UK companies or they would have called in the receivers. Look at it today.
“I believe in certain parts of the UK people have always gone for cutting costs, cutting people, cutting research – ‘we can’t afford it, R&D is the first cut’. This is absolutely the wrong direction because you’re signing the death warrant of that company.” While this story may inspire, business is not romantic and it takes a lot of hard work, Honeyman concludes. “You must supply things in the United Kingdom that other people find it difficult to make, or with a superior technology. We could never have survived fighting toe-to-toe with the Koreans, Chinese or others because they have fundamentally lower costs and we have got to keep climbing the technology tree to be better than them so we become the first choice of our customers.”