Manufacturing busiest for turnaround activity with another challenging year in prospect, says IF

Posted on 11 Oct 2023 by The Manufacturer

Manufacturing was the sector with the most turnaround activity in the last year and this trend is expected to continue over the next 12 months, according to new research. 

Between Q2 last year and Q2 2023, the sector saw a 20 per cent increase in insolvencies. And The Institute for Turnaround’s latest Societal Impact Report says the number of struggling manufacturing businesses rose to 13,660 in the last year against a backdrop of labour shortages, high energy costs, rising interest rates and inflation.

During the same period, IFT members, who specialise in business transformation, saved an estimated 55,000 jobs in total, helping UK companies to add £2.6bn in shareholder value.

The IFT expects that the manufacturing sector – followed by retail and construction – will continue to face the most demand for turnaround expertise in the next 12 months.

The report says that a “temperature test” for the sector would currently be set at amber, heading towards red, with businesses facing a tougher financial climate after 15 years of a benign lending market.

It warns that the impact of interest rate rises has not yet been fully felt in the manufacturing sector and that some banks are actively reviewing their portfolios, as traditional drivers of stress and distress, including cash and liquidity, become more apparent.

While it describes many manufacturing businesses as being in “survival mode”, the report does highlight “sectoral winners” such as defence and aerospace and those operating in any specialist, added value, non-discretionary markets.

IFT members also reported that over half (54 per cent) of companies they are called in to assist are simply unaware that they are in trouble until it is too late. This year’s survey showed continued strong resistance among distressed companies to turnaround support.

Over three quarters (77 per cent) of IFT members reported cultural resistance to external advice as the most common reason that companies didn’t seek support.

Against this, while turnaround projects typically require an adviser to focus on short-term survival, some 60 per cent of them have involved a full business transformation process in the last year, reflecting the IFT’s focus to “adapt, transform and succeed.”

The report also draws attention to the greater use of restructuring plans, a procedure that enables directors of viable companies which have built up debt in a troubled period, to achieve a balance sheet reset and transform their fortunes.

Delivering the Willerby “wow”

After 70 years of making memories for British holidaymakers, an ill-fated buyout resulted in holiday lodge manufacturer, Willerby, seeking turnaround support in 2015 to reverse a large fall in turnover and profits.

Willerby is the UK’s largest manufacturer of holiday homes, lodges and residential park homes. It operates from an 80-acre site in Hull and produces more than 7,000 homes each year.

The company, which also has showgrounds in Hull, Southport and Livingston, went on to win The Institute for Turnaround’s large turnaround of the year award in 2017 and under CEO Peter Munk, began shifting its focus to transformation – bringing the Willerby “wow” factor to customers and investors alike.

“Willerby was a sleeping giant,” Peter Munk recalls, when he set the company on its transformation journey in 2017.

The first step was to understand the value of the Willerby brand. Willerby does not sell direct to end users and had no relationship with the people who holiday or live in its homes. It broadened its focus from park operators and distributors to include the end customers and built engagement with end customers through its website and showgrounds.

It also created an owners’ club from a standing start, and dialogue with its 10,000-strong owners’ club brings both valuable feedback and contributes to a strong net promoter score and repeat purchases.

Beyond the brand, “values around people, product and place are what’s really driving the business forward,” explains Peter Munk. “If what we are doing doesn’t hit one of these, we ask why we are doing it.”

On the people side, there has been investment in health and wellbeing. During Covid, the company prioritised retaining staff and the six directors phoned all 800 employees on furlough to check on their welfare. Investment in training and development has been increased, including a significant increase in its apprenticeships scheme.
Product investment has focused on “delivering affordable luxury across all price points” says Peter Munk.

“We start with the ‘wow’ factor and work out how to deliver it a different price points, rather than starting with the price and working backwards to what we can afford.” Sustainable product development is also key, with the company pioneering energy efficient GreEN standards and all-electric homes.

Environmental considerations are at the heart of the place proposition. An all-EV fleet and charging points, LED and smart sensor rollout are reducing energy usage and the firm is also investing in energy generation from biomass and solar panels, and, potentially, wind power. As well as being good for the environment, these will bring “significant financial returns through reduced energy costs”.

Throughout its transformation, the company has maintained very strong cost discipline, which meant that it didn’t break a single covenant during Covid.

While sales dropped by about a fifth in 2020 to £122m, Willerby rebounded strongly to £217m in 2022 and Peter Munk is optimistic about the future, thanks to staycation trends, strong demographics and buoyant institutional investor interest.

Although dealing with Brexit, Covid, high inflation and supply chain pressures has been a challenge, it has made the company more agile. A pipeline of operational improvements, including pioneering electric homes, new kitchen designs, and targeting a more premium product, Peter Munk is targeting a £50-70m EBITDA business in next three years.

Milly Camley, CEO of The IFT, said that challenged businesses can transform their fortunes with expert advice. The advent of restructuring plans, introduced through new company law legislated during the pandemic, can provide a balance sheet reset, thus enabling an authentic company-led turnaround.

“In 2023’s difficult economic climate, the work of our members has never been more important or relevant,” she said.

“Last year, our members saved an estimated 55,000 jobs and protected £2.6bn in shareholder value. In the next six to 12 months most of our members are forecasting a busier period, as more firms struggle with escalating challenges, including the availability of affordable credit after over a decade of cheap money plus rising inflation and labour costs.

“Sometimes good management teams find themselves struggling due to bad luck or highly leveraged balance sheets that looked viable pre-pandemic. These stressed but viable firms are the ones that members of The IFT support.”

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