Simple principles underpin the plant hire firm's success: close attention to cash flow and constant applications of common sense.
Back in the early 1960s, when Hewden Stuart chairman Sir Matthew Goodwin was still plain Matt Goodwin and a hard-up junior partner in a firm of Scottish chartered accountants, he was invited by a friend in the building trade to go halves in buying a mechanical shovel. The intention was to use it for a few months of the year, and hire it out for the rest, his friend explained; the seller of the machine had also promised to rent it for the first three months. All this seemed a logical enough proposition, so the young Matt Goodwin shelled out his £500.
'The machine was rented out to the Coal Board,' recalls Goodwin, now a silver-haired, steely-eyed and vigorous 65, 'and 18 months later I decided to check how it was getting on. It was a gloriously sunny day, and there, in the middle of a wood, was Willie Bell the driver, sitting with the engine switched off, reading a paperback. Every three or four hours a lorry would come by, Willie would fill it up with wood, and then return to his reading. Frankly, I went away thinking that this must be the easiest way imaginable to make money - and bought a second machine, then a third, then a fourth.' Thus, in the anecdotally abbreviated version at any rate, was born the earthmoving equipment hire company Hewden Plant, the forerunner of Hewden Stuart, Britain's largest independent plant-hire company. Goodwin founded Hewden Plant in 1962 in association with Frank Jamieson, the man who had sold the original mechanical shovel and who was to be largely responsible for the company's style of leadership - management by walking about, except that in such far-flung businesses as plant hire it is more a case of driving about so as to keep in constant touch with the staff in the depots.
'Frank Jamieson knew every driver by name,' remembers Goodwin; and although that is no longer possible in a group with over 3,600 employees, Goodwin, his chief executive, Sandy Findlay, his senior managers and even the non-executive members of the board make a point of dropping in on the depots regularly. Goodwin himself will visit some 16 in a fortnight, he says, chatting to the fitters and drivers and managers, listening to their problems over a mug of tea.
This approach, which combines the human touch with a very direct form of intelligence gathering, is not all that common in the industry. 'In certain large groupings or companies we've bought,' says Goodwin, 'it has really surprised us that the people in the depots didn't know their senior managers' (at times it was clear that said senior managers didn't even know where all their depots were).
It was Jamieson who became the first chairman when Hewden Stuart was formed in 1968 through a merger with Stuart Plant, specialists in mobile-crane hire, and simultaneously floated on the Stock Exchange. Goodwin succeeded him in 1979. He has, theoretically, been non-executive chairman since 1993, when Findlay was appointed group chief executive. In practice, the two agree, Goodwin is still rather too active and involved in the company to be described as non-executive. 'He is part-time, but fully executive,' grins Findlay, who joined Hewden Stuart in 1969 and whose long association with Goodwin has been called one of the most effective partnerships in British industry.
The group has grown over the years through a combination of organic growth, selective acquisitions and astute management. Its board has always taken the long-term view when investing, whether in people, property or plant, willingly sacrificing profits in the shorter term when it believes that the investment will be justified in the future. Say what you will about 'short-termism' in the City, this long-term approach of Hewden Stuart's has certainly not damaged the performance of its shares; and the group's record in creating shareholder value is enviable. The £700 required to buy 1,000 shares on the company's flotation has now turned into around £25,000, a transformation rivalled by only about a dozen other companies in the UK. The company has never called on its shareholders, believing that expansion should be financed by profit retention and that present shareholders' interests are normally diluted over the longer term by rights issues. It has also increased dividends 'on every possible occasion' - 47 times over its 25-year history.
Inevitably, the company's fortunes suffered in a recession where the construction industry virtually came to a standstill; and turnover and pre-tax profits dropped from their peak of £227 million and £36 million in the year to end-January 1990 to £165 million and £12 million respectively three years later. However, the fact that the company remained profitable, despite plant utilisation rates of less than 50% and prices which Goodwin described as suicidal, was something of an achievement - particularly since, true to its long-term vision, it continued investing in upgrading and modernising its fleet throughout the recession, while depreciating at its usual generous rates (which obviously affects profits). By the autumn of 1993, the board had deduced from the results that were coming in from its six hire divisions that the recession was nearing its end and that recovery would start in 1994. 'We looked at our cash projection and our cash balances, and although we couldn't forecast the precise end of the recession, we could see that we could afford to step up our capital investment.' Had the recession lasted a further six months, says Goodwin, the group would not have suffered unduly. But as it was, 'the timing was perfect', and by the end of 1993 profits were once more on an upward path - up 60% to £19 million on turnover of £200 million in the year to end January 1994. This increase was achieved despite the company's record capital expenditure of over £50 million, including the acquisition of 39 depots from BET Plant Services in July 1993, the acquisition of a crane-hire operation in the London area and of small fleets of earthmoving machines and crawler cranes, in addition to the never-ending programme of fleet modernisation.
The interim stage last October brought forth a further 77% leap in profits and, for the financial year just ended, analysts expect another substantial surge in profits to around £34 million. This happy record might suggest that Goodwin was right in his original impression of the plant-hire business as an easy way to make money, were it not that so many of Hewden Stuart's competitors and counterparts over the years have gone to the wall or been bought out (the BET plant-hire businesses, for example, which were loss-making and suffering from cash problems at the time of the acquisition).
Nevertheless, although plant hire is clearly not a mug's game, Hewden Stuart's success over the years has been based on some quite simple principles. One is the crucial importance of cash flow and cash resources: indeed, ask Hewden Stuart managers any question and there is a 75% likelihood that the answer will be 'cash flow'. Adherence to the principle is shown by the fact that even after the hefty capital expenditure of recent times - over £130 million in three years - the group had cash in the bank at the last year end, achieving a cash flow over £1.5 million per week by the summer of 1994. Another guiding principle is the need for a constant application of what Goodwin calls 'common sense'.
Sitting in his modest chairman's office in Glasgow, Goodwin explains further. 'One of the first things we decided when we set up the company,' he says, 'was that we had to provide security of employment and opportunities for all our people.' This approach was highly unusual in the industry at that time, he adds. 'It was very much a hire-fire business in the early 1960s; drivers used to be sent home when a job was finished. We took the contrary view that it was up to the management to find work and to guarantee a full week's work - although obviously when you go into a recession you may have to make redundancies.' One result of the company's high-minded responsibility towards its employees was a 'flood of applications from the best drivers'. Another, adds Findlay, was that it inspired genuine loyalty among staff. But in practical terms it meant that at the very least the company had to be able to pay all the wages of all staff for a year ahead. 'That in turn meant concentrating on cash flow and cash resources.' 'We believed that if you got your cash flow right,' chimes in Goodwin, 'profits would ultimately follow' - as indeed they have. Moreover, with no leasing, loans or extended credit facilities to service, the company's cash flow is immediately available for its investment programme. 'If your cash flow is strong you can afford to invest for the future and to ignore short-term profitability,' he says. And in the plant-hire industry, he points out, a clampdown on investment is 'very serious'. Machines wear out; companies start cannibalising their equipment; and then, come the recession, discover that only the best machines will sell.
The emphasis on cash flow permeates all decision-making. All employees are given a basic course on the subject, learning how to judge what a new machine will cost, what it will earn, what its market will be. 'The fundamental skill in plant hire is to know, if you put up the cash for a crane or a compressor, whether you can afford to keep it operating at below capacity.' It follows, of course, that even a small upturn in demand will bring in the money. On the critical matter of timing when to buy or sell a machine, explains Goodwin there is a golden Hewden Stuart rule: this is that 25% of the total cost must be raised from proceeds from disposals of fixed assets. 'It goes back to the days of hire purchase, when we used to put down a 25% deposit while other companies only put down 10%.' The group's policy of owning everything outright wherever possible means, Goodwin says, that 'all you need to look at is your overdraft - and if you owe something, all you have to do is to sell some plant'.
The importance attached to cash flow also partly explains the company's preference for owning the freehold of the depots from which it operates, since cash flow is boosted when you don't have to pay rent. But, explains Goodwin, owning the freehold of a property also lends the company a greater flexibility: 'You do sometimes open depots in the wrong area; and owning the freehold means you aren't saddled with the problem of 25-year leases.' If all this sounds obvious and common-sensical, then that is exactly what Goodwin and Findlay would advocate. Moreover, the plant-hire industry is evidently not always as hardheaded and sensible as the outsider might imagine. 'The crane-hire industry is littered with failures because people have bought the biggest cranes, with no customers to use them,' comments Goodwin. Hewden Stuart, by contrast, does not get involved in prestige projects for the sake of it. Nor do its senior managers indulge in luxury or corporate swank: 'We don't fly first class or Concord, because there's no real advantage in it.' A 'degree of common sense' combined with a certain detachment from the day-to-day problems of the business also plays its part, he says, in the group's ability to read the economic cycle. Equally important, he points out, is the 'network of intelligence' the group possesses in the 'well-motivated people' in its depots across the land, able to report on market demand far more accurately that any published statistics. But, he stresses, it is up to the Hewden Stuart board to evaluate the information and make the decisions. 'In September of 1993 the feeling of our people on the ground was more cautious about investing just yet,' Findlay recalls. But the board judged that the risk of investing too early was minimal - 'If we were proved wrong, we could simply curtail expenditure and accelerate the disposal of old equipment' - while there was a risk in waiting too long, since prices would have risen and deliveries might not be available.
On the subject of company boards, corporate governance and the Cadbury Committee, as on much else, Goodwin has decided views. 'I personally detest legislation, and believe companies have to set their own standards.' He rejects, for example, the Cadbury suggestion that boards should have a minimum of three non-executive directors - a ritual appointment which has not stopped many companies from failing - and disputes the Cadbury emphasis on auditing and financial expertise on the board in an operationally led company such as Hewden Stuart. He also expresses hearty disapproval of three-year service contracts: 'These are rarely of benefit to the company and serve primarily to benefit the individual, and I find difficulty in understanding why shareholders' funds should be used to reward directors who have patently failed to achieve the performance for which they are remunerated.' Goodwin is also sceptical, to put it mildly, about such current fashions as business process re-engineering ('We've been re-engineering the business every day for the past 25 years,' pipes in Findlay), and doubtful, to put it kindly, of the value of management consultants.
On the future of Hewden Stuart, meanwhile, he is optimistic. Growth will not come from international expansion: 'We have been involved in France and Holland, and we found the operational problems very different. We haven't the expertise, in language, union laws and so on. There's enough growth here, in the UK.' Hewden Stuart managers believe that the recovery has begun and that confidence is beginning to edge back into view - even in Canary Wharf. But the group's growth will not depend upon a vibrant economy, but on its place in the fragmented plant-hire market (currently worth an estimated £2 billion, which means that Hewden Stuart's share is between 8% and 12%).
'There are an awful lot of companies being kept going by the banks,' Goodwin suggests. The volume of equipment which has been put into the UK market has dropped dramatically in recent years, and large quantities of the newer machines have been exported. 'A lot of the equipment now is extremely old and needs replacing, but I don't think people now can just go out and buy what they want,' he says. This will be to the advantage of Hewden Stuart, which has maintained its investment. Meanwhile, the industry is being faced with the increasingly rigorous health and safety standards imposed by EU legislation and by the petrochemical companies, for example. Equipment has to be the most modern, backed up by qualified engineers and by advanced training programmes. All this increases costs for the plant-hire companies, but means that the industry will become concentrated in fewer hands. Already, Goodwin points out, petrochemical companies specify a limited number of suppliers. 'Higher quality standards are to our advantage.
Hewden Stuart: Financial facts
Turnover/profit before tax* (£m)
Plant hire and associated activities 126.0 17.2
Merchandising and associated activities 74.0 1.9
Total 200.0 19.1
Shareholders' funds (£m) 135.7
Number of employees 3,640
*year to 31 January 1994.