Despite Wimpey's disastrous performance at the outset of the '90s, the past year has seen a dramatic reversal in fortune. Geoffrey Foster discovers how the group put its house in order.
'All of our businesses are more competitive than ever and are poised to benefit rapidly when the recovery comes.' How many chief executives have penned such words for their shareholders during the past three or four years, then read through the draft and grimly concluded it was the best that could be done? And 12 months later they were trotting out the same lapidary phrases again. In the construction industry, certainly, both the claims and the implied confession have been ritually intoned at successive AGMs of several-dozen household names. But in recent months a new and more uplifting mantra has crept into use. It's a spring song, full of references to green shoots, or at least to 'an improvement in the company's underlying trading environment'. The long-awaited recovery is at last on the way, it seems, in construction as elsewhere.
But is it? There was no doubt whatever about the recession, at least, not in construction. Housebuilding was just about the first sector of the economy to slide inelegantly down the hill in the closing years of the 1980s, and the civil engineers came tumbling soon after. 'Contracting is still going through a torrid time,' in the words of Joe Dwyer, group chief executive of George Wimpey, by most reckonings the second-biggest player in the field after Tarmac. Major new projects have remained extremely thin on the ground, so any invitation to tender that appears these days is likely to be an invitation to the underemployed contractors to cut their own throats. And while the housing market has given a few nervous twitches of late, there is still such a backlog of unsold and repossessed properties available that a buoyant time for the builders looks almost as far off as ever.
So why the new-found optimism? Partly, it's relief that things are no longer actually getting worse, like the feeling when somebody stops beating you over the head. In Wimpey's case, the group slumped from a pre-tax profit of close on £145 million at the 1988 peak, to £43 million (after exceptional items) in 1990, then to a loss of £16 million, which ballooned to a figure of minus £112 million in 1992. But the year recently ended saw the business restored to profitability once more, after scraping back into the black in the first half. Analysts put the profit for the full year at some £23-£27 million - which is fairly exiguous by historical standards but certainly progress in the right direction.
But these figures don't tell the whole story. Behind the turnround in performance lie significant changes in the complexion and organisation of the group. Wimpey, its management says in effect, is leaner and fitter and better prepared to make the most of opportunities that come its way - which takes us straight back to the opening sentence. The company is assuredly leaner. Shareholders' funds shrivelled by almost 40% in the three years to end-1992. After divesting one or two non-core businesses - such as waste management - and the sale or write-down of numerous property assets, plus provision for redundancies (numbers employed in the UK fell by 30%, to 10,300, during the same period), the group is smaller in every respect. But simultaneously, net borrowings declined from over 50% of shareholders' funds in 1989 to a little over 30% three years later - which, in a recession, is certainly a measure of improving fitness.
Of course, other businesses can tell much the same story. Almost every company that has come through the past few years in one piece - and that includes Wimpey's rivals among the big constructors - will claim just as forcefully to have gained from the experience. If everyone in an industry is leaner and fitter to the same degree, then in a national context, at least, the competitive picture has scarcely altered; and with the market still flat, the vista can hardly give much delight to anyone.
Nevertheless, Wimpey people believe that their prospects have fundamentally changed for the better. Why? Because, they infer, the company's structure is more dynamic, its decision-making more soundly based, and because it enjoys greater freedom of action - not necessarily compared with its rivals but compared with its former self. Nowadays, when an enterprise makes assertions of this nature, it usually means that management has seen the light on the road to Damascus and is busily engaged in 'empowering' employees. Construction, however, doesn't properly lend itself to organisational reform of that kind, not in the way that mass production might. Besides, construction managers are generally robust, broad-shouldered types who are not easily swayed by the latest cult. None of the industry's big groups is famous for its addiction to management fashion. And Wimpey, perhaps, least of all.
Long periods of unbroken leadership tend to make for conservative organisations, and there have been times when Wimpey's top management appeared immutable. For almost all of the past 75 years the company has been headed by just three powerful chairmen-cum-chief executives. In fact, the full corporate history goes back to the last century, when the eponymous George Wimpey set up in business as a paviour in Hammersmith, west London, where the company still has its head office. But its rise to prominence in the construction world dates from 1919, when it was bought by Godfrey Mitchell, a young ex-army officer lately back from France.
The ghost of Sir Godfrey Mitchell has haunted Wimpey almost to this day; which is hardly surprising, since he was not only the group's effective founder but a business leader of genuine vision. He powered its drive into housebuilding after World War I, and again, into local authority housing in particular, after World War II. The company was already a sizeable public-works contractor before 1939, and during the war it peppered the landscape of Britain with military airfields, the remains of which are all too often visible yet. (This was hectic work: you can still hear tales of how runways were rolled out in the wrong field when Wimpey's trucks arrived ahead of the government-employed engineers.) In the post-war years, the group, like its peers, saw enormous expansion in contracting. And it was one of the first of the UK contractors to become active overseas.
Mitchell soldiered on as chairman into the 1970s. When he eventually retired, and after a brief interregnum, his place was taken by Sir Reginald Smith, his former chief estimator. In the early 1980s Smith was followed in the top job by another life-long Wimpey man - who had also, therefore, been long exposed to Mitchell's patriarchal management style. Sir Clifford Chetwood led the company through the boom of the later '80s and willy-nilly into the recession, before retiring at the close of 1992. A year or two earlier he had appointed Joe Dwyer (then in charge of contracting and quarrying) to succeed him as chief executive. These days the group has a non-executive chairman: Sir John Quinton, late of Barclays Bank.
At the end of Mitchell's long reign Wimpey seemed to have run out of momentum. Caught between a depressed housing market and a squeeze on public expenditure, it took a long while to pick itself up again after the downturn of the early '80s. Chetwood set about stirring up the sluggish organisation he had inherited, abolishing more than a dozen UK operating companies-each of which covered the waterfront from suburban semis to structural steelwork-and pouring their activities into separate divisional streams: homes, construction (ie contracting) and minerals (meaning quarries, etc). Although the previous structure may have looked decentralised, it was no such thing, according to Dwyer. The company was actually 'a complex matrix'. The regional companies 'existed in shell form' but did not accurately reflect the realities of responsibility and accountability.
Dwyer has carried Chetwood's reorganisation a step further. In order to straighten the lines of accountability worldwide, and to capitalise on expertise, Wimpey's structure is now based entirely on business areas. The important (and much-troubled) North American housebuilding operations, for example, no longer report direct to the group chief executive in London but to the chairman of the homes division. More significant, Dwyer has completely recast the top management team. Among those who were working members of the main board when he became chief executive, not one remained 15 months later. Their replacements are all much younger men. Four of them were promoted from within. Two - finance director Roger Wood and homes division chief Richard Andrew - were recruited from the world outside. Andrew's appointment broke new ground, as they say. He was a banker who had worked in industry before, but never in building.
Now in his mid-50s, Dwyer has been with Wimpey throughout his working life of 38 years. He joined the company not long after Chetwood, starting out 'in the bowels of sites' at the age of 16. He might easily, therefore, have become steeped in the history and awed by the legend of Sir Godfrey Mitchell. On the contrary, Dwyer is self-evidently his own man; not afraid of being unconventional; gently spoken, and a good listener - but ruthless, too. Having pulled himself up via part-time study at technical college, he is, he says, 'a technocrat'-both as a civil engineer and as a manager. On being picked as chief executive, he 'thought very long and hard about how to bring some modern business principles in'.
Appointing someone with Andrew's qualifications to run the homes division was one result of that process. Wimpey is full of people who know about housebuilding. There are - or were - not so many who can interpret a balance sheet. Housebuilding, which begins with the purchase of plots and ends with the sale of finished homes not more than two years later (that's the aim anyway), has an enormous appetite for cash. Before Andrew was appointed 20 months ago it was widely believed - by Dwyer among others - that ERM had ushered in a new epoch of low inflation and stable prices. The housebuilders would need to appreciate the implications of these changed conditions, and understand that they could no longer rely on poor judgments being concealed under an inflationary tide.
ERM has gone, but the rest still applies. These days, housebuilding operations are measured (as they never were in the past) by return on assets and return on a nominal equity: 'I see no reason why a 20% return on assets should not be obtained in normal times,' says Dwyer. 'That equals around 15% on equity, dependent upon gearing.' So managers have been trooping off to internal courses to learn about balance sheets and what it means to have shareholders, and how to satisfy them. There are further signs that modern management thinking (circa 1960) is taking hold. When Andrew arrived he expected to be inundated by market research documenting exactly what kinds of people the next generation of buyers would be and what they wanted of their homes. There weren't any reports. But there soon will be. Andrew has found a divisional marketing chief, like himself from outside the industry.
In past decades the group itself was not much bothered by the idea of shareholders. 'It had scant regard for City views or for the share price,' says Dwyer. Wimpey could afford this lofty attitude because, although a public company since 1934, it existed under the umbrella of a charitable trust set up by Sir Godfrey Mitchell. The Tudor Trust originally owned about 50% of the shares. Although the holding came down to 34% many years ago, this was probably quite enough to see off any predator. Unfortunately it constituted an equally formidable barrier to the raising of capital, for the Tudor Trust was a genuine charity without funds available for investment. Not once since the flotation had Wimpey gone back to the shareholders. Mitchell had even been adamantly opposed to borrowing. But while that objection later became unsustainable, the continuing need of the company to finance its own development might well have prevented moves that would have weakened its dependence on volatile housebuilding profits.
Here again, Dwyer broke with the Mitchell tradition, although the break was a little slow in coming. As Wimpey's new chief executive, he naturally met representatives of the Trust and explained his intentions: which were, above all else, to reduce borrowings by cost savings along with sales of assets. But some of the assets proved difficult to shift. And when the first hints appeared that the recession might be coming to an end he began to think seriously about raising new capital. He put it delicately to the trustees that they might accept some reduction, even a progressive reduction, in their holding. The trustees were 'not entirely happy'. However, it was later suggested by a director of the charity (Dr Desmond Graves, who is also a non-executive member of Wimpey's board) that a bigger and less gradual reduction might be to everyone's good. 'On reflection I thought, Why not?' says Dwyer.
Just under a year ago, an overnight placing of shares cut the Tudor Trust's interest in Wimpey to a mere 5% of the equity. With the critical constraint removed, the company waited a couple of months or so - while the market smiled on construction stocks in confident anticipation of recovery - before announcing a rights issue to raise £104 million. 'We were very fortunate with the timing,' Dwyer admits. The offer was 97% taken up. 'It gave us confidence that the City and the market thought well of us.' Thus, amazingly, after three horrendous years, Wimpey found itself towards the close of 1993 with a strong balance sheet and a range of options such as it had not had in 50 years.
There was no doubt about what to do with the money. Management has constantly reiterated that it intends to stick with its core concerns of housebuilding, construction and minerals. In any recovery, quantities of cash would be soaked up by the housebuilders, for extra plots and bricks and labour. The traditional source of liquid funds - aside from the banks - is contracting, which, since it employs negligible manpower, is able to operate with negative working capital: payments come up-front, settlement of subcontractors' bills at the back of the queue. But even in the good times, margins are notoriously thin. In that sense, says divisional chairman Dennis Brant, 'there's never really a boom time in construction'.
Increasingly the contractors have been looking overseas to offset the decline in UK work. The minerals division has ample opportunities both at home and abroad. Quarries normally supply stone over a radius of up to around 40 miles. Some of Wimpey's US quarries are connected to the railroad, which opens up the possibility of creating a whole network of railhead depots. All that's lacking are the orders - and the prices. 'There's little sign of black-and-white orders up to the present,' notes minerals chairman Tim Ross. On the other hand, he adds: 'If we wait until the order books start to move it will be too late.' 'Timing is everything,' Dwyer acknowledges. So when is the right moment to press the investment button? Indeed, that's the question.