6th Jun 2007 07:01
Fonebak plc06 June 2007 Fonebak plc Operational Review and Trading Update Highlights: • Operational review complete: • Refocus on higher margin and better quality business in the core Fonebak organisation • Plan in place to exit loss making activities • Loss making in current year; Board approved recovery plan with clear route back to profitability • Strengthened management team • CRC business continues ahead of plan • Intec Distribution business continuing to make good progress Commenting, Gary Stokes Chief Executive of Fonebak plc said: "The operational review outlined at the Interim results is now complete and webelieve we have a deliverable plan in place to return Fonebak to acceptableprofitability. Whilst the decline of the Fonebak business is highly regrettablethere clearly remains a core profitable business which we can develop." For further information: Fonebak plcGary Stokes (Chief Executive) Tel: 01865 487235David Kelham (Chief Financial Officer) KBC Peel Hunt Ltd Tel: 020 7418 8900Jonathan Marren Pelham Public Relations Tel: 0207 743 6670James HendersonPhilip Dennis Operational Review On 30th March 2007 the Board confirmed that a full operational review of theenlarged business had commenced and would be completed by late spring. The newmanagement team have since conducted a thorough appraisal of the performance andprospects of all the Groups activities and now report the findings and actionplans. Fonebak has grown rapidly since launch, developing a new market for the re-useand recycling of mobile phones; a key feature of which has been anenvironmentally compliant model for the end-of-life management of pre-ownedequipment. Subsequently Fonebak acquired phone refurbishment and repair businesses inRomania, Barnet and Stoke. In January 2007 the Group completed the acquisitionof CRC Group plc, a market leader in the repair of consumer based technologyproducts, leading to a significant increase in the scale of the Groupsactivities. UK mobile phone repair With the acquisition of CRC the Group currently has four sites in the UKrepairing mobile phones. Having reviewed the order book and projected capacityrequirements the Board has concluded that the operations based in Barnet andStoke should be closed. These businesses are projected to incur combined lossesof £1.5m in the current year and have no immediate prospect for improvement.Consultation with the workforce will therefore begin today. The closure costs for Stoke will be mitigated by guarantees provided by DSGi atthe time of the acquisition in 2006; effectively offsetting the employeeliabilities. Costs of closure at Barnet, before potential asset write-downs andother 'non-cash' charges, are likely to be in the order of £1m. In the cases of both Stoke and Barnet management are in discussion with clientsto transfer viable business to facilities acquired with CRC in Nottingham andHuntingdon. It is unclear at this stage whether retained business will bematerial. Romania The facility in Bucharest provides access to a good technical, low costoperation in a prime location. However, the commercial side of the business hasnot been developed and as such capacity has been under utilised. The site runsat a substantial loss and is projected to have cost approximately £2m to supportthis year. Originally conceived as an internal service and cost centre the better prospectis to establish the facility as a 'stand alone' business and profit centre. Asan accredited, low cost repair centre Romania should have a more significant andultimately profitable role. Headcount will be reduced immediately to reflect a more prudent cost base whilstthe longer-term prospects are developed. The business is targeted with achievingbreak even within two years. Progress will be monitored closely over the comingmonths. Fonebak The original Fonebak business model created the first environmentally compliantprocess for the mobile phone networks and manufacturers to dispose ofend-of-life handsets. The model has been particularly successful in the UK whereFonebak services all the major networks and continues to build on itsestablished reputation. Building on this experience the Group has been expanding into Continental Europewith some success. Taken as a whole however, mainland Europe has been lossmaking, partly due to the volumes and quality of product returned. Given the priority to re-establish the profitability of Fonebak a decision hasbeen taken to consolidate the European footprint and to close offices in Italy,Portugal and Turkey. Costs of closure are expected to be minimal. Markets whereFonebak has a stronger presence such as France and Spain will continue to bedeveloped. In the UK greater focus is being placed on managing an appropriate cost baserelative to reduced activity levels and further savings have been identified. Earlier this year Fonebak was accredited as a Producer Compliance Scheme (PCS)and has since contracted services with Vodafone, Orange, O2 and '3'. Theimplementation of WEEE into UK legislation comes into force on 1st July 2007 andFonebak has been busy developing the business model to include full compliancewith the industry guidelines. Whilst the market for pre-owned equipment is undoubtedly more competitiveFonebak continues to differentiate itself and is the only service provider ableto deliver the full environmental and commercial solution. Accordingly moreresource will be placed into expanding the client and market facing activitiesto deliver this potential. Having initiated steps to restructure and refocus the original Fonebak businessgreater emphasis is being placed on margin management and the commercial pricingof the differentiated services. In the short-term it is anticipated that volumeswill be reduced but with a consequent improvement in margin and matched to amore appropriate cost base. CRC The restructuring programme commenced in 2006 is now well advanced. The UKactivities are centred on sites in Glenrothes, Nottingham and Huntingdon. Theheadquarters and repair centre at Thame was finally closed in April and theonerous lease on the property was successfully reassigned The Glenrothes site is being expanded to accommodate additional business and tointegrate activities currently outsourced in a secondary location. The projectis to be supported by grant funding recently confirmed from the ScottishExecutive. In Germany the closure of the Berlin operation, previously announced, isproceeding in line with expectation. The closure will take effect from the endof the current month. CRC has also agreed an initial three-year contract to collocate the FujitsuSiemens laptop repair activity to Sommerda in the former Eastern Germany; thenew site will be operational this summer. The facility will provide the Groupwith a lower cost in-country solution for the German market as well asstrengthening the relationship with a key customer. The main site in Germany is currently in Paderborn, with good technical andprocess skills it was formerly an in-house service facility for Siemens. Thebusiness has performed well for CRC; however, the per capita cost is the highestwithin the Group. Discussions are underway with the unions in Paderborn torenegotiate the employment terms and conditions to a more sustainable level. The Polish operation has been trading strongly for some time and the Warsaw siteis reaching capacity. As clients continue to migrate business to lower costoperations the opportunities in Central and Eastern Europe are good. Capacityrequirements in Poland are being weighed against the available resources inRomania to create a more coordinated 'low cost' strategy for less time sensitiverepairs. Board The Board recognises that with the acquisition of CRC earlier in 2007 there is asignificant increase in scale and breadth of the enlarged business. In the shortterm the emphasis is on the delivery of the recovery plan and the need to returnthe business to an acceptable level of profitability. The Board believes it hasa robust and deliverable programme to achieve this. With a new Chief Executive; Gary Stokes and Chief Financial Officer; DavidKelham in place there is recognition that now is an appropriate time tostrengthen the non-executive Board and to plan for the succession of theChairman, Gordon Shields. A search will commence in the coming weeks and it ishoped that the end of the calendar year will complete the process. At this stageit is envisaged that Gordon will remain a director. In addition Stephen Shields plans to step down from the Board with effect fromthe end of this month and concentrate on developing new revenue streams. Stephenis key to the successful turnaround of the original Fonebak business and it isagreed that he should dedicate himself to this whilst unencumbered by widerBoard responsibilities. Both Gordon and Stephen have played a fundamental part in establishing Fonebakas the market leader in a new and still emerging market. They remain key membersof the Fonebak team and are fully committed to supporting the business throughthe current transition. Management Given the increased scale of the enlarged Group and the commercial opportunitiesthat this presents Martin Gossling has been recruited to create sales leadershipand head up international business development. Martin was previously the SeniorVice President Global Sales of Fastmobile Inc, a US based mobile phonesbusiness, and prior to that worked with Motorola and Orange. Initially Martin will be focused on the repair activities but with a wider remitas the recovery programme progresses. Martin has considerable and relevantexperience within the broader technology market and will spearhead a morecoordinated sales push across the Group. The operations management includes experienced leaders in each territory andwith this appointment the team now in place has a good blend of pragmatic handson experience and skills together with a strong commercial focus. The new management team now in place will have their reward structures andincentives aligned to the interests of shareholders through the provision ofshare options. The options will be issued within the limits and performanceconditions previously approved by shareholders and by 30th June at the latest. Current Trading The original Fonebak business has continued to grow inbound volumes; however, itis evident that margin pressure and increased operating costs have been erodingprofitability. These trends had been masked by much higher margins on certainproducts, however, the loss of a key contract, announced on 6th March 2007, hasexposed the deterioration in the underlying performance of the business. At the same time customer concentration on the outbound sales has beenidentified as a risk for the business and efforts are being made to reduce thisdependency and establish multiple routes to market. The business has experiencedsome short-term disruption as a consequence, however, sales have returned toexpected levels and with a more diverse customer base, which will ultimately beof greater benefit to the Group. The operations in Romania, Barnet and Stoke are all currently operating belowcapacity and taken together are heavily loss making. On a more positive note the acquisition of CRC has progressed well; trading isahead of expectation and the outlook is positive. The current management teamrestructured the business in 2006 and the benefits of that programme are nowevident in the improved profitability and cash flows. Intec Distribution is having a strong year and has established itself as a majorsupplier to the replacement phone and insurance markets. The business wasrecently relocated to more suitable facilities and has good growth prospects. The performance of CRC and Intec Distribution provides encouragement and isexpected to sustain the enlarged Group whilst the performance and capacityissues identified are addressed. Outlook In the announcement of the Interim results on 30th March 2007 it was stated thatthe Fonebak business had suffered from a combination of a key contract loss andan underlying decline in margins on the residual business. In addition theoperations at Barnet and Stoke were increasingly loss making and whilst the CRCand Intec Distribution businesses were trading well they would not make up theshortfall. With the operational review now complete the Group will accelerate theactivities to eliminate all loss making activities, starting with the closuresof Barnet and Stoke and the downsizing of operations in Romania. Whilst much ofthe work that needs to be done will ultimately be self funding from a cash flowposition it is anticipated that that there will be significant non-cashprovisions, in the current year, to cover consequent liabilities and asset writedowns. Whilst these numbers have yet to be finalised it is clear that overall the Groupwill be loss making in the current year. As described in the Interim Announcement the Board is keeping the Group's bank,KBC Bank NV, fully appraised of developments and again can confirm that thatbank is supportive of the new management team and the actions being taken. The Board believes it has a deliverable plan and a clear route back to anacceptable level of profitability. Whilst the decline of the Fonebak business ishighly regrettable there remains a core profitable business, which can bedeveloped. The process to eliminate the loss making activities, whilst involvingsome difficult decisions, is clear and will have immediate benefit for theprospects of the remaining business. -ENDS- This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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