Chief executive of Rok on the worst week of his working life, Connaught’s woes and the future of his business
Last week Rok suspended its finance director after auditor BDO Stoy Hayward uncovered “serious mismanagement” in its plumbing, heating and electrical business. Since then the firm has announced that the mismanagement has cost it £6.4m, wiped out any profit and driven its share price down by 50%. Here the firm’s chief executive, Garvis Snook, gives a candid interview.
How are you feeling?
I’m tired. The share price has recovered a little bit so that’s helpful. Equally, a lot of employees were shocked by what we had to announce last week, but now the dust has settled there is a determination to demonstrate that the majority of the group is in good shape and trading well, to say, ‘We’re not going to let this get us down. We’re going to keep going and we’re going to build back up again.’
Are you finding it difficult convincing shareholders that the problem was isolated to one part of the business?
Well, I suppose that’s an obvious challenge - if you’ve found these issues in this particular part of the group why wouldn’t it exist elsewhere? There’s a very simple explanation. The whole of the rest of the group operates on the COINS accounting system, which is an industry standard. This small unit was operating on its own system until October last year and it was during the transition onto the group’s system that we realised that something wasn’t quite as it should be, so we delved further.
But because the rest of the group is on the COINS system we have high visibility of what’s going on at an individual job level, which we didn’t have in this subsidiary until October. We have a range of financial directors and managing directors who’ve been in post for a long time. Equally we have an internal audit function that carries out a review of every section of the group on a regular basis to ensure that it is complying with all the standard preset financial rules that we run the business by.
So everything is definitely now on same system?
Yes absolutely. That small unit was the last one, the very last one, and it was left to the last because, bluntly, it was seen as being relatively small, and the scale of potential risk within it was relatively small.
So was the problem because it was an acquisition?
It was an acquisition we bought in the early part of 2007, a company called Avonside, which was focussed on delivering PHE [Plumbing, heating and electrical] services to the housebuilding industry. Its market fell away from it not long after we bought it. We were transferring the trade into other parts of the group and indeed at some of the housebuilders cut prices at that time, cut volume and at the same time material prices went up.
But the management reports coming out of the business were indicating that, yes, they were suffering - their gross margins were going down - but they were still making a bottom line profit. But it transpired that cost prices weren’t being booked when they fell due. And some of the values weren’t ultimately collectable. Therefore the management accounts we were receiving didn’t adequately reflect the underlying performance. Otherwise we would have taken action previously.
Shouldn’t a chief executive have more of an instinct for whether a business could be making that kind of profit or loss, regardless of the accounts?
[Laughs] Yes, and… erm… I am known for having a nose and a bit of a gut feel about certain things. And it would be true to say I challenged the information I was being provided on a number of occasions during the last year, and investigations were carried out as a result of that. I didn’t personally go to the local branch of a small part of the subsidiary and delve through the detail, but investigations were carried out and I was fed back with assurances that the debt levels that were rising in that business were due to the amount of work it was now doing in-house. And others parts of the group were paying it, efficiently and effectively, and that that was the underlying reason.
One thing I do every day is I get a cash/debt report on every section within the group. That’s my lodestone as it were. So, having been reassured on that on a number of occasions, I had no reason to believe it was anything other than that. Quite right, perhaps I should have dug a lot deeper. I’m sure there are a number of people in the group that have learned lessons that will stay with them for the rest of their days.
So would you avoid acquiring any other businesses that runs on a different accounting system?
No, no, that’s not the case. It’s quite common to have a different accounting system. The issue is one of ensuring that when we do allow a business to continue on its own accounting system, before we integrate it, we closely monitor that it is being operated effectively and efficiently and is producing reliable information. That’s the failure. That’s the mistake. And as someone pointed out – ‘But Garvis, you guys have done lots of acquisitions, weren’t you a bit foolish to be caught out this way?’ Fair cop.
How did you feel when you found out about the losses?
Furious. Initially incredulous, then gradually furious. Because it was very difficult in the early stages to recognise the truth from fiction. A lot of detail had to be gone through to get to the bottom of what was real and what was unreal to get clarity. And that took a little while, but we got there in the end and we took the decision that we had to bring it to an end very quickly.
Was this the hardest moment of your career?
Yes, it’s been the hardest period in my whole career in the industry, yes it has.
Did you panic?
Panic is not usually a good way of dealing with problems. Nervousness would be more accurate, about really getting to understand what it is you’re dealing with, and then thinking through an appropriate action to mitigate the risk. All whilst ensuring that you manage the group’s accounts appropriately and soundly and securely.
How did you feel at home? Could you sleep at night?
My way of dealing with problems over many years is listening to the reports, trying to stay calm while absorbing the information, and then I usually take a long walk and try to work my way through what it is that’s really important and really matters. Normally I take an hour or two to do that, and often it results in a few more questions to get greater clarity. Then I agree with my team, because this isn’t just about the chief executive - I lead the team, who make the decisions and implement them.
Where did you walk?
In the good old days when I lived in the West Country it used to be on the Dorset coast. These days it happens to be Hyde Park.
Are you worried about the major shareholders pulling out?
It’s always disappointing, of course it is. But I equally understand that given what we’ve announced, the industry we’re in and the current market, it’s going to take time to recover shareholder confidence, undoubtedly. But for every shareholder that sells there has to be a shareholder that buys, so that means there are other people out there that do have a belief and faith in the company. Indeed some very lucky people in the last couple of days bought a number of shares at 10% below their current value, so that’s quite a good return. You may have seen on the wires in the last few minutes [August 17] that I’ve bought a quarter of a million shares. We just made the announcement.
How much did that cost you?
I paid 20.25p for 250,000 shares, which must be around £50,000. Err… I can’t do the maths quickly enough.
So around £50,000 of your own money?
A little bit more than that.
Is that to show confidence?
Yes. I’m ultimately responsible for the business. I’m making statements to the market that this is an isolated incident, that we’ve gripped it and dealt with it quickly. It’s painful but actually our construction business is trading well and is going to trade better than we originally expected this year. Our social housing business is trading well and will trade better than expected for the full year. Our maintenance improvement business had a slow start to the year as a result of the effects of this [rogue] part of the business hurting it, but overall as the year progresses is doing well. Our order book is strong and we’ve got high visibility for future revenues. For rolling forecast we’ve got 77% of our work secured and our debt is coming down. That’s a pretty good combination and I’m quite happy to put my own money behind that to demonstrate that I don’t think we’re as bad as the current share price is reflecting. It’s appropriate that I risk some of my own money in the process.
Connaught has had problems and some of its clients were talking to you with regards contingency plans. Are they now going to have to find a contingency for the contingency?
No! Our social housing business is doing fine. It’s OK. This business we’re talking about that caused all these problems was less than 4% of group revenues. It’s crazy the scale of the impact it’s had on the group, but that’s a short term hit; the underlying business is fine.
So you are still talking to clients about those contracts?
Us, Mears, Morgan Sindall, Kier - I’m sure all of us will have experienced the same thing. A number of our customers we may have jointly serviced with Connaught, or were exclusive, of course we’ve had conversations. Potential customers are asking about our capacity to provide services should anything happen to Connaught. But nothing actually has yet, has it, and may not even.
How many redundancies are there going to be?
Around 80 people have already gone out of this business earlier this year. And about another 80 will go as part of our decision last week.
Are you taking longer to pay suppliers since the problem?
No, no, it’s the same. Our debtor days have reduced from 44.5 to 41, so, no, no, no. In fact our cash at the half-year is £10m better than at the half-year last year. We’re generating cash above and beyond this.
Is Ashley Martin, the financial director who the chairman suspended following the BDO report, coming back?
[Garvis could not answer on the record]
He must be under a lot of strain. Have you contacted him to see if he’s alright?
I’ve attempted to call him on a couple of occasions. He’s not responded to my calls. I think he’s probably feeling pretty angry.
People say your strategy, of being a national network of local builders, can’t work. How do you respond?
Well that keeps out the competition, but let’s dig under that a little bit more. In our contracting division we operate like any other regional contractor – Kier, Morgan Sindall, you name them. We do exactly the same thing and we make similar returns and generate similar levels of cash. In our social housing business in new-build housing we operate with subcontractors in a similar way to everybody else, and we generate similar, slightly better returns than many others, because we’re quite good at it. In the rest of our business we operate a planned maintenance and urgent response maintenance business, covering many sectors in domestic insurance repairs, where we’re the number one supplier in the UK.
We supply smaller, general building and improvement services to social housing companies, local authorities and local businesses of all sorts. Often our competitors are the local builder. In that business we generate operating margins which are three to four times - actually more than that as contracting is getting tougher - but generally in our market three to four times what can be generated out of contracting. We’ve been bitten by one small part of our group that returns less than 4% of sales. The rest of the model isn’t broken as a result. The rest of the model is still fine.
I will accept that in January of this year, because we employ well over 2000 tradespeople, carrying urgent repairs and response maintenance, when the weather was bad we had 2000 people who weren’t productive and that cost hurt us. But that was a very exceptional event that hadn’t occurred in the UK for 30-odd years before that. What I do know is that that service drives very high levels of customer satisfaction in our insurance business, for instance 93% of our customers tell us we’re very good or excellent. That drives reliable profits. Now I’m quite happy if my competitors say that model can’t work. Stay out of it guys. Nobody’s competing with us, we get better returns.
But I guess there won’t be any acquisitions for a while?
I don’t think now is the time for acquisitions. Now is the time to get our heads down, deliver what we say we will, keep doing what we say we will for the next year or two and demonstrate that fundamentally the business isn’t broken, that the underlying business is still good and strong.
Do you regret becoming the boss at Rok?
At Rok? Hey, I took over what was EBC [Exeter Building Contractors] in the middle of 2000. The business was losing money heavily and had a huge pension deficit which would have caused it ultimately to collapse. We have created a business which has a unique strategy, a unique culture operating with a set of values and employees in a completely different and engaged way, which hasn’t existed on this scale ever before. We’re bloody proud of what Rok has achieved. We’re bitterly angry and disappointed to have been caught out by a small part of the group which wasn’t fully integrated hurting us to this extent. But overall this is a damn good business and there are a lot of people very proud to be part of it.
Are you looking forward to the end of this week?
Well, I was looking forward to last weekend but in the end I had four hours off on Sunday afternoon. I’ve been working very long hours now for a couple of weeks and I expect I might be for a couple of more weeks more yet. But gradually the dust is begging to settle. And I’m feeling happier, if a little tired.