A believer in permanent evolution, not revolution
Taylor Woodrow's chief executive says getting out of construction would destroy the conglomerate, writes Magnus Grimond
Friday 15 August 1997
He certainly has a hard act to follow. Colin Parsons, Taylor Woodrow's executive chairman, has built up a formidable reputation during his tenure, knocking into shape a group which was in crisis when he arrived from running its Canadian operations in 1992. In five years, Mr Parsons has turned a pounds 94m loss into profits last year of pounds 67m and has overseen a share price which has more than doubled. It is an impressive turnaround in an industry which has been under the cosh. Even so, given that the group is still making meagre net returns - less than 6 per cent on sales of pounds 1.2bn last year - there is clearly more for Mr Castle to go at.
His strategy, illustrated by some deceptively simple management school diagrams, is permanent evolution, rather than permanent revolution. There is going to be no reinvention of Taylor Woodrow in the way Tarmac and Wimpey reshaped themselves by swapping house-building assets for quarries. Although some would characterise Taylor Woodrow as the conglomerate of the sector, spanning construction, house-building, property and an equipment sales operation, Mr Castle says he has inherited a strong platform in four fairly stable businesses: "There is nothing in any of our sectors where we say, `God, this is so awful we must close it down'."
This cautious approach is understandable, given that Mr Castle is a rare outsider in a company which normally recruits its bosses from within. Indeed, three years at the head of Marley in the early 1990s is the nearest he has been to the building industry, but that was tiles and plastic pipes, rather than bricks and mortar. Otherwise Mr Castle's has been an eclectic career, taking in a period in a technology-transfer-come-venture-capital business, along with Textron of the US and BP.
So he arrives without the sentimental attachment to construction that many in the industry appear to display. But even construction, the sick man of Britain's industrial sector, remains sacrosanct for Mr Castle. Despite years of massive losses or minimal profits, he has quickly arrived at the conclusion that to get out of construction would be to destroy Taylor Woodrow. "It would be a revolutionary change. If we were to think about it, it would have to be done over a very long period of time. I don't see why we shouldn't be able to manage construction just like any other business."
He says it must generate value and it must not fall foul of the Rolls- Royce syndrome - "the view that we are going to build the best aero engine, even if the company goes bust". But to many outsiders, this will look like a platitude to cover the very trap into which the whole industry has fallen, with managements nearly everywhere still wedded to a barely profitable business which is crying out for rationalisation and consolidation.
Under the Castle regime, construction will be stripped down and rebuilt around its "core body of talent" to forge it into a single operation, bringing together the disparate groupings which have grown up over the years. Over time, the reliance on the business will be diluted, so that in five to 10 years Taylor Woodrow will be a housing and property group that dabbles in construction, rather than the other way round, he says. The hope is that in this state, Taylor Woodrow will be able to ride the troughs of the industry without having to resort to marginal business to fill the gaps, as in the past.
Property is another business which does not appear to fit particularly well with a trading group such as Taylor Woodrow. The City measures property companies by their assets and that is difficult when they are mixed in with operations judged on earnings. The group has been running down the investment side of the operation, which tends to be asset based, in favour of the development side, where short-term profit and loss is more important. This evolution will be continued by Mr Castle, who believes property will continue to underpin the group's balance sheet, thereby giving hefty financial backing to bids for big construction projects and contracts under the Government's Private Finance Initiative (PFI).
The PFI is something the construction industry will have to live with, he reckons, and he is encouraged by Labour's enthusiastic adoption of the Tory idea. "I've been very impressed with what they have done. They have cracked in on it good and hard and picked up on issues which were worrying the industry."
Elsewhere, Mr Castle faces fewer problems. The house-building side is riding an upswing in two of its markets, in the UK and California, even if Australia remains in the doldrums, and Greenham Trading, a supplier of everything from hard hats to lavatory paper, chugs along nicely. Certainly he has no illusions that the current housing market buoyancy is anything other than a temporary phenomenon and that, apart from sales to the over 60s, this is a market lacking fundamental growth prospects. What he does believe is that there is no reason Taylor Woodrow's housing arm cannot be run with the same focus on shareholder value as a specialist house- builder.
The "tidying up" phase at Taylor Woodrow will be complete within a year, Mr Castle believes, with another year to see it all shake down. But he recognises that rationalisation will extend beyond the boundaries of the group.
To illustrate his point that there are too many companies operating in the construction industry, he points to the fact that Taylor Woodrow, one of the largest, has a mere 2 per cent market share. The process of consolidation has begun, he says, but in the future it is more likely to come through changes in the way construction is managed and operated, rather than through reductions in the amount of assets deployed. Indeed, once some focus has been put back into Taylor Woodrow's construction operation, it is very likely that he will be seeking to take part in the consolidation process himself through acquisitions.
But while the City remains sceptical about construction, those sunlit uplands look some way off. Mr Castle may have to deploy his skills to their utmost to negotiate the traps that lie ahead.
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