Rodney Westhead has plenty of good reasons to be cheerful. The share price in automotive engineering consultancy Ricardo Group of which he is chief executive reached a record high last week, having doubled from its level 12 months ago.
That followed the company’s interim results earlier this month, which showed pre-tax profits up 52% to close to £4m, with orders up more than 23%, and the first increase in dividend for three years. Turnover this year is expected to be substantially higher than last year’s £97m.
Meanwhile, a settlement with Christopher Ross, Westhead’s ousted predecessor, is imminent. And the restructuring of Ricardo’s loss-making business in North America is almost complete, with it forecast to break even by June, the last month of the financial year.
What this all adds up to is a turnaround for the Ricardo Group. And Westhead an accountant rather than an engineer can claim a large part of the credit.
‘There was nothing wrong with the operations in the UK,’ he says. ‘The problems were really in North America. It was clear we should get rid of the non-automotive businesses and deal with the losses in North America. It was good just to be able to get on with it.’
Westhead joined Ricardo in 1992 as a director, having spent 18 years as a partner at accountant Grant Thornton. He says the transition into engineering was relatively simple. ‘I just moved from working with one set of highly professional people to another. Whether you are dealing with lawyers or accountants or engineers, the common thread is that these are collections of professional people.
‘In an accountancy firm you are working with people who left university and decided to be accountants,’ he says. ‘In engineering they left university and decided to be engineers. But they are the same kinds of people.’
Following the sale of Ricardo’s Hinckley head office in Leicestershire, Westhead is relocating to the main Bridge Works site at Shoreham-by-Sea in West Sussex, on the edge of the airfield which was the UK’s first commercial airport, opened in 1909. Today it is the home of a flying club, and the sound of light aircraft buzzing over the Ricardo workshops is a familiar one to engineers working there.
Despite its attractions, the seaside location has not made it easy to recruit automotive engineers to Ricardo, with the majority of potential candidates based in the Midlands. For this reason Ricardo is preparing for a Midlands office.
But the Shoreham site itself is expanding too, with a £12m investment planned to create more engine test cells, bringing the total number of staff on site close to 1,000 within the next two years.
This will allow for what Westhead predicts will be 15 20% organic growth rates. But the Ricardo Group looks set to grow faster than this by acquisition.
‘There will be consolidation in this industry,’ Westhead says. ‘And we are determined to be a player in that process. We can’t choose the timing, but in an ideal world we will be able first to demonstrate to shareholders that we have fully resolved the issues in North America. Six months more would be good for us.’
The second prerequisite for acquisition is a strong management team, which Westhead now believes he has in place.
‘Finally, as any acquisition will be financed with paper, we need a very strong share price,’ he says. With that now at 205p, conditions for acquisition seem about right.
Westhead and his team look certain to set their sights on another engineering consulting services company, specialising in engine, transmission, electronics or chassis engineering. ‘We’ve no interest in body-in-white and vehicle styling work,’ he says. ‘Investments in this can be worthless. Tastes are fickle, and there is really no margin.’
Nor is there any benefit in teaming up with a tier-one component supplier. ‘Our value would be immediately downgraded. We would not be seen as independent,’ Westhead says.
Equally, Ricardo will not get involved in any kind of manufacturing, due to the high investment costs required to get started and the low returns. Ricardo’s Special Vehicles Operations on the other side of the airfield is geared up for ultra-low volume output, and no more. Half the work carried out here looks set to remain for military vehicle development projects.
The potential market for Ricardo is enormous. Car makers spend an estimated £2.5bn annually on vehicle development, and up to 10% of this goes into engineering service providers such as Ricardo and its rivals.
Ricardo’s strategy now is to focus on its core areas of expertise of engines and transmissions. New areas of development will include electronic engine management technology and, to a smaller degree, electric vehicle systems.
As Westhead puts it: ‘We want to be doing everything that’s clever under a vehicle’s skin.’