FON Fonebak

RNS Number:8435X
Fonebak plc
06 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 we
believe we have a deliverable plan in place to return Fonebak to acceptable
profitability.  Whilst the decline of the Fonebak business is highly regrettable
there clearly remains a core profitable business which we can develop."


For further information:

Fonebak plc
Gary Stokes (Chief Executive)                               Tel: 01865 487235
David Kelham (Chief Financial Officer)

KBC Peel Hunt Ltd                                           Tel: 020 7418 8900
Jonathan Marren

Pelham Public Relations                                     Tel: 0207 743 6670
James Henderson
Philip Dennis




Operational Review


On 30th March 2007 the Board confirmed that a full operational review of the
enlarged business had commenced and would be completed by late spring. The new
management team have since conducted a thorough appraisal of the performance and
prospects of all the Groups activities and now report the findings and action
plans.


Fonebak has grown rapidly since launch, developing a new market for the re-use
and recycling of mobile phones; a key feature of which has been an
environmentally compliant model for the end-of-life management of pre-owned
equipment.


Subsequently Fonebak acquired phone refurbishment and repair businesses in
Romania, Barnet and Stoke. In January 2007 the Group completed the acquisition
of CRC Group plc, a market leader in the repair of consumer based technology
products, leading to a significant increase in the scale of the Groups
activities.



UK mobile phone repair


With the acquisition of CRC the Group currently has four sites in the UK
repairing mobile phones. Having reviewed the order book and projected capacity
requirements the Board has concluded that the operations based in Barnet and
Stoke should be closed. These businesses are projected to incur combined losses
of #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 at
the time of the acquisition in 2006; effectively offsetting the employee
liabilities. Costs of closure at Barnet, before potential asset write-downs and
other '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 clients
to transfer viable business to facilities acquired with CRC in Nottingham and
Huntingdon. It is unclear at this stage whether retained business will be
material.



Romania


The facility in Bucharest provides access to a good technical, low cost
operation in a prime location. However, the commercial side of the business has
not been developed and as such capacity has been under utilised. The site runs
at a substantial loss and is projected to have cost approximately #2m to support
this year.


Originally conceived as an internal service and cost centre the better prospect
is to establish the facility as a 'stand alone' business and profit centre. As
an accredited, low cost repair centre Romania should have a more significant and
ultimately profitable role.


Headcount will be reduced immediately to reflect a more prudent cost base whilst
the longer-term prospects are developed. The business is targeted with achieving
break even within two years. Progress will be monitored closely over the coming
months.



Fonebak


The original Fonebak business model created the first environmentally compliant
process for the mobile phone networks and manufacturers to dispose of
end-of-life handsets. The model has been particularly successful in the UK where
Fonebak services all the major networks and continues to build on its
established reputation.


Building on this experience the Group has been expanding into Continental Europe
with some success. Taken as a whole however, mainland Europe has been loss
making, partly due to the volumes and quality of product returned.


Given the priority to re-establish the profitability of Fonebak a decision has
been taken to consolidate the European footprint and to close offices in Italy,
Portugal and Turkey. Costs of closure are expected to be minimal. Markets where
Fonebak has a stronger presence such as France and Spain will continue to be
developed.


In the UK greater focus is being placed on managing an appropriate cost base
relative 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'. The
implementation of WEEE into UK legislation comes into force on 1st July 2007 and
Fonebak has been busy developing the business model to include full compliance
with the industry guidelines.


Whilst the market for pre-owned equipment is undoubtedly more competitive
Fonebak continues to differentiate itself and is the only service provider able
to deliver the full environmental and commercial solution. Accordingly more
resource will be placed into expanding the client and market facing activities
to deliver this potential.


Having initiated steps to restructure and refocus the original Fonebak business
greater emphasis is being placed on margin management and the commercial pricing
of the differentiated services. In the short-term it is anticipated that volumes
will be reduced but with a consequent improvement in margin and matched to a
more appropriate cost base.



CRC


The restructuring programme commenced in 2006 is now well advanced. The UK
activities are centred on sites in Glenrothes, Nottingham and Huntingdon. The
headquarters and repair centre at Thame was finally closed in April and the
onerous lease on the property was successfully reassigned


The Glenrothes site is being expanded to accommodate additional business and to
integrate activities currently outsourced in a secondary location. The project
is to be supported by grant funding recently confirmed from the Scottish
Executive.


In Germany the closure of the Berlin operation, previously announced, is
proceeding in line with expectation. The closure will take effect from the end
of the current month.


CRC has also agreed an initial three-year contract to collocate the Fujitsu
Siemens laptop repair activity to Sommerda in the former Eastern Germany; the
new site will be operational this summer. The facility will provide the Group
with a lower cost in-country solution for the German market as well as
strengthening the relationship with a key customer.


The main site in Germany is currently in Paderborn, with good technical and
process skills it was formerly an in-house service facility for Siemens. The
business has performed well for CRC; however, the per capita cost is the highest
within the Group. Discussions are underway with the unions in Paderborn to
renegotiate the employment terms and conditions to a more sustainable level.


The Polish operation has been trading strongly for some time and the Warsaw site
is reaching capacity. As clients continue to migrate business to lower cost
operations the opportunities in Central and Eastern Europe are good. Capacity
requirements in Poland are being weighed against the available resources in
Romania to create a more coordinated 'low cost' strategy for less time sensitive
repairs.



Board


The Board recognises that with the acquisition of CRC earlier in 2007 there is a
significant increase in scale and breadth of the enlarged business. In the short
term the emphasis is on the delivery of the recovery plan and the need to return
the business to an acceptable level of profitability. The Board believes it has
a robust and deliverable programme to achieve this.


With a new Chief Executive; Gary Stokes and Chief Financial Officer; David
Kelham in place there is recognition that now is an appropriate time to
strengthen the non-executive Board and to plan for the succession of the
Chairman, Gordon Shields. A search will commence in the coming weeks and it is
hoped that the end of the calendar year will complete the process. At this stage
it is envisaged that Gordon will remain a director.


In addition Stephen Shields plans to step down from the Board with effect from
the end of this month and concentrate on developing new revenue streams. Stephen
is key to the successful turnaround of the original Fonebak business and it is
agreed that he should dedicate himself to this whilst unencumbered by wider
Board responsibilities.


Both Gordon and Stephen have played a fundamental part in establishing Fonebak
as the market leader in a new and still emerging market. They remain key members
of the Fonebak team and are fully committed to supporting the business through
the current transition.



Management


Given the increased scale of the enlarged Group and the commercial opportunities
that this presents Martin Gossling has been recruited to create sales leadership
and head up international business development. Martin was previously the Senior
Vice President Global Sales of Fastmobile Inc, a US based mobile phones
business, and prior to that worked with Motorola and Orange.


Initially Martin will be focused on the repair activities but with a wider remit
as the recovery programme progresses. Martin has considerable and relevant
experience within the broader technology market and will spearhead a more
coordinated sales push across the Group.


The operations management includes experienced leaders in each territory and
with this appointment the team now in place has a good blend of pragmatic hands
on experience and skills together with a strong commercial focus.


The new management team now in place will have their reward structures and
incentives aligned to the interests of shareholders through the provision of
share options. The options will be issued within the limits and performance
conditions previously approved by shareholders and by 30th June at the latest.



Current Trading


The original Fonebak business has continued to grow inbound volumes; however, it
is evident that margin pressure and increased operating costs have been eroding
profitability. These trends had been masked by much higher margins on certain
products, however, the loss of a key contract, announced on 6th March 2007, has
exposed the deterioration in the underlying performance of the business.


At the same time customer concentration on the outbound sales has been
identified as a risk for the business and efforts are being made to reduce this
dependency and establish multiple routes to market. The business has experienced
some short-term disruption as a consequence, however, sales have returned to
expected levels and with a more diverse customer base, which will ultimately be
of greater benefit to the Group.


The operations in Romania, Barnet and Stoke are all currently operating below
capacity and taken together are heavily loss making.


On a more positive note the acquisition of CRC has progressed well; trading is
ahead of expectation and the outlook is positive. The current management team
restructured the business in 2006 and the benefits of that programme are now
evident in the improved profitability and cash flows.


Intec Distribution is having a strong year and has established itself as a major
supplier to the replacement phone and insurance markets. The business was
recently relocated to more suitable facilities and has good growth prospects.


The performance of CRC and Intec Distribution provides encouragement and is
expected to sustain the enlarged Group whilst the performance and capacity
issues identified are addressed.



Outlook


In the announcement of the Interim results on 30th March 2007 it was stated that
the Fonebak business had suffered from a combination of a key contract loss and
an underlying decline in margins on the residual business. In addition the
operations at Barnet and Stoke were increasingly loss making and whilst the CRC
and Intec Distribution businesses were trading well they would not make up the
shortfall.


With the operational review now complete the Group will accelerate the
activities to eliminate all loss making activities, starting with the closures
of Barnet and Stoke and the downsizing of operations in Romania. Whilst much of
the work that needs to be done will ultimately be self funding from a cash flow
position it is anticipated that that there will be significant non-cash
provisions, in the current year, to cover consequent liabilities and asset write
downs.


Whilst these numbers have yet to be finalised it is clear that overall the Group
will 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 that
bank 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 an
acceptable level of profitability. Whilst the decline of the Fonebak business is
highly regrettable there remains a core profitable business, which can be
developed. The process to eliminate the loss making activities, whilst involving
some difficult decisions, is clear and will have immediate benefit for the
prospects of the remaining business.



                                     -ENDS-


                      This information is provided by RNS
            The company news service from the London Stock Exchange
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