New EMS chief reviews progress toward fiscal recovery
A seriously flawed business strategy and poor fiscal management put Environmental Management Solutions (EMS) "in critical financial condition" by last September, company president and CEO Tony Busseri said last week. In a detailed progress report on the Burlington, Ontario company's status and near-term prospects, Busseri, who was appointed in October 2004, provided extensive background on the need for a whole new strategy and significant restructuring.
Estimates of revenues and earnings by the previous management proved to be over-inflated when, by the end of September 2004, EMS was running at a loss of approximately $250,000, and by the end of the year, the company was not paying suppliers promptly, had liens on some of its assets and was facing difficulty with secured debt holders.
In addition, EMS's bonding facility had been capped at $5 million which, Busseri explained, was essentially the same as having no bonding facility at all. He acknowledged that as a result of its inability to provide a significant bond, combined with the lack of working capital late in the year, EMS failed to win a major soil remediation sub-contract in Hamilton.
In spite of a forecast loss of $1 to $2 million for the first quarter of 2005, the company is optimistic that it can achieve enough of a turnaround to reach its goal for the year of $95 to $100 million in revenue and earnings of $8 to $9 million.
Busseri noted, however, that these operating figures do not include the potentially substantial costs associated with the dissident shareholders' requisition for a special meeting of shareholders. He added that uncertainty caused by the dissident action has led to delays in negotiating more favourable terms with secured debt holders and for a bonding facility required to allow the company to undertake significant projects. Both were high-priority items in the restructuring but have now been postponed until after the company's annual and special meeting of shareholders, scheduled for April 29, 2005.
Up until late 2004 EMS was oriented towards acquisitions and pursuing large, asset-intensive but low-margin short-term contracts. These produced high revenues but low profitability or return on assets. In fact, said Busseri, some of the acquisitions have been an outright drain on the company, financially.
For example (based on unaudited results), Cannington Excavating (1989), acquired in February 2004, will report a loss of $1.4 million on revenues of $7.6 million last year, while Greenbank Environmental, a consulting company, lost about $250,000 on revenues of $2.8 million for the year.
Failure to develop and execute an integration plan in Western Canada meant that K-Lor Contractors Services will report a loss of $1.1 million on revenues of $16.7 million for 2004, and WasteCo Environmental Services will report a loss of $1.5 million on annual revenues of $26.8 million. (Figures cited represent earnings before interest, taxes, depreciation, and amortization (EBITDA).)
Busseri indicated that EMS intends to divest Cannington and Greenbank shortly but will continue to integrate K-Lor and Wasteco in its western regional division. This will be part of a new strategy focusing on quality of revenue, with the objective of pursuing long-term, profitable revenues for the 21 EMS facilities in order to bring the return on assets back to acceptable levels.
EMS is also moving to reduce costs through integration and improved controls. Before being reorganized, said Busseri, companies within the EMS Group were functioning independently, each with its own accounting platform, insurance, benefits program and financing. By September 2004, there were 47 separate debt agreements across EMS and the company was paying aggregate interest of more than 11%. In addition, provisions within some of the debt agreements prevented EMS from using cash from the most profitable operations to meet the obligations of others.
As well, Busseri continued, EMS was not collecting cash from clients effectively, nor was the company adequately controlling expenditures. It had no annual capital expenditure budget in 2004 and no approval process for spending. By mid-2004, EMS had uncollected accounts receivable equal to 100 days of sales. That number has since been cut to 70 days and is targeted to be at 60 days for 2005.
More information is available from EMS president and CEO Tony Busseri, 905/335-2100, or on the EMS Web site, www.emsgroupinc.com.