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11 July 2004
SUNDAY HERALD
Platform for success

JOHN Scott is a man on the move in more ways than one. He has been on so many easyJet flights lately that he is on first name terms with many of the staff. And he has grown Scott Timber, his family's pallet-making business, from a small Fife concern to the biggest player in Europe in less than 10 years.

As recently as last year, his five-year target for the company was (pounds) 50 million in annual turnover. It is already within touching distance thanks to this year's acquisitions of Hammond Pallets and now James Industrial. With other deals in the pipeline, it may well break the ceiling before the end of the year.

But according to Scott, these are tough times for pallet makers. The cost of nails has surged 40% in recent months due to heavy steel demand from industrialising China, and the low-grade Baltic softwood that is used to make pallets has been in short supply because of increased competition from the UK construction industry and European manufacturers.

'It has been a nightmare,' says Scott. 'The UK used to be a big market for the Baltics, but there has been a shortage of timber because countries like Latvia have started selling everywhere in Europe.

'Timber prices are rising between 10% and 20% depending on the suppliers, and timber is a very large percentage of our turnover.'

Scott insists that his company's sales have not been badly affected because it is a big enough player to make sure it gets what timber is available. It has therefore been able to keep adding customers, partly by getting business from the smaller players who bear the brunt of the shortages.

The problem for Scott Timber has been the bottom line. 'There is pressure on margins, no doubt about it. Profitability has been squeezed considerably,' says Scott. He explains that it is not possible to switch to a different type of wood because the other varieties are of a higher grade and therefore more expensive.

One answer is to work on growing the recycling side of the business, which is where used pallets are bought back from customers to be reconditioned. The James Industrial deal is part of this, doubling Scott Recycling's contribution to the company's turnover to (pounds) 5.5m.

One particular reason for buying James was that pallet recycling is more dependent on regional bases than manufacturing. This is because the pallets have to get to the factory to be recycled, either by being dropped off by customers or being collected by Scott Timber. By adding James's Wigan base to its existing recycling sites in Wales and Rosyth, Scott Recycling can cater for a much wider stretch of the UK.

It seems everyone's a winner from recycling. Scott Timber benefits because it is about 15% to 20% cheaper per unit to recycle rather than make new pallets, which eases the pressure on margins from higher material costs.

Meanwhile customers can buy reconditioned pallets at cheaper prices, and they can cash in on what would otherwise be waste material. 'We want to work more closely with our customers to make sure the pallets are not being disposed of,' says Scott.

'Many companies are just putting their pallets into skips and having them taken away to be made into chip board, which is a complete waste as far as we are concerned. We buy each pallet for about a pound. If they are chipping it, generally they will pay to have the pallets removed, or only make pennies from them,' he says, adding that there are also environmental benefits from recycling rather than making new pallets.

The company wants Scott Recycling to become a much bigger part of the business in future. Thanks to the mutual benefits and a marketing push from Scott Timber, turnover from recycling is growing at 10% to 15% a year, which is almost certainly faster than the business' continuing operations as a whole.

Scott is coy about forecasting how large a part of the business recycling can become. He says he would shift completely from new pallets to recycling if it was viable, but recycling has one big limitation.

'Reconditioned pallets tend to be a standard size - 1200mm x 1000mm and 1200mm x 800mm. We produce 2000 different sizes of pallets on a weekly basis, so that in itself will mean there will always be a high percentage of new pallets bought.'

The remarkable thing about Scott is that he is still only 33 years old. He inherited the company at the age of 18 after his father's death, when it consisted of a sawmill manned by four employees which made fences and generated less than 100,000 turnover a year. It was not on any business magazine's list of hot tips for the future.

Though he was barely out of puberty, Scott could see that fences were not a growth industry. He shifted the company into pallet making by negotiating a 125,000 deal with BP, and then steadily grew the business, bringing in his older brother Norman to strengthen the management team in 1995.

In 1997 they made their first acquisitions, buying Precision Pallet & Case and Joseph Jack Materials Handling. It was a bold step, and it nearly pulled the company under. 'We went quickly into a loss situation,' he says.

'Costs were going out of the window. The problem was the number of sites. We went from one to three, which may not sound like much, but we were trebling our manufacturing locations without any systems in place. Very quickly you lose track of stock and staff. It took us probably a couple of years to bed that in, but looking back on it, it was one of the best things that ever happened. Now we can fold other businesses into the group without a huge amount of disruption.'

Seven years later, Scott Timber has bought its way to become the behemoth of its sector. It employs about 500 staff and has bases as far apart as Fort William and Kent. It makes well over 200,000 pallets a week, both from independent factories and on large customers' sites, and moved into making potato boxes last year through its United Box joint venture, which is based in Angus.

'I look back on it and I am amazed at the growth we have had,' says Scott, who married his long-term girlfriend Mhairi in November last year. 'The companies we are competing with are the companies we were looking up to.

''We see the business continuing to grow,' he adds. 'We want to develop into other products, such as packaging - cardboard cases, binding wire and shrink wrap. We are also looking at a pallet renewal system, which could be very exciting. This is a fantastic business to be in.'

Catch up

In only 14 years, John Scott has transformed Scott Timber from a sawmill with four employees into the largest pallet-making company in Europe. Thanks to the takeover of James Industrial, annual turnover is approaching 50m, and Scott is planning his next move.

STEVEN VASS



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