So why did Prout Catamarans fail?

The bankruptcy of Prout Catamarans was little to no news in the yachting world - if my father had not clipped the article out of a British magazine, I would not have known. As I scoured the Internet, I found a number of articles and interviews that did little to explain why the builder stumbled, was acquired by Quest, then stumbled again - this time into liquidation.

Back in July 2000, things were falling apart for Prout Catamarans. Like many companies, boat builders depend on trade credit to survive. If your suppliers start asking for cash on delivery, then the working capital requirements shoot sky high. After all, buyers only pay as stages of construction are completed. Back then, Rob Underwood, the managing director of Prout was quoted in the press stating that Prout Catamarans had no financial difficulties. Yet even he had to admit that the strengthening British pound had led to a great number of cancellations in 1999. To keep the company afloat, Prout Catamarans started building Moody Elite monohulls (31' and 34'). This collaboration ended when Quest, a subsidiary of the Winfair Group in Canada bought Prout.

Interestingly enough, Prout has "outsourced" the production of its smaller catamarans to a company in South Africa since 1998. One article on a South African Sailing web-site (thanks RC!) sounds quite upbeat about the new production facilities. Considering the continual slide of the Rand since 1996 with respect to the currencies in the markets that Prout exported to, this location should have been ideal with respect to lowering the labor cost of construction substantially. Yet, licensing fees and production quantities must have not been sufficient to sustain the parent company.

I had a hard time believing that Prout could stumble into bankruptcy due to the results of one bad year. Furthermore, people sent me e-mails indicating that the ever-changing mix of OEM-installed equipment on board had more to do with sources of credit drying up than anything else. Since I never worked for Prout Catamarans, I have no way of verifying this assertion. However, my interest was piqued sufficiently to explore the depths of Prout Catamarans' troubles a bit further. After all, if Moody had enough backlog to let Prout build boats for them, the state of the industry could not have been that bad. My first step was to seek out a credit report which I obtained from Business Credit Management UK. The following observations are based on this report. FY refers to Fiscal Year, which the report usually ended in 30 of April. So when I state FY98, it means I am referring to the year that ended on April 30, 1998 (i.e. eight last months of 1997, four first months of 1998).

The report goes back to fiscal year 1996 (FY96). The first thing that struck me is that sales dropped in successive years from £6.2MM (FY97) to £4.2MM (FY98) to £3MM (FY99). So the majority of the drop in sales occurred well before 1999! While operating profit was negligible in FY96-97, at least it was positive. Starting in FY98, Prout Catamarans started incurring ever-greater operating losses, culminating in FY00 with a loss of £1.3MM! What also becomes obvious is how dependent Prout Catamarans was on exports - over 3/4 of the production was exported. Naturally, as the continental currencies devalued in line with the Euro (and the £ stayed strong), more buyers started considering continental EU builders instead of Prout Catamarans.

Meanwhile, the total number of employees at Prout Catamarans stayed within the range of 30-40. Their pay was average for the industry, at approximately £17,000 p.a. However, for every employee in FY00 and FY99, the company lost more money than it paid them to work for Prout Catamarans! The chief culprit here is the drop in sales with no concurrent drop in employment payroll. Either the boats got harder to build while Prout Catamarans couldn't raise prices because of competition or a lot of people sat around smoking cigarettes. The former hypothesis seems to be underscored by a interview with Jean Larroux, a Quest representative. He was quoted saying that Prout Catamarans had planned to spend about 2,500 man-hours per Prout 38, while actual man-hours were about 5,000. That's about £38,000 (~$50,000) more in cost than planned!

Naturally, the money to finance this deficit had to come from somewhere. Trade credit was apparently easier to get than bank credit since trade credit ranged from 100-200% of bank credit. Typically, trade credit hovered around £1MM while the bank overdraft ranged from £500-600k. These levels seem high, given that buyers were asked to pay deposits on new boats and release funds as milestones were reached. Essentially, Prout Catamarans should not have needed to finance 1/3 of its sales with short term liabilities. Someone had either dropped the ball in operations or decided to increase the leverage of the business in order to extract more profit when times were good.

What also I found notable is that revolving bank credit and trade credit falling due in a year or less (i.e. current liabilities) decreased for FY00 even though the year was longer (74 weeks) and Prout was just about to be placed into receivership. However, Prout took on a lot of long-term debt in FY00. Some was in the form of long-term bank loans, but the majority consisted of long-term liabilities due to Group (I assume this means Quest). Perhaps this was a mechanism for Quest to gain sufficient control of the debt to do with the company as they pleased?

Furthermore according to Larroux, every boat built in the last two years (2000-01) was sold at a loss. It seems curious that 14 months into the acquisition of Prout Catamarans that Quest could have done nothing to save its subsidiary. Since outstanding trade credit levels were dropping while the number of small claims judgments against Prout Catamarans were increasing (The ten last judgments on file only go back as far as 20/7/2001) I guess the handwriting was on the wall - no one wanted to extend credit to Prout anymore. With huge operating losses and minimal reserves, the best way out was receivership.

This receivership allowed Quest to acquire the parts of the company they wanted: The latest molds, the 11 boats under contract, and the required employees. Meanwhile, the banks and trade creditors still holding Prout Catamaran debt probably lost a fortune. No wonder so many judgments were coming due in the last months of ongoing business.

The production of the larger catamarans (60'+) was being outsourced to Concordia Yachts in Thailand where labor is cheaper than in England. Meanwhilw, in Canvey Island, new boat building facilities were being completed to expand production and to house the larger boats comfortably that Prout supposedly would have been building in the future. As of 2001, Prout allegedly planned to only build the existing 38, 46 with a new 43' and a 53' in England. Kit boats got discontinued altogether. This rationalization of the product line and flight towards larger boats seemed to indicate that Quest wanted Prout to go after the charter business.

The initial expectations for the Quest charter needs were about 15-20 boats a year. Given the man-hour requirements to build these catamarans and the number of employed production workers at Prout, I doubt that these numbers were ever reached. For example, a reasonable assumption is that about 80% of the (on avg. 35) people at Prout actually work in production. These 28 people can deliver a total of 51,520 man-hours per year (46 weeks, 40 hour weeks).

• If Prout were to build only Prout 38 footers, then that would give them a capacity of about 10 boats per year. Logically, larger boats like the 46' sailboat probably require even more man-hours to finish while other boats like the 34' probably take less time. Given the number of defects on our boat, Prout probably went through a fairly steep and expensive learning curve where production requirements stabilize at lower levels only once the output is a) steady and b) has reached hull #10 or higher.
  
  Perhaps it was a good idea to rationalize the number of boats being built, since Mr. Larroux implied that employees didn't seem to be capable of transferring knowledge learned in Hull A to Hull B. I find this a bit offensive for the employees in question. Having worked in manufacturing environments with a similar number of basic permutations (hulls) and extras (add-ons) I have seen people deal easily with variety and customization once the systems have been put in place to support them. Such systems simply require investments and some management skill. For example, Prout could buy or contract a CNC cutter to make perfect bulkheads, flooring, windows, etc. that fit every time. One cutter program per hull configuration later and all you need to monitor is proper assembly.
• Approaching the problem from the other side, the average Prout 38 probably generated about £250,000 of revenue given that new ones (with broker commissions, etc.) retailed for around $350,000. At £3MM of sales that implies a production of 12 craft per year. Either way, Prout wasn't even close to producing 20 boats per year. The volume that the Quest deal promised simply did not materialize. Naturally, chartering conditions probably have a big impact on that and Quest is only one player in a fragmented and mature market.

Hence, I fundamentally did not understand the logic of this vertical integration. Prout Catamarans was neither a source of profits nor does it give Quest a competitive advantage in chartering. While having a captive supplier is nice in boom times when production schedules are full, there has been no recent shortage of new or used boats in the catamaran industry. More designs are being produced every day; some in places where the raw ingredients and labor are much less expensive than in the UK. For example, with the 40% devaluation of the South African rand as of 2001, a number of builders there are probably struggling to keep up with demand.

To underscore its revival in 2000, Prout Catamarans recommenced advertising. Quite proudly, they announced that they had sold their first 70 foot catamaran already. Fair enough, but who bought the boat, and at price? What concessions did Prout/Quest have to make to find a beta-tester? Given the number of defects on our early series Prout Escale (only narrowly eclipsed by what I saw on Hull#1 when we visited Canvey Island), I can only hope for the buyer that the contract had some heavy duty provisions for repairs under warranty.

Meanwhile, Prout Catamarans web and press-presence could only be summed up as negligible. The French don't only produce better looking ads, they're actually convincing people that they are producing better boats. How else could Lagoon advertise their 100th 38' catamaran, just a few years after starting to build them? From what I could tell, they had Prouts entire volume beat with the production of just one model. Is some form of French government subsidy involved? (the answer is apparently a qualified "yes" when one compares the support of the French government to its boatbuilding industry to that of the English government.)

Mr. Underwood, the former longtime managing director of Prout Catamarans, may have best summed up the pathetic situation back then: "I can't make any comment or I'll be shot." (12/01 Yachting Monthly). Mr. Underwoods reported November 2001 departure from Prout Catamarans ushered in a new era for the company, though it was already too late by then. After all, it was under his watch that our Escale was built and he allowed the many defects we reported to fester untouched. Due to Mr. Underwoods management genius, the sales of the undisputed leader in cruising catamarans declined dramatically before being sold to Quest. I'd love to see the list of accomplishments on his CV! He now heads up the Broadblue boatbuilding effort...

I suppose the demise of Prout echoes the takeover of Mr. Underwoods preferred mode of transportation (Jaguar) by Ford. The ailing Jaguar brand was to revive via access to Fords worldwide suppliers, better distribution/repair via existing Ford dealers, improvements in quality control, and an injection of operations management skills. However, is Quest a world class boat manufacturer? Do or will they provide market access that Prout did not have? Are there significant returns to scale in this industry? Time will tell.

In the Second Bankruptcy page, I sum up the latest news regarding Prout. Unfortunately, the company failed for the second time six months later, this time for good.