Galliford Try Holdings plc (GFRD) Earnings Call Transcript & Summary

Okay. It's half past according to my watch so we'll kick off. Welcome, everybody. Thank you very much for coming. I was half expecting to be speaking to an empty room today and most of you on the webcast. So thank you for making the effort. Welcome to our half year results presentation. There's no fire alarm plan for today. So if an alarm does go off, it's real, and we'll have to evacuate by the stairs and so on. So the plan for today is that Andrew and I will speak for about half an hour and then take questions after that, and for those listening on the webcast, we can take questions via the web. Okay. So 10 minutes into the -- 10 minutes, it feels like 10 minutes. 10 weeks into the new Galliford Try Holdings, and in a period of very significant transition for us, and we're really encouraged by the reception of the new businesses we had from -- I'll start from our clients from the investment community. And I'm pleased and honored to be leading the new business alongside a very capable executive team and senior management team. And you'll notice that the exec team isn't all here today, and that's because of the coronavirus, and we decided that they can stay in their remote offices and not be all -- all be in the same room at the same time. Constant of the change in the register post the transaction, I'll spend quite some time on who we are and what we do for those new to the business, and then we'll add some more color around our strategy at the full year in September. And a key theme you'll see coming out of this presentation is our focus on bottom line quality of earnings and not top line revenue growth. Who's changing the slides? Okay. So going on to the agenda, I'll talk about the business and the half year highlights. Andrew will take us through the numbers, and then I'll pick up the strategy and the outlook. So our business. This is what I see as important for our business: for us to be a people-orientated, progressive, values-driven business that delivers for our stakeholders. People are our most important asset, the most important asset for any construction company. And the right people with the right attitudes, the right culture, the right competence and experience are absolutely critical to our business going forward. When we talk about progressive, we talk about modern methods of construction, off-site manufacture, BIM and the sort of technology platforms like Viewpoint and Field View that help us to be more efficient on our sites. And more importantly for me, or just as importantly for me is a progressive mindset that keeps us up-to-date with all aspects of our business. Welcome, come in. Our values include, of course, safety, ethics, inclusivity, community engagement and of course, the environment, and these come together to enable us to deliver high-quality projects to our clients, world-class facilities for communities and predictable, sustainable results for our shareholders. So we'll cover these aspects in more detail. Is it -- I see, okay. We'll cover these aspects as we move into our business, Slide #4. We'll cover these aspects in more detail as we go through the presentation. But in a nutshell, we are a well-capitalized business with an excellent order book in our chosen sectors. We have no debt, no pension fund deficit, and we've got a really disciplined approach to risk from both a process and a cultural perspective, which is important to us. So really, a strong balance sheet, which is a real differentiator in today's markets where clients are being more robust about contracting with businesses that they're confident can deliver. So I'll spend a fair bit of time on the next 2 slides just to give you all an idea of what we do. We've restructured the business at the Construction part of the old Galliford Try last year, and that was just fortuitous in terms of timing. We reduced the size of the business to focus on our core markets where we can produce good sustainable results, and that means that the sort of the dust has settled on that restructure as we've transitioned into the new Galliford Try from a construction perspective. On the sectors, education on the left there is our largest sector. And just to give you an idea, we've built 157 schools in the last 5 years and have 33 under construction as we speak, and these range from small sort of GBP 5 million primary schools up to big GBP 65 million, GBP 70 million secondary schools and academies and so on. And the demographics of this sector, coupled with the aging condition of the school estate, means that this sector will remain a core sector and a big market for us for many years to come. In defense, we undertake operation and living accommodation projects for Defence Infrastructure Organization, and we're well placed in all of their frameworks. The DIO is consolidating modernizing their garrisons and their estate, and that gives us good long-term workload going forward. In health, we're on the ProCure22 framework, and we mainly do small additions to hospitals in existing hospital grounds. So we don't do the big hospitals that you see in the press, we basically do sort of bolt-on a cancer care center here and an A&E sector there on existing hospitals. In highways, we work with Highways England on the motorway and the trunk road network and with local authority clients through frameworks like the Midlands Highways Alliance and YORcivil's framework and it was good to see excellent government support for the road sector in the budget yesterday. The environment business, which is predominantly water and wastewater to us, is well positioned through the Ofwat 5-year asset management cycle, and we've recently extended our Southern Water and Yorkshire Water frameworks for a further 5 years to 2026. We are incumbent in the Scottish Water framework, which expires later this year, and we're hopeful that we'll extend that for 6 years, in that case to 2027. And we're currently bidding for Thames Water's AMP7 program. And on the right-hand side there then, the investment business helps us to generate work for the wider group. For example, we can participate in the financing of new schools through the MPD model in Scotland, predominantly. We can construct the school through our local business, billing business, and then we can undertake the hard FM for typically 25 years. So the FM business -- the investment business helps to generate good quality work for the wider company. Moving on then to sustainability and ESG. We take our ESG obligations extremely seriously, as do our clients, and I will run through that list in a bit of detail. Health and safety is always top of our agenda. It's paramount in everything that we do. Our focus is very much on culture and behaviors in health and safety, supported, of course, by good processes and an expert health and safety team who guide us and advise us. We're supportive of the government's decarbonization agenda, and we look to influence and assist our clients to reduce embodied -- or embedded and whole life carbon in their projects. On a local level, we try to reduce our carbon footprint by having environmentally friendly site accommodation, by having green energy to our sites and offices, and our fleet, which is about 1,100 cars now. 21% of that fleet is now electrical hybrid and the average emissions is coming down fast, and the average fuel bill is also coming down fast, which is good to see. People, I mentioned people earlier on, but people want to work for safe, ethical, sustainable companies who contribute to society and where they can forge a successful career. And our smart and agile, as we call them, working policies are designed to attract a broader demographic to the business to help us to become more diverse. 3/4 of our clients are repeat customers. With the overall customer satisfaction score of 86% and a Net Promoter Score of 80, which I'm told is very good. Anything over 60 is good. So 80 is very good, and we enjoin our supply chain, which is a long-established and high-quality supply chain to the business through a program which we call Advantage through Alignment, and the clue is in the name really. It's all designed to align our supply chain closer to the business, give them access to our systems, to our training, to our culture and an insight to our pipeline so that we move in tandem in concert with our supply chain. And finally, we engage with the communities in which we work through employing local people where we can, through supporting initiatives like Open Doors, which opens up our sites to young people to come and have a look and show them the breadth of opportunity and the breadth of careers in the construction industry. And we have our younger people as STEM ambassadors presenting to schools and local colleges and so on, again, to educate people on the construction opportunities as they get on. So that's the ESG agenda. Moving on to our people. We have an experienced executive team with a great many years of experience under their belt, construction experience under their belt. The PLC board has remained the same, and that gives us stability and continuity as we move forward in our new skin, and of course, it's a host of excellent people beneath the crowd you see on the screen there that provides strong succession through the business. So on to the highlights, our accident frequency rate of 0.09 is upper quartile in the industry. But we'll never be happy until we achieve 0 there. We settled the Aberdeen contract, which removes a huge milestone from around our necks and allows us to move forward without distraction, and we've made excellent progress in the order book -- the quality of the order book through a period of significant transition. So I'll hand over to Andrew now to take us through the numbers. Thank you, Andrew.

Okay. Thank you, Bill. Good morning, everybody. The numbers, as you have seen, are reasonably complicated, so I will run through them. I'll go through them reasonably quickly, but happy to stay around afterwards if anyone has got some more detailed questions. But I guess before I get into the detail, for me, the real key is that we are now well capitalized, we've got a strong balance sheet and our new work is performing in line with our plan. So that gives us a real platform to work from. So on Slide 10, we summarize the financial performance, and the results there show the continuing business with obviously Linden and Partnerships now shown as discontinued. So it's still in the statutory result but as discontinued business, and I'll walk you through a bridge of that in a moment. The overall construction revenue was down about GBP 92 million, 13% to GBP 636 million, and that reflects both the end of the Aberdeen project, which had some revenue in the equivalent period last year, but more particularly, our strategy, which is to bring back and bring down our top line to really increase our focus on risk management. And so I'm very happy with that run rate that we're seeing there, the GBP 636 million and also the mix. So that's kind of 2/3 building, 1/3 infrastructure. So really happy with the run rate we're seeing in that. You can see the next line, the loss before -- the loss from operations of GBP 6.7 million, and that's stated before amortization costs. And again, that reflects, to a large degree, the fact that we are in a transition year. So as part of that, we have accelerated some final account settlements into the current year on some older jobs, which has impacted our gross margin, but again, gives us a good base to work from going forward. And also, of course, the full central costs of the business have now been absorbed by the continuing construction business. So again, that reduces the overall operating profit. So after allowing for tax, tax is at 19%, a fairly standard rate. The continuing business has a loss after tax of GBP 4.6 million, and you can see the equivalent number on the right-hand side, the statutory profit after tax is GBP 60.5 million, which includes both exceptional income and the discontinued operations, and I'll come onto that in a moment. So the continuing business, loss after tax, that translates to an earnings per share of -- or loss per share of 4.1p. But although this is a year of transition, and we're reporting a loss -- the Board's reported a decline in interim dividend of GBP 0.01, and that does reflect our confidence in the outlook and the strength of the order book, the strength of the balance sheet. So just moving on to Slide 11, this is just in terms to try and help bridge the results from previous periods to the current period. So the table on the left-hand side shows revenue. So our continuing revenues in the construction business of GBP 636 million. The discontinued revenue is the housebuilding of GBP 704 million. The growth, though, is in the partnership's contracting business, including the benefit of the STG acquisition that we did in July 2019. That more than offset some reduction, actually, in Linden's revenue in the period. And then the bridge on the right-hand side, so you can see that the left-hand side, the construction business, so building and infrastructure reported a small profit in the period. After you then take central costs into account, GBP 7.7 million and the PFI losses, that gives us the loss from operations of GBP 6.7 million I referred to earlier. We then have interest, amortization and then particularly the net exceptional item and the discontinued activities, which showed a profit after tax of GBP 48 million. And that gets us to the overall group profit after tax of GBP 60.5 million. It is quite complicated. So hopefully, that bridge just helps cover that across. So on Slide 12, we give a little bit more detail on this segmental breakdown for the continuing business. So let's just again go through the sectors in a little bit of detail. So Building, you can see the revenue is only a little bit lower than last year. And that reflects really a little bit of lower revenue, particularly in the commercial sector and in the southeast of England through the second half of 2019. Actually, encouragingly, we've seen some quite good pickup and some new contracts, awards and signed contracts so far this calendar year, in commercial, and particularly in the southeast. So there was a little bit of a hiatus, I think, in the run up to the election, which we're seeing -- we're seeing that come through, obviously, coronavirus aside. And Buildings' margin was 0.6%, and as I mentioned earlier, that was slightly constrained by some historical final account settlements so that just pulled that margin down. In Infrastructure, the revenue reduction, from GBP 286 million to GBP 208 million. So probably about GBP 25 million of that year-on-year change relates to the Aberdeen projects finishing. There was -- that revenue included last year, and then you'll remember that the strategic review that we undertook in the middle of 2019 particularly focused on our Infrastructure business. So we're very happy that, that reduction in Infrastructure turnover is in line with that strategy, and I'm very happy that, that's -- that, that level of turnover for Infrastructure for the half year is where we want to be. It may be that the second half year actually, the run rate is a little bit lower. But overall, that's a -- that's where we want to be, and that was a strategic reduction in revenue. The loss in Infrastructure, GBP 1.4 million. That, again, includes some final account settlements, and in particularly, some substantial legal costs that we've taken through in the half year, and so overall, the combined construction profit is a margin of 0.2%. And although that is low, I think what's worth noting is that the margin on our current jobs is much more encouraging. So when you look at the jobs which are current and live on the ground at the moment and those which have completed over the last kind of 12, 18 months or so, they are reporting gross margin in line with our target gross margin. So you can -- we can see the margin pipeline coming through, and that really gives us confidence in our future plans and in the risk management processes that we've put in place. So that's really important. And then just to conclude on Slide 12, PPP Investments, loss of GBP 0.9 million , last year, there was GBP 3.6 million (sic) [ GBP 3.7 million ] of profit from a couple of disposals. So if you extract those out, that's relatively similar. And the central cost is GBP 6.8 million, as I've said earlier, that, of course, is relatively high for the continuing business, and that does reflect the fact we're in a transition year. So I'd expect the second half year to be a similar run rate before we then start to see those costs coming down in FY '21. Moving on to Slide 13, so there are various one-off items, which I just again want to just touch on. So we announced in December that we've settled the AWPR contract and also one other adverse adjudication ruling, and we said in December, that amounted to about GBP 61 million loss. And I'd also previously -- we previously said that the -- and you'll have seen this morning that the FRC were looking at our 2018 accounts. And following the settlement of Aberdeen, we've agreed with the FRC that the right way to show that was to adjust the opening balance sheet position, and then that results actually in the Aberdeen settlement income was GBP 32 million, net of an allowance for final cost coming through as an exceptional income in the current year. So the table on the right, importantly, that you can see the GBP 61 million in the middle of the bottom row there. So although there's a presentational change, there's no change to the number that we reported in December on either Aberdeen or the other adverse adjudication that we talked about in December. We've also taken through in the period, exceptional costs related to the Bovis deal of GBP 5.8 million, and that relates to the costs that were incurred up to the 31st of December due to some further costs on completion of the transaction. Secondly, on this slide, we have adopted IFRS 16, the new lease standard. We adopted that on the 1st of July, and that adds to the continuing business. At 31st of -- 1st of July, that added about GBP 26 million of liabilities to the continuing business, and that's about GBP 22 million as at the end of December. So -- and that's a gross up of assets and liabilities, as you know. And then finally, the discontinued housing business, the profit after tax, GBP 48.1 million. I've given the breakdown there of that, the revenue, the profit from operations and the profit after tax for the housebuilding operation. So moving on to Slide 14, really importantly, I mentioned it earlier, the transaction with Bovis has allowed us to restructure our balance sheet and we now operate debt-free every day of the year since the 3rd of January. So we've got no balance sheet debt, we've got no pension liabilities, and you can see that we've got PFI assets of around GBP 40 million on the balance sheet. So that gives us a really, really strong base, and what's particularly encouraging is that, in talking to prospective clients, Bill and I have already seen the benefit of that, and we can already see that, that is a real differentiator in the market, and our clients appreciate the simpler balance sheet and particularly, that cash back balance sheet. So that's very important. The numbers on the table, the increase in the other noncurrent assets, GBP 34.8 million. The large increase in there is the IFRS 16 leases coming in, as I mentioned earlier. You can see that our working capital is about GBP 30 million less -- negative working capital is about GBP 30 million less than this time last year, at the end of June. And that GBP 30 million, of course, includes the receivable from AWPR, which was paid in calendar 2020. So our working capital is a very similar level to the end of June. And then I've included there pro forma cash figure. So our net debt at the end of December, obviously, was pre transaction. But if you allow for the Bovis transaction, so the proceeds and the various working capital adjustments, then if you have allowed all that to happen on the 31st of December, we would have had a pro forma cash figure of GBP 225 million. And as I said, it's really important we trade with cash now every day of the year, and our average month-end cash for the second half year will be over GBP 100 million. And in fact, with -- in fact, it should be well over GBP 100 million. So moving on to Slide 15, so I've said that the strong balance sheet and the cash position is a differentiator for clients, which it absolutely is. It's also really important for our suppliers and for our supply chain, and our supply chain is obviously critical to us. That's why we were particularly disappointed to be suspended from the Prompt Payment Code in July. But as you know, we were then readmitted to the Prompt Payment Code in December, and our payment performance in the second half of 2019 was much improved on the first half. And in the final quarter of 2019, we were paying over 90% of our invoices within 60 days across both Building and Infrastructure, so really pleased with the improvements we've made, and that's a real credit to our teams right across the business who made huge efforts to get us back into the right place. That's critically important for us going forward. And then the final slide here, Slide 16, is a pro forma cash flow. So again, I just wanted to give you a sense of the cash flow of the continuing business, which is why I've done it on the pro forma. So I have adjusted the opening 1st of July cash to a kind of pro forma opening position, allowing for all the working capital movements in the disposed housebuilding businesses. And then what you can see really importantly is that the actual free cash flow, the continuing business in the period was almost neutral. But of course, don't forget that includes the relatively heavy central costs included within those numbers. So you can see that again, links into the fact that our working capital position is very stable in construction. And of course, worth pointing out that the dividend payments was the final dividend paid in December of the old Galliford Try. So it's slightly skewing the position if you were to roll that forward. But what I would do -- again, I don't just emphasize that cash position. It's really important to us, and it's -- it gives us a real strength and differentiator in the market, both with clients and with suppliers. And with that, I'll just hand back to Bill to talk a little further on the strategy and the outlook.

Great. Thanks, Andrew. Okay. So the strategy that we put in place in the restructure of the construction business last year remains valid and appropriate to the business as we go forward. And there are some opportunity to refine here and there, that strategy post transaction. It's probably a good time as any to talk about coronavirus. We're taking, as you'd expect, all the sensible and pragmatic precautions in terms of not traveling, unless we need to, and stopping big meetings and so on. But we've also gone on the front foot here, and our business continuity plan has swung into action, and our people have reacted really well, actually, which is really nice to see. We've dispersed -- on a sort of preemptive basis, we've dispersed our back office finance team to work from home, and they've trialed running payroll and paying our supply chain, our subcontractors from home and has worked well. So that gives us a lot of faith in -- depending on what happens going forward, we can continue to run the business. We've dispersed the people already, that happened earlier this week. Because obviously, having everyone in the same room, not very intelligent. So in the same breath, we've dispersed the IT service desk. Obviously, with more people working from home, they are likely to be more IT questions coming through. So we've done the same with them, they're all working from home, and so that gives us confidence, as I said, in our ability to weather the storm. And it's really good to see our investment in technology for small, what we call, smart and agile working coming into play here and it's working really well. We also, of course, engage with our clients and our supply chain, just to make sure that if there is some disruption going forward, which looks increasingly likely, I suppose, that we just keep things on an even keel and discuss things sensibly. We're reviewing our terms and conditions to see what protections we have in terms of any disruptions that may occur, and we're strengthening those requirements on contracts that we're about to sign up to. So if we're about to sign up to a contract, obviously, we're going to strengthen the clauses about force majeure and protection against disruption from coronavirus. So I think we're doing everything that's sensible and pragmatic to do. There's no panic going on, but we need to be as prepared as we can be to deal with whatever comes down the line. So moving on then to our business model. This graphic just seeks to explain how we look. The core capability in the middle here is and will remain in Building and Infrastructure. And Building's running at sort of GBP 850 million, GBP 900 million per annum. Infrastructure, GBP 300 million -- sorry, GBP 350 million, GBP 400 million per annum and in the sectors in which we choose to operate. On either side then, we have 2 smaller businesses. On the left-hand side, we have investments with assets of about GBP 40 million, and on the right-hand side there, we have a small hard FM operation that turns over GBP 20 million, GBP 25 million per annum. And one of the refinements that I mentioned earlier is that we now have more agility in dealing with our investments portfolio. Whereas before, we would have generally sold our investments to fund the housebuilding operations we now have the ability, if we choose to, to retain our investments and build an investment portfolio. And the hard FM operations on the other side are an adjacent skill set to our Building skill sets, obviously, and allow us to offer our clients a seamless transition from construction into operating and maintaining their buildings. So one of the small refinements, as I said, was that both of these businesses, the small businesses either side, albeit they're not of great scale yet, generate lower risk, higher margin annuity-type income as opposed to the typical construction income. Moving on then to where we're located. As you can see, we're spread across the country. We're a regionally based business in the Building division, and we have national coverage in the Infrastructure division, albeit we work. We are sensible out of the local Building offices or shared offices, and we leverage that national strength through specialist sector teams that sort of join the dots between our clients wherever they may be. So in education, for example, we have a special education team that will provide continuity between ourselves and the ESFA, regardless of what region we happen to be building the school in. That's the theory. And we're well placed to benefit from the government's leveling up agenda. In the Midlands and the north, and actually, we've already seen some increased activity in that regard. Moving on to the markets, I've already spoken about our key sectors, but you can see here the size of some of those sectors, and it's important here to recognize that the fundamental drivers of our business are unchanged. The need for more and better social and economic infrastructure are unchanged. We've got a growing and aging population and large parts of our infrastructure are in need of renewal or replacement, and as we've seen recently, climate change is likely to exacerbate that. In terms of the market, we've seen a, I would describe it as a gentle uptick in demand post the election, and a bit more clarity on Brexit and so on as some clients who had been sitting on their hands, waiting for better clarity have now decided to go ahead with their projects. But a gentle uptick is always better than a big upswell in terms of construction. Moving on, another slide, I've already spoken about the sustainability agenda, and this slide just shows some of the external recognition we received. Awards for our behavioral safety program, our efforts in attracting early careers people to the business, our drive to increase diversity, and really importantly, the BIM construct of the year there, showing leadership in the whole digital agenda as we move forward. On to risk management, so robust risk management is really important to me. We have a laser-like focus on risk and we're really selective about what we do and more importantly, what we don't do. We've strengthened our processes significantly over the years. We've got much better, much stronger commercial training and a better, more transparent culture to underpin the selectivity. And that translates through to a high-quality, lower risk order book, which allows us to make more predictable, more sustainable margins. And moving on to the next slide, which is the order book. The order book sits at about GBP 3.2 billion, and going back to our selectivity, it's an excellent order book with intelligent clients, a sensible risk profile, reasonable terms and conditions. It's an excellent order book in terms of its quantum, its duration, because it's through typically 5-year frameworks and the type of work that it includes. And it's got good, obviously, embedded cash and margin in the order book. You can see there that if you look at the regulated, the sort of light gray bit in the middle, the regulated sector, that's predominantly water and wastewater, and you can see that, that order book diminishes through the 5-year AMP cycle down to 4% last year, and in the current year, it's back up to 12% as we're replenishing the order book and -- through the AMP programs. And I fully expect that 12% to rise further as we go forward. And then you'll see that diminish again through the next 5-year period as the order book gets eaten up through the program. You can see there, we run the typically sort of 75% in the public sector and 10% to 15% in the regulated and private sectors, which waxes and wanes a little. We've got 95%, 96% of this year's order book secured and really good. 72% of next year's revenue already secured, which is ahead of our normal position. At this time of the year, we typically expect to be at about 60% in hand for the following year, and this reflects what I said earlier on, clients were sitting on their hands earlier on, and now the order book is starting to come through. On to the next slide then, outlook. As I said right at the start, our focus is on bottom line quality of earnings over top line revenue growth. So we intend to stick at about the GBP 1.2 billion to GBP 1.5 billion range, maintaining an average cash balance of more than GBP 100 million and targeting a minimum of 2% construction margin in 2022. And finally, in summary. Just to reiterate, we're really focused on our core sectors. We've got good process and a good attitude to risk. We've got an excellent order book, great people, supported by great technology and great processes. We're well capitalized and strongly positioned for the future. So we're confident in our position going forward. So that concludes the presentation. Thank you for listening. And we'll take questions now.

Sure. So if we take questions in the room first, and then we may get some questions on the -- over the web as well. But just to give them some time to come through. So Joe?

Yes, but maybe. . .

Oh, sorry, for the webcast, if you could.

State your name and company.

Sure. It's Joe Brent of Liberum. Three questions, if I may. Firstly, in the light of what's going on around the sector, could you talk through your working capital dynamics going forward? In particular, sort of joint operations, project bank accounts and the Prompt Payment Code, things like that? And secondly, could you tell us what percentage of your contracts have force majeure clauses in them at the moment? And then finally, just with regards to our national business, there's a couple of areas you're not in, notably, I think, Wales and Cornwall. Might they become part of the agenda in the future?

Okay.

Do you want to do the second and third? And I'll come back to the first, Bill? Go on.

Yes. Okay. So I'd expect all of our contracts to have force majeure clauses in them, and I'm confident that, that is the case. We should point out that force majeure will generally give you time, but not necessarily money. So depending on what happens going forward, there will be some discussions with our clients. But I'm confident that with our client base, which is a long-term client base in -- predominantly in frameworks that common sense will prevail. Because we all need to pull together through this and clients have a strong vested interest in us as are -- as we do and our supply chain do in keeping things on an even keel as we go forward. Wales and Cornwall, Joe, we don't operate in the heartlands of Wales, we operate in the sort of the southern belt and the northern belt, and that's just because of geography and supply chain and so on. We don't have the people there. We don't have the infrastructure there, and there are other generally smaller companies that are, frankly, better placed to operate in those regions. So we have no intention of going into the heartlands of Wales, as much as I love it. And then similarly, we operate our southernmost offices in Bristol in Portishead, and we go down about as far as Oxted depending on who the client is and what the job is. But again, after that, the geography becomes quite difficult and the supply chain is difficult. So I won't say we'll never go down there, but it would have to be for the right reasons.

And then in terms of working capital, Joe, so obviously, project bank accounts, joint ventures, Prompt Payment Code. They're all topical, they were also all topical when we were rightsizing the balance sheet in the autumn as part of the transaction. So these are not things which are, if you like, have come left field and surprised us. So we're well set on that. So we don't have significant cash tied up in joint ventures, and into -- or indeed in project bank accounts. So we have used project bank accounts for a long period of time, particularly in our highways business. So we are quite experienced at using those. And then Prompt Payment Code, as I say, so we -- so through the second half of calendar 2019, we obviously made great strides on the Prompt Payment Code, and we are looking at it to make sure that we can continue to make those improvements. But we don't see a significant working capital outflow to be able to move that on. Actually, it's as much as anything, it's about process internally and making sure that we can -- we can turn and process invoices as efficiently as possible, more than as a working capital issue for us.

Okay. Andrew Nussey from Peel Hunt. Again, a few questions, if I may. First of all, the 2% net margin aspiration. Within that, what are the thoughts in terms of PPP disposals to get to that target over the medium term? And I guess sort of allied to that, sort of thoughts on the overall PPP strategy, I think you mentioned in the presentation, Bill, maybe looking to build a portfolio there. And more question maybe for Andrew in terms of the legacy items, obviously, we're aware of a claim out there. But just is there anything else there within the balance sheet of note that might be pulled into question moving forward, I guess, is the point.

Okay.

Okay. So I'll start off with the first 2. The PPP disposals, there's a small element in there, Andrew, but nothing material. Typically, we sell off our businesses at the optimum time, once they're in steady state and they've got their best market value. But in the forecast going forward, they're fairly small. The strategy about building a portfolio is -- it is a refinement. The point is more about we don't have to sell them anymore because, really, the opportunities to build are fairly limited at the moment. PF2 is nonexistent in England, NPD is still going to some extent in Scotland, but starting to wind down as well. But there may be some other opportunities for SMEs to keep their portfolios as opposed to churn, I suppose.

And then just in terms of legacy, Andrew, so our working capital includes -- so we've talked in the past about the claims, 3 claims against a single client, which -- and that -- the position that remains, to all intents and purposes, the same as it was at September when we reported in the full year, and that's still reflected in our working capital balance in the same way that it was in September. There's no other significant -- certainly, in that order of magnitude, items in working capital of that nature. I have a question online. I feel I should -- I'll deal with that. Our first question, Christen Hjorth from Numis. I'll read the question and then we'll answer it. So the question, you mentioned how the current net cash position has helped discussions with customers, does the current average net cash position of over GBP 100 million need to be retained over the longer term to continue to win work that you want? Or could capital be allocated elsewhere? So that's the question. And so Christen, I think the answer to that is that we are -- I mean, we are really happy with the structure of the balance sheet. So we absolutely expect that we would keep that level of average month-end cash because I think it is important, both for our customers and for our supply chain. It gives them the confidence that they know that we can deliver. Clearly, in the future, as we become profitable and cash generative, then we've got options in terms of how we allocate the capital. But it's important that we have a cash based on the balance sheet, which allows us to provide that confidence and to write the other kind of bumps in the market, which we can see in the current climate with coronavirus, actually, the importance of having that ability on your balance sheet.

Yes. I'll just add, Andrew, that more and more clients are looking to contract with a -- contractors with robust balance sheets to give them confidence. They should be expected to pay a little more for that as well. So the quid pro quo is we should be able to raise our margins a touch out of this as well.

Alastair? Sorry, just wait for the microphone. Thank you.

Alastair Stewart from Progressive Equity Research. Just a few questions, really, I suppose for Bill around the budget yesterday, seemed very aggressive, especially in some of your areas. In terms of the highway spending, I thought there was a slight uptick in the overall budget. Am I getting that right? And is it more important that you actually see the commitment rather than the actual quantum? On health, the 40 hospitals that have been promised since election, are you engaging with any of those 40, actually talking to them? And then just general thoughts on -- apart from the unknown from COVID-19, in terms of the impact on your private sector clients. Obviously, there seem to be a bounce after the election. Have they clammed up again? So kind of roaming questions.

Okay. Well, first, on highways. The numbers have gone up a touch from 25, that was being muted before to 27-odd. So that's welcome. The Highways England's risk to strategy hasn't been published yet, has been delayed a bit further. But we've got a good order book in -- with Highways England. We've got -- we announced last year, GBP 461 million of contract wins in Highways England, and just to be clear, those -- whilst those are big projects, they're undertaken on a sensible basis. So they're all early contract involvement, target cost, cost reimbursable contracts and so on. So you can manage your risk much better. So we've got a good order book already with Highways England. I do expect that to carry on. The limitation will be the supply chain in terms of how quickly they can get this out, and of course, roads take a long time to go from the drawing board on to site into the strategic processes and compulsory land purchases and all those sorts of things. So yes, it's a great aspiration. I don't see any immediate impact, though it will take little while to trickle through. With regard to health, yes, we're engaging with a few trusts. We're quite selective about which trusts we do engage with. But -- and I can't sort of cross-reference the 40 hospitals to the ones that we're doing, I have to say, because I don't know whether they're part of the 40 or not. But as I said before, most of what we're doing in health is fairly small bolt-ons to existing hospitals, and we're currently engaged with Leicester National Health Trust. And again, they've been keen to talk to us about the robust of our balance sheet to make sure that as we go forward to deliver a long series of small projects that we're going to be around for the duration. So that's how the clients are -- it gives you an idea of how the clients are thinking. Private sector clients, no, I see no impact yet of COVID-19 in the private sector clients. We've signed on Friday, I think, a fair sized contract in the private sector for a PRS scheme, and we're busy speaking to the same client about another one, and we've seen no change in attitude as yet. But as I said before, it wouldn't surprise me if there was some sort of a hiatus, Alastair, in people coming through.

But quickly on the private, you did see an increase in incoming inquiries prior to this?

Yes.

And then looking back, you mentioned a delay to the roads program. I presume that's because of the environmental questions post Heathrow terminal at this -- at runway 3. Do you think that can be overcome, politically, quite quickly?

I think it will be overcome, how quickly, I don't really know. And it's a bit of a -- the carbon footprint of building a road is one thing. But then if you can build a road that has 100 years of a flatter gradient, and therefore, a long-term life cycle carbon that's lower than it would have otherwise have been, it's a balance, and there's people far more qualified than me to talk about that. And then the [ alternate ] in roads is a smart motorways program, and there are some questions about the inherent safety of smart motorways, which has delayed our scheme on the M-56 to some extent. I personally think it will continue. It's my personal view, and we'll just put more refuges in to cater for the concerns.

Just a follow-up question, really, [ considering ] why I asked about Wales earlier. In terms of Highways England, Balfour to south east is quite an enlightened customer, whereas in Scotland, we've clearly had Aberdeen. In Wales, we've had A465. Do you think the regional highways bodies procure in a sensible way, like Highways England does?

I think they have seen the light, and they're starting to improve. Yes, that's what I'd say. I think they've seen that Highways England's attitude, which to be fair to Highways England, in their old Highways Agency days, was always quite enlightened for the last probably 15 years more possibly and they've been quite an intelligent client, which is good to see. They value their supply chain, and they want their supply chain to be sustainable. So I do see that trickling in to the highways procured bodies now with more sensible terms and conditions, yes.

Presuming no one will do the work on the other basis there?

Precisely. Okay. Any other questions? Anything on the wires, Andrew?

I don't have anything else on the wire services. No other questions in the room. Then I suggest we close there.

We'll close. Good. Thank you very much, everybody. Take care.

Thank you.