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

Welcome, everybody, to Galliford Try's trading update. My name is Simona, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Bill Hocking, CEO of Galliford Try, to begin. Bill, please go ahead.

Great. Thanks, Simona. Good morning, all. Thank you for joining. I'll keep it fairly short, then we'll have time for some questions. So all in all, a really good year for us and really pleased with our performance in the year with good progress against our margin improvement targets and as you see in the statement, PBT expected to be towards the upper end of consensus. Maintained a really strong balance sheet with average net cash of about GBP 164 million. All our sites are operational. There was no further impact from COVID. And all of them are underpinning our medium-term margin aspirations. Really strong order book both in terms of its quantum and in terms of its quality and with the strong pipeline that we see coming through, so a really good position in regard of the order book. And in the year, a few months ago now, we published our net zero carbon aspirations, to be net zero within our own operations by 2030 and across all our activities by 2045. Within the supply chain, obviously, there's been some issues on materials and shortages and inflation and so on. We've mitigated those. We've got no material impact. We have some bumps along the way, of course, but no material impact from that. And we put that down through our strong relations with our suppliers and our subcontractors and, of course, the prompt payment that they received from us. So all in all, a really good year and looking forward with confidence to this year. So short and sweet, but that's what it is really. And I'll take questions now. Thank you.

Bill, it's John Fraser-Andrews. Bill, can we take the chance just to get a little update on the market for work? Clearly, you've kept the order book in good shape. Just thinking through whether the -- there seems to be Highways England seem to have a big program. High Speed 2 is probably causing a little bit of strain in contracting capacity. So is this improving pricing power at all in terms of when you're pricing up jobs? And on the other hand, are you seeing any impact of this flow of work on materials pricing and availability? Are you able to manage that price-cost equilibrium for yourselves?

Yes. So firstly, the outlook is robust, as you said, John. On Highways England, for example, all our work at Highways England is on an NEC occupancy basis. That's a target cost reimbursable basis. And our fee for that is fixed throughout the period for the whole RDP framework. So on those projects, we -- on every single project, we essentially negotiate the price with the client based on current pricing and current availability. So insofar as that is the contract for mechanism, there's no additional risk caused by shortage of material or inflation because they're priced into the project. Of course, at the moment of signing up, you then take more responsibility for that. But even on -- in that regard, on a cost reimbursable or call it the cost reimbursable project, you're getting paid all of your costs, and you've already priced in what you think is going to happen with inflation or materials increases and so on. So it's manageable, John, I suppose is what I'd say. With regard to the program, of course, we [ parted ways ] of the HE's RDP program, so that's good for us. We're not in HS2, and we're quite happy with that actually. What we're seeing is a bit of impact on people around the Midlands area but, again, nothing that's not able to be mitigated and managed. So all in all, I'd say that although there's a lot of talk about material and labor shortages, so far, I think they've been mitigated okay. It's sort of stabilized now, John. It's not getting any worse at the moment. It's not getting any better either, isn't it? So I probably see another 6 months, maybe 9 months of this before things start to improve.

Okay. And are you finding, given the volume of work in the pipeline, that pricing conditions have improved at all?

Well, as I said, in terms of our framework, the fee is fixed, so it's a constant really, John. In some of the other ones, though, I think that I wouldn't say it's particularly improved. It's a difficult one to say. Some clients where we have a fixed-term framework, the fees are fixed. In other cases where we're pricing on a -- maybe to private clients, we're pricing on a more current basis. And in that regard, I think that the hurdle rate has got a bit higher, yes. Yes, 90% of our business is in long-term frameworks and regulated issues, so that impact on us isn't particularly great.

Yes, understood. And whilst I've got you, Bill, yes, what about the different end markets in the U.K., are you seeing any noticeable changes in terms of -- you had got a couple of contracts. I can think of the one in Tottenham Hale, in high-rise apartments. Are you finding that they're possibly not flavor of the month in terms of new schemes going forward because of work-from-home changes? And in the commercial markets, any sign of the office -- city center offices being impacted?

Well, I've got to say no, John. I think there's a few things here. The PRS sector remains pretty buoyant. And as I've said before, I think the developers seem to be looking through those to more normal times and when things will come back to normal. So the PRS market remains pretty robust. On offices, again, I've been surprised, there've been a few new office builds that have come through the tendering process. We've not won or that we've won 1 or 2. So again, there seem to be developers looking through these offices as well. We've just won, and the current offices are actually up, some are back in the woods. So the public sector is also investing in offices. But I think the things will change to some extent, John. But I think what we're seeing in Galliford Try and we're seeing with other people and other companies is that people do want to go back to work. And I think the balance is going to be where people can, maybe 2 days at home and 3 days in the office. But of course, for us and many other companies, people need to be on our construction sites and in offices to tender. So I reckon that balance will come back to something close to normal a bit quicker than we all expect, although I do expect there to be long term, more people work from home 1 or 2 days a week, yes.

Okay. And just in terms of your own costs, COVID costs, have you -- you've obviously carried some additional cost in 2021 that you've just reported, so perhaps Andrew could just touch on that and whether any of that falls away in '22 or at some point or thereafter.

Yes, I'll leave that to Andrew. Go ahead, Andrew.

Yes, I'll pick that up, John. So I mean, as I say, so COVID, we've now got the standard operating procedures that we're working on, on all our sites and we have been now for 12, 15 months. So the new -- the sites will be open all year. Productivity is essentially, yes, as normal. Yes, and where we have the costs [indiscernible] into the jobs, whether that be program length or just additional [indiscernible] and so on. So that's all being priced in. So the impact of COVID really has been -- yes, has been relatively little on the jobs through the year just finished. And yes, we will continue to monitor, continue to operate under safe procedures. Even after Monday, the 19th, of course, it's important to keep our sites open and our sites safe.

Good. So it doesn't seem to have any problem then, Andrew, all priced in.

Yes, correct. Yes, and we're in that -- yes, that's all priced in. And the new jobs in site are being bid based on the requirements that we now have.

Yes. And if those requirements ease, then you won't -- that is out of your price?

Yes. But I think the important thing, John, is that some of the -- it's about the working practices as well. It's about working efficiently. And it's also -- we've learned different ways to work, and it's about keeping some of the best practice of working through COVID. Actually, there's some opportunities to do things differently that we'll keep as well because, if you like, they're necessitating us to rethink some aspects of the way we do things. And to some extent, that's -- in some areas, that's helped us as well, and we'll probably keep the good practice in place.

[Operator Instructions] Our next question is from Andrew Nussey of Peel Hunt.

Andrew and Bill, just a couple of questions from me. First of all, when you refer to the strong pipeline, are you able to just provide a little bit more detail around particular end markets, whether that's in relation to new framework opportunity or draw down on existing frameworks really to get some comfort around your ability to remain very selective in the work that you undertake? And secondly, just I think you touched on it there, but just in terms of skills and particularly your ability to ensure the supply chain that you use has the skills to fulfill your requirements, can you just give us some comfort around how you can sort of manage that, please?

Yes, sure. I'll start there. Thanks, Andrew. So the pipeline does remain robust. And of course, most of our work is in the public sector, in education, in defense, in health and justice and so on. So those end markets won't change, Andrew. And we don't actually see any change in the dynamics there either. Government continues to spend based on leveling up, based on decarbonization, based on making sure the country is productive post-Brexit and post-COVID and so on. The end markets in terms of the private sector, which, of course, is only 10-odd percent, 15% generally of our business, it hasn't really changed either. The PRS market is holding up. The student market seems to be coming back. We just have signed up on the Coventry [indiscernible]. And as I said before, the office market is also -- doesn't seem to be too badly affected. So, so far, the new frame of opportunities that we've seen, we saw in the update that just picked up a Scottish Water DV program, that in addition to the SR21 program we picked up a few months ago. And that's GBP 700 million over the next 6 years with another 6-year extension after that. So it just reinforces again that if you can get a really good order book in a long-term framework, that gives you a real solid base for your business. They have always come up for renewal. And you see at the moment, for example, the education skills -- educational one is coming up for renewal. The water ones are in place now for another 4 years at least to 2025, most of them extendable to 2030. So overall, the pipeline remains really strong for us, and the end markets haven't really changed. In terms of skills, what I'd say is that the skill shortage, 2 things about that. Firstly, we've not seen any immediate impact of it as yet. And secondly, it's very much in London and Southeastern. So if you go out to -- further out to Birmingham and Leeds and up into Scotland, it's not so much of an issue because the labor base is far more local. So it's really London and the Southeast where there's a far more -- yes, a far bigger foreign labor presence. And as I say, we've not seen any particular impact of that as yet. We stay very close to our supply chain and our major subcontractors. And the strength of our relationship with our supply chain is really good. We pay them on time. And then give us an update, if you don't mind, Andrew, on the stats for the Prompt Payment Code, but we pay them well. We make sure that we provide a productive working environment on our sites where they can be efficient, they can be profitable. So they like working for us. And that goes a long way when anything was in a shortage there, be it labor or material, Andrew. So we hear a lot about it. We haven't seen any impact of it ourselves as well. Andrew, would you mind giving a little detail on the Prompt Payment Code?

Yes, of course. So that continues to be improving. So we've improved our practices after 6 months over the past kind of 2, 2.5 years. And that's the same again in the 6 months to June, so we've had a reduction in the average days to pay. We've had an improvement in the percentage of invoices paid within 60 days again. So we are absolutely clear that we've got ourselves into a place that we now -- we pay our supply chain properly. And we continue to improve that with -- let's say, we have published numbers very shortly on the period to June, and you'll see that 6 months have improved again.

Our next question is from Stephen Rawlinson at Applied Value.

Just a quick one from me, if you don't mind. So I mean if I look at the ratio of net cash to revenue among the peer group, you sit at the top of the table. What do you consider the optimum cash -- net cash level might be for the sort of revenues that you're aiming at? And so what's the broad discussion around that? If you can just help us a little bit with that, please.

Okay. I'll let Andrew answer that one. Thanks.

Yes. So Steve, we're happy with the position of the balance sheet. Our cash has been robust through the last 12 months, in fact, through the last 18 months since we divested housebuilding. So what we're very comfortable is that that's the right-sized balance sheet that allows us to grow. So as the business grows up to that GBP 1.5 billion target, yes, we don't need to grow the cash balance, yes, alongside that. We're happy that we will be cash generative and that the overall size of the balance sheet, yes, is about right. And I should put that, that balance sheet is strong. That is a differentiator for us in the market. We're seeing clients who are valuing that as we're tendering and going to market. It's also of value for our supply chain as well because it gives them the certainty and, of course, it gives us the confidence and the certainty around our own shareholder program. So yes, we've got our dividend cover policy is 2 to 2.5x and -- yes, and we're very comfortable with that balance sheet that we can pay the dividends. So we're very happy with the size and where that is, Steve.

Okay. I get that. That's all I need.

We currently have no further questions registered, so I will hand back to Bill Hocking.

Okay. Well, thanks all for joining. And it was short and sweet, under 21 minutes. That's good. Okay. Well, thanks all, and thanks -- I mentioned that -- sorry, I forgot to mention Andrew Duxbury is on the call in my introduction. Apologies, Andrew, our Finance Director. So thanks all for joining, and we'll see you at the full year. Take care. Bye-bye.

This concludes today's call. Thank you all for joining. Have a great rest of your day. You may now disconnect your lines.