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

Good morning, all, and welcome to our full-year results presentation for the year ending June 2021. I'm Bill Hocking, Chief Executive, and I'm joined here by our Finance Director, Andrew Duxbury. Here is the agenda for today, I will run through the highlights, Andrew will take us through the numbers. I'll give an update on our strategy for sustainable growth, and then we'll take questions. So the highlights. We've had a good year. Thanks to our excellent people, processes, supply chain and clients, we've delivered PBT slightly above the top end of market expectations. I'm very pleased to report our achievement of 2% operating profit earlier than anticipated and demonstrating good margin progression against our target. We've updated our strategy to deliver sustainable growth, and I'll explain this and our new targets after Andrew has taken us through the numbers. Over to you, please, Andrew.

Thank you, Bill. Good morning, everyone, and there's a nice photo there of the team outside the excellent GBP 60 million Barony Campus learning facility in Scotland. So I'll start with some headlines before going into a little bit more detail. As Bill said, we're really pleased with the performance in the year, which has delivered profit before tax above market expectations at GBP 11.4 million, and we've achieved the 2% divisional operating margin ahead of schedule. And that margin improvement has been driven by improved operational performance and the quality of newer work coming through the order book. Earnings per share of GBP 0.095 reflects a tax rate of 9%, which is lower than the standard rate due to some brought forward losses. But importantly, the result for the year is clean. There's no exceptional items or underlying adjustments. We continue to be cash-generative in our operations and have started the new financial year very well, which has contributed to us declaring a GBP 0.047 full-year dividend. As you know, we've been trading at essentially normal levels since the 1st of July last year with COVID disruption largely confined to the previous financial year. Revenue is up 3% to GBP 1.1 billion, in line with our guidance. You'll see Buildings revenue increased 10%, reflecting the normalization following the COVID disruption in the prior year. And Infrastructure's revenue is down GBP 28 million, but that reflects the trough that we expected as we transitioned to the new AMP7 programs in water. And this is consistent with what we said at the half year, and Infrastructure's revenue will start to grow again this financial year. Operating profit before amortization, GBP 10.1 million, and we continue to prioritize margin growth. And although the comparative figures were heavily impacted by COVID, the operating margin improvement is being seen across both Building and Infrastructure, and we're pleased to have achieved 2% in the year with the divisional split, being 2% in Building and 1.8% in Infrastructure, and we continue to focus on growing this as we move into the new financial year. Central costs of GBP 10 million are bang in line with our guidance. The small increase relates to bonus and share scheme costs. And they will remain around this level as we go forward, and we absolutely continue to focus on cost efficiency across the business. Our strong balance sheet continues to help us in the market, both in winning work and in engaging with the supply chain. You'll have heard me say before, we've got no pension liabilities, no debt, and our balance sheet strength is driven by our cash and our PPP assets. Month-end cash increased to GBP 164 million towards the top of the guided range, with the year-end cash of GBP 216 million. And it's worth noting, there's no net benefit included in that year-end figure from the recent VAT changes as we accelerated payments to the supply chain to more than offset the VAT cash benefit. Our PPP assets are valued at GBP 49 million, a blended 7% discount rate, and that reflects the active market for the assets. The GBP 8.5 million increase in the year includes GBP 7.5 million from the change in discount rates and GBP 1 million net investment, and the portfolio contributed GBP 3.9 million of interest income in the year. On the cash bridge, you can see that we were strongly cash-generative with an operating cash inflow of GBP 48 million before interest and tax, and that included our IFRS 16 lease payments. We had very strong collections performance in the year, and we're also able to improve our supply payment performance. The payments for discontinued operations on the right-hand side there, that was the final working capital adjustment to Vistry, and that's all now been completed in line with the demerger agreements. Month-end average cash was GBP 164 million, with a daily low point in the year around GBP 100 million, providing real resilience to the business. And importantly, with no pension to fund, our operating cash generation is all available for growth and for shareholder returns. Working with our supply chain is really important for us. And the importance of this has been brought into stark relief through COVID and then the more recent period of inflation and supply constraints. Our view is simply that we should treat the supply chain properly and fairly, and we believe that this approach benefits both parties. Nearly 2-thirds of our spend is with aligned suppliers on our Advantage through Alignment program, and these suppliers have access to our training, to our pipeline. And importantly, the program encourages cultural alignment between our respective businesses. In the most recent 6-month period, our reported payment performance hit 95% of invoices paid within 60 days. It was 93% across the full 12 months, which is a sustained pattern of improvement over the last 2 years, as you can see from the bottom chart. And that positive engagement with the supply chain, along with early procurement and careful program management, has really helped us to mitigate the recent supply issues, such that the recent inflation and material shortages that you've heard about have had no significant impact on our trading or margin. We continue to prioritize a strong balance sheet so we can invest in our growth plans and other strategic opportunities, so we can mitigate against any future market downturn. And alongside that, pay a sustainable dividend within our policy range of 2x to 2.5x cover. And we'll continue to review our capital allocation opportunities as we deliver our growth strategy going forward. We've taken no benefit from furlough money in the year, having repaid the amounts previously claimed, and we've got no pension liabilities to fund. So the excellent performance, the strong balance sheet and our quality order book that Bill will [ come on ] to, have given the Board the confidence to declare a full-year dividend of GBP 0.047. And given our continuing businesses, earnings per share of GBP 0.095, that dividend is 2x covered by earnings. And back to Bill.

Great. Thanks, Andrew. So now on to our strategy for sustainable growth. Our previous 5-year strategy was to retain and enhance the Company's strengths and differentiators, improve our business processes and risk management. And in so doing, move the culture of the business to the progressive people-orientated and values-driven business we are today. This strategy has successfully delivered a firm foundation and allied to our strong balance sheet allows us to set our sights on disciplined, sustainable growth, and the market is there to support that growth. This is very much evolution, not revolution. In the center there, we have a very straightforward aim to deliver high-quality projects for our clients in a socially responsible manner and provide a good return to our shareholders. There are 4 main pillars of our strategy. On the left, we continue to drive to be a people-orientated, progressive, values-driven business with a strong focus on health and safety as ever, and ensuring an inclusive and diverse working environment that allows all of our people to reach their full potential. With regard to social responsibility, it's about ensuring sustainable working practices, minimizing our carbon footprint and playing our part in mitigating climate change. Communities is about making a positive impact in those communities where we operate, creating social value, local employment and buying from local suppliers wherever possible. We deliver high-quality projects for our clients through long-term relationships where we understand and help our clients achieve their objectives, embracing innovation and modern methods of construction. Our supply chain is really important, and our Advantage through Alignment initiative creates collaborative relationships and encourages innovations through the supply chain. Having a robust supply chain is really important, especially in the environment of labor and material shortages. We provide safe, well planned productive workplaces, which enable our suppliers to be efficient and profitable. This, together with our strong balance sheet and prompt payment record, is a real differentiator and allows us to attract the best supply chain partners. A disciplined approach to contract selection and robust risk management is and will remain a cornerstone of our business. Our high-quality order book and strong cash generation gives us confidence that our margin progression will continue in line with our targets. The market is good, and we see that continuing in the medium-term. The main drivers of the government spending plans in response to COVID using construction as one of the plans to stimulate economic recovery. And in response to Brexit, ensuring we have the infrastructure to support the country's productivity. The government's leveling up agenda is obviously focused in the Midlands and North of the country, which is well suited to our regional structure and supply chain. Decarbonization of the economy provides significant opportunities for the Company through building new facilities that have a lower carbon footprint. I have a case study in this later in the presentation, actually, and also the retrofit of existing buildings to make them more carbon efficient. The need to lower carbon and improve productivity is driving innovation, and we keep abreast of this through our own carbon toolkit, digital strategy and modern methods of construction. Before we move on to the strategy, I just want to make it very clear that our robust risk management and commercial controls remain front and center as we grow the business. Just as an example, we recently held our ground on a bid that would not accept certain terms and conditions. The client initially awarded the project elsewhere but subsequently returned to us, and it will be different terms, and we're now in contract and on-site. So that's a good example of the fact that we will not take on work with unacceptable terms and conditions. So our risk management processes and our culture lead directly to our high-quality order book and to our confidence in hitting our targets. I always say that coming up with a strategy is the easy part. The action plan to turn the strategy into reality is a really important part. Our high-level action plan to achieve our strategic goals are focused on 2 main areas: the first is growth in existing markets, doing more for existing clients in Building and Infrastructure, bringing all of our business units up to critical mass and maintaining the momentum that we have. In addition to greater revenue, our investment in digital and in modern methods of construction will improve efficiency, productivity and operating margins. The second area is to develop adjacent markets to our current activities, and this has a number of strands to it. The first strand is a PRS market where we can develop our own schemes and co-develop projects with appropriate partners. We've identified our core geographies and are investing at the front end to secure over the medium-term, a steady pipeline of projects to be delivered through our regional businesses. The second strand is to grow our FM business organically and expand its operations to include low carbon retrofits of existing buildings. And the third strand is moving into adjacent markets in the water sector, where we already have a significant presence. And here, we intend to address the capital maintenance and asset optimization markets with current clients. The core Building and Infrastructure business will remain core, albeit bigger and more profitable, and we will augment the profitability of that core with higher-margin business in adjacent markets. In terms of timing, the growth in existing markets will come through first. The PRS market pipeline will ramp up over a few years as these projects have quite a long gestation period and the water sector opportunities towards the back end as we move to AMP8 in England and SNP27 in Scotland. We will, of course, consider bolt-on acquisitions to accelerate the strategy in the right circumstances. So here's a slide you've all been waiting for, our targets to 2026. We will grow our operating margin to 3% before central costs on revenue towards GBP 1.6 billion, with strong cash generation, supporting a dividend cover in the range 2x to 2.5x. We've said over the last 18 months or so that we will always stretching but realistic goals. And I think that these targets are ambitious, achievable and will put the business in a really good place. So here is an example of how we add value and reduce operating carbon and energy costs on our projects. The top pictogram is a traditional project and really captures the point that many clients have concentrated on the capital cost of a building with the whole life cost, whole life carbon as secondary issue. This is changing fast, and the lower pictogram demonstrates the type of analysis we do to achieve net zero carbon in use of buildings and dramatically lower operational costs. So you see there, things like ground source and air source heat pumps, replacing old boilers, gas boilers and so on. We see heat recovery ventilation systems, photovoltaic panels on the roof, much improved insulation and air tightness, high-performance glass and some very, very basic things like orientating the building for the maximum solar gain where that's possible to do. The key thing on this slide is that our in-house skill sets enable us to help our clients achieve their own low carbon targets. And this is a real differentiator as we go forward in this market growth. So this case study on sustainable growth is the ElectroRoad study, which is funded by the Department for Transport, where we are working with Honda, amongst others, to consider how their technology can be deployed to allow for vehicles to charge as they drive down the road. And this follows another research project funded by National Highways, where we are part of a team looking at the interaction of autonomous vehicles with the built environment on motorways. So here, our new sustainability commitments, some of which will be familiar to you and some are new as part of our sustainable growth strategy. I'll pick out just a few. Health and safety, as ever, is paramount to us, and our record is good with our accident frequency rate at 0.08, actually, as we speak, it's now 0.07. We always have and always will put a huge amount of effort into health and safety in pursuit of our goal of no harm to anybody on our sites or in our offices. We [ signify ] to the 5% club. And actually, we employ 7.9% is the actual number as we speak, but at the year-end it was 7.2% of our staff are early careers people. And this is really important to me and demonstrates our investment in the future and growing our own talent in the business. With regard to carbon emissions, we joined the race to zero. We committed to that early in the year with a target of 2045 for net zero carbon, which is closely aligned to the government's goals. In support of this, we've just launched our new car policy, whereby only plug-in hybrid vehicles or pure electric vehicles will be bought or leased as of today. So moving on to our markets. These are chosen markets, and you've seen a similar slide before, supported, of course, by the government spending plans, and we heard more about this recently. We've got a great position across many national and regional frameworks, and we intend to keep that position. I've actually got a case study in the next slide to explain why that is. And just to point out that these sectors are closely aligned to the market drivers we spoke about earlier on. So the case study, many people ask us why it is that we're so keen on working in frameworks. 87% of our work is in frameworks and the benefits are there on the left-hand side. But in essence, it gives us long-term relationships with our clients. We get to know them, they get to know us. We can work closely together to achieve their goals. We have greater certainty of tendering. Typically, there's fewer people tendering and the reduced cost of tendering. And overall, we get better outcomes from these long-term relationships. So that's why we're so keen on retaining that high percentage of our work in frameworks. Moving on to the order book. Our order book is GBP 3.3 billion, up from GBP 3.2 billion last year, which is mainly through our success in water frameworks. You can see the main constituents of the order book here, Building GBP 1.9 billion, with education and defense remaining our biggest markets. And in Infrastructure, up GBP 1.3 billion, GBP 1.4 billion. The environment backlog, which you see there, will reduce over the next 5 years as we go through the 5-year cycle in England and the 6-year cycle in Scotland before the next cycle starts up again. So as I always say, the quantum and the quality of the order book in terms of a sensible client base, sensible terms and conditions, embedded margin, cash risk profile, et cetera, is what gives us real confidence in our ability to achieve our financial targets. On this slide, I would note the public and regulated sector, making up, as you can see, the 91% of the order book with the private sector at 9%. Again, this split varies typically as we go through the water investment cycle. So the public investor will reduce over the cycle, which is normal. So sort of 80-20 rule is normal in -- on this slide. The important number for me is the 90% work secured in the bottom left there. So we've got 90% secured for the current financial year. And importantly, more than 60% secured already for full-year '23, which is a great place to be. This means that we can maintain our focus on quality of work and bottom line earnings as we're not trying to fill an order book within a specific period. In summary then, we're in good shape with a strong balance sheet, excellent people and a high-quality order book. Our sustainable growth strategy has a firm foundation of process and culture, and we're well positioned in growing markets. All of these attributes give us confidence in achieving our 2026 targets. So that ends the presentation. Thank you for listening. And I'll now hand back to the operator to take questions. Thank you.

[Operator Instructions] We take our first question today from Andrew Nussey from Peel Hunt.

Bill and Andrew, a couple of questions from me, please. First of all, just curious to know if the rising materials costs, skills, availability challenges are leading any of your clients to review the projects or perhaps expected to draw down from various framework relationships? And secondly, sort of allied to that theme, in terms of managing the supply chain, are you able to get good insight to how your supply chain is dealing with those challenges and how the risk might have been passed to them? And thirdly, if I may, in terms of the PRS opportunity, how key will the investments division be in helping you deliver that adjacent opportunity?

Okay. It's Bill here. So far, we've only had one project where the client has responded with a delay really in terms of the increasing costs of inflation and so on. But actually, as we speak, I think we're about to sign it. So it's gone backwards probably a month or 6 weeks, I'm guessing. But it did go around the houses a few times because, obviously, we submitted a price. And by the time the client came back a few weeks later, the price has gone up. So it was a bit iterative, but that's the only one I can think of. On a broader note, the materials shortages seem to be stabilizing. There are still shortages. We're not immune. The whole industry has this issue, of course. But it does appear to be stabilizing. And, of course, we are pricing the longer lead times and any inflation into our current bids. I think that's really important. So -- but overall, our clients seem to be carrying on pretty much as usual. On the supply chain, it goes very sort of hand-in-hand with the previous answer, really. We've been working closely with the supply chain in terms of mitigating any impact of labor and material shortages. And I'll give you one easy example. We brought in Monk Bridge PRS scheme up in Leeds. It's a big scheme, 5 block, 665 units. We brought in every single brick we needed for the entire project a year ahead of program, just to make sure we could secure it. And then our installation subcontract can perform. The other thing, I think, is the strength of relationships with our supply chain is really important. We look after them on-site. We provide them with a productive working environment, and we pay them well, as you saw, in Andrew's Prompt Payment Code slide. And that means that we do attract a better quality subcontractor, which is, of course, helpful in the sort of circumstance. Finally, on the PRS, yes, the investments decision will be -- division will be -- we're very much involved at the front end. So the skill sets involved in what they do already is very close to allied to what the front end of PRS looks like. So in essence, of course, it will be a one GT team, but the investments guys will need the front end and the building guys will be the construction side of the piece.

We now move on to our next questioner from John Fraser-Andrews from HSBC.

Bill, and Andrew, 2 for me, please. The first one, would you mind just setting out how the water transition played out in '21 and the outlook in the coming years for that? And perhaps you just elaborate on the maintenance opportunity? And then the second question is on pricing more generally. Perhaps you could give an indication on how contract prices have trended over recent months? And how you mitigate any risk to yourselves on that?

Okay. I'll take those. So water, the transition into AMP7 has been slower than we anticipated. There's always a bit of a cycle that we see between the start of a new AMP and the end of the old one. But it has been a bit more accentuated, I think, this time. It is gathering pace now. Momentum is growing. Actually, we've seen quite a bit of work coming through. So I think we will more than make up for that in the coming years. So the outlook is pretty positive in water. And with regard to the asset maintenance opportunity, the point here is that, we build water and wastewater facilities all the time, and we commission them and we run them for the -- in a -- for a short period of time, typically while we commission them. And so, it's not a big jump to move into the adjacent to the market of maintaining those assets over the long-term. So we don't currently do that at the moment. But my view is that, the OpEx side, the operations and maintenance side of water and particularly, asset optimization will become a bigger part of what water companies outsource. If you look at their current sort of balance now, they outsource the vast majority of their CapEx, but they in-source or maintain responsibility for the vast majority of the OpEx. And I think that will change over the next AMP or 2. So I think there's an opportunity there to move into that field. It's a more M&A-type orientated world, but it does attract higher margins. So as I said, it's an adjacent industry, which we understand, and we think we can move into it in a quite straightforward manner. With regard to pricing, yes, obviously, inflation needs to be priced into our future bids. So it depends on the form of contract. In terms of future bids, we're pricing in what we see currently and what we expect going forward in terms of inflation risk as ever, of course. In terms of current projects, it depends on the terms and conditions on the sort of target cost, cost-reimbursable projects, the cost is what the cost is. And the client, if there's no spend for the client, typically, picks out half and that's other half. So the effective it is mitigated to a certain extent. And, of course, there's an inflation provision in all those contracts in the first place. In the fixed price ones, there's a mix, actually, there's some clients that are very reasonable and are being sensible about how we manage and others that are sticking to the contract. But overall, we've had no material impact on the business currently, and we're pricing and how we see the future, obviously, as we go forward.

And just perhaps a supplementary on the margin outlook, the 3%. Quite interesting there, the water opportunity is higher margin. Can that be set for the PRS as well? And are you shifting generally to more higher margin? So I imagine that you're shooting for 3% or more in lots of your work now. So perhaps you could just give an indication on that?

Yes. The sort of basic philosophy of the new strategy, John, is that, the core of the business, which is Building and Infrastructure will remain the core, but we'll make that core bigger and more profitable. And then we'll augment that with higher-margin, probably smaller, but higher-margin business around the [ proof ]. So that's what augments the margin. That's the broad philosophy.

We now move on to a question from Joe Brent from Liberum.

2 questions, if I may. Just following up on the margin point because I think that's quite key. I understand you're going to kind of augment the core and add around the peripheral higher-margin businesses. But in terms of augmenting the core, what are the kind of steps you're going to do to achieve that? Is there -- presuming some operating leverage, cost savings, love to get a bit of an understanding of how that breaks down? And secondly, if you could just give us some sense of what we should expect in terms of capital commitments to PRS?

Okay. I'll take the first one, and Andrew can pick up the second one, Joe. Yes. So the margin improvements come from a number of places, obviously. They come from the quality of the order book in the first place. So as you know, we've been working for a long time to make sure that everything in the order book sustains our aspirations going forward and that there's nothing in there that's going to damage us going forward. And I'm really happy with where the order book is. It's grown slightly. But in terms of, as I always say, it's quantum and it's risk profile, it's cash profile, the embedded margins with sensible terms and conditions and sensible clients. That's the first thing that underpins predictable margins because I think that dilutes contractors margins or loss-making projects. So if you can mitigate those, then you increase your opportunity to hit your targets exponentially, really. And then there's lots of other things around that, Joe, there's efficiency that comes through the whole digital agenda and modern methods of construction. What we've seen, and we're studying this at the moment through COVID is actually, we've produced a similar revenue using fewer man hours. In other words, our efficiency is improving. Now, we don't quite understand what's behind it, but yet we're looking into this as some of it might be people who working from home where the man hours aren't necessarily properly long. But we think that a significant proportion of it is the fact that we've put a huge amount of effort in COVID into managing work on a far more granular basis, knowing where everybody is in relationship to each other all the time on the site, putting much more into planning, both in terms of keeping people at safe distances, but also in terms of material lead times, all those sorts of things. And so, I think that has led to more efficiency and a better productivity, which will feed its way through to the bottom line. And then when you look at the whole digital agenda, the technology coming through is fantastic in terms of how we use technology to make sure we have the current drawings at all times, I know it sounds basic, but when you're drawings on a hardened [ iPad ] out on-site, you're confident you always look at the latest iteration of the drawing, going back 10, 20 years, that was a difficult thing to maintain, making sure everyone had the current drawings at all the time, good records, good quality control and so on. But for me, it's how we take really fantastic technology and convert it very practically into action on-site. Now this will be a little anecdote on this one, Joe, a while back, I was on one of our sites where we're using Level 2 BIM. So we've got a whole 3D model of the building. It's been used to design the building. It's been used to make sure there's no clashes. It's been used to price it and so on. You can put the virtual reality glasses on and walk around the thing. It's fantastic, really. But what I have witnessed when I was on-site is the BIM model, so we had the BIM -- the guy operating the BIM model was the model up on the screen. And we had around him half a dozen or so of the key subcontractors. This is on a Thursday afternoon. And these guys were looking at what was going to be happening in the next week and planning it out. And so, on the BIM model, you can build the building and you could take it back down. You can zoom into different rooms and different floors. And what the supply chain we're doing with our project management was looking at how they interact with each other, who's going to be working where, safety implications, productivity implications and then using the collaborative planning of Board to make sure that all of this was captured. So what I saw there was, technology in the BIM model being transferred very practically into better safety, better productivity, better interaction, if you've not studied on the site. And those sorts of things that will drive better margins.

And then, Joe, just picking up your question on PRS and our approach to that market. So this is about using the strength of our balance sheet, leveraging that into the market, and we're already doing it. So we've got 2 schemes, for example, which we're a preferred bidder on 2 PRS schemes. And combined, the gross development value was about GBP 120 million. But what we're -- the costs we're incurring on there is the development fees because what we'll still look to do is, as Bill said earlier, is not to put the money out of door in terms of buying land unconditional or anything. That's not what we're about. It's about taking things through development and then forward funding those into the construction phase. So we see it as a way where we can leverage the balance sheet and the balance sheet strength allows us to do that without us putting the balance sheet funds at risk. And so, that's the balance that we're looking to achieve on PRS.

We're now moving on to Greg Poulton from Singer Capital Markets.

Congrats on the results. Just 2 for me, please. I was wondering if you were seeing any labor shortages or any wage inflations starting to come through? And then just on the margin and the revenue growth target, do you think the central cost base will need to grow very much to support that? Or is it just probably inflationary growth in that number?

Okay. I'll take the first one, Greg, and Andrew take the second. So with regard to labor shortages, yes, we have seen labor shortages, more pronounced in the South and Southeast of the country than in the Midlands and the North. So that is a bit more pronounced at the moment. Remember, of course, that it is holiday season. And typically, the European labor does go back home, August and sort of half of September. So we do expect that to start to ease pretty much from now. And that's the lupus test really is, will the people come back. So I believe they will, personally, I think that we still provide an attractive working environment. And as I always say, the exchange rate is really important for people because it's how much money they can send home, that's important to them. So I think the labor situation will ease over the coming weeks. Yes, there has been labor inflation. There's all sorts of talk about HGV drivers and what they earn and [ bricklayers ] and so on. There is inflation that we had to deal with that in our current projects, through our supply chain. And, obviously, we price it into our future projects.

Yes. Greg, just to pick up on the central cost piece. So the central costs are -- we've said, we'll stay around the level that we're at now, and that's the case going forward to that current level to support the growth plan. So we don't need to grow those central costs proportionate to the growth of revenue or margin at all. So that will be -- that will generate a kind of greater efficiency, if you like, as we go forward. I mean, the other thing I would say, whether it's central costs or whether it's out in the business, we remain really focused on that costs and overheads across the business. So we do keep that as a -- that's kind of a -- that's an ongoing piece that never be completed, obviously. But overall, that level of central costs is there to support the growth of the business.

We're now moving on to Alastair Stewart from Shore Capital, with our next question.

John and Joe and others were asking about the margins and has certainly heard your response. I think the response on the first question from John was focused more on looking at the upper end of the margin range, looking at more of that. My view -- my question comes more from the upper end. Historically, construction groups have been able to grow their margins, but just be more selective on the lower-margin stuff and avoiding the occasional overruns versus budget costs. Are you tackling it at that end? And this kind of leads into the sort of trajectory of getting to 3% by 2026. Are you looking to get there earlier rather than later? And really, in the case of tackling more higher-margin stuff and less lower margin stuff surely be in the 3% pretty conservative target as far out of that. So that's a [ company ] 1A. And then 1B is just -- Andrew, you've just said that you're looking to keep central costs around GBP 10 million. Is that going to be the case for 2026? I would have imagined a bit of growth from then, if no other reason than inflation.

Okay. I'll take the first one, and Andrew take the second one. So Alastair, yes, so margins, what we see at the moment is, actually, the margins are quite consistent across both Building and Infrastructure. And they're both -- obviously, you see now our progression of 2% better than they were. And we see that continuing. And there's a number of drivers to that. One is that, we still have a few frameworks where we are profitable and cash generative, but are not making the type of margins that we make on the newer frameworks. Those will fall off the belts in the fullness of time, and that will drive some further margin progression. The construction playbook and -- has driven a different sales from our clients. And as we said before, the government wants and needs the construction industry to be more sustainable. And, obviously, that means, not only stable in terms of all of the ESG terms, but also in terms of profitability. So we are seeing, in government procurement, that a more sensible, mature attitude as opposed to pricing. With regard to 2026 target, we always set sensible, achievable targets. We don't set out to go applying the sky. And I think those are, A, sensible and B, achievable. If we beat them beforehand, I'll be very happy, Alastair.

Yes. And so, just to clarify on the central costs. So that overall central cost base is about the right size, and that will support us on growth. And, of course, there's an inflation, there might be a bit of inflation there. But what we're saying is that, there's not a need to grow that central cost pool, if you like, in order to support the additional growth targets that we've set out.

We now move on to a question from Adrian Kearsey from Panmure.

A couple of questions on the maintenance. As you transition and take on more maintenance-type work, are you going to change the way in which you perhaps want to deliver that? So for example, would you take on more direct delivery? Or do you want to retain your very much subcontractors' focus? And also, some of the maintenance sort of work that's around in the sector is higher-margin. Do you anticipate maintenance to have a sort of similar margins to your current focus? Or do you have there's potential for higher margins there?

Yes. So yes, we already do quite a bit of self-delivery, Adrian, through our FM business, which is all self-delivered, actually, and also through our smaller specialist companies in piling and dry lining and so on. So we already do a fair amount of self-delivery. And yes, I see that the maintenance market is suited towards a self-delivery model. So that's what we would certainly look to do. And yes, those margins are better. The margins in -- the typical margins in maintenance are probably towards 5%, I'm guessing overall. So better margins, certainly.

We now take a follow-up from Alastair Stewart.

A completely different question. You mentioned modern methods of construction. Is that referring to residential? If it's more of a commercial and infrastructure, MMC, can you provide a bit of color on that? And if you can provide, if it's of concrete products, the only company I can think that makes MMC on a concrete basis is Laing O'Rourke?

Yes. I mean, it's a very broad subject, Alastair. So we're not talking about modern methods of construction. There's things like -- if you take the student resi block we built in the Park View a few years on in Newcastle. That was a modular building, brought in -- on ships from China in this instance, containerized, we build the foundations and the precast lift, core staircase and so on. And then we put in place these containers. Essentially, they come in with the curtains, hang on the windows and the mattress and the bed. I mean, it's a [ starting ], and then we put a brick skin around the other side. So that's one example. We built a PRS scheme in Birmingham recently, where it was precast concrete. And that -- the concrete panels were all made off-site, obviously, they are brought in on a truck lifted into place with one lift to the truck and then one lift in a wall section or whatever because the truck goes out. So very efficient there. Bathroom pods, kitchen pods are normal, more so bathroom pods and kitchen to be fair, but they are absolutely normal now. And also, modularizing of M&E components in lift cores, for example, and heating and the cooling systems in commercial buildings and residential building. So it's a very broad church. And it's evolving all the time, where more work can be mechanized, robots will do more basic things so far anyway. And we continue to look at all of this. So by those 2 case studies I talked about in terms of driving carbon out and working in the transportation sector, that's all about innovation and trying to stay ahead of the pack. So it's across the piece. The examples I gave were in Building, but equally in Infrastructure as when our M56 widening project the other day. And they saw a new type of central reservation barrier. I know that sounds a bit anarchy, sorry. But it was -- it's really interesting because you take the -- you bring in these precast barriers, you use it in the temporary situation while you are keeping your staff and workforce safe from traffic. And then the permit situation, you're sticking with the central reservation and they form the permanent core. So there's no need, for example, to having a whole lot of temporary barriers, that saves you time, saves you money, all sorts of things. So there's lots of stuff going on, and it's really exciting. So we don't look to make our own factor in like that. I don't think that's the future. We look to adopt and embrace innovation as we can. And I think over the longer term, the language of construction is going to change more to sort of integration and assembly more than construction. They're always going to be some parts of the construction that will have to be done in situ, but more and more will become about integration and assembly.

As there are no further questions, I'd like to hand the call back over to you for any additional or closing remarks.

Okay. Well, that's great. Thanks all for attending. So it brings a [ session ] to a close. And you take care. Thank you.