GFRD Q2-2022 Earnings Call

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Section:

Earnings Call Analysis

During the earnings call, the company announced a 10% revenue increase and a 73% jump in pre-exceptional profit. The operating margin rose to 2.2%, with a target of reaching 3% by 2026 as revenue aims for £1.6 billion. An interim dividend of £0.022 was declared, reflecting an 83% increase year-over-year. The CEO emphasized strong cash generation and a well-structured balance sheet, enabling strategic investments and potential shareholder returns through excess cash. Significant growth in both the Building (up 3%) and Infrastructure (up 25%) sectors was also noted, driven by robust project deliveries.

Earnings Call Transcript

Dividend

Acquisition

Revenue

Bill Hocking

Good

morning, all,

and

welcome

to

Galliford

Try

Holdings

Half Year

Results

to

December

2021.

I'm

Bill

Hocking,

Chief

Executive.

And

I'm

here

with

Andrew

Duxbury,

our

Finance

Director.

Here's

the

normal

agenda

for

today.

I'll

spend

a

few

minutes

on

the

highlights,

Andrew

will

take

us

through

the

numbers,

I'll

give

an

update

on

our

Sustainable

Growth

Strategy,

and

then

we'll

take

questions.

We've had

a

good half

year.

Thanks

to the

skills

and

agility

of

our

staff

and

supply

chain,

and

of

the

cooperation

of

our

clients,

we've

managed

the

challenges

of

inflation

in

materials

and

labor,

and

produced

a

good

result.

The

integration

of

the

nmcn

business

is

going

well,

and

we're

very

pleased

with the

acquisition

and

the

900 or

so

excellent

people

that

joined

Galliford

Try

through

it.

We're

making

progress

across

our

suite

of

ESG

measures,

and

we

have

momentum

in

the

business,

which

is

reflected

in

the

order

book,

our

controlled

revenue

growth,

and

in

the

figures

you

see

here.

Profit

for

the

half

year

is

£7.1

million,

up

from

£4.1

million

in

the

same

period

last

year.

Operating

margin

is

2.2%,

up

from

1.6%

same

time

last

year.

And

the

interim

dividend

is

£0.022,

up

from

£0.012

previously.

All

of

these

figures

demonstrate

good

progress

in

the

period,

and

we're

on

track

for

full

year

2022

and

the

longer-term

strategy.

So, over

to

you,

Andrew,

to

give

you

more

detail

on

the

finances.

Andrew James Duxbury

Thank

you,

Bill. Good

morning,

everyone.

So,

the

picture

on

the

screen

there,

you're

seeing

Invercannie

Water

Treatment

Works. It's

a

£52 million

project

for

Scottish

Water

that

will

produce

60

million

liters

of

drinking

water

each

day

once

it's

completed.

So,

let

me

start with

some

headlines.

As

Bill

said,

we're

very

pleased

with

the

performance

in

the

half

year

and

the

progress

that

we're

making

against

our

strategic

targets.

You

can

see

that

all

the

key

metrics

on

the

slide

show

improvement

compared

to

the

same

period

last

year.

In

particular,

revenue

is

up

10%,

our

divisional

operating

margin

has

increased

to

2.2%,

and

pre-exceptional

profit

before

tax

is

up

73%.

And

we

continue

to

be

very

strong

on

cash

performance,

which

I'll

come

back

to.

Our

interim

dividend

per

share

of

£0.022

is

83%

higher

than

last

year.

So,

let

me

go

through

the

results

in

a

little

bit

more

detail.

Revenue

is

up

10%

in

the

period,

and

it's

worth

remembering

that

neither

this

period

nor

the

comparative

were

disrupted

by

COVID,

so

that

increase

is

real

growth.

Building's

revenue

is

up

3%

as

we

continue

to

deliver

more

across

our

existing

businesses,

and

Infrastructure's

revenue

is

up

25%,

with

increases

in

both

highways

and

environment.

The

main

driver

of

the

increase

is

the

improvement

in

the AMP7 revenues

in

our

water

business,

as

we

anticipated

when

we

reported

in

September.

And

about

£12

million

of

that

growth

in

Infrastructure,

so

about

7

percentage

points,

relates

to

nmcn.

And

nmcn's

contribution

will

be

more

in the

second

half

year,

around

£60

million

in

H2

as

that

business

begins

to

get

back

to

delivering

at

full

capacity.

Operating

profit

before

amortization

is

up

77%

at

£6.9

million,

and

the

divisional

margin

improvement

to

2.2%

is

very

good,

progressing

in

line

with

our

margin

improvement

targets.

You

can

see

that

the

margin

has

increased

in

both

Building

and

Infrastructure,

driven

by

good

contract

performance.

Central

costs

of

£5

million

are

around

half

of

the

last

full

year

figure,

as

you

would

expect.

And

we

continue

to

focus

on

cost

efficiency

across

the

business.

We've

reported

exceptional

costs

of

£9.7

million

as

flagged

in

our

January

trading

update.

None

of

this

is

contract

related.

£6

million

relates

to

the

acquisition

and

integration

of

nmcn,

and

£3.5

million

relates

to

our

investment

in

cloud-based

ERP

systems.

This

ERP

investment,

which

is

upgrading

our

previous

10-year

old

Oracle

platform

to

the

latest

cloud

version,

will

continue

through

2022

with

a

similar

spend

in

the

second

half

year

and

completion

around

the

turn

of

the

calendar

year.

Our

tax

rate

is

lower

than

the

standard

due

to

brought

forward

losses.

So,

our

£7.1

million

pre-exceptional

profit

before

tax

translates

into

£6.5

million

profit

after

tax

and

its

earnings

per

share

of

£0.059.

Our

strong

balance

sheet,

both

our

cash

and our

PPP

assets,

continue

to

help

us

in

the

market

in

winning

work

and

engaging

with

our

supply

chain.

I've

said

it

before

and it's

worth

repeating,

we've

got

no

pension

liabilities

and

no

debt,

and

that's

even

more

relevant

now

in

a

period

where

interest

rate

rises

are

more

likely.

Our

month-end

average

cash

increased

to

£180

million, with

period-end

cash

of

£211

million.

The

PPP

assets

are

valued

at

£48

million

at

a

blended

7%

discount

rate

with

the

same

as

we

used

at

June,

and

that

reflects

the

active

market

for

these

assets.

And

that

portfolio

contributed

£2 million

of

interest

income

in

the

period.

Our

intangible

assets

and

goodwill

increased

by

£11

million

pounds

as

a

result

of

the

acquisition

of

nmcn.

And

these

intangibles

will

be

amortized

over

3

to

10 years,

with

an

initial

annual

charge

of

around

£1

million.

On

the

cash

bridge,

you

can

see

that we

have

an

operating

cash

inflow

before

exceptional

items

reflecting

a

very

strong

collections

performance

in

the

period.

Month-end

average

cash

of

£180

million

in

the

daily

low

point

in

the

year

remained

above

£100

million,

providing

real

resilience

to

the

business.

And

very

importantly,

our

supplier

payment

performance

improved

again,

with

now

98%

of

invoices

paid

in

60

days

and

an

improved

average

days

to

pay

of

25

days. As

I

said

in

September,

working

closely

with

the

supply

chain,

paying

them

properly

is

the

right

way

to

operate.

And

it's

been

especially

important

in

these

last

few

months

of

a

tighter

supply

market.

So,

now, I'll

just

spend

a

moment

talking

through

our

capital

allocation

framework,

the

principles

of

which

are

consistent

with

what

we

said

at

September.

So,

most

importantly,

we

continue

to

prioritize

a

strong

balance

sheet.

So,

firstly,

our

balance

sheet

provides

a

competitive

advantage,

which

will

help

us

to

deliver

our

sustainable

growth

plans.

It's

valuable

to

our

clients

who

see

the

importance

of

financial

stability

in

their

contractor,

and

it's

also

important

to

ensure

we're

the

partner

of

choice

for

our

supply

chain.

On

top

of

that,

it

allows

us

to

invest

in

our

people,

in

digital

assets,

in

adjacent

markets,

such

as

PRS,

and

in

other

opportunities

or

bolt-on

acquisitions

that

arise

which

support

our

strategy.

Our

ability

to

transact

with

the

administrators

of

nmcn

is

an

example

of

that

agility.

Secondly,

a

strong

balance

sheet

provides

mitigation

against

any

future

adverse

market

conditions

and

provides

confidence

that

we

can

deliver

our

strategic

plan.

As

an

example,

we

don't

need

to

chase

the

wrong

terms

or

pricing

on

contracts

just

to

generate

cash

flow,

as well

as short-term

decisions

that

would

harm

margin

and

performance

in

future

years.

Thirdly,

the

balance

sheet

provides

us

the

confidence

that

we

can

pay

sustainable

and

regular

dividends.

With

today

improving

our

annual

dividend

cover

policy

from

a 2 times

to

2.5

times

cover

range

to

a

straight

twice

covered

policy,

so

returning

50%

of

our

annual

earnings

to

shareholders

as

dividends.

As

we

deliver

our

strategy,

with

revenue

growth

and

margin

growth

combining

to

provide

faster

earnings

growth,

our

dividends

will

increase

accordingly.

And

we

do

also

continue

to

review

our

future

cash

requirements

in

the

context

of

the

market

conditions

and

outlook.

We

don't

anticipate

cash

requirements

will

need

to

grow

proportionately

with

our

revenue

growth

through

the

period

of

our

strategic

plan.

And

when

there

is

a

sustainable

excess

cash

in

the

business,

then

we'll

seek

to

return

that

excess

to

shareholders.

So,

to

summarize,

overall,

we're

very

pleased

with

the

results

we're

announcing

today.

The

excellent half

year

performance,

strong

balance

sheet,

and

the

quality

of

the

order

book

have

given

the

board

the

confidence

to

declare

an

interim

dividend

of

£0.022,

which

is

83%

higher

than

last

year.

And

we've

improved

our

policy

such that

we

now

plan,

this

year

and

going

forward,

to

pay

full

year

dividends

that

are

twice

covered

by

pre-exceptional

earnings.

And

with

that,

I'll

hand

back

to

Bill.

Bill Hocking

Thanks,

Andrew.

And

now, it

is

progress

on

the

strategy.

[indiscernible]

(08:28)

of

our

strategy

to

deliver

high-quality

buildings

and

infrastructure

in

a

responsible

manner,

and

provide

a

good

return

to

our

shareholders.

There

are four

main

pillars

to

the

strategy:

Culture,

safety

and

people

at

the

top

left.

Responsible

delivery,

net

zero

carbon,

social

value

and

so

on,

bottom

left.

Quality,

innovation,

digital

and

supply

chain,

top

right.

And

the

result

in

good

financial

returns,

bottom

right.

And

I'll

cover

each

of these

pillars

in

a

bit

more

detail

later

on

in

the

presentation.

We

have an

action

plan

to

grow

the

business

to

£1.6

billion

of

revenue

and

3%

margin

in

2026,

as

we

have

previously

announced.

Part

of

that

growth

comes

from

doing

more

in our

existing

markets

and

part

from

growth

into

higher-margin

adjacent

markets,

primarily

PRS,

retrofit

of

existing

buildings

to

lower

their

operational

carbon,

and

the

capital

maintenance

asset

optimization

in

the

water

industry.

In

PRS,

we

will

develop

or

co-develop our

own

projects

using

our

balance

sheet

to

acquire

land

or

options

on

land,

designing,

and

obtaining

planning

permission

for

the

project,

and

then

selling

that

project

to

a

forward

fund.

This

locks

in

the

development

gain

on

the

project,

and

then

we

then

go

on

to

construct

a

scheme

on

behalf

of

the

buyer.

The

blended

margin

from

this

approach

is

significantly

higher

than

normal

construction

margins.

In

FM,

which

is

a

higher-margin

business

in

the

first

place,

we

look

to

help

our

clients

reduce

their

operational

carbon

by

refurbishing

their

buildings

with

more

efficient

heating,

lighting,

glazing,

and

so

on.

And

in

water,

in

addition

to

our normal

activities

of

designing,

constructing

and

commissioning

water

and

wastewater

facilities,

we

intend

to

move

into

higher-margin

capital

maintenance

and

asset

optimization

of

treatment

plants.

Our

acquisition

of

the nmcn

water

business

adds

momentum

to

this,

and

here

is

a

bit

more

color

with

regards

to

that

acquisition.

In

the

first

place,

the

acquisition

is

very

complementary

and

aligned

to

our

strategy.

It

provided

an

excellent

geographic

fit

with

our

existing

water

business

as

there

was

virtually

no

overlap

between

the

two

operations.

As

a

result,

we

now

have

a

long-term

framework

with

virtually

every

water

company

in

the

UK,

and

have

gained

a

portfolio

of

new

long-term

clients.

The

acquisition

also

brought

new

skillsets

into

Galliford

Try,

a

significant

design

function,

offsite

build

capability,

and

the

design

software

and

manufacture

of

control

panels

and

chemical

dosing

systems

for

the

water

sector,

all

of

which

adds

momentum

to

our

growth

strategy.

And

of

course,

and

very

importantly,

it

brought 900

excellent

people

into

Galliford

Try.

Our

balance

sheet

strength

and

our

knowledge

of

the

water

industry

enabled

us

to

move

very

quickly

when

the

acquisition

opportunity

arose,

and

the

integration

is

going

well

with

a

new,

bigger

business

restructured

in

January

and

settling

down

nicely.

As

Andrew

said,

there

was

limited

contribution

to

revenue

in

the

first

half,

but

we'll

see

revenue

and

operating

profit

come

through

in

the

second

half,

along

with

opportunities

to

leverage

our

new

capabilities

across

the

whole

of

Galliford

Try.

As

well

as

a

business

rationale

for

the

acquisition,

it

ensured

continuity

of

important

water

and

wastewater

projects

across

the

UK,

and

safeguarded

the

livelihoods

of

a

great

many

people,

both

in

terms

of

staff

and

in

the

supply

chain.

It

is

our

intention

to

do

a

more

detailed

presentation

on

the

environment

business

to

our

investors

later

in

the

year.

Moving

on

to

the market.

We

continue

to see

a

robust

pipeline

of

work

through

the

medium

term,

driven

by

government

spending

across UK

and

by

private

commercial

organizations

in

the

regions.

And

you

can

see

here

examples

of

very

significant

programs

of

work

in the

sectors

in

which

we

are

very

well-placed

to

perform.

Our

order

book

has

grown

by

£100 million

pounds

to

£3.4

billion,

and

you

can

see

here

the

split

between

Building

and

Infrastructure,

and

the

constituent

parts

of

each

sector.

90%

of our

order

book

remains

in

the

public

sector;

and

at

the

half

year,

we

had

95%

of

this

year's

revenue

secured,

of

which

87%

is

in

long-term

frameworks.

Very

importantly

to

me,

we

already

have

just

over

80%

of

full year

2023's

revenue

in

hand,

which

is

a

very

good

position.

You've

seen

this

slide

before.

And

just

to

remind

you

that

our

risk

management

process

is

unchanged

and

incorporates

robust

contract

selection

procedures

and

product

commercial

controls

and

oversight.

There's

a

lot

of

focus

and

effort

on

managing

the

effect

of

materials

and

labor

shortages,

as

well

as

inflation.

Our

strong

order

book

and

cash

position

supports

our

disciplined

attitude

to

risk

and,

as

Andrew

said,

allows

us

to

walk

away

from

the

wrong

projects. And

that's

really

important

to

us.

Our

supply

chain

is

aligned

to

our

business.

We

engage

them

early

and

we

pay

them

promptly,

which

is

important

in

retaining

the

best

suppliers

and

subcontractors.

We

allow

for

risk

and

current

inflation

in

our

tenders,

and

so

we're

only

looking

at

the

differential

between

what

we

allowed

for

in

the

first

place

and

the

actual

inflation

through

the

tenancy

of

our

projects.

There's

also

a

lead-and-lag

cycle

in

inflation,

which

tends

to

balance

out

over

time,

in

my

experience.

We

procure

materials

early

to

mitigate

possible

inflation

and

material

shortages,

and

we

have

increased

our

lead

times

to

provide

more

of

a

buffer.

And

most

importantly,

the

culture

of

risk

management

across

the

business

is

good,

and

our

management

incentives

are

aligned.

So,

going

back

to

our

strategy,

here

are

some

of

the

metrics

we

use

to

monitor

our

progress.

You'll

see

in

the

appendix

the

full

suite

of

metrics

which

you

report

on

an

annual

basis.

Our

AFR

at

0.07

is

significantly

better

than

the

industry

average;

and

notwithstanding

that,

we

always

work

very

hard

towards

aspirational

zero.

Early

careers

people

make

up

6.2%

of

our

staff.

Our

considered

contractors

score

is

well

above

the

industry

average.

And

93%

of

our

clients

are

repeat

clients.

We

have

a

huge

focus

on

people

and

career

development,

with

an

emphasis

on

retaining

our

excellent

people

and

attracting

new

high-caliber

people

to

the

company.

We

did

our

staff

engagement

survey

last

year,

and

we're

very

pleased

to

get

an

overall

engagement

score

of

72%,

with

85%

of

respondents

being

strong

advocates

of

the

company

and

94%

of

our

staff feeling

motivated

by

our

vision

for

the

future

of

the

business.

We've

made

good

progress

towards

our

zero

net

carbon

goals

in

the

period,

both

in

terms

of

general

business

processes

and

practical

actions.

We've

resourced

up

on

appropriately

qualified

people,

and

invested

in the

tools

we

need

to

drive

and

measure

our

progress

in

carbon

reduction.

On

the

practical

side,

we've

converted

all

of

our

piling

rigs

and

associated

equipment

to

run

on

hydrotreated

vegetable

oil,

which

dramatically

reduces

their

carbon

emissions.

And

our

fleet

average

across

all

of

our

cost

is

down

to

67

grams

of

carbon

per

kilometer.

We

continue

to

invest

in

the

technology

that

we

need

to

collaborate

digitally

with

our

clients,

designers

and supply

chain,

which

helps

us

to

enhance

site

efficiency

and

site

safety,

reduce

rework

and

capture

high-quality

data

to

monitor

quality

and

progress.

And

all

of this

drives

an

excellent

financial

performance.

We've

maintained

a

robust

risk

position,

prioritizing

the

bottom

line

over

top

line

growth.

And

we're really

pleased

to

see

the

progression

in the

margin

to

2.2%,

en

route

to

our

3%

target.

Revenue

is up

10%

and

cash

generation

is

good,

and

we're

producing

a

good

return

for

our

shareholders.

So,

in

summary,

everyone,

we're

in

good

shape.

A

strong

balance

sheet,

excellent

order

book,

and

we're

making

good

progress

against

our

strategy,

with

improved

financial

performance

across

[indiscernible]

(16:28). We're

on

track

for

full

year 2022

and

the

strategy

period.

And

my

thanks

go

to

all

of

our

staff

and

supply

chain

for

their

excellent

contribution.

So,

that

concludes

the

presentation,

and

I'll

hand

back

to

the

operator

to

take

any

questions.

Thank

you.

Operator

Thank

you.

[Operator Instructions]

We

will

now

take

our

first

question

from

Joe

Burnett (sic) [Brent] (17:01)

from

Liberum.

Please

go

ahead.

The

line

is

open.

Joe Brent

Analyst, Liberum Capital Ltd.

Good

morning,

gentlemen.

Bill Hocking

Morning, Joe.

Andrew James Duxbury

Morning,

Joe.

Joe Brent

Analyst, Liberum Capital Ltd.

Congratulations

on

some

very

good

numbers.

If

I

may be

greedy

and

just

start

with

three

questions,

if

that's

okay.

Firstly,

on nmcn,

can

you

give

us an

indication

of

what

sort of

margins

that

business

is

achieving

and

what

it

can

achieve

relative

to

group?

And

secondly,

given

that

that

looks

such

a

fantastic

acquisition,

are

there

other

acquisitions

that

you

can

make?

And

could

you give

us

some

indication

of

the

areas

you

might

be

looking

to

add

to?

And

thirdly,

you

touched

on

the

very

important

subject

of

shortages

and

inflation.

I'm

very

interested

to

hear your

perspective

on

which

parts

of

that

are

most

worrisome.

On

the

inflation

side,

I

imagine

that

your

principal

issues

is

labor.

And

on

the

shortages

side,

I'm

sure

it'll

be

certain

building

materials. So,

interested

in

a

bit

more

color

on

what's

going

on in

the

ground

in

those

areas.

Bill Hocking

Okay.

Thanks,

Joe.

Yeah, we're

really

pleased

with

our

acquisition

of

nmcn.

It's

settling

in

really

well.

And

on

a

margin

basis,

it's

–

on

the

business

as

usual

stuff,

so

that's

the

design

commissioning

and

construction

of

water

and

wastewater

plants,

we

see

the

margins

sort

of

typically

where

we

expect

them to

be,

2.5%

to

3%.

And

then

they've

got

some

other

parts

of

the

business,

for

example,

the

[indiscernible]

(18:29) business

who

make

the

control

panels

and

the

chemical

dosing

systems

and so

on,

where

margins

can

be

significantly

higher.

So,

on

a

blended

basis,

they're

very

supportive

of

where

we

intend

to

be

in.

On

other

acquisitions,

it's

certainly

been

a

good

experience

for

us,

our

first

acquisition,

and

we –

whilst

our

strategy

doesn't

rely

on

acquisitions,

we

are

certainly

open

to

acquisitions

if

something

sensible

comes

along.

And,

of

course, our

balance

sheet

gives

us

the

agility

to

do

just

that.

So,

we

will

keep our

eyes open,

Joe,

for

the

right

opportunities

here.

On

shortages,

things

are

stabilizing

across

the

piece,

I

think.

Inflation

has

stabilized.

I

think

it's

not

going

down.

It's

stuck

at

probably

4%

to

4.5%

is

my

guess.

But

it

has

stabilized.

Labor,

again,

has

stabilized.

And

again,

that

depends on

which

part

of

the

country

you're talking

about,

Joe.

The

labor

issue

is,

more

general,

an

issue

in

London

in

the

southeast

than

it

is

in other

parts

of

the country.

And

the

same

thing

in

materials.

They're

almost

stable.

We are given

more

predictable

supply,

I

suppose.

And

I'd

say

the

odd annoyance

is

more

than

anything

fundamental

in

the

material

supply.

Looking

forward

and

with

the

issues

happening

elsewhere

at the

moment,

there

might

be

further

inflation

caused

by

energy

prices

and

so

on

perhaps.

But

of

course,

we have

prices

into

our

tenders.

We

forecast

what

we

think

inflation

will

be

and

we

take

a

view

of that

in our

tenders.

And

so,

as

we

go

through

the

tenancy

of

those

projects,

we're

only

looking at

the

differential

between

what

we

thought

would

happen and

what

is

actually

happening.

Joe Brent

Analyst, Liberum Capital Ltd.

And

just

following

up

on

that

[indiscernible]

(20:12)

what

you

are

budgeting

for

energy

prices going

forward,

roughly?

Bill Hocking

We

don't

budget

the

energy

prices,

per

se,

Joe.

We

look

at

what

the

impact

of

that

will

have

on

material

prices.

So,

it's

obviously,

if

you're

looking

at

steel

or

glass, these

are

more

[indiscernible]

(20:27)

energy

prices

into

that

commodity.

If

you're looking

at

something

else

like

a

timber,

for

example,

then

that's

not

necessarily

affected

by

energy.

Joe Brent

Analyst, Liberum Capital Ltd.

Thank

you.

Operator

Thank

you.

We

will

now

take

our

next

question

from

Andrew

Nussey

from

Peel

Hunt.

Please

go

ahead.

Andrew Nussey

Analyst, Peel Hunt LLP

Hi.

Good

morning,

Bill.

Good

morning,

Andrew.

A

question

from

me.

Just

in

terms

of

the

commercial

activity

and

obviously

[ph]

conscious

of (20:58)

about

10%

of

sort

of

the

order

book,

the

business

now,

but

your

thoughts

on

that

end

market

over,

I

guess,

both

the

sort

of

near

term

and

what

you

might

be

sort

of

seeing

in

terms

of

customer

hesitancy.

But

perhaps

more

interestingly,

how

you

see

that

in

the

runway

to

your

FY

2026

growth

objectives,

please.

Bill Hocking

I

think,

Andrew,

it

depends

on

where

you

are

in

the

country.

So,

in

the

regions,

we

see

quite

a

bit

of

commercial

activity, particularly

in

PRS,

student

resi and some commercial

offices,

and

it

does

vary

by

region

quite

a

bit

actually.

And

it

is

variable,

yes.

It's

reliant

on

individual

private

companies

taking

a

view

on

what

they

think

is

going

to

happen.

So

far,

we've

seen

it

fairly

constant.

We've

not

seen

any

diminishment

in

appetite.

The

pipeline

of

tenders

coming

through

is

fairly

constant.

And

for

us,

it's

mainly,

as

I

say,

PRS,

student

resi.

The

only

change

that

I'd

say

is

perhaps

increasing

a

touch,

but

that

might

be

a

bit

early

to

say

– call

it

a

trend,

is

the

refurb

of

offices.

So,

you'll

see

more

and

more

offices

being

taken

back

to

the

structural

shelves,

so

to

speak,

and

then

completely

recabined

and

refitted

internally.

And

part

of

that

is

just

to

modernize,

I

mean,

part

of

that

is

to

lower

their

operational

carbon

and

have

an

office

building

that

clients

want

to

be

in

because

of

their

new

credentials.

Andrew Nussey

Analyst, Peel Hunt LLP

Got

it.

And

just

sort

of

follow-up.

In

terms

of

the

investments

portfolio

and

sort

of

the

opportunities

that

you're

seeing

there

to

invest,

I

mean,

should

we

think

over

sort

of

the

next

couple

of years?

Actually, we

probably

see

a

degree

of

net

investment

in

terms

of

the

portfolio

moving

forward.

Maybe

that's one

more

for

Andrew,

but

just

curious

on

how

you

see

the

shape

of

the

investments

portfolio,

the

investments

activity

developing

in

the

group.

Andrew James Duxbury

Yeah,

of

course. Good

morning,

Andrew.

So,

the investments

portfolio

on

the

books

are

£48

million.

Of

course,

it's

largely

PFI-type

assets,

so

we

don't

see

big

–

there'll

be

some

movement,

but

obviously

the

PFI

market

in

England

is

not

– is

closed

effectively.

But

what

we

are

doing

is

repointing

that

business

into

private

rented

sectors,

into PRS,

and

you'll

see

in

the

first

half

year,

we

got

our

first

PRS

scheme planning

permissions

that

will

go

on

to

site

later

this

calendar

year.

So,

there

is

opportunity

for

us

to

continue

to

invest

into

the

PRS

space,

which –

yeah,

which

will

then

help

us

drive

some

of

our

margin targets

as

well

as

we

go

forwards.

Andrew Nussey

Analyst, Peel Hunt LLP

Okay.

Great.

Thank

you.

Operator

Thank

you.

We

will

now

take

our

next

question

from

John

Fraser-Andrews

from

HSBC.

Your

line

is

open.

John Fraser-Andrews

Analyst, HSBC Bank Plc

Thank

you.

Morning,

Bill

and

Andrew.

Bill Hocking

Hi,

John.

John Fraser-Andrews

Analyst, HSBC Bank Plc

I'll

have

three,

please.

Firstly,

can

we

come

back

to

the

PRS?

Do

I

understand

correctly

that

the

investment,

the

planning

permission,

the

stages

before

securing

the

construction

of

the

building

that's

undertaken

within

the

PPP

business

and

then

the

construction

business

will

then

undertake

the

constructions

on

behalf

of

the

investor,

the

forward

funding

investor?

Is

that

right?

So,

that

profit

and

margin

that

you've

referred

to

earlier,

Bill,

that's all

within

the

PPP

business.

So,

that's

the

first

one.

The

second

is

on

cash.

You've

stated

that

if

Strategy

2026

plays

out,

you

won't

need

to

commensurately

increase

the

average

month

in

cash,

and

surplus

cash

will

be

returned

to

shareholders.

If

you

could

explain

some

parameters

of

what

surplus

cash

is,

that

would

be

really

helpful.

And

then

thirdly

and

finally,

in

terms

of

the

pace

of

margin

accretion

and

Strategy

2026,

how

do

you

see

that

playing

out?

Is

that

a

steady

progression,

or

do

we

see

a

jump

in

the

near-term.

Possibly,

some

thoughts

on

that

would

be

also

useful.

Thank

you.

Bill Hocking

Okay.

Thanks,

John.

I'll

take

the

first

one,

and

Andrew

can

pick

up

the

second too.

The

PRS

market

is

a

very

much

joint

effort

right

from

[indiscernible]

(25:52)

because

what

you're

trying

to

do

here,

John,

is

first identify

a

parcel

of

land

that's

good

for

PRS

scheme,

and

then

looking

to

design

and

build

a

scheme

that

is

easy

and

efficient

and

safe

to

build.

So, as

I

always

say,

you

can

generally

keep

the

planners

happy

by

putting

any

skin

they

want

on

the

outside

of

the

building

and

changing

the

shape

of

it,

but

the

inside

of

it,

the

fundamentals

should

be

repetitive,

easy,

straightforward

to

build,

and

that

makes

it

efficient

and

makes

it

a

better

and

more

profitable

venture.

So,

it's

very

much

a

joint

effort

from

the

investment

side

of

the

business

and

the

building

side of

the

business

right

from

the

start,

and

making

sure

that

we

get

those

things

aligned.

And

of

course,

the

construction

cost

has

to

– is

one

of

the

most

important

things

in

making

sure

that

you

can

get

these

things

over

the

line

in

the

first

place.

So,

very

much

a

joint

effort

all

the

way

through,

John.

Over

to

you,

Andrew.

Andrew James Duxbury

Yeah.

And

then

– so

on

the

second

[indiscernible]

(26:50)

question, John,

so

on

cash.

So,

I

mean,

I

guess the

first

point

is

we're

very

happy

with

the

level

of

cash

and

where

our

balance sheet

is

today.

So,

that

is obviously

the

first

and

most

important

point.

You'll

see

our

average

cash

balance

in

the

first

half

year

is

around

about

15%

of

turnover

on

an

annualized

basis.

And

what

we're

saying,

John,

is

as

we

grow

the

business

from

£1.1

billion

in

June

2021

to

£1.6

billion

by

June 2026,

so

50%

growth

in

revenue,

that

we

don't

need

our

cash

position

to

grow

50%,

so

that's

why

we

see

potentially,

there

will

be

some

opportunity

for

us

to

return

the

excess

cash

as

we

grow

the

business.

What

we

do

though,

John,

is

we

look

at

that

level

in

the

context

of

the

climate,

the

macro

position,

the

uncertainties

in

the

market

and

all the

rest

of

it.

So,

it's

not

a

question of

sort

of putting

a

precise

number

out

for

where

we'll

be

in

a

year's

time or

two

years'

time

because

we

just

need

to

obviously

look

at

that

in

the

context

of

the

current

market

conditions

all

the

time.

In

terms

of

the

second

point – in

terms

of

margin

growth,

so

we're

very,

very

pleased.

We've

moved

from

2%

in

last

full

financial

year

to

2.2%

in

the

half

year.

So,

that's

good

progress

towards

the

3%.

We

do

think

there's opportunity

for

the

gross

net

margin

to

accelerate

as

the

adjacent

market's

part

of

the

strategy

comes

on

board,

and

some

of

that

will

be

towards

the

latter

part

of

the

five-year

period.

So,

those

adjacent

markets

are

margin

enhancing,

so they

will

help

us

increase

that.

So,

I

don't

think

we

should

expect

the

margin

to

grow

to

3%

in

the

first half

of

the

period.

We'll

expect

that

to

grow

towards

the

back

end

as

those

adjacent

markets

come

through.

John Fraser-Andrews

Analyst, HSBC Bank Plc

Thanks,

Andrew.

That's

clear.

Perhaps

more,

like,

I've

got

your

attention.

There's

one

further

question

that

sprung

to

mind,

and

that

the

current

building

safety

crisis,

fire

safety

crisis

that

the

government

is

wrestling,

the

residential

development

industry

and

the

building

products

manufacturers,

the

contributions

to

remediating

the

problem.

Firstly

on

that,

are

yourself

involved

in

that?

Is

there

any

cost

to

yourself

in

terms

of

past

projects,

or

is

it

providing

a

source

of

revenue

to

help

be

part

of

the

solution?

Bill Hocking

Well, the

first

thing,

John,

is

that

we're

not

covered

by the

residential

property

tax

because

we're

not

a

developer

as such.

That's

the

first

thing.

And

in

the

same

breath

[indiscernible]

(29:42) that

we

agreed

that

leaseholders

should

not

have

to

bear

the

brunt

of

this.

It

should

be

the

industry.

But

we

are

not covered

by

the

tax,

so

we

don't

have

to

pay

it.

And,

of

course,

the

type

of

work

we

do

and

did

in

the

run

up, because

this

goes

back

a

few

years,

is

very

limited.

So,

we

have

a very

limited exposure

in

the

first

place.

And

notwithstanding

that,

we

did

identify

a

handful

of

projects after

that

dreadful

night

at

Grenfell

and

– which

had

this

ACM

cladding

material

on

it.

And

we

convened

a

task

force

the

very

next

day. We

identified

every

building

we

built

in

the

last

12

years.

As

I

said, there

were

a

handful

of

ACM

buildings

in

there.

We

approached

the

clients

and

we

remediated

all

of

those

buildings

over

the

past

few

years.

And

from

a

cost

perspective,

in

some

cases,

the

client

paid;

in

some

cases,

our

insurance

paid;

in

some

cases,

the

subcontractors

paid;

in

some

cases,

we

contributed

as

well.

But

that

was

all

dealt

with

as

normal

business

as

usual.

And

we

don't

expect –

there

are

a few

ongoing

inquiries,

John,

but

they're

not

material,

and

we

don't

expect

them

to

be

material

going

forward.

John Fraser-Andrews

Analyst, HSBC Bank Plc

Okay.

Thanks,

Bill.

Is

it

providing

work

for

you

in

remediating

for

others?

It

seems

to

be

that

[indiscernible]

(31:03)

in

the

construction

industry

to

get

the

work

done

seems

to

be

an

issue.

Bill Hocking

On

very

small

basis,

John,

yes.

We

have

one

of

our

smaller

companies, dry

lining,

does

some

work

in

this

field

and

they

do

retailing

of

lower

rise

buildings

where

it's

appropriate

and the

associated

fire

protection

work.

So,

yes,

we

will

benefit

from

a

little

bit

of

work

coming

through,

but

nothing

of

any

substance.

John Fraser-Andrews

Analyst, HSBC Bank Plc

Great.

Thanks,

Bill.

Operator

Thank

you.

We

will

now

take

our

next

question

from

Greg

Pluton

(sic) [Poulton] (31:37) from

Singer

Capital

Market (sic) [Markets] (31:37).

Please

go

ahead.

Greg Poulton

Analyst, Nplus1 Singer Capital Markets Ltd.

Yeah.

Morning.

It's

Greg

Poulton

from

Singer's

here.

Bill Hocking

Hey.

Greg Poulton

Analyst, Nplus1 Singer Capital Markets Ltd.

Most

might

have been

asked,

but

just

on

the

labor

shortages.

I

think,

Andrew,

you

said

it

was

more

[indiscernible]

(31:50)

in

London

in

the

southeast. So, if you

could

expand a

bit

on

how

you're

managing

that

and

if there's

any

impact

on

build

schedules

and

things?

And

then

secondly,

on

the

exceptional

charges,

I

think

it

was £6 million for

that

nmcn acquisition

integration.

Is

that

the

extent

of

it

for

the

year?

I

think

on

the

ERP

system,

you've

got

another

sort

of

stock of

3.5%

in

the

second

half,

is

that

right?

Andrew James Duxbury

Yes.

So,

just

picking

those up,

Greg.

So, on

the

exceptionals,

yes,

so

that

is

broadly

with

[indiscernible]

(32:27)

integration,

as

Bill

said,

it's

progressing

very

well,

very

pleased

with

that.

And

those

costs

included

some

of

the

downside

costs immediately

post the acquisition.

So,

[indiscernible]

(32:37)

brought

it

up

for

nmcn.

You're

right,

the

investment

in

IT systems

will

continue,

so

we'll

expect

more

cost

sort of

right

in

the

second

half

year.

But

just

to be

very

clear, that's

a

positive

strategic

investment

we

make

in

our

IT

systems,

which,

two

years

ago

really

capitalize

those

costs. We're

not

allowed

to

do

that

anymore.

So,

that's

the

only

reason

those

are

going

through

as

exceptional,

but

that

is

a

positive spend

by

the

group.

Do

you

want to get

on

labor,

Bill?

Bill Hocking

Yeah. Yeah. So,

on

labor,

Greg,

as

I

said

earlier

on,

it's

more

accentuated in London

in

the

southeast

than

elsewhere

in

the

country,

and

that's not

across

the

piece

that

generally

is

specific

trade

at

any

one

time.

So,

we

mentioned

dry

lining

a

minute

ago.

That,

for

example, at

the

moment

is

one

there's

a

bit

of

a –

seems to

be

a

bit

of

a

shortage.

But

we

get

around

these

things

by

reprogramming

contracts

and

by

giving

forward

visibility

of

what's

coming

up

to

our

supply

chain

so

that

they

can

plan network,

and

we

generally

manage

our

way

through

it.

So,

I

think

it's

settling

down

a

bit

now.

And

as

I

said

earlier

on,

it

isn't

having

a

material

impact

on

the

business.

So,

we're

managing

through,

and

I

think

it'll

continue

to

stabilize

[indiscernible]

(33:47).

Greg Poulton

Analyst, Nplus1 Singer Capital Markets Ltd.

Okay.

Thanks

a

lot.

Cheers.

Operator

Thank

you.

We

will

now

take

our

next

question

from

Alastair

Stewart

from

Shore

Capital.

Please

go

ahead.

Alastair Stewart