Given the threat of shrinking margins and the number of big-name M&E firms that have gone under in the past two years, the chief executive of one of the UK’s largest subcontractors NG Bailey could be forgiven for feeling anxious.
Instead, while frankly admitting that breaking even is the current market expectation and that margins could dip further before they recover, David Hurcomb insists his long-term strategy will see the firm through the dark times.
The industry was left reeling after big names in M&E, including MJN Colston and part of Rotary UK, closed last year, while Emcor UK this year took the decision to withdraw from the UK construction market.
Speaking to Construction News, Mr Hurcomb insists NG Bailey’s order book and moves to diversify into new sectors will see it right in the end, even if it operates at ‘break-even’ margins in the near term.
Brought in after the economy crashed, the former Carillion director has been attempting to steady a ship in rough waters ever since his arrival in 2010.
“The business had been very successful in the boom times, but very much in the building markets, working for main contractors, doing very well, making good profit,” he says.
“As opposed to being reliant on building profits, we want to be a third in building, infrastructure and services”
David Hurcomb, NG Bailey
“Overnight that market shrank quite significantly and worse still the margins disappeared, so it went from being very profitable to being marginal.
“My role is to come up with a long-term strategy to make the business stronger and more resilient.
“Quite simply we are looking to diversify into new markets and sectors. As opposed to being reliant on building profits, we want to be a third each in the building, infrastructure and services sectors.”
Rolling with the punches
NG Bailey returned to growth last year, with pre-tax profit of £7.2m on £458.6m turnover to 25 February 2012 and group operating profit margins at 1 per cent.
This followed a difficult year to February 2011, when turnover dipped to £419.2m and the firm recorded a pre-tax loss of £4.2m.
Margins could be even lower at the company’s next set of results expected in October. In the current climate, breaking even is a good result, Mr Hurcomb says.
Is NG Bailey buying work? Mr Hurcomb insists not, but says problem jobs have cost the firm. He adds that it is investing £3m in areas such as recruiting to improve its bidding teams and diversifying into sectors like new nuclear.
“In the building market we are aiming to break even and that’s a good result,” he says.
“We have had some difficult contracts that have lost us money and that’s where we have probably taken it at a competitive price with bid assumptions that haven’t come off.
“We had a couple of horrible jobs last year where we should have said no and we didn’t”
David Hurcomb, NG Bailey
“[Those contracts] have cost us a lot of money,” he adds, but insists NG Bailey can cope as a national company where some regions perform better than others, whereas some regional firms are at risk of one bad contract taking them under.
“We had a couple of horrible jobs last year, which we took on in 2009 in the commercial sector, where we should have said no and we didn’t,” he admits.
Refusing bad offers
But he insists the firm has learnt from this and now if a major contractor comes to them and says they have “won that job but need to take off 3 per cent”, NG Bailey will say it’s not possible and walk away.
The state of the M&E market in the wake of big-name firms collapsing has seen three chief executives at main contractors approach Mr Hurcomb recently to talk about having a “closer supply chain arrangement”.
But Mr Hurcomb admits NG Bailey is continuing to have to work with some main contractors who are still interested in lowest price, rather than strategic arrangements.
“We have seen main contractors taking prices from some of our competitors at such ludicrous rates that it can only end in disaster”
David Hurcomb, NG Bailey
“Selectively we will work with them because we need the work,” he says. “We do work with people who we might not want to work with when things pick up or we walk away.
“But some of these are companies who have been very good to us as well, so when the market comes back you don’t want to be biting the hand that was feeding you.
“No doubt relationships have been tested because people have chopped and chopped. We have seen main contractors taking prices from some of our competitors at such ludicrous rates that it can only end in disaster.”
In terms of goals, he talks of a £500m turnover target “within three or four years” but says the firm will prioritise “quality of return” over chasing revenue.
He expects rail turnover to be around £55m this year – more than treble its worth to the business when he joined – and says the company turned its services arm from a net loss into around £100m-worth of profitable business.
However, buildings still account for around 55 per cent of revenue, so there is clearly more redistributing to do to meet the target of a third of revenue in infrastructure and in services, despite the progress to date.
Asked whether the company is in the position he wanted it to be when he took over, Mr Hurcomb admits that it suffered a setback in Q4 2012, when it won around 10 per cent less work than it had expected.
That has also affected staff numbers, which he estimates are roughly 200 down year on year, though he expects net growth in staff numbers this year.
At its London office, rail will be a major contributor to jobs growth thanks to contracts, such as its M&E win at London Bridge. The firm was named ‘supplier of the year’ by Network Rail at its partnership awards last month.
There are “pockets of optimism out there” and the shift in sentiment is “palpable” from recent market surveys indicating growth, he says.
“We are able to tell our shareholders everything – warts and all – so we can be very honest”
David Hurcomb, NG Bailey
Mr Hurcomb is confident that clients sitting on strong balance sheets will start bringing schemes back to market soon to invest in infrastructure, buildings, new assets and also their technology.
“A lot have cut back investment and can’t put off upgrading systems forever. But he warns optimism felt today may not start being reflected in the bottom line for another two years.
Thinner margins near term
And margins? They will probably be “even thinner” this year, he says. “We’re around break even in reality,” he says.
“We have a decent order book going forward – it will be nearly £700m, which is as high as it’s been. We’re optimistic in our growth sectors that we will succeed and we have a strong balance sheet.
“We have a strong financial covenant and shareholders who understand the long term. If we were a plc our share price would not be a lot at the moment, but we are able to tell our shareholders everything – warts and all – so we can be very honest.
“I don’t think margins will pick up for a couple of years. So our trick will be to get ourselves positioned in the growth markets and there will be a time when margins will rise, because they have to.”
And is he happy that his reform plans will help NG Bailey avoid the pitfalls that have claimed other M&E firms? “We’re on track, but it’s going to be a slow recovery.”