Interserve chief executive Debbie White has said she expects the company’s construction business to shrink as opportunities in its traditional markets dwindle.
Speaking to analysts this morning, Ms White said the construction sectors in which Interserve operates “are not the strongest markets”, and warned that the challenging outlook for UK construction meant revenue in that part of the business would shrink.
Interserve reported a £244.4m pre-tax loss for the year to 31 December 2017 this morning.
Its UK construction division reported the weakest underlying performance, with an operating loss of £19.4m on revenue of £1.05bn.
Chief financial officer Mark Whiteling hailed the performance of its international business, which is mainly focused on the Middle East.
It reported a £19.2m operating profit on revenue of £290.5m, giving it an operating margin of 7 per cent.
Ms White said the group’s overall construction business, including the UK and Middle East, was now focused on increasing profitability with a target margin of 1-2 per cent.
Reducing overheads was key to this, she said. Interserve planned to use its size to achieve greater “leverage” on purchasing from its supply chain.
Ms White said the company had worked on “keeping our suppliers on side and supporting us” in recent months.
CFO Mr Whiteling added that suppliers had not been able to get trade credit insurance on Interserve for a number of months, which had put extra pressure on its supply chain relationships.
He said the company had been forced to pay out around £15m in advanced payments for work to suppliers as a result, but he hoped insurers would start covering Interserve again now that its refinancing has been completed.
Ms White said she had also introduced stronger discipline around bidding for new construction work to reduce the company’s risk exposure, with all prospective bids now being approved by her or Mr Whiteling.
She added that the company was targeting lower-risk work and more framework jobs in particular.
The pipeline for the construction business now stands at around £1.5bn.
Energy-from-waste projects have added around £195m to Interserve’s losses over the past two years and analysts were keen to know when a line could be drawn under this.
Ms White said that the six remaining EfW projects the firm is working on are now more than 95 per cent complete.
She added: “I’m not a betting person but […] I would hope by the end of the 2018 we can say, ‘We’re done’.”
This will involve agreeing settlements on four projects, including with Pennon on the Glasgow EfW scheme.
Interserve’s contract to deliver the Glasgow plant was terminated in November 2016.
In a recent update Pennon said the expected cost of the plant had risen from £155m to £250m, and that it was “contractually entitled” to reclaim extra costs from Interserve.
“We note the comments made by Pennon,” Mr Whiteling said. “We don’t recognise the position as they see it.”
He added: “We have had preliminary discussions with them and expect to re-engage them on the basis of our understanding.
“If that doesn’t work there are other remedies available.”
Interserve’s borrowing now stands at £834m following an increased refinancing deal that was finalised last Friday.
Ms White said: “We’re not happy with the aggregate level of overall debt that we’ve inherited.”
At the end of 2017 net debt stood at £502.6m and Mr Whiteling said this would peak in the first half of 2018 at between £650m and £680m.
This will be driven by around £60m in further cash outflows related to EfW projects, £25m of adviser fees related to the recent refinancing deal, £20m of loss provisions, and mobilisation costs of around £10m on new projects.
Mr Whiteling said its total facilities of £834m would cover all of this with around £30m to spare.
The £30m was taken as a contingency in case Interserve fails to sell its mixed-use Haymarket scheme in Edinburgh by the middle of the year, from which it expects to earn around £40m in profit.
Part of Interserve’s new financial covenants – which will receive their first test in September this year – will be to reduce its total borrowing to £450m by June 2020.
The company revealed in its results that to achieve this it will need a “significant de-leveraging event”, most likely an asset sale, or will have to try to issue more equity to raise funds.
It was suggested by one analyst that the business was yet to define what its core activities were and that it could be broken up.
Ms White rejected this view, saying: “We will keep the group whole.”
Last October she launched the Fit for Growth programme, which is expected to deliver savings of £15m in 2018 and £40m-£50m by 2020.