ISG aims to make a total of £4m in procurement savings over two years in UK construction and plans to lift the division’s margin above over 1 per cent during 2015, its chief executive has said.
Speaking to Construction News, David Lawther said the company aimed to bring its UK construction operating profit margin, which was negative in the financial year 2014, up beyond 1 per cent in the calendar year 2015.
Operating margin for the group as a whole in 2014 was 0.8 per cent excluding exceptional items such as £2.4m of restructuring costs, but will go beyond 1 per cent as the market continues to recover, Mr Lawther added.
In its results for the year to 30 June 2014, published on Tuesday, ISG said growth in construction orders, the completion of some older projects won at lower margins and improvements in the market would aid its return to profitability in UK construction.
The firm’s UK construction order book grew to £444m from £391m in 2014 compared to 2013.
ISG’s UK construction arm made a £1.2m pre-tax loss in 2014, reversing a £2.1m pre-tax profit a year earlier. Revenues in the division fell from £498.8m to £463.4m in that time.
ISG plans to make £2m a year of procurement savings in UK construction over the next two years.
Mr Lawther said this included trying to reduce problems such as snagging and delays to practical completion that added to costs. It will also improve quality and value by involving subcontractors earlier in projects.
The CEO said in some regions the firm would need more subcontractors to handle its extra workload.
He denied that lowering procurement costs was about cutting subcontractors’ margins.
“It is not about reducing the price that is paid to subcontractors; it is about being more effective. Volumes are increasing so we need more out of the subcontractors. It is not just about baseline costs; it is about quality and service. Simply going out and bidding to the cheapest is not going to provide the right quality.”
The firm is focusing on repeat clients and frameworks and less on open market tendering in UK construction.
In June, the UK construction arm closed its office in Tonbridge, Kent generating a loss of £2.8m in 2014 as part of a restructure of the division from seven regions to four.
Mr Lawther said the large-scale restructuring of the company’s regional business was now done and there is “nothing of the same size of scale” to come.
Stronger performances in areas such as fit-out and engineering helped boost the firm’s overall pre-tax profits to £11.5m, excluding exceptional costs such as restructuring, up from £9.1m a year earlier and revenue up more than £200m to £1.5bn.
The group’s UK fit-out and engineering division, which includes its growing data centre business, almost doubled its pre-tax profits to £10m while its UK retail division increased its pre-tax profits by £223,000 to £6m.
The continental European business saw a fall of £326,000 in pre-tax profits to £1.2m; ISG’s Middle Eastern business made £448,000 pre tax profit up from £16,000 in 2013 and the Asian business made £539,000 more in pre-tax profits to take it to £2.7m.
ISG increased its net cash by £10.2m to £46.3m. Mr Lawther said the group was “continuing to look for acquisitions and bolt-on acquisitions” but that should it undertake any purchases it would be likely to fund them with a mix of debt and equity rather than solely from its own funds.
ISG bought two companies in Spain specialising in data centres, office and retail fit out after the financial year ended and one in Germany almost a year ago.
Mr Lawther said ISG did the deals because its Spanish client business was seeing more opportunities in the country, especially in retail and also the office market.
He added that Germany has been strong for ISG and the company’s exporting manufacturers could benefit if the Euro weakened. France and Italy were weaker markets for ISG, he added.
Mr Lawther said ISG grew by 300 people in 2014 and said the group planned to expand its workforce by a similar number in 2015.
With the referendum on Scottish independence just a week away, Mr Lawther said the outcome would make little difference to ISG.
He said: “Our customer base in Scotland is international names and they will continue. If there are changes and some of the investment companies decide to move elsewhere we would expect to see that reflected in terms of increased office fit-out.”