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ISG chief predicts another year of 0.2% construction margin

ISG chief executive David Lawther has said he expects its construction division to continue working at a 0.2 per cent margin for at least another year.

Mr Lawther told CN restructuring costs will be “north of £1 million” in 2012/13 as the firm “continues to manage its cost base in line with the market”.

But he said there are signs of major projects coming back in the fit-out sector, where orders have rocketed by 83 per cent.

He pointed to major schemes such as the Cheesegrater, Walkie Talkie and Broadgate projects coming through to boost fit-out from 2014-16, along with companies’ leases coming to an end 25 years after the ‘big bang’ in the 1990s.

There is also a focus on technology company clients, such as Google, which “are all growing and spending money” in London and offsetting the decline in spending in the City by investment banks.

ISG posted results for the six months to 31 December 2012 on Tuesday and said revenue was up 6 per cent to £659m as profits fell slightly from £2.3m to £2.2m. It posted a group operating margin of 1 per cent. Group cash fell just £4m to £25.3m.

The company, which played a role on every 2012 Olympics venue, has cut construction jobs and closed offices in East and South-east England in the past six months, but Mr Lawther said they are taking people on in other areas of the construction business.

It has also combined its various retail operations in the UK under a single management structure and consolidated UK IT teams into a single location, leading to £500,000 of further restructuring costs after it spent £3m on restructuring in the year ended 30 June 2012.

Mr Lawther would not give details on the number of job losses or office closures in construction, which he described as the “most difficult” of their divisions.

It has continued to operate on a 0.2 per cent margin, in line with the 2011/2012 year-end. Operating profit for the half-year was £0.7m on revenue of £280m, as the order book increased to £409m (2011: £377m).

Asked whether the below-industry-average margin was down to tight pricing, Mr Lawther said: “It’s a competitive market and that market will remain competitive.”

That sentiment has also been evident at Balfour Beatty, Kier and Morgan Sindall, which also have reorganisation strategies under way.

“We made no secret, we are reorganising in the East – it’s part of the marketplace that will continue to have to go through a difficult market,” he added.

Mr Lawther said an upturn in margin will only be driven by capacity coming out of the market or work volumes increasing.

“We’re clearly in a market where capacity is being taken out of the marketplace, and that process will go on through the next 12 months,” he said.

“In terms of more coming into the marketplace, that’s all about the recovery of UK plc. Clearly in the current economy, that’s further away.

Asked how long that margin level will continue, he said: “The margins will continue, whether it’s a couple of years, it’s certainly there for the next year.”

Mr Lawther said cost management will only take out capacity and maintain the margin, not improve it.

“As a business we have restructured in the South-west over 18 months, we are restructuring in the South-east, there’s been ongoing restructuring in some of our northern activities, so it’s a continual process.

“We started earlier [than other contractors]; if you go back we did over £2.5m-worth of restructuring 14 months ago. We’ve made no secret that within this year, we will probably be north of £1m.”

Mr Lawther said ISG had reacted to a marketplace where there are “significant cost pressures”, along with a change in strategy by major supermarkets, which affected the retail and construction divisions. He said the firm is also focusing on repeat relationship work. Retail held steady with a 1.6 per cent margin.

Overseas orders have doubled to 25 per cent of the £766m group order book, with 80 per cent of that in the private sector which, with fit-out, has led to City analysts saying ISG is well placed for the upturn.

The chief executive said ISG had its eye on “a number of overseas opportunities” for possible acquisition.

Fit-out margin slipped from 2.5 per cent to 1.7 per cent, but the order book is up 83 per cent after ISG entered engineering services.

Mr Lawther said smaller fit-out companies are likely to feel pressure as big companies move in to their markets, while it remains “very competitive” as they compete “head to head” with the likes of Overbury and Como.

He said some clients are trying to push out payment terms, but said ISG has resisted 120-day arrangements by “saying no”. He said clients are also more conscious about not overpaying and have exerted pressure on consultants.

ISG payment terms for their subcontractors are 30 to 60 days, he said. ISG last year scrapped a controversial £300 registration fee it was asking subcontractors to pay to prequalify for its national supply chain.

Mr Lawther said there is still a debate over “who bears the cost” of invoice factoring, which sees banks take on invoices from big companies to pay the supply chain quicker, but at a rate. However, he declined to comment further.

He said there is also a responsibility with banks and insurance firms who “have more to do in helping UK plc’s recovery” after a “tightening on credit terms”.

ISG’s chief executive on:

2012 Olympics marketing

Mr Lawther said the fact that ISG worked on every Olympic 2012 venue has helped win work. He said there was “confusion on what you could and could not say” under the marketing rules.

“Nobody said you could not advertise it; [but] you could not advertise it in isolation. So we have always been able to reference that London 2012 was one of our clients.”

He said clients do their own research on contractors and their supply chain and said the loosening of the marketing rules will not have any “big impact” for ISG, but could be more significant for the supply chain.

Overseas and acquisitions

ISG is looking at acquisitions with their eye on “a number of overseas opportunities”.

“But it would have to be a new service offering, rather than one of our existing ones where we are already the market leader,” he said

Around 25 per cent of the £766m group order book is international against 12 per cent last time.

The global performance is also set to be second-half weighted, according to analysts.

Mr Lawther said the overseas part of the business will grow in line with client demands outside of the UK, but said there is no target volume. He said that also means moving people abroad, adding “you have to be local”.

“The supply chain side does not travel. It does not even travel within the UK, so you need a different supply chain in the south to the north of the UK.

“When you go into these different countries you need to be compatible and need to work with the local supply chains… it takes a long time to build up these businesses overseas. When you have started from scratch it can take up to five years to build a return from these investments overseas.”

The fit out “squeeze” on small firms

Smaller firms have felt the squeeze as the likes of ISG and Morgan Sindall drop into their markets, said Mr Lawther.

“If you are one of the lead players used to working on larger fit outs, you have the skills set to go down.

“You don’t have the skill set to go the other way, so the smaller fit out companies have been squeezed by the likes of ISG and Overbury taking on smaller projects.

“As the market recovers with these bigger projects, clearly there will be more volume.

“It only takes two to be competitive and it’s a very competitive marketplace and we compete head to head with [the likes of] Overbury and Como.”

Clients and payment terms

“There have been some clients who have sought to push out payment terms and we have entered into negotiations where the supply chain has worked with us for some clients, to restrict extension terms by clients.”

Mr Lawther said this means “saying no” to customers.

“We have clients who will say we want to pay in 120 days and we say ‘no, we can’t do the job – it will be finished so how will we know we are going to be paid’.

“If clients are going to only choose on the criteria of payment, we want to convince them that there are other criteria they should be taking into account when taking that decision.”

He said clients are also more conscious about overpaying and have “exerted pressure” on consultants as a results.

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