Exclusive: Vinci UK has streamlined its business and decided to move away from projects under £5 million after a £7m loss in its building division in 2012.
Chairman and chief executive John Stanion spoke exclusively to Construction News as the company reported results to the year ended 31 December 2012, which included a record order book of £1.1 billion.
The firm has realigned from eight to five UK divisions – now operating across building, Taylor Woodrow (civil engineering), facilities, its technology centre and international.
Building was realigned from four to two regions, in the North and the South.
Mr Stanion said the company is moving away from the small end of the market to concentrate on larger, more complex projects with better margins.
Vinci has 300 projects below £5m at present, with 74 between £5m-£10m and 104 schemes above £10m, considered major projects.
“Very few are making any serious money out of building”
“The reason for that is really to do with pressure on margins, which is driven by competition, a certain number of mistakes that we have made ourselves and the fact we have got inflation coming back in – all those things are putting pressure on margins,” he said.
“Lots of people can do projects below £5m and they may not have the same level of overhead that a corporation like ours has.”
Mr Stanion said the firm is expecting a boost to revenue this year after growth in the Middle East, but a drop in UK building revenue.
He said he is “pretty pleased with the results in the market we’re in”. But he said conditions remain difficult against a backdrop of a “flatlining” economy, with competitiveness in the market meaning “very few are making any serious money out of building”.
Building revenue was £600m (2011: £587m) but recorded a £7m operating loss, compared with a £2m loss a year earlier.
“We are not securing the price levels from the supply chain that we anticipated”
“It reflects a number of specific issues on projects, the fact we are not securing the price levels from the supply chain that we anticipated, and certain legacy issues, putting right projects completed in earlier years or that came to the company through acquisition,” said Mr Stanion.
Taylor Woodrow posted turnover of £242m, up from £206m, as profits rose from £11.5m to £12m, focused mainly on rail. The firm has re-entered highways and continues in energy from waste, despite governement cuts to PFI credits stalling projects. But its nuclear jv with Balfour Beatty and Vinci Grand Projets lost out at Hinkley and Horizon.
Facilities recorded £243m in turnover and a £7.1m profit (2011: £228m and £6.2m).
“Cash and profit is going to be under pressure and the only answer is to be selective and build up relationships with the supply chain and customers”
The company said tough competition, supply chain insolvencies, bidding costs and long lead times across all types of schemes “all conspired to reduce operating margins”.
However, Mr Stanion said the company would grow this year primarily through its international work, pointing to its record book and the fact that 74 per cent of its work for 2013 is secured.
“But cash and profit is going to be under pressure and the only answer to that is to be selective, build up relationships with the supply chain and customers, to innovate more, to collaborate more and upskill our teams through management development and training,” he said.
The firm closed three offices, including at Heathrow, Maidstone and Nottingham, but opened two new offices in Wakefield and central London. Its air division, formerly based at Heathrow, continues within the business.
Mr Stanion said staff were relocated to Reigate. Employee numbers stayed flat at around 4,000 and there are no plans for further restructuring.
The chief executive said the company is looking to work more collaboratively with its customers, supply chain and other parts of the Vinci group to bring together their specialisms.
Key contracts in 2012 included the £49m Jaguar Land Rover deal in Solihull, the £100m Swansea university campus and £77m BNP Paribas King’s Cross office scheme.
Mr Stanion said clients now want a multi-disciplinary service, which Vinci as a group can meet.
He said the UK business is “not driven by acquisition” and that growing “more of the same” in the UK, where margins are lower than in France, is dilutive for its parent group.
He added the company also wants to rationalise the supply chain “and build stronger links with fewer suppliers”. It will also mean the contractor can be “more diligent” in its supply chain management.
“We want to rationalise our supply chain and build stronger links with fewer suppliers”
Vinci had more than 5,541 subcontractor orders last year, but Mr Stanion said the company is assessing where that might drop to.
The contractor will have two centralised supply chain hubs to reflect the regional building divisions.
Mr Stanion said Vinci is averaging 31-day payment periods, but payment remains a “major problem” in the market with suppliers “effectively financing the industry”.
But he also said overheads have been affected by a number of government decisions, including the abolition of holiday pay concession in the industry, the loss of site tax free allowance and the introduction of pension auto enrolment, along with carbon reduction commitments and “suffering like everyone else that we are getting no interest on cash” which used to make up 1 per cent of the net margin.
He said the biggest risk for the industry will be inflation, but added there is a “deadly” combination facing the wider industry of inefficient procurement in both PFI and the public sector, along with a lack of confidence in the private sector and banking problems that make it difficult for firms to raise finance.
Vinci UK saw a £24m cash reduction from £154m to £130m. Mr Stanion said any rapid drop in revenue would hit cash, adding that its focus is on making sure it gets paid on time, organising cash-positive contracts and maintaining volume.
Building volumes are expected to fall in 2013, albeit not substantially, as civil engineering will grow “quite strongly” on the back of rail, roads, waste to energy and light rail.
Vinci is also now more involved in residential blocks in the capital.
Vinci UK also decided in 2008 to re-establish its and Taylor Woodrow’s international presence, opening offices in Oman, Abu Dhabi and Saudi Arabia, with Mr Stanion expecting revenues to treble in the next three years to £150m.
Vinci rejects reverse factoring amid Carillion controversy
Vinci Construction UK’s chief executive has rejected the use of reverse factoring, saying the “sensible answer is just to pay people on time”.
Mr Stanion said his company is starting to see supply chain prices increase because “the supply chain is being squeezed as far as it can be”, with prices rises while the industry is still in recession putting an “enormous amount of strain” on construction.
But Mr Stanion said he does not use or support reverse factoring.
Carillion has controversially adopted the facility, which sees the debt passed to the bank for a fee, under the government’s Supply Chain Finance scheme as it pushes out payment terms to 120 days.
“At the end of the day it costs money; either it’s going to push up subcontractor process or further weaken their margins,” he said.
“At the end of the day [reverse factoring] costs money; either it’s going to push up subcontractor process or further weaken their margins”
But he also said project banks accounts could “fundamentally change the industry”, and create a climate of companies needing to build working capital, resulting in them pushing up costs.
“The sensible answer is just to pay people on time,” he said.
He also suggested some smaller firms are taking on jobs that are more complex than anticipated and “when it goes wrong it’s very difficult for smaller companies to survive”.
“We constantly have to monitor the financial health of our major subcontractors,” he added.
Procurement and finance ‘deady combination’ for industry
Construction is facing a “deadly” combination of inefficient procurement in PFI and the public sector, along with a lack of confidence in the private sector and banking problems that make it difficult for firms to raise finance, Mr Stanion said.
He said questions remain over PFI, nuclear and schools programmes.
Mr Stanion said the problem remains how quickly finance can be raised for projects on the National Infrastructure Plan, and pointed to a “slow resolution of the energy policy, an absence of road investment completely and the end of the Building Schools for the Future”.
The firm said major projects will be a “difficult market to operate in” unless more investment is forthcoming.
However, it is investing in Nottingham Tram and “hopefully New Covent Garden market”, which Mr Stanion said was effectively a land swap deal.
“It’s going to be many years before we come back to where we were in 2007, which admittedly was a fairly high point… unless government decides to really boost investment,” he said.
On nuclear, he said investors need to see projects moving forward.
“Nobody’s going to do anything until Hinkley Point’s resolved.
“We’ve got to see a big investment in energy management and energy use reduction, and that’s a huge task.”