Carillion chief executive Richard Howson has said he anticipates construction operating margins of up to 4 per cent in the short-term, while defending the firm’s approach to how it pays its supply chain.
Mr Howson said the firm is pleased with its 2012 results, after posting a 13 per cent drop in revenue from £5.1 billion to £4.4bn as the company shrank its UK construction business and saw revenue fall in the Middle East, where it is targeting a £1bn turnover. Underlying pre-tax profit for the group was down 4 per cent to £232.4 million.
In construction, covering UK and Canada, Carillion reported an industry-busting 5.6 per cent operating margin, up from 3.1 per cent a year earlier, which it put down to the resizing and selective bidding, lower bid costs and “a rigorous focus on cost management”.
Construction revenue was down 31 per cent from £1.84bn to £1.28bn, with underlying profit up from £57.9m to £72.3m.
On the 5.6 per cent margin, Mr Howson said: “Everybody talks about being selective, but I think it was the action we took in 2010 to manage down the scale of the business.”
He said: “We have got a slimmer, leaner and more effective overhead in that business.”
“But I think it’s that proactive rescaling which means the better quality margins from our long-term customers. We have been able to remain at strong margins [and] not be diluted by numerous low margins contracts over the past few years.”
He said the 2012 margin will reduce over the next two or three years, but still expects to see it “in the high threes, maybe beginning with a four”.
Carillion has come under fire from subcontractors in the past for the time it takes to pay its supply chain.
Mr Howson said: “We negotiate terms on an individual basis with suppliers, like any commercial organisation we try to get the best terms that we can.”
Carillion and Balfour Beatty are also part of a goverment-backed invoice factoring scheme, where banks can pay the supply chain an immediate advance at an interest rate. The invoice will ultimately be paid by the large contractor.
Mr Howson rejected the idea that the firm’s invoice factoring could be putting any financial pressure on its supply chain, saying that Carillion foots the bill, and saying the scheme gives the supply chain the chance to reduce payment terms.
“Carillion is funding the factoring back to the payment period agreed,” he said.
“It’s a very fair scheme operated by the government, and we have been doing it for over two years now, and I think it’s a win-win deal for suppliers, for customers and contractors like Carillion.”
He added he “does not really see an issue” with how long clients are taking to pay.
Asked whether he thinks the industry is facing more restructuring, Mr Howson said firms must always “be on your toes”.
“In this type of economic climate you have to be constantly thinking about doing things differently; whether you have got the right supply chain partners, whether you are being innovative enough with design solutions.
“You have to be on your toes in all these areas.”
He also said the £700m Oxfordshire council integrated facilities and property management contract is the “first in the new generation of contracts” which will see local authorities bundle facilities management and construction.
His company is “pursuing quite a number of opportunities” following the Oxfordshire council win, he added.
Revenue fell in the Middle East by 14 per cent to £473m, including joint ventures.
Mr Howson said the Middle East market was “a bit frustrating” in 2012, but said he is not expecting that to impact the plans to hit £1bn by 2015.
The group’s total order book, plus probable orders, was £18.1bn.