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Edited Transcript of GFRD.L earnings conference call or presentation 11-Sep-19 8:30am GMT

Full Year 2019 Galliford Try PLC Earnings Presentation

London Sep 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Galliford Try PLC earnings conference call or presentation Wednesday, September 11, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew Duxbury

Galliford Try plc - Group Finance Director & Director

* Andrew Hammond

Galliford Try plc - CEO of Linden Homes & Member of the Executive Board

* Bill Hocking

Galliford Try plc - CEO of Construction & Investments and Member of Executive Board

* Graham Prothero

Galliford Try plc - CEO, Member of Executive Board & Executive Director

* Stephen Teagle

Galliford Try plc - CEO of Partnerships & Regeneration and Member of Executive Board

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Conference Call Participants

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* Aynsley Lammin

Canaccord Genuity Corp., Research Division - Analyst

* Charlie Campbell

Liberum Capital Limited, Research Division - Housebuilding Analyst

* Christen David Hjorth

Numis Securities Limited, Research Division - Analyst

* Clyde Lewis

Peel Hunt LLP, Research Division - Analyst

* Gavin Jago

Peel Hunt LLP, Research Division - Analyst

* John Fraser

HSBC, Research Division - Global Equity Head of Building Materials and European Building Materials Analyst

* Stephen Joseph Rawlinson

Edison Investment Research Limited - Analyst

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Presentation

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [1]

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So I'm obviously delighted to be welcoming you for the first time as Chief Executive of Galliford Try. And of course, very pleased to welcome my colleague, Andrew Duxbury, for his first results presentation as Group Finance Director.

This is the agenda for the morning. I will naturally say a few -- give a few thoughts on yesterday's announcement. I'll then give you the headlines of the group performance for the year. Andrew will step up and take you through the detail of the numbers. And then I'll come back and talk about some of the progress we've been making against our strategic objectives on the operating review and then give you a few words on the outlook, and of course, naturally leave plenty of time for your questions at the end.

So yes, turning then first to the announcement that we made yesterday. And I have to say, I'm naturally really pleased with the opportunity in the combination and let me try to explain why. We've obviously got 3 strong businesses in Galliford Try, all making good progress against the strategic targets that we set out for them some 3 years ago, and I'll talk a little bit about that as we go through this morning.

We've obviously also got a strong balance sheet and we don't need to change that. But as you've -- most of you heard me say in the past, as the business grows, and importantly, as the housebuilding and development businesses grow disproportionately to the Construction business so the logic of the hybrid inevitably diminishes. And therefore, I think the potential transaction really does offer an opportunity to create 2 strategically focused businesses. And hence, a really exciting opportunity to strengthen and advance all 3 of our businesses.

The combination clearly creates a fantastic opportunity and a strong platform for both the housebuilding businesses, Linden Homes and Galliford Try Partnerships, and an opportunity to create a unique and sector-leading business in the combined housebuilding businesses. And Construction will remain a well-capitalized stand-alone construction and investments group. And therefore, as I say, a bright future for that business as well.

But clearly, significant work still to be done before we can bring all of that to fruition but I'm convinced that we'll succeed in that and that the conclusion of that will really generate significant value for our shareholders and benefits for all of our wider stakeholders.

So moving on then to the group performance for the year to 30th of June 2019. Very nice picture there and the reason for choosing that picture is those are -- it's a development in South Oxfordshire, in the village of Cholsey. But those are Linden collection units, which are obviously very important part of Linden's strategic future. I'm really pleased that we've got them on site and selling now. They represent some 38% of our completions in the year to June. The sales teams really like them and they are selling well and we're excited for the future of that.

So the headlines for the group performance. Basically, exactly as we guided in July. So there's very little new news, as I said, performance in line with our guidance. But we have achieved a lot in the group during the year. I was really pleased that the Board's strong succession planning facilitated a smooth transition not only in my role but also in the opportunity to promote Andrew into the Group FD role. It's a role he's brilliantly qualified to fulfill.

We've also refocused and restructured our leadership in all 3 of our operating businesses and I will spend a few moments on that in a minute. We made excellent further progress in transforming Linden into a proper volume housebuilder and we've been talking to you about this now for a couple of years. Those operational improvements continued and we have managed to deliver a small margin improvement even in tougher time, even in the slightly tougher conditions and of the lower turnover, which we'll talk about.

We saw continuing excellent growth in Partnerships, increasing our geographic spread as intended and growing both revenues and margins. And as you're aware as we talked about earlier in the year, we've successfully reorganized Construction to focus that business on its core skills and expertise.

Turning then to the financials. And I'd characterize this as a good performance in a more difficult year. We are, as you're aware, still managing through the resolution of some significant inherited problem contracts. And those impact not only our profit but also the cash that we have to deploy in our development businesses. It means that we have to be very disciplined in deploying that capital.

As you saw at the half year, revenues were lower in Construction and in Linden, but strongly up in Partnerships. Importantly, pre-exceptional profit before tax was in line with our expectations at GBP 155.5 million. In Linden and Partnerships, total new homes delivered by those businesses in the year were up by 5% at over 6,500 new homes. The order book of GBP 4.5 billion is down a bit on the prior year, that's mostly in Construction. And in the contracting order book in Partnerships, still at a very good level for us and nothing to read into that.

Very importantly, average net debt remained really well controlled and came in at GBP 186 million across the year, which is exactly in line with the guidance we gave a year ago. And I'm pleased that we're announcing a final dividend of 35p, which makes a full year dividend of 58p, which is in line with our guidance of 2x earnings cover and we have set that at the -- based that on pre-exceptional earnings.

So at that point, I will hand over to Andrew.

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [2]

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Thank you, Graham. Good morning, everybody. So I will just now spend some more time going through the financial results in a bit more detail. So I'm pleased to report pre-exceptional profits in line with our previous guidance and that each of our 3 businesses has delivered a strong and robust performance during the year.

So in particular, Linden Homes has maintained its strong margin. Partnerships has continued its impressive growth rate. And although the Construction result has been impacted by write-downs, the underlying business is performing well and I'll come on to that shortly.

Revenue is down 9%, which we'll cover on the next slide. But pre-exceptional profit of GBP 155.5 million is in line with the guidance that we gave in July. Exceptional items are about GBP 9 million higher than previously guided and this is a result of an accounting policy change, which I'll come onto in some detail in a moment. And that means our statutory profit before tax, GBP 104.7 million, leading to an earnings per share of 115.7p.

And the earnings per share obviously is lower because of the lower profit, but also because of the increased number of shares following the 2018 rights issue, which is right at the back-end of the previous financial year. And this results, as Graham said, a dividend per share of 58p based on 2x pre-exceptional earnings.

And although the group pre-exceptional return on the assets is lower, that's partly impacted by the Construction write-downs that have been taken through operating profit. And if you add those back, the return on assets is back about 25%, which is exactly in line with the target range that we've given.

So looking at the results in a bit more detail by division. So there is cost inflation in the system, as you know, but pleasingly, actions in Linden over the last couple of years have meant that we've been able to maintain, in fact, slightly increase our operating margin to 19.6%.

And you'll see that Linden has reduced turnover by about 13% year-on-year and that really is a couple of things. So first is a 4% reduction in net units and there's also 9% reduction in the average selling price within the Linden numbers. So the reduction in units reflects the lower average sales outlets that we had during the last financial year. And the ASP reduction includes a 4% fall in private ASP and we've been talking for a while about bringing our private ASP down. That's in line with our change of product mix, change in geographic mix as well as the Linden business. And there's also a higher proportion of affordable units included in that this year. And full details of the unit mix is all set out in appendix 2.4.

But of course, even with the margin staying at 19.6%, the lower revenue means a reduction in the absolute level of profit to GBP 160.5 million, but still a very good return for Linden.

Partnerships. Their growth continues to be impressive, particularly in the mixed tenure business. So Partnerships revenue is up 31%, but the mixed tenure revenue is up 55% to GBP 192 million. And that mix change has helped drive the margin up to 5.6% and that is both an increase in gross margin and improved overhead leverage. And Partnerships also continues to have excellent return on the assets and their use of capital is very efficient. Their return on assets in the last year was over 50%.

Construction. You can see that revenue has reduced and that's partly as we completed the Aberdeen project, which contributed over GBP 100 million to last -- to the previous year's turnover and also as we start to move away from their top line growth targets. And that GBP 1.4 billion split has GBP 859 million in Building and GBP 527 million in Infrastructure. Infrastructure, of course, includes the water and highways businesses.

And although it is disappointing to post an operating loss, the majority of our business units in Construction performed well. And if you add back the losses that we announced in the spring, then Construction reported about a 1.1% operating profit. So you can start to see that the platform for the future in that business and that gives us confidence for the future.

You'll see on that PFI investments -- or PPP Investments. Small profit, GBP 4.5 million, that includes about GBP 7 million profits from the sale of investments. And finally, just want to touch on the group costs on that slide. You'll see they are unusually low this year and there are 2 elements there. There is about a GBP 4 million reduction in share scheme and bonus costs and there's also a GBP 3 million one-off saving in there. So that number is unusually low in group costs.

On the charts, you can see the margin progression in a bit more detail and I'll particularly draw your attention to the improved gross margin in both Linden and in Partnerships and also that improved overhead leverage in Partnerships, which I mentioned earlier. You'll see a small increase in the overhead percentage in Linden. That is just a function of reduced turnover. That actual overhead spend in Linden was reduced again in the year. And actually 4.4%, we're very happy that that's a sensible range for their overhead percentage as well.

So as you all know, there's a couple of new accounting standards in place this year and this is quite complex. I will just take a moment to take you through the impact. So following the introduction of IFRS 15, accounting for downstream third-party claims in Construction is -- has been an evolving area across the sector. And consistent with other companies in the sector, we have taken the opportunity to tighten our accounting policy and so we've made an opening reserves adjustment accordingly.

And this adjustment has also resulted in an additional exceptional item related to Aberdeen in the year. But it's important to stress, this is not any additional cost. This is not an additional cash and also this does not change our view of the recoverability of those assets. This is about a timing and an accounting policy change.

Similarly, we've introduced IFRS 9 in the year and that's led to a fairly esoteric debate about expected credit losses. And what the standard has done is to force us to make an adjustment based on an estimate of creditworthiness of claims that we have in the business. And again, we've taken that as an opening adjustment with a small movement in the year as well.

Again, to stress, this doesn't change our overall view of the strength of our claims in the business. This is about a -- implementing a standard and a new method for assessing credit. So also worth noting, IFRS 9 has led to a small uplift in the value of our PFI investments on the balance sheet by about GBP 5 million.

IFRS 16, which is a new leasing standard, is one which you're probably hearing a lot about at the moment. But just to remind you, this is not effective for us until our December 2019 half year numbers, but we have given some advanced guidance on that in the appendix, appendix 1.5, of what the impact is likely to be.

And then finally on this slide, I've included a breakdown of our exceptional costs. So the GBP 41 million is largely in line with our previous announcement in July and the additional GBP 9 million comes from the accounting policy changes in IFRS 15 and IFRS 9, as I've just described. I suspect that's enough technical accounting talk for one morning, but if -- it is quite complex. If you want to have more details on that, I suggest you pick up with either me or with [Stu Aldman] kind of over coffee after the presentation. More than happy to do that.

Just turning to the balance sheet. So maintaining a strong balance sheet is a absolute priority for us. You can see on this slide, there is a small reduction in tangible net assets by GBP 21 million, but that includes the impact of the GBP 46 million opening adjustment, which I've just referred to.

Our pension schemes remain well funded. They have a net surplus of GBP 7 million at the end of June on an accounting basis. And at year-end, net debt of GBP 56 million represents gearing of 8%, 7.5%. So again, well within our targets. And our average debt of GBP 186 million compares to GBP 227 million in the previous year and compares to GBP 550 million of committed debt facilities. So we're operating well within our facilities.

On the second table, you can see that our net investment in housebuilding and that includes our land, our WIP, net of land creditors has increased by 11% up to GBP 991 million. And that movement includes the acquisition of a former joint venture site in the southwest and it also includes general increases in the investment into both Linden and Partnerships. And there is also in there the continuing benefit of being able to buy land on deferred payment terms.

And of course, other working capital continues to be inflated by both Aberdeen on the 3 contracts with a single client that we've referred to previously. And again, in the appendices, there is additional analysis both on working capital and on land creditors.

So finally, the chart shows the movement in our year-end cash position. I'll just cover to the key movements I just want to draw out. So the cash at the end of June '18 benefits from the fact that we had just received the proceeds of the 2018 rights issue. That was largely dispersed during the first half of the year on Aberdeen and then into the investment in housebuilding, which I've just referred to. And I split on the screen the movement into Aberdeen into housebuilding and other working capital so that you can see the impact of that clearly.

Of course, cash management remains an absolute priority and a key focus for us in the new financial year as well.

And with that, I'll hand back to Graham.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [3]

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Many thanks, Andrew. This is an excellent shot of a project in our highways business. It's actually a new junction on the M49 at Avonmouth. It's a GBP 27 million project for Highways England. And importantly, and the reason I chose it, it's -- because it's in their collaborative development framework and it's a really good example of the -- what we've talked around -- about around disciplined bidding and more risk-adverse model in our infrastructure projects. It's a target cost project and we're very happy with the way that, that is working out.

So here they are, the boy band. As I am really pleased to be able to say that the average age of the executive continues to come down and our diversity has improved. We have now no less than 2 beards on the executive. As I've said, we have restructured the leadership in each of our businesses during the year and just to talk about that for a moment.

So in March, I was really pleased to invite Andrew Hammond to take up with the role of Chief Executive of Linden Homes and that's very much about wanting to move to a structure whereby the executive has one exec responsible for that business rather than the sort of triumvirate that we had before and really recognizes the fantastic progress that Andrew has driven in that business over the last couple of years in rationalizing our process and standardizing our product.

In Partnerships, Stephen has made an important change at the -- in his executive level, moving to a model from where we had one single MD for the whole country. As you know, we're expanding rapidly and so we now have 3 regional managing directors, each supported by a regional finance director, and that really is about that important principle of keeping tight control as that business grows fast in both size and complexity.

And Bill, as we've talked about, has led an important restructure in the Construction business. We talked about this back in May. But now we have a strengthened and tightened management structure there. The whole of building now reports into Ian Jubb, who previously ran the North & Scotland, and then we have a managing director for highways and a managing director for water, both reporting directly into Bill. And it's all about, as I say, keeping that tight, keeping the discipline and control.

All the guys are here this morning. I'm hoping they're going to help me with your questions in a few minutes. And of course, they'll be happy to have a chat with you over coffee afterwards if you got any more specific questions.

So turning then to the operating review. Linden Homes revenues, as Andrew said, were lower than the prior year. That's driven mainly by 3 factors. Outlets were down some 6%. That was, as I said -- that dip, if you like, is as a result of the discipline that we've shown in allocating working capital. I'm pleased to say that in the current year, we expect that to pick up and we're looking at, I think, 87 as our average outlets for the current year.

Average selling price -- private average selling price, as Andrew has referred to, was down by 4% and that represents success in our repositioning of Linden, more to focus away from Central London and also from larger units nationally to much more focus on the midrange family housing.

And the third area, slightly subjective, but we did hold back from discounting through the year when possibly others have pushed into that. Possibly that's cost us a bit of volume. Of course, what that has done is continue to protect our margin. And the result of that is that even in slightly cooler markets and with the lower revenue, our margin has improved slightly during the year. And that reflects not only firm pricing, but also the continuing benefit of that process rationalization that we've been so hotly focused on over the last couple of years.

And all other things being equal, there should be further margin improvement to come as we roll out the collection. As I said, just 38% of our units -- of our unit completions came from the Linden Collection in this year. But Andrew showed you the cost benefits of the collection range when we had -- those of you that were at the Capital Markets Day back in October.

And as I say, all other things being equal, as we realize our ambition to get the collection up to over 80% of Linden's output, we should see further margin benefit arising from that.

Return on net assets was strong at 26% and the sales in hand -- the value is -- the number of units was roughly in line. The value at GBP 474 million is still at a good level, again, slightly lower and that principally is reflecting a slightly higher proportion of affordable and a lower private average selling price in that number.

And very importantly, the final point is that we have continued to improve our underlying quality scores and that's clearly a really important, an increasingly important metric for us. We're still a 4-star housebuilder today but we're much -- the underlying score has much improved and we do now have several of our business units operating at a good 5 star, which is excellent to see.

The land market continues to be favorable. We are able to buy all of the land that we need at sensible margins. We acquired some 3,800 plots during the year, such that the landbank today stands at 12,600 plots and that's exactly in line with our target level of 3 to 4 years' supply.

The gross margin in the landbank remains robust, as you can see, at 24.4%, and the average selling price in the landbank of GBP 303,000 is at a good level for where we want the business to be. Also, we increased the strategic land during the period up to 2,850 acres.

Turning then to Partnerships & Regeneration, and it really was an outstanding performance again from that business with excellent progress against our strategic targets. As Andrew's already alluded to, contracting revenues were up by 23%. Mixed-tenure revenues were up by some 55%.

We also increased the -- improved the operating margin up to 5.6% and the combined effect of all of that is an improvement in our operating profit up to just under GBP 35 million, which is an improvement of almost 50% on the figure that we achieved in the prior year. Importantly as well, we're also seeing a strong improvement in customer service scores in Partnerships, now operating at a good 4-star level and again with a couple of units actually achieving 5 star, which is superb.

The sales in hand contracting is down a little bit at GBP 1 billion as that really just reflects where we are on -- in London. Nothing to it, as I say, nothing alarming at all. It's actually at a superb level but 1 or 2 large contracts can change that quite dramatically. But great to see that mixed tenure, of course, which is a really important part of the business, is in -- is up at over GBP 200 million. And that's -- we're seeing some really good progress on the type of work that we're winning. We had significant land wins with both local authorities and Homes England. I would single out in March, we were delighted to announce that we were -- we won the first project under Homes England's new initiative to grant building leases, which all focused around building at pace. And we were delighted to acquire some 800 units across 4 sites in that particular transaction.

And we're working now with over 60 strategic partners, both local authorities and housing associations. And again, in July, it's a good example, we were delighted to announce that we were -- we've been appointed preferred bidder on the borrower of Enfield's impressive regeneration scheme at Meridian Water for the first 725 units on that scheme.

We're making excellent progress with our geographic expansion plans. We now have 10 business units, as I said earlier, structured into 3 regions. And in July, we were delighted to complete the acquisition of Strategic Team Group, now Galliford Try Partnerships Yorkshire. And that really is quite similar to the acquisition that you'll recall 2 years ago of Drew Smith, which has proved a superb combination for our business, and that's all about -- we've identified Yorkshire as an area where we wanted to expand. We were then introduced to STG and what's that done is accelerated our ambitions instead of having to go out with one man and a flag and a group of huskies. We're actually there from the 1st of July operating as a mature platform. Really pleased with that.

And that's -- there are now over 1,000 people working in the Partnerships business. It's a really vibrant culture and a really strong sense of purpose to deliver excellence for all of our customers and clients. And we've got a continuing strong pipeline of opportunities across all of our regions and in all tenures. And I think I can confidently claim that this is a sector-leading business.

Turning to Construction. As we've said, revenue was lower. There were 3 principal reasons for that in the period and I think the biggest single item was that obviously we completed the Aberdeen Road in the period, praise the Lord. And that in itself reduced turnover year-on-year by about GBP 100 million.

In addition, we have talked over the last couple of years about being more disciplined in our bidding and in making sure that we're delivering -- absolutely focusing our business units and our MDs on quality -- on the quality of the work and the bottom line rather than just sheer quantum in the top line and some are -- and that undoubtedly brings back our turnover in a quite deliberate fashion.

And also I think the third factor in there, you are seeing some uncertainty, some hesitancy as a result of the B word. We've talked about this probably since just before the referendum and certainly that hasn't let up. But it's at a -- GBP 1.4 billion is at a perfectly good level for this business.

The underlying -- the -- sorry, the operating loss does include some GBP 33 million, as Andrew said, in respect of previously announced contract write-downs following the strategic review that we talked about earlier in the year. And I make that point only to stress that the underlying business is indeed showing good progress on both margins and cash.

During the year, we did close out several of the older legacy projects. But as we've talked about in a statement, we are still pursuing the recovery of our significant claims, both on AWPR and on the 3 contracts for a single client that Andrew mentioned just now.

The order book at GBP 2.9 billion is at a good level for us, slightly lower than the prior year but it does give us visibility of some 89% of our planned revenue for 2020. There's a couple of interesting dynamics going on in that -- in the analysis of the order book as you can see. So -- and I think the thing I would point you there is the 17% proportion of private commercial clients, which actually, if I'm honest, surprised me in terms of because of the strong sense that we've conveyed that it's the private sector that has actually seen more hesitancy as developer clients have been less willing to commit to projects than the public sector.

But actually, what you can see here is that we are still maintaining a good level of activity and we're actually mining quite a rich seam in 2 areas in particular, one is private rented construction or construction of blocks for private rented developers and then student accommodation. And those 2 have actually held up the private commercial work.

And then you can see unusually for Galliford Try, the regulated sector down at just 4%. That really reflects 2 factors, the biggest one being the water asset management plans are coming -- were coming to the end of the current cycle. And until you pick up the awards under the new cycle, of course, your order book naturally decreases. And there's also quite a significant bow wave of highways work on the bench as it were. Can you have a bow wave on the bench? Nevermind.

And I would expect that in 6 months' time, when we show you the order book, it will have a more normal proportion for Galliford Try. The restructure, as I said, was successfully implemented. We're still betting that down. But I'm very happy with the structure and size of the business and now the focus of that business, the underlying, we're absolutely focusing on the underlying business which provides the real platform for the future delivery from this business focused on sectors with an appropriate profile of profit, cash and growth and really exploiting our core areas of strength, our excellent regional building business and our strengths in highways and in water.

So turning then to the outlook. The -- I think the housing market continues to surprise me. We are against the backdrop of almost unprecedented political chaos and uncertainty, but that -- the housing market does continue to be robust. Visitor levels are good. That market obviously continues to be supported by Help to Buy, and indeed, by very strong and almost increasingly competitive mortgage market.

Linden is seeing an improving sales rate after the traditionally quieter months of the summer. And in Partnerships, we're seeing very strong demand from registered providers and local authorities but also excellent levels of private sales as well.

As I said, the restructuring, the reorganization in Construction is settling down and the business is enjoying a steady level of demand in particular from government and regulated sectors. And all the businesses, I think, are in good shape. They're making good progress against their strategy. We have a strong senior team, focused businesses and all well placed to take advantage of the opportunities that they're seeing.

And at that point, we will be pleased to open up for your questions.

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Questions and Answers

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [1]

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I will just grab my pen. Who's going to get us going? Christen has got a question.

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Christen David Hjorth, Numis Securities Limited, Research Division - Analyst [2]

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Christen Hjorth from Numis. Just a few for me. First of all, on Linden and margins, you pointed to all else being equal in terms of margins from here in terms of the new format, but actually looking at house price inflation expectations and build cost. Can you provide a bit of color on perhaps the direction of EBIT margins in Linden as we go forward to next year?

And then also just sticking with Linden as well. You've pointed to maybe some outlet growth this year. I do note that over recent years, there's been probably a bit of a struggle to get outlets up towards expectations. So what sort of comfort can you give there?

And then just a final one on Partnerships. Clearly, a year of exceptionally strong growth this year. To what degree can we look at that as actually a year of consolidation to step up again? Or can that growth level continue going forward?

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [3]

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Okay. I might just ask Andrew and Stephen for some thoughts as well. But I'll just -- I'll give you the headline answers. So yes, in terms of where we -- where the Linden EBIT margin can go, I would say that we would -- and I do stress all other things being equal, we would be looking at pushing through that 20% barrier. But I do stress that you're asking me, as I say, at a time of unprecedented uncertainty, so that's -- that is very much all other things being equal. Andrew, I don't know if that's something you would agree with or you're going to beat me up for saying 20% later.

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [4]

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[Because I've been nerve-racked].

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [5]

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No pressure.

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [6]

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So yes, we've talked about the embedded margin in the landbank before and the increasing hurdle rates that we've had in recent years. The benefit of that obviously is still to manifest over the period of production as those sites come into fruition so that lower-margin sites disappear. But also as Graham has suggested earlier in the transition towards more collection as part of our -- I put over that planned period also enhanced that margin and it's actually offsetting the inflationary pressures that we're seeing at the moment.

So broadly, broadly neutral against an inflation number that we were [going to convey] in terms of materials in particular around about 4%. So that's been negated by those operational savings that we're enjoying from the increase in production from the collection. So our trajectory should go forward but it is against the backdrop of continuing sales at the rate that they are, which has Graham has alluded to. It's a big assumption to make against a backdrop of political uncertainty. So you have to watch that carefully.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [7]

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Just on the outlets, Christen, there is a slide in the appendix that shows our outlet growth. Of course, that [ate up] our numbers and we got very good visibility, of which I guided. And in Partnerships, well, year of consolidation. I -- clearly, we're -- I've talked to you about the demand. We have just made the acquisition of Galliford Try Partnerships Yorkshire. So I mean, we're looking for growth to continue. We're looking for certainly revenue growth to continue. And that was a huge leap in margin this year, up from 5% to 5.6%. So I would -- I think it'd be significant -- it would be possibly a bit much to expect a similar leap in the current year. But I think that, as I say, our expectation that we would not be looking to stand still. Stephen, I don't know if you want to add to that.

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Stephen Teagle, Galliford Try plc - CEO of Partnerships & Regeneration and Member of Executive Board [8]

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So just really on Graham's point, absolutely sustained growth in the Partnership business for 3 reasons. As Graham said, firstly, we'll have a full year effect of Strategic Team Group in Yorkshire. Secondly, we finished the year in Partnerships with about 21 outlets, mixed tenure. We expect that to -- trajectory to over 30 by the end of the year. And we've also got a very positive figure supplementing that GBP 1 billion in the forward order book. And mentioned in the text of the announcement is the fact that we have work on the bench in excess of GBP 1 billion as well. Our work on the bench comprises work in our landbank, but also schemes where we're a preferred bidder but have not yet summoned the contracts. So we've got very good forward visibility that gives us the confidence that we can sustain that growth.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [9]

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Thanks, Stephen. Aynsley?

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Aynsley Lammin, Canaccord Genuity Corp., Research Division - Analyst [10]

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Aynsley Lammin from Canaccord. Just -- I think it's actually 4, but 2 on the balance sheet. Wondered if you could just give some guidance on average net debt for FY 2020. I think it was running around GBP 250 million in the second half. Is that kind of annualized run rate we should look at? And then linked into that, just the land creditors expectations or guidance for FY 2020? I think it was GBP 217 million FY '19.

And thirdly, on the kind of targets you've set out for Construction of around 2% operating margin. I mean given they were obviously set before the Bovis deal has been formalized, if the Bovis deal goes through, more executive management time or focus business, better balance sheet, is that 2% margin looking quite conservative in your view?

And then lastly, just on the claims, probably won't give a number, but any kind of guidance you might be willing to give there? What you could expect to come through or just has your confidence changed as to success of meeting those claims -- getting those claims?

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [11]

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So what I'll do is deal with the 2 questions on Construction. Maybe get Bill to comment as well and then Andrew can pick up the balance sheet point. So obviously, margin, Bill has assured me we'll be at 5% by -- no, I mean, it will be great. What we're looking for us is focus and stability in that business and 2%, it should be the outcome of that. Now quite clearly, the business is targeting higher than that. That's what you'd expect. And we've got some business units, Bill, that's already performing at above that 2% level. But it would be mad where we are today for us to be saying we're going to be planning to achieve more. But if we have a business that's earning revenue of GBP 1.3 billion to GBP 1.5 billion and a steady 2% and perhaps a bit over that, we -- that would be a great outturn for us.

And on the claims, no. I mean we stated the position as it is. These things, as I mentioned, it can take a long time to resolve between the parties. So I don't think we're reporting anything other than -- well, on -- so on AWPR, we continue in intensive negotiation with our client. On the other one, the 3 contracts with a single client, I suppose since we last stood here, we've made the significant step of actually filing that into a formal claim, which the number on that claim is obviously significantly higher than we have in the balance sheet. Bill, I don't know if there's anything you'd -- you want to add. Don't feel you have to but ...

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Bill Hocking, Galliford Try plc - CEO of Construction & Investments and Member of Executive Board [12]

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No. I agree with you all, Graham, 2% is a decent aspiration. I would personally be disappointed if we don't do better.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [13]

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There you go, there you go. So it is 5% then annually. Andrew, do you want to pick out on net debt and land creditors?

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [14]

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I will do. So just picking up net debt first. So the GBP 186 million average was for the full 12 months to June. Actually, if you look at that in the second half year, which is less impacted by the rights issue timing and the Aberdeen spending, the average debt in the second half was just shy of GBP 250 million. And for the new financial year, I see that in the kind of mid- to high 200s again. So I think the second half year is more illustrative than the full financial year from last year. And then we should start to see that coming down the following year.

And in terms of land creditors, I mean actually as I said, we can still buy land with good deferred payment terms, which is really an important point. I think the land creditors as at the end of June is relatively high, which is a mixture of a couple of acquisitions late in the financial year and also some payments which were going out in the first quarter of the new financial year. So I would expect that to come down through the first half year. There is a maturity schedule in the appendices. It will be split by financial year and you can see how much of that unwinds in the first half. So I would expect that to come down over the course of the next 6 months.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [15]

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Clyde?

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [16]

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Clyde Lewis at Peel Hunt. I'm not quite sure how many I've got, 4, maybe 6. But I'll rattle through them. Can I just confirm the number of operating divisions in Linden is still 10?

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [17]

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Yes.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [18]

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Central costs, Andrew, you very kindly split out GBP 5 million of the difference, but there was a GBP 10 million difference. Can you help us with the other GBP 5 million and...

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [19]

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I actually said GBP 7 million, Clyde.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [20]

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Did you? Sorry. Maybe I missed the numbers. Apologies.

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [21]

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So I said 4 of the movement was around share schemes, bonus costs and there's also GBP 3 million of one-off savings in the year. So if you put that back in, then you're up to GBP 14 million, which is more -- closer to the normal run rate.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [22]

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That's -- okay. Okay. Great. In terms of Linden, could you give us some percentages for what [part x] and Help to Buy was last year?

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [23]

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Yes. [Part x], I think, was running at about 19%, which is very, very good level. And as we've said before, that seems to be a good tool for this market whereby the liquidity in the secondhand market is not great. So the key for us is to make sure that we're not sitting on somebody else's secondhand stock for long periods and that we're getting -- we're buying in at good valuations. And actually, we monitor that very carefully, working very well for us as a tool. We're finding no issue with moving the properties on at the level of which we're effectively buying them in. So as I say, 19%, it's been a great selling tool for us and it's a net no cost. And Help to Buy, slightly lower this year, but it's still running at just under 1/3.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [24]

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Okay. Of total completions or private completions?

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [25]

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Private completions, I think, it is.

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [26]

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That's private.

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Clyde Lewis, Peel Hunt LLP, Research Division - Analyst [27]

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Private. Okay. Can you give us a split -- the GBP 33 million of, I mean, what I'm calling exceptional, you're calling it sort of write-downs in the Construction division. Can you give us a split between the Building and Infrastructure parts or some idea of roughly how much was what?

And the other one was on the PPP portfolio maturity. As we look at that from our side, should we sort of be expecting again a similar sort of sales rate in terms of sort of assets from that business over the next couple of years?

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [28]

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Do you want me to take those or you?

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [29]

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Yes. Well, I mean, on PPP, the answer is yes. We will continue to sell. Don't forget there's now a single very large investment in there, which is the Aberdeen road. And this is a piece of good news on the Aberdeen road. They are few and far in between but actually that is a good investment for us and we would expect that, that will come through. I'm not going to commit Mark to when he brings that to market. But undoubtedly, that is worth more than the GBP 20 million than we've invested in it and will wait for the right moment. So you've got a lumpy item to come through there, but the rest of the portfolio will continue to behave as it has.

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [30]

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Yes. In terms of the write-down that we announced in the spring, I mean, so the element which is through operator is both Building and Infrastructure. There is some legacy projects in there, which are more on the Infrastructure side and we talked in the spring about a particular region which had been underperforming, which is in the Building business. So that's the split across both Building and Infrastructure.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [31]

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John? Yes. Thanks, Clyde.

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John Fraser, HSBC, Research Division - Global Equity Head of Building Materials and European Building Materials Analyst [32]

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John Fraser-Andrews, HSBC. So my first question is a follow-up on Construction. I think the legacy contracts were down to a handful. Can we have an update on that? And reassurance, if you can give one, on the core contracting areas. How much private sector building is in that building number, which is the bigger part is education, sort of big parts and that's ongoing and that provides some confidence about the revenues coming through that business? And also roads, my reading is that there's a lot of roadwork out there so perhaps you could comment on that.

Second question is to Andrew. The net debt guidance -- or the average debt guidance you've just given, I'm assuming you're not building any recoveries from the receivables in that but perhaps you could clarify.

And then a final question on the housing market from peers. We've had a mixed report on build costs. Here, the number you just gave, the 4%, but we had a sort of quite optimistic outlook yesterday, had a real mixture. So perhaps you could comment on that.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [33]

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Yes. So let me take the first and the last. I'll ask Bill to sort of give you a bit of a picture of the demand and the revenues in contracting. And obviously, Andrew will touch on the -- well, actually, the answer is no on the net debt. There's nothing. That was fairly simple. Andrew always gets the easy ones.

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [34]

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There's nothing in the net debt for next year for those claims.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [35]

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So the -- yes, Construction legacy. So we're pretty much off-site right across the [P thing.] There's a couple of odds and sods of painting bridges and things. So when I talk now about the resolution, John, it's very much the negotiation of the final settlement. Some of those are upstream with most -- mainly upstream with our clients and some are downstream and I'll stop there because otherwise I'll be back into Andrew's horrendous complex IFRS 15 explanation, which I'm sure he'll be delighted to talk to you about. But so it is -- it actually -- this is sitting in rooms and talking about settling claims rather than finishing contracts, if that makes sense. We have closed out, I can think immediately, of 3 difficult ones that we closed out during the year. So I'm going to say we're probably down builds of something like 5, 6, 7 that we -- you got the 2 bigger ones that we've actually mentioned to you and then, as I say, 3, 4 others that -- where we're still to achieve a final resolution but that's not going to trouble the score or a period in an exceptional item.

The last, I'll just take the last one and then I'll let Bill talk about the construction demand. So yes, I mean we have -- the build cost, it is averaging out at that sort of 3.5% to 4% level. I think you're alluding to the comments Greg made yesterday about the subcontractor piece. And we are indeed seeing the same labor -- there has been a slight relaxation in the demand for labor and so we're not seeing quite the pressure on labor. But materials, as you're well aware and you're hearing from others, I mean, we could simply talk at length and some of them are behaving and we're just seeing normal inflation increases. And then you've got some like bricks whereby constrained supply is causing disproportionate increases, very high increases, and that's what's averaging down to that level of 3.5% to 4%.

Bill, did you want to pick up the point about demand that John was asking?

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Bill Hocking, Galliford Try plc - CEO of Construction & Investments and Member of Executive Board [36]

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Well, in Building in the private sector, we continue to see good demand in PRS and student resi. The commercial building is a bit slow in London but steady away in the other parental cities. In public sector building, we've got x in order backlog in education, in defense, in health and an increasing building order backlog in rail, in aviation or building adjacent to rail and aviation, so to speak. And in roads, you've got a great position on the RDP, the regional development framework. We've been allocated something like GBP 600 million worth of work. It's all done on an early contract involvement basis. So we get involved from day 1 with the designers and the clients. We design the scheme to be lean and efficient and easy to build, of course, then we go and build it on a total cost-reimbursable basis. So the risk profile is exactly what we're looking there. So that's a really good order backlog. And as Graham said in water, the dam cycles are just renewing and we're in the final stages of negotiations with 2 clients for 5-year renewals for 2 dams. So we're in a good state overall.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [37]

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Exactly. Just one supplementary. Are you involved in high speed, too?

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Bill Hocking, Galliford Try plc - CEO of Construction & Investments and Member of Executive Board [38]

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No.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [39]

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Stephen?

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Stephen Joseph Rawlinson, Edison Investment Research Limited - Analyst [40]

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All right, Stephen Rawlinson. Just one for me, if that's okay. In and around the Construction and Building business. The book-to-bill -- or the order book-to-bill ratio was -- you're putting new orders about half the level of your revenue last year according to the data here. Can you just help us a little bit? Was that in and around you wanting a much lower risk profile? Is the pipeline not quite where you'd like it to be? I mean I know we had a question about demand but we have had others talk about project delays and so forth.

And therefore actually really, I suppose the question is around the pipeline and the level of orders that you're anticipating and bidding for currently, which might get you to sustain a GBP 2.8 billion turnover Construction, Building and Infrastructure business with the 2% margins that you spoken of. And because there are suspicions in the market that perhaps actually the pipelines are, I think, getting weaker.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [41]

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Yes, I'll -- I mean, I'll let Bill comment as well. But -- so in some ways, Stephen, all of the above. When you said GBP 2.8 billion, we're not -- GBP 2.8 billion is the order book, not the...

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Stephen Joseph Rawlinson, Edison Investment Research Limited - Analyst [42]

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Sorry, the turnover?

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [43]

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Yes, I didn't want that being picked up and tapped out in the -- so -- but yes, so there is a hesitancy, I think, as I said in my presentation and we're seeing that in both the public markets and in the private markets. But as you can see, we are still achieving a good level of pipeline for ourselves. But we are overlaying on that and a very deliberate increased discipline in our own bidding. And so make no apologies for that. That's something that Bill has started to do since he's been here and we've absolutely revved that up following the strategic review we made earlier in the year. So it's a bit of market and it's a bit about us being both focused on the type of work and the sectors where we want to work and on the terms on which we'll take that work on. Bill, I don't know if you want to add to that.

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Bill Hocking, Galliford Try plc - CEO of Construction & Investments and Member of Executive Board [44]

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Yes, I agree, Graham. So it is GBP 1.4 billion of turnover. We've got 90% of this year's work in hand. And as we speak, we've got 54% of next year's work in hand, which is a good position from where we are now. So we do see some [drift off] to the right, but we've also got something like GBP 450 million of preferred bidder positions in Building at the moment and probably a similar number in Infrastructure. So that's in the pipeline and coming through. We've burned, on average, GBP 120 million a month we have to replace. That's the bottom line.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [45]

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Gavin?

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [46]

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Gavin Jago, Peel Hunt. There's a couple. The first one's just around on the material side again. Bricks, I just wonder if you could comment on your use of or appetite for use of concrete bricks within the group, whether it be Linden Partnerships or both, just given what's going on with the brick market.

And the second was more a general group one. Just comment around kind of staff retention over the last year in the different divisions and whether you've seen any visible changes in pickup in churn or otherwise.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [47]

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Yes. Well, I'm going to ask Mr. Hammond. The concrete bricks, I mean, just completely revolutionized from where they were in the appearance of those things. But let me let the expert give you a more precise view.

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Andrew Hammond, Galliford Try plc - CEO of Linden Homes & Member of the Executive Board [48]

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The answer is yes, we're already using them and have been for a number of years. We haven't gone quite as far as opening up our own brick factory yet, some others have. But it was around 10% of our production last year with a concrete product just for that very reason to secure your supply. So brick suppliers are spread over 3 clay manufacturers and 1 brick concrete manufacturer just for securing your supply rather than just have a solid agreement with one. But there is an undersupply of clay bricks, has been for a number of years. And they're reticent to reopen any plants or invest in any new ones. So they're certainly exploiting that position in the market in terms of inflationary increases.

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Gavin Jago, Peel Hunt LLP, Research Division - Analyst [49]

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And is the concrete product a particular type of product?

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Bill Hocking, Galliford Try plc - CEO of Construction & Investments and Member of Executive Board [50]

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No. I mean, as Graham has alluded to, the appearance of them these days, you struggle to tell the difference standing from the curb. So it's not a product that we use on lower-value prop as we use across the piece and depending on availability. Geography plays quite a part in what you pay for bricks as well in terms of how you are from the respective factory. So it would be more geography driven rather than product driven.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [51]

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Staff retention. Interesting question, Gavin. I think we've -- so our churn has improved or reduced over the last year. We're doing an awful lot, as you might expect, around engagement with our teams and engagement with our own culture. So different -- it's different in each of the 3 businesses. I would say you do see -- I mean, typically, you know what private housebuilding is like. There's always a lot of pressure in that market, but it helps that we've got clear strategic direction in Linden. And that business, it does feel good. So there is a sense -- there is a strong sense of loyalty within Linden. I think the same is true in Construction. Clearly, we had some disruption that, if you like, disruption we brought on ourselves by the review earlier this year. And -- but I think that we're through that. We are -- we are settled. We've been very clear with all of the businesses that -- what we are going to do going forward. And I think we've got to a pretty good stability there. And of course, you heard me speak earlier about the growth in Partnerships, whereby the churn there is noticeably lower than the other businesses just because of that buzz and excitement around that business. Charlie?

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Charlie Campbell, Liberum Capital Limited, Research Division - Housebuilding Analyst [52]

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It's Charlie Campbell at Liberum. There's sort of 3 questions but they're quite detailed and therefore probably quite quick, I think.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [53]

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Oh, good.

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Charlie Campbell, Liberum Capital Limited, Research Division - Housebuilding Analyst [54]

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Not very financial either, I should say, you'd be glad to hear. So on Linden, just wonder about the timing of site openings. Is that already happening now, and therefore, you've got confidence in that growth in sites? Or is that a bit more sort of in the second half, and therefore, there are risks around that?

Second question on Linden. Just percentage of social, obviously, quite high in the year just gone. But in the order book, I think 21% social. So how quickly does the social percent trend back down to 21% just thinking about our '20 forecast, I suppose?

And then the third question on head office cost. I suppose you're guiding us to sort of GBP 14 million ongoing. Should we think of that head office cost splitting roughly in line with turnover. So kind of half of it is Construction, half of it is housebuilding broadly. Is that the right way to think about that head office cost?

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [55]

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So I'll ask Andrew Duxbury to give you a bit of color on the head office split and I'll ask Andrew Hammond to talk to you about site -- timing of site openings, but that has been a hot topic, as I am well aware, from some of the more vigorous engagement with our business unit MDs that I witnessed. In terms of the social, Charlie, yes, that was slightly disproportionately higher last year or affordable, I should say, and that trends back down, in fact, in the current year to a more normal level.

Andrew, do you want to talk about site openings and the discipline around that?

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [56]

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Yes, always close to our hearts. We do focus an awful lot on that in terms of our forecast. And we're reasonably confident on the ones that are identified in the short term, in the next 12 months. We've got visibility over there. It is a topic we talk about very regularly. It's something that I bang on about relentlessly in the business units and there's a focus on it. I think there was a comment earlier about we tend to struggle to get the outlet numbers up. I think the drop that we saw last year was more around some of the investment decisions that the group made probably 18 months or 2 years ago in terms of refocusing that investment on Partnerships & Regeneration. You'll see the significant increase in output from that business. I think that was a semi-defensive position at the time, bearing in mind we didn't know where we were going with Brexit and all the uncertainty around that. So I think that was a very sensible move. It was supported by me at the time. But I think that's the reason predominantly we dropped last year before we'll start to pick back up again. So I'm pretty confident we'll get back up to the numbers that was suggested with actually much difficulty.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [57]

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Might be in terms of the actual timing, it's slightly weighted to the second half. But it's spread reasonably through the year.

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Andrew Duxbury, Galliford Try plc - Group Finance Director & Director [58]

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Correct.

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Andrew Hammond, Galliford Try plc - CEO of Linden Homes & Member of the Executive Board [59]

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Obviously, I'll do the head office cost structure but I wonder why you're asking. But the reality is it's not quite simple as sort of fitting it kind of 1/3, 1/3, 1/3 across the 3 businesses because if they were direct costs, we would've already pushed those out. So it is more -- so it's not as easy as doing that kind of split. I mean I think if you're trying to -- I guess if you're trying to model, how do those costs, if you had to apportion them, then doing it by turnover probably gets you as good as any other answer. But it won't -- it's not going to be right, Charlie, because that's just not the nature of the costs which are in there. So hopefully, that is kind of helpful. It's not as straightforward an answer as the question was, I'm afraid.

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Graham Prothero, Galliford Try plc - CEO, Member of Executive Board & Executive Director [60]

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That's absolutely right. That is right. Do we have any other questions? Shout if I'm missing because the light is in my eyes. No? Very good. Well, thank you very much for your attention, for your questions. And as I say, we'll be delighted to have a further chat over a coffee. Many thanks.