Annual Financial Report

Galliford Try Holdings PLC

06 October 2023

 

GALLIFORD TRY HOLDINGS PLC

PUBLICATION OF ANNUAL REPORT AND FINANCIAL STATEMENTS 2023 AND NOTICE OF

2023 ANNUAL GENERAL MEETING

Galliford Try Holdings plc has today, in accordance with LR 9.6.1 R of the Listing Rules, submitted to the Financial Conduct Authority's National Storage Mechanism copies of the following:

·      The Annual Report and Financial Statements 2023 - prepared using the single electronic reporting format, specified in the TD ESEF Regulation.

·      Notice of 2023 Annual General Meeting.

·      Form of Proxy for the 2023 Annual General Meeting.

The documents will shortly be available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism

The Annual Report and Financial Statements and Notice of Annual General Meeting are also available on the Galliford Try website at www.gallifordtry.co.uk/investors/reports-presentations/.

A condensed set of the Group's financial statements and information on important events that have occurred during the financial year and their impact on the financial statements were included in Galliford Try Holdings plc's Final Results Announcement on

20 September 2023.  That information, together with the information set out below which is extracted from the Annual Report and Financial Statements 2023 constitute the material required by DTR 6.3.5 of the Disclosure Guidance and Transparency Rules which is required to be communicated to the media in full unedited text through a Regulatory Information Service.  This announcement is not a substitute for reading the full Annual Report and Financial Statements 2023.  Page and note references in the text below refer to page numbers and note references in the Annual Report and Financial Statements 2023.  To view the results announcement, slides of the results presentation and the results webcast please visit www.gallifordtry.co.uk/investors/reports-presentations/.

Principal risks

At a Group level, the Board monitors risk using the following four principal risks, a detailed analysis of which is provided below:

1 Work winning

2 Project delivery

3 Resources

4 Regulatory compliance

This approach facilitates a targeted focus on the most significant risks and the actions being taken to manage them.

At an individual Business Unit level, our risk management process captures and monitors risks and mitigations using more detailed risk themes aligned to the four principal risks so that we can take more targeted actions to address issues that are specific to the regions and sectors in which they operate.

 1 Work winning

Risk description

We fail to secure an appropriate pipeline of projects to achieve our revenue and profitability targets.

Key risk indicators

· Percentage of planned revenue secured.

· Percentage of order book in frameworks.

· Order book by client type.

· Percentage of repeat business with existing clients.

·

Link to our strategic priorities

Quality and innovation.

Sustainable financial returns.

Risk appetite

We aim to secure a forward order book that provides a high degree of certainty of current year and following year revenue, while reflecting appropriate margin, cash and risk attributes.

Maintaining discipline in the projects that we take on is a fundamental element of our internal control framework. We will only accept projects where we are confident that we have the experience, knowledge and supply chain to deliver effectively and where the client relationships and commercial terms support a collaborative approach to managing risk.

Potential causes of risk

· A significant and sustained reduction in Government investment in building and infrastructure projects reduces the opportunity pipeline.

· Increased costs make some schemes economically unviable leading to delays or cancellation of projects.

· Delays to and/or reduced levels of private sector investment due to macro-economic conditions.

· Failure to secure positions on key procurement frameworks.

· Failure to meet the increasing sustainability expectations of our clients.

· Poor quality bid submissions.

· Failure to maintain discipline in project selection.

· Insufficient resources to support bid preparation.

Current risk environment

· Pipeline in our chosen markets remains strong, supported by Government policy on infrastructure spending.

· Inflation and higher interest rates mean that some client budgets need to be increased which makes it more challenging to move from preferred bidder to agreeing contract values, which in turn results in delays to project starts.

· The long-term transition to low carbon buildings and infrastructure is creating market opportunity - net zero new builds and energy-efficient refurbishments and retrofits.

· The Building Safety Act introduces additional regulatory requirements which increases compliance risk and therefore may deter some private sector developers and investors.

Emerging risks

· With a UK General Election due in 2024, there is a risk of a short-term hiatus in decision-making in central Government departments which could result in delays to project starts or new projects not coming the market.

· We innovate or adopt new technologies too early, incurring costs associated with being an early adopter, or too late, losing market share.

· Client attitudes to sustainability shift at differing rates, leaving some clients focused on construction cost and others on whole-life cost and carbon performance.

· Changes to planning policy and regulations to deliver the UK's net zero ambition limit the ability of our clients to pursue new build construction schemes.

Mitigations

· We manage the potential impact of an economic downturn by building a high-quality order book with projects that meet our strict risk profile.

· We concentrate on sectors where we have core strengths and clients with long-term growth and profitability potential.

· We focus on securing positions on key procurement frameworks (page 38) and repeat business with key clients through a centralised, dedicated pre-construction team. This allows for strategic planning, better collaboration and reduced risk of project failure.

· Each time we bid for a contract, we follow our internal "heat map" process, identifying risks across a range of criteria including the client and their advisors, project location and our local supply chain, our technical experience, our internal resources and capacity, the procurement method, contractual terms and conditions, and price.

· All contracts over £25m in value, or which have a heightened risk indicator on any other measure, are reviewed by the Executive Board prior to approval to bid. We typically target lower-risk contract types.

· We carry out peer reviews of bids where relevant to ensure robust review and challenge of risks and assumptions and to promote knowledge sharing across the business.

· Adjacent markets strategy, including PRS and the recent acquisitions in our Environment business, expand our target markets in a risk-managed way.

 2 Project delivery

Risk description

We fail to deliver projects safely, on time, in agreement with contractual terms, or to a high quality for our clients.

Key risk indicators

· RIDDOR and AFR scores.

· Safety leading indicators (eg Director Safety Tours, Safe Behaviour Discussions).

· Forecast project margins.

Link to our strategic priorities

Progressive culture.

Socially responsible delivery.

Quality and innovation.

Sustainable financial returns.

Risk appetite

We prioritise health and safety above everything else and believe that nothing is so important that we cannot take the time to do it safely.

We will not tolerate poor quality and strive to deliver high-quality buildings and infrastructure for our clients that provide safe environments for the occupiers and users of the assets.

We aim to provide realistic and transparent forecasts of project performance with potential risks to programme and margins identified and addressed before they materialise.

Potential causes of risk

· Changing regulations.

· Non-compliance with health and safety regulations and/or poor safety behaviours.

· Programme delays and cost escalation.

· Poor control of client and subcontractor variations and claims processes.

· Contractual notices not given as per contract requirements.

· Poor record-keeping and document management.

· Poor design quality and/or co-ordination.

· Failure to comply with quality control procedures.

· Extended periods of adverse weather conditions.

· Poor subcontractor performance and/or insolvency.

· Unrealistic estimates, including cost to complete, inflation estimates, outcomes of disputes and final value included in project forecasts.

· Material unavailability and extended lead times.

· Interest rate rises causing investment and cashflow issues within the supply chain.

Current risk environment

· Health and safety remains our first priority and our Lead Indicators approach is now established in the business.

· Staff shortages and cost of living pressures increase the sense of workers feeling stretched which could impact on safety and wellbeing.

· High levels of recruitment to support strategic growth plans require a greater focus on employee onboarding and training.

· Although we have experienced periods of extreme heat and intense rainfall, they have not resulted in a significant or widespread impact on our operations.

· There continues to be the potential for external factors, such as the war in Ukraine, to have an indirect and unpredictable impact on our supply chain in the future.

Emerging risks

· We fail to adapt our processes to meet the requirements of our clients to have better and more reliable data about the assets we design and build for them.

· The country fails to learn from the Covid-19 pandemic and any potential future global pandemic, or indeed other supply-side shocks, have a significant impact on the construction industry.

· Building designs and construction methodologies fail to adapt to the physical effects of climate change, including more regular and more extreme weather events, leading to reduced productivity, programme delays and cost overruns.

· Materials availability will become more challenging when demand from the housebuilding sector returns to normal levels.

Mitigations

· We continued to reinforce our behavioural safety programme Challenging Beliefs, Affecting Behaviour, and use Lead Indicators which target no harm.

· We take a values-driven approach to project delivery focusing on close collaboration and client satisfaction to achieve end goals for both parties.

· We undertake robust review and approval of contractual terms, pre-contract to ensure we do not sign up to contracts with onerous terms. This includes the employment of margin thresholds and escalation to the Board of any contracts that do not meet our criteria.

· We apply rigorous quality control in our BMS policies and procedures and adopt digitalisation to improve data, quality and efficiency.

· We carry out due diligence to select competent designers and subcontractors and use specialist consultants at key review stages.

· We provide comprehensive commercial training.

· We have introduced standardised formats for monitoring and reporting project performance and forecasts.

· We undertake monthly cross-disciplinary contract review meetings on all projects to enable a robust assessment of programme status, risks and commercial forecasts and are investing in upgrading our existing ERP systems.

· We carry out a programme of commercial 'health checks' to provide an independent assessment of the project team's reported project performance and forecast outturn.

· Operational controls including health and safety site risk assessments are monitored through a regular audit process.

· Our Technical and Business Support Forums drive process improvements across health and safety, digitalisation, carbon reduction, procurement, design management, mechanical and electrical, and commercial activities.

· Escalation processes respond promptly and appropriately to incidents.

 3 Resources

Risk description

We fail to secure the right people and other resources necessary to deliver our projects and manage our business.

Key risk indicators

· Material and trade shortages.

· Voluntary staff churn rate.

· Time to hire.

· Prompt Payment Code performance statistics.

· Average month-end cash.

· Subcontractors not paying staff and suppliers promptly.

Link to our strategic priorities

Progressive culture.

Socially responsible delivery.

Quality and innovation.

Sustainable financial returns.

Risk appetite

We aim to recruit employees from a diverse talent pool who are aligned to our values and behaviours.

We seek to work with financially resilient subcontractors, suppliers and joint venture partners who share our values in relation to safety, quality and sustainability.

Potential causes of risk

· We are unable to attract, retain and/or develop the right staff to meet our future needs, or we mismatch our staffing levels to peaks and troughs in activity or lack diversity.

· Lack of capacity in the supply chain due to high levels of activity in the construction sector.

· Subcontractor and/or client insolvency.

· Failure to comply with fair payment practices.

· Lack of geographical coverage.

Current risk environment

· Material cost inflation reduced over the year as demand/supply imbalances and energy prices have fallen. However we continue to take sensible measures to manage material cost inflation (early procurement, supply chain engagement, risk allowances in tenders etc).

· Lead times for bulk items like steel and bricks are now more predictable and shorter than in 2022 and are factored into our programmes and procurement planning. However, we are still experiencing occasional short-notice delays, cancellations or incomplete deliveries which can cause some disruption to programmes.

· Subcontractor insolvency is an increasing risk. We manage this by being selective in who we work with, monitoring our exposure and ensuring we pay our suppliers promptly.

· It remains a competitive market for talent. Large infrastructure schemes and a mismatch between skilled worker supply and demand continues to drive up salaries and increases the risk of employees leaving for higher reward packages. We have developed our 'Grow Together' campaign to outline our employee value proposition as part of the broader 'retain and gain' people strategy.

· We continue to support our people to achieve their career objectives and ambitions and provide them with opportunities for progression. We actively promote opportunities for internal mobility through our Explore programme.

· The results of our employee survey indicate that we have high levels of engagement and satisfaction within our employees and we continue to improve the way we promote the business and develop our employee offering.

· We continue our focus on health, safety and wellbeing.

· Strong balance sheet and net cash position gives confidence to clients and allows us to continually improve our prompt payment performance.

Emerging risks

· There is a generational shortage of skills as more experienced staff retire and are not replaced in sufficient numbers because the construction sector cannot compete with other sectors in attracting talent.

· Innovations in the use of technology will require us to attract a workforce with a different set of skills.

· Depletion or increased scarcity of non-renewable materials may lead to greater volatility in prices and more regular disruption to supply.

· The drive towards net zero construction may lead to an increased risk of defects and quality issues as we start to use new, low carbon materials whose long-term performance is unproven.

· Availability of lower carbon materials will become more challenging as more main contractors look to secure the same resources.

Mitigations

· The Group has an established HR strategy based on best practice principles and relevant legislation which, among other things, includes the regular review of remuneration and benefits packages to ensure we remain competitive.

· Our succession planning and talent management processes, together with our internal mobility programme, enable continuity and identification of future leaders.

· We operate graduate, trainee and apprenticeship programmes to develop our own pipeline of talent.

· We develop long-term relationships with key suppliers and subcontractors to ensure that we remain a priority customer when resources and materials are in short supply.

· Our Advantage through Alignment programme facilitates greater engagement with our key supply chain members and provides them with greater visibility of our pipeline of projects.

· We are committed to paying 95% of supply chain invoices within 60 days, and achieving the new standards of the Prompt Payment Code.

· We carry out enhanced supply chain checks and monitor subcontractor financial performance and reputational risks.

· Each Business Unit reviews its cash forecast weekly and monthly, and the Group prepares a detailed daily cash book forecast for the following eight-week period to highlight any risk of intra-month fluctuations. These forecasts are reviewed at Business Unit, division and Group level.

 4 Regulatory compliance

Risk description

We fail to comply with requirements of the various legal and regulatory regimes in which we operate, resulting in a high-profile breach and regulatory censure.

Key risk indicators

· Number of external enforcement cases.

Link to our strategic priorities

Socially responsible delivery.

Quality and innovation.

Sustainable financial returns.

Risk appetite

We have zero tolerance for non-compliance with regulations. We expect all employees and subcontractors to be aware of all regulations relevant to their role and to comply at all times. We also expect our people to speak up if they observe or suspect non-compliance.

Potential causes of risk

· Failure to update our procedures to reflect changes to key legislation and regulations.

· Failure to provide sufficient and effective training to all staff.

Failure to implement effective compliance monitoring processes.

Current risk environment

· The Building Safety Act is new legislation that provides greater clarity on the requirements and responsibilities in relation to building safety and should drive greater quality in construction.

· However, the Act also has the potential for adverse consequences in relation to the extended period in which certain defect claims can be made, which increases the risk of opportunistic claims being brought forward.

· We continue to invest in cyber security surveillance tools, recognising the potential risk of cyber-attacks, especially linked to the conflict in Ukraine, and the wider geo-political environment.

· The regulatory landscape in relation to ESG reporting is evolving quickly and will require us to monitor and publish more information and comply with new standards (ie ISSB).

Emerging risks

· Greater devolution or even full independence may lead to very different regulatory regimes in Scotland and the rest of the UK.

· New legislation to combat climate change, such as carbon taxes or a ban on the use of diesel could have a significant impact on our operations.

· Biodiversity and water use regulations may become more stringent and result in increased compliance costs.

The new Corporate Governance regime will introduce greater responsibility for directors, and the requirement for enhanced disclosures in relation to internal controls, fraud, resilience and audit and assurance arrangements, with increased costs of compliance.

Mitigations

· Galliford Try has comprehensive policies and guidance at every level including our Code of Conduct, mandatory regulatory and cyber security e-learning for all employees, an anonymous and independent whistleblowing helpline, regular legal updates and briefings, six-monthly compliance declarations, and conflict of interest registers and authorisations.

· The Ethics and Compliance Committee, provides ongoing monitoring and oversight of policy and compliance activity in relation to key areas of legislation.

· We continue to review the detail of the Building Safety Act and are preparing through training, continued investment in digital tools to support quality.

· Our information security standards and procedures are accredited to the ISO 27001 standard.

Viability Statement

As required by provision 31 of the UK Corporate Governance Code, the Board has assessed the prospects and financial viability of the Group, taking account of the Group's current position and the potential impact of the principal risks to the Group's ability to deliver its business plan. The assessment of prospects has been made using a period of five years. The assessment of viability has been made using a period of three years, which aligns with our budget period and provides reasonable visibility of future revenue from the existing order book. Since the sale of the housebuilding businesses and the recapitalisation of the business in January 2020, the Group no longer has any debt facilities and associated covenants, therefore viability has been assessed in terms of the headroom against available cash reserves.

Assessment of prospects

As outlined in our Strategic report, the long-term prospects of the business are supported by a strategy which builds on our existing strengths and the growth opportunities in our target markets.

Our alignment to the UK's continued investment in social and economic infrastructure is a fundamental driver of demand for our services and plays to our strengths in the health, education, defence, highways and environment markets. Our ability to achieve sustainable growth within these markets is underpinned by our position on the most significant procurement frameworks, our commitment to supporting the decarbonisation of the built environment and our investment in digital technologies to drive continuous improvement in quality and productivity.

Our people remain the key to our success and our focus on attracting and retaining a more diverse workforce as well as increasing the proportion of apprentices and graduates help us access the skills and expertise required to deliver on our sustainable growth strategy.

Assessment of viability

The base case for the cash flow projections modelled in our assessment of viability is the budget for the three years from 1 July 2023 which incorporates appropriate contingencies against plausible day-to-day downside risks, primarily the Group's principal risks as disclosed previously. The base case shows strong levels of average month-end net cash and assumes that the Group continues to operate without debt facilities.

Against this base case, we have stress-tested the forecasts and modelled the impact on cash flow and liquidity of a number of downside scenarios related to our principal risks, including a combined downside scenario that includes a number of these sensitivities occurring together. The scenarios modelled, and their link to the underlying principal risks, are described in the below.

Scenario 1 - Reduction in construction volumes (Link to principal risks: Work winning)

Our cash performance is correlated with earnings growth and therefore reliant on construction activity being in line with our assumptions.

We have modelled a reduction in construction volumes that would equate to a 10% reduction in monthly cash receipts offset by a proportionate reduction in payments, relative to our base case forecast.              

Scenario 2 - Deterioration in working capital (Link to principal risks: Resources)

We have modelled the impact of a deterioration in our working capital, which could be caused by delays in receiving payments from clients and/or earlier payments to our supply chain.

Scenario 3 - Irrecoverable cost increases (Link to principal risks: Project Delivery, Resources)

There is a risk of a prolonged period of materials cost inflation and therefore we have modelled the impact of failing to fully mitigate these cost increases on our projects.        

Scenario 4 - 'Perfect storm' (Link to principal risks: Work winning, Resources, Project Delivery)

We also tested the unlikely but plausible scenario where all of scenarios 1-3 combine at the same time.   

As part of the viability assessment, the Board also considered the mitigations and interventions available to manage the impact of one or more of the downside scenarios occurring. The base case already includes significant cash contingencies and the Board has considered further mitigating actions that are available to it.

The directors do not expect the emerging climate change risks to have a significant impact in the short and medium term, particularly given the nature of the contractual arrangements in place, although continue to monitor this, as the Group adapts to the changing environmental requirements and demands to deliver innovative solutions through new technologies and methods of construction.

Based on the results of this analysis, the Board has concluded that it has a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the three-year period of its assessment.

29 Related party transactions

Transactions between the Group and its related parties are disclosed as follows:

Group

	Sales to related parties		Amounts owed by related parties
	2023 £m	2022 £m	2023 £m	2022 £m
Trading transactions
Related parties	71.2	97.3	36.8	38.4

	Interest and dividend income from related parties
	2023 £m	2022 £m
Non-trading transactions
Related parties	4.1	4.6

Sales to related parties (all of which are to joint ventures and associates) are based on terms that would be available to unrelated third parties. Amounts owed by related parties consist predominantly of subordinated debt within the PPP and Other Investments portfolio, that if held to maturity would be due over the next 25 years (2022: 26 years). These receivables are unsecured, with interest rates varying between a range of 9% and 12%. Payables are due within one year (2022: one year) and are interest free.

Company

Transactions between the Company and its subsidiaries which are related parties, which are eliminated on consolidation, are disclosed as follows:

	Interest and dividend income from related parties
	2023 £m	2022 £m
Non-trading transactions
Subsidiary undertakings	25.0	15.0

The Company has provided performance guarantees in respect of certain operational contracts entered into between joint ventures and a Group undertaking.

Statement of directors' responsibilities

The directors are responsible for preparing the Annual Report and the financial statements in accordance with applicable law and regulations.

Company law requires the directors to prepare financial statements for each financial year. Under company law the directors have prepared the Group and Parent Company financial statements in accordance with UK adopted International accounting standards. Under company law, the directors must not approve the financial statements, unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of the profit or loss of the Group and Parent Company for that period.

In preparing the financial statements, the directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· state whether they have been prepared in accordance with UK-adopted International Accounting Standards and with the requirements of the Companies Act 2006; and

· prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Group and Parent Company will continue in business.

The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Group and Parent Company's transactions and disclose with reasonable accuracy at any time the financial position of the Group and Parent Company and enable them to ensure that the financial statements and the Directors' Remuneration Report comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Group and the Parent Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The directors are responsible for the maintenance and integrity of the Group and Parent Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

The directors consider that the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group and Parent Company's performance, position, business model and strategy.

Each of the directors, whose names and functions are listed on pages 76 and 77, confirms that to the best of their knowledge:

· the Parent Company financial statements, which have been prepared in accordance with UK adopted International Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Parent Company;

· the Group financial statements, which have been prepared in accordance with UK adopted International Accounting Standards, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

· the Strategic report contained on pages 1 to 73 includes a fair review of the development and performance of the business and the position of the Group and Parent Company, together with a description of the principal risks and uncertainties that it faces.

In the case of each director in office at the date the Directors' Report is approved:

· so far as the director is aware, there is no relevant audit information of which the Group and Group's auditors are unaware; and

· they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Group and Group's auditors are aware of that information.

This confirmation is given and should be interpreted in accordance with section 418 of the Companies Act 2006.

For and on behalf of the Board

Bill Hocking

Chief Executive

20 September 2023

Forward-looking statements

Forward-looking statements have been made by the directors in good faith using information up until the date on which they approved this Annual Report. Forward-looking statements should be regarded with caution due to uncertainties in economic trends and business risks. The Group's businesses are generally not affected by seasonality.

For further enquiries:

Galliford Try Holdings plc	Kevin Corbett, Company Secretary	01895 855001
	Clara Melia, Investor Relations	020 3289 5520
Tulchan Communications	James Macey White	0207 353 4200
	Ed Cropley

Notes to Editors

Galliford Try Holdings plc is a leading UK construction group listed on the London Stock Exchange. Operating as Galliford Try and Morrison Construction, the group carries out building and infrastructure projects with clients in the public, private and regulated sectors across the UK.

 

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