Balfour Beatty plc (BBY) Earnings Call Transcript & Summary

Good morning. I'm Leo Quinn, Balfour Beatty's Group Chief Executive. Welcome to our half year results. And I'm joined today by Phil Harrison, our Chief Financial Officer. There's no doubt that COVID has had a dramatic impact on all companies and in particular our industry, but what I'd like to talk about this morning is how Balfour Beatty has responded to that. I think it's worth taking the COVID impact upfront, and then we'll talk about all the good things that have happened to the business in the meantime. So let's start off with our #1 priority, and that has effectively been to maintain capability. And that's on the premise that you can't really take a capability holiday, so in effect the #1 decision that we made and the most important, which has led to the fact we've got a strong foundation for the future, is to keep our sites open and to work through the lockdown period. We were a leader in the industry in doing that. And many of the Tier 1s actually made the same decision and kept their sites open too. The second thing we actually decided was that we would ensure that we would maintain our liquidity, and that liquidity would keep our supply chain fueled with cash and that cash would invariably make sure our sites were supported by people. In order to do that successfully, we had to give our employees and our supply chain and our subcontractors the confidence that our sites were safe and that they could come to work and be assured of the fact that they would go home safe. I think, in principle, we've managed to achieve that across the piece. At the peak of the crisis, about 80% of our sites were open. We're now back to over 95%, and they're all performing what I'd say as nearly up to full productivity. So we've done well there. The other side of the debate, which is worth putting on the table early, is around the government's furlough scheme and job retention. First and foremost, that was really an inspired decision on behalf of treasury to do that. And we've actually at our peak had 3,000 people furloughed, and we've actually benefited to the tune of about GBP 15 million. And that effectively has actually kept people -- effectively on the furlough scheme and being funded through that scheme, but that's not the full story. The other side of the story is that there's been a contribution to retaining employment within Balfour Beatty from our shareholders. Our shareholders have put in some GBP 30 million in terms of the dividend that's not been paid at the full year. And from an employee point of view, the top senior managers have contributed about 20% of their salary over the 2-month period following lockdown, whereby that's contributed another GBP 6 million, GBP 7 million into the pot. So in total, the furlough scheme has actually contributed some GBP 15 million. Our shareholders have contributed about some GBP 30 million, and in the case of our employees and the company another GBP 6 million or GBP 7 million. So net-net-net, there's been a huge injection into ensuring that we maintain capability, and we need that capability to deliver our forward order book. If I go to the next slide. So our #1 priority was really to maintain capability and keep our sites open. Second was in to -- order to ensure liquidity, and we've done that very successfully. We've averaged over GBP 500 million net cash over the last 6 months of trading. Not only have we managed that, but we've also in the period paid down our private placement in the U.S. and also our preference shares in the U.K. on the 1st of July. This is all underpinned by a GBP 1.1 billion asset portfolio in terms of our investment assets. We've actually been very active in the period and we've seen some very big orders come in, HS2 being the largest of those. We've won the section N1, N2, which is about GBP 3 billion to Balfour Beatty and GBP 6 billion in joint venture. And we've also won the Old Oak Common, where we're actually the construction manager, which is about GBP 1 billion. Net-net, our order book is at an all-time high of some GBP 17.5 billion. The other area that we've taken great comfort from is that, at a time like this where we are now officially in recession, there is going to be a lot of government injection of fiscal expansion, and that's going to be a rising tide for infrastructure companies. And in the U.K., I think we're the largest ship on a rising tide in infrastructure, and therefore we see the outlook to be extremely positive for us. If I take you to the usual graphs we look at, which I regard as our leading indicators in terms of how the business will perform in the future, and the next slide is what I regard as our lagging indicators. You'll be aware of our Build to Last measures in terms of lean, expert, trusted and safe. And in the area of lean, we talk about cash in and cost out. And what you can see versus our baseline of 2014, our cash, despite the COVID uncertainty, is around the same level as last year. So that's a great result for us. In terms of expert, our employee engagement scores are up some 10%, and I think that's a real credit to the way that we've led the company over the last 6 months. And it's also a credit to the way that we've behaved in terms of looking after our employees and making sure that they feel comfortable that this is a company to work for in the long term, not just the short term. So our feedback here has been very, very encouraging. If I look at trusted, where we use customer satisfaction as the measure. We've retained the usual 95%, but that really is the -- half the story. If you talk to our major customers such as Highways England, HS2, Hinkley, Network Rail, Crossrail, all of these companies, if you talk to their chief executives, will actually tell you how Balfour Beatty over this period has been absolutely standout in terms of the fact we've turned up for work. We've delivered in a very adverse environment, but we've delivered safely, adopting all of the rules around social distancing and the like. So our customer satisfaction and our customer confidence, I think, is really at an all-time high. And then if I look at safe, you can see that safe is a leading indicator of performance; and that as a company, again, we've improved over the period in terms of lost time incidents. We do work in a dangerous industry and we have to be really careful. One of the things we have noticed is that, while we've been very focused on COVID and improving the environment around the likes of social distancing, hygiene and that, what we've seen is that some of the old incidences which caused accidents are creeping back into the system. So we're going to be very careful that we don't forget all the lessons we've learned over the last 5 years in terms of keeping our people safe. But on every indicator, if you look over the last 5 years, we continue to improve half year in and out. If I look at the lagging indicators, which you can actually take all the way back to our balance sheet, and you can see these numbers. Our average net cash is GBP 0.5 billion. 5 years ago, we were overdrawn in the bank. If we look at our operating expenses, we're down on the half year from GBP 215 million to GBP 117 million. That's a GBP 100 million reduction. If I annualize that, that's a GBP 200 million reduction in our cost base. All of this drives to efficiency and makes the company better positioned to perform well in the future. If I look at our earnings from our earnings-based businesses, you can see back 5 years our loss, and we've gone into a loss for the first time since then in this period. And there is no doubt that COVID has been very expensive for our industry in terms of the fact that we've lived through sites and regions shut down. For example, Scotland has been closed for 3 months. Florida that relies very much on the entertainment and hospitality industry has been closed. All of those have had a major impact on revenue and profit. Social distancing has had a massive impact on productivity, and it's something we've had to learn and get back to working productively. There's been the incremental costs of increased PPE and safety and like that, all of those things we hope now are behind us and that we can move forward and get back to normal levels of working. And then finally, in terms of voluntary attrition, our peak was about 16%, but we've moved from 15% down to about 9%. That's probably the normal level of turnover for our company, with jobs starting up and closing down every period. So in effect, if you look at all of these numbers: strong net cash, overheads reducing, onetime costs from COVID, employee retention at an all-time low, which is a benefit as a high. So in effect, I think, some very good results and very good prospects as we go into the rest of this year. At this point, I'm going to hand over to Phil to talk about some of the financial numbers. So Phil, over to you.

Thanks, Leo. Good morning, everyone. I'm going to start with the headline numbers. During COVID-19, all stakeholders have been negatively impacted. Shareholders have lost dividends. Governments have provided support through tax deferrals and job retention schemes. The Board, executive directors and senior management have taken voluntary pay cuts. And many of our U.K. employees were placed on furlough. COVID-19 has also materially impacted profitability in the first half of the year, but I'd like to start this morning by highlighting 2 other key points on this headline slide. Firstly, cash. We ended the period with GBP 563 million of net cash and the month-end average balances of over GBP 500 million for the first half of the year. Our first priority through this period has been to preserve liquidity and the strength of our balance sheet. This provides the financial flexibility to navigate through short-term disruptions and make the right long-term decisions for the benefit of all stakeholders. In March, we repaid $46 million of our U.S. private placement notes. And on July 1, we fully redeemed GBP 112 million of the preference shares, which will save GBP 12 million per annum in interest costs. Secondly, over the last 2 years, Balfour Beatty's order book has grown substantially, driven by public sector infrastructure projects. And it now stands at over 2 years worth of revenue at GBP 17.5 billion, providing good future visibility. Now turning to the impact of COVID-19. In the first 6 months of the year, the group reported an underlying loss from operations of GBP 14 million, as COVID-19 has had a material impact on the business. Contracting is a complex business; and COVID-19 has had primary, secondary and tertiary impacts on projects across our portfolio. To help better understand the impact, we've listed out the key 4 areas as follows. Across our geographies, sites have been closed, most notably in Scotland and London in the U.K. and in Washington state and Florida in the U.S. On average, in the key months of April and May, we had 20% of our sites closed. We've also experienced significant disruption to sites that remained open due to the availability of employees, subcontractors or materials, which have then impacted productivity. On average, we estimate significant disruptions impacted around 17% of our open sites. And there have been additional operating costs due to the implementation of social distancing along with the need for enhanced PPE and security measures. And finally, in contract accounting, the group is required to forecast total end-of-job contract revenues and costs for each discrete project. Under the standard, there is a higher bar for recognizing contract recoveries, which is highly probable, rather than recognizing costs. All 4 areas had a material impact on profitability, but the mitigations put in place in keeping the majority of our job sites open safely has alleviated an impact that it could have been much larger. Turning to Construction Services. As I've just said, throughout this period, the group worked hard to minimize the impact as the majority of Balfour Beatty's projects remained operational. By the end of June, 95% were open, with the most notable exception being hospitality projects in Florida and aviation projects in the U.K. In Hong Kong, there were minimal site closures. U.K. construction recorded an underlying loss from operations of GBP 23 million, as Scotland was effectively closed for the second quarter of 2020. London has seen limited productivity due to public transport availability. The South region has been affected by slowdown in aviation, and lengthening site programs triggered a reassessment of the group's contract and forecast positions. U.S. construction was also negatively impacted. Our buildings Washington state and Florida were the most affected; and at civils, contractual recoveries were reassessed on a number of projects. In Hong Kong, there were minimal site closures, but the business operated below optimum productivity in the first half of the year. Turning to Support Services. Revenue decreased by 5% to GBP 476 million, while underlying profit from operations for the period decreased to GBP 10 million. The order book also decreased by 6% to GBP 3 billion following the group's decision to withdraw from the gas and water sectors. In Support Services, many of the group's employees were designated as key workers, and as such, the business has shown good resilience. The group was able to accelerate road and rail maintenance programs for some customers due to lower volumes of traffic in the period, but this was more than offset by general disruption on projects and other customers reducing maintenance expenditure given the economic uncertainty. Turning to Infrastructure Investments. Operations in the U.K. continued as normal, supported by the government advice that private finance initiative contractors should consider themselves to be part of the public sector response to COVID-19. Predisposals underlying profit in the period decreased to GBP 3 million as a result of prior year disposals and higher legal costs at military housing, which are being taken directly to the profit and loss on an ongoing basis. Underlying profit from operations of GBP 3 million was also lower, as there were no infrastructure investment disposals in the period. Also of note, in military housing there is no further update at this time with regard to the Department of Justice. Their investigation is still ongoing; and therefore the group is not able to provide an indication of outcome, including timing or any quantum at this point. Directors' valuation is the next item to cover. The first half of 2020 was relatively quiet for the Infrastructure Investments business with no new projects and no disposals. The directors' valuation increased by 5% to GBP 1.125 billion primarily as a result of a favorable GBP 40 million foreign exchange rate movement in the period. The group invested GBP 21 million in new and existing projects. Cash yield from distributions amounted to GBP 39 million, as the portfolio continued to generate cash flow to the group, net of investment. The continuing yield during COVID-19 demonstrates the essential nature of the Infrastructure Investments portfolio, and this will be demonstrated further on the next slide. Unwind of discount of GBP 41 million is a function of moving the valuation date forward by 6 months. And operational performance movements resulted in a GBP 34 million increase primarily as a result of foreign exchange movements. On the -- on this next slide, the first graphic shows the expected annual cash flow from our investment portfolio. The left hand actually shows the forecast cash distributions to the group over the next 20 years, in blue; and the committed equity investments over the next 7 years, in gray. The right hand actually shows the projected directors' valuation of the portfolio at each point in time. There are 2 things that struck me around this graph: firstly, the long life of the assets within the portfolio, with cash distribution back to group of over GBP 70 million for the next 20 years. This portfolio has provided an annual yield of 6% under Build to Last. And secondly, if we were to do nothing, i.e., no new projects but also no disposals, the directors' valuation is expected to remain above GBP 1 billion for the next 20 years. The second graphic on the right shows how the wider market for infrastructure assets has grown. In the last 10 years, during a period of low interest rates, infrastructure has developed from its own asset class. Looking ahead: The historic double-digit compound annual growth rate of assets under management is expected to continue, particularly as post COVID 19 we could well be in a lower-for-longer world with regard to interest rates. If I move on to order book. The group's order book in the half year was GBP 17.5 million, over 20% higher than the year-end position. The most recent increase is due to the addition of over GBP 3 million of contracts following HS2 notice to proceed being issued in April. Balfour Beatty, in joint venture with VINCI, will deliver the main civils works south of Birmingham and the London hub station at Old Oak Common. The addition of HS2 more than doubles the U.K. order book from GBP 3 billion at the end of 2019 to over GBP 6 billion at the half year. It also continues the transition to a lower-risk profile, which Leo will come to later on in the presentation. Also in the first half, Balfour Beatty was awarded around USD 450 million of additional work on 2 significant ongoing projects in the U.S.: an office campus redevelopment in Redmond, Washington, and the Broward County Convention Center extension in Fort Lauderdale, Florida. And at Gammon, the group's 50-50 joint venture based in Hong Kong, there were a number of significant wins in the first half, including a HKD 7.2 billion contract to deliver tunnels and associated works for an automated people mover and baggage handling system at Hong Kong International Airport as part of the third runway expansion program and a HKD 5.7 billion contract from the Highways Department for mechanical and electrical works on the Central Kowloon Route. Importantly, with both the order book and net cash positions at record levels and the Build to Last, Balfour Beatty can continue to bid selectively in all its chosen markets. Now if we move to cash flow. As I mentioned in my opening remarks, as you can see from the waterfall, we have generated a total cash flow inflow of GBP 51 million, increasing the group's net cash position to GBP 563 million in the period. The increase is driven by GBP 88 million of operating cash flows, with working capital the most material line item. The working capital performance in the period benefited from U.K. and U.S. government tax deferral policies enacted in response to the COVID-19 pandemic. In total, these schemes improved working capital by around GBP 50 million in the period, with the majority due for repayment in 2021. In addition, the Aberdeen Western Peripheral Route settlement of GBP 32 million was received in February 2020. These 2 factors have increased the negative working capital as a percentage of revenue by 1.2% at the end of June 2020. Taking those factors out, working capital as a percentage of revenue would have been flat year-on-year. Subsequent to the period end, on the 1st of July, Balfour Beatty fully redeemed the GBP 112 million of preferences, which were not included in our net cash position. Following this redemption, the group has now no more debt to repay until 2023. Turning to financial guidance. On the assumption that the group's chosen markets continue to recover as currently anticipated, we expect the earnings-based businesses to recover steadily through the second half of 2020 and then report a more normalized operating profit in 2021 broadly in line with 2019. With regard to our Infrastructure Investments portfolio, given the strong liquidity position of the group, Balfour Beatty will only resume disposals when market conditions return to more normal levels. In the medium term, demand for high-quality infrastructure assets in the secondary markets is expected to exceed supply; and the group will continue to sell its investment assets, timed to maximize value to shareholders. The redemption of the preference shares reduces cash without a corresponding reduction in the level of debt, as the group does not take preference shares into account in its measure of net cash borrowings. Therefore, the group expects that full year 2020 average net cash will be in the range of GBP 430 million to GBP 460 million. The Board has decided not to declare an interim dividend in the period as it balances its responsibilities to all stakeholders. We will look to reinstate the dividend at the appropriate time and at a level the Board believes reflects the future prospects of the group. In addition, the Board will continue to review the group's capital structure for further redistributions for shareholders. Thank you. And I'll now hand you back to Leo.

All right, thank you, Phil. I think -- when you hear those statements and you see the strong underlying performance of the business, bar COVID, I think we've come through this extremely well and in a strong position. And it's fair to say that Balfour Beatty is the market leader in our business in the U.K., in infrastructure. And by virtue of that, I think it's important that Balfour Beatty does lead the conversation in respect of the industry and where it's going. And throughout the COVID period, we've helped galvanize all of the Tier 1s in order to come together in terms of what effectively is the right response from the industry, and it's not a response from just Balfour Beatty. It's around how do we align ourselves as an industry to deliver the right economic outcomes for the work that we do. So during the COVID period, we have actually assembled all of the -- or the majority of the Tier 1 players, and it was between us that we made a decision to make sure that we kept our sites open. And it was between us that we actually decided as to how we would respond to furlough, every company doing their own thing but at least sharing their points of view. And Balfour Beatty has helped in terms of leading that conversation but more importantly helping with the communication on how we were positioning things out to our employees, which in turn flowed down in the marketplace. And I think the industry has come through very well. It's not without challenge, by the way, from the supply chain onwards, but keeping our manufacturing facility open to supply plasterboard and [ glass ] have been critically important. And the good news is that, by virtue of the things that we've put in place, from a materials point of view, Balfour Beatty experienced no real shortage during the whole COVID period. The conversation is broader than just what we've done in the case of COVID-19, but -- and it's also about leading the conversation, whether it be in terms of diversity and inclusion; sustainability; or capitalizing on this pandemic in order to generate new ideas, new businesses and new ways of working, which we've done very well. The thing I'm most drawn to actually is the diversity within Balfour's. We've done for the first time reverse mentoring, where we've adopted somebody from the black, Asian or minority groups. Male or female, it doesn't really matter. And they've coached our senior executives to say what life is like. And interestingly enough, I mean, I took on one of our employees; and I have to say it's really quite illuminating seeing it from their perspective rather than ours. And I think, as a result of that, in terms of diversity, we're a lot richer as a company, and we will be in the future. And remember all these things are a journey, so the idea is to start it. If you've never done it, I strongly recommend it. In terms of carpe diem or seizing the day, we've looked at what does the new world look like and what things would we change in terms of more off-site manufacture, more modular manufacturing, more assembly on site. The fact is you need less people. There's less reasons to breach social distancing and things like that. So it's really important that we actually take the opportunity of what we learn in this period to actually make us a better and more productive company in order to actually seize the day, and then around lower-carbon footprints and things like that which are going to be more and more important in the future. Again, we're a leader in many of the areas there. And if you look at some of our major projects, the amount of recycling that we're doing is phenomenal in terms of volume and quantities. If I go back and remind everybody is that we are quite a diverse portfolio. So you are looking at a company that operates really in 3 regions now, Hong Kong, U.K. and the U.S.A. And you can actually see the proportion of our order books that lie there. Within those countries, we have a civils and also a buildings business, so again the portfolio is diversified. It's also diversified in the fact that it's underpinned by GBP 1.1 billion of assets in our investment portfolio. So net-net-net, although we do a lot of construction, there's more to Balfour Beatty than just construction. And in effect, what we have is quite a risk-reduced, resilient portfolio. If I actually look at how we've actually pivoted. If you think about the next 5 years, it's going to be a lot around government expansion, fiscal expansions, things like that. If we look at our business across the globe: In the U.K., in our construction business we are strongly geared towards fiscal and government work. In our services business, it's nearly 100% in the U.K. In the U.S. it's just over 50%; and in Hong Kong it's about 60%, 65%. So net-net-net, we are still perfectly positioned for what I think is the rising emerging tide of fiscal and government expansion. If I look at the portfolio risk. What you're seeing here is 2018 to 2020. That's actually a function of the fact we only started to collect the data this way in 2018, not before, but what we're looking at is really a markedly reduced risk portfolio. And what that means is more certainty in the outcomes and less volatility in terms of surprises and variations on jobs. And so the majority of our portfolios are now all around target costs. And target costs will involve things like ECI as well, which is early contractor involvement, where we'll also get involved in actually putting the job together in the first place, getting the price and the risks and then actually having more assurance around the margin outcome. In the case of target costs here, the biggest job is HS2. And that works on effectively a fee, with the opportunity that -- if you deliver on time and to cost, that you can actually get a 2 percentage point increase in that fee. And for a job which is GBP 6 billion, that's a very large number. The downside risk is also capped that, if for example you actually don't achieve schedule and costs within the matrix, you can only lose 1 point of margin. So that's a fairly assured outcome for what I think is actually a very big job. And the amount of actually fixed-price work is reducing all of the time. If I look at Hong Kong and the U.S., not quite in the same state of evolution as the U.K. but moving in that direction now because, at the end of the day, customers are more focused on outcomes as opposed to lowest price. If I look at some detail. This is a really exciting future for Balfour Beatty. As you know, we run the M25 contract in terms of the maintenance, which is part of our investment portfolio. And on the back of that, we just completed the A14. And if you go down the M4, the progress in terms of new bridges and demolition is actually going like a train, if you pardon the pun. Work progress has been fantastic because, during this period of low traffic flows, we've taken advantage to accelerate the program. Highways England is one of our biggest customers. And I think we are probably their largest supplier now based on merit. A recent visit by Jim O'Sullivan, their Chief Executive, to our M4 site praised the way the site has been operated, the digital solutions that we've put in place and the likes of that. It's not surprising to me that we've recently won 2 areas in terms of the new regional investment program. We've won the North and we've won the South, and we've also in the South won the smart motorways alliance agreement. So fundamentally our future within highways is very secure for the next 5 years. In the North, we're working on the A57, A19. In the South, we've got the next phase of the M3; and the M25, the Guildford-Wisley junction. It's a very exciting portfolio of projects. If I then look to more infrastructure in terms of energy, and we regard within this the likes of Hinkley. We're doing the tunnelings. And we have our segment factored at Avonmouth, but coupled with that, we've also got the overhead power cables for the Hinkley transmission. We're working on the Viking Link, which is the Denmark-to-U.K. interconnector. We're doing the land side of that. At Inveraray, we're doing the transmission lines. So in effect, we're not only doing new nuclear, but within transmission in Inveraray we're doing wind power as well. So you can see we're well positioned to take advantage of those rising tides. If I look at HS2: Phil has already talked about Old Oak Common and the Birmingham section, but if we look to the future, we've still got the track slab to bid for. We've got the overhead cabling, the electrification, so again there's also a potential more -- another GBP 1 billion worth of business to come from that. If I look at railways. We successfully delivered towards the end of last year and into the first quarter of this year the Great Western line, from Bristol, electrification down to Cardiff and Swansea. And we've strategically won the CP6 track maintenance contract, which is actually now the largest contracting vehicle for the placement of work for Network Rail. And we are engaged fully in London Underground, although that's virtually been shut for the last 6 months for us, but the future in terms of the Core Valley Lines, which we've won the core valley line months ago. But in terms of Midland Main Line, things like the Oxford upgrade, the Pennines Way, the Croydon area remodeling, we are spoiled for choice. And I think the number is GBP 640 billion of opportunity, so you have to think about this market over the next 5 to 10 years as being the right place to be. And Balfour Beatty has the right assets at this time to actually deliver in this environment. If I move to U.S. and to Hong Kong, equally exciting. I only have to look at the work we've won at the moment. We've got the LAX people mover you know about. We've got the Caltrain electrification; the Microsoft campus; Southern Gateway in Texas; I-635, which we won recently with GBP 1.7 billion. And as we look out, there's no shortage of road and rail contracts out there. We signed on Monday the Oak Hill highway, which is actually in Austin, Texas, and I think that was $550 million. In the case of Hong Kong, we've won the people mover at the airport. We've got the Kowloon tunnels and the M&E. As of yesterday, we are the preferred bidder for the Hong Kong terminal 2; and the contract is in the process of being finally negotiated in the order of GBP 1.2 billion, a huge order. With those last 2 orders, over in the month of July, we will book another GBP 2 billion worth of infrastructure work. And again, there's no shortage of work coming through in Hong Kong. So I have to say this is about as exciting a pipeline and backlog that I've seen in my last 5 years with the company. If I talk about for the moment is how do we drive productivity. How do we get more out of this COVID era of ours? And you've got to look to our IT infrastructure. And if I go back to 2015, our hardware and our software was in complete meltdown. The first decision we made was to insource it, and that's been a genius decision in terms of how the company has benefited from that. Our first program was really to standardize around information and data. And on the back of that, we were able to actually launch Project on a Page. That's now a universal language across the whole of Balfour Beatty in terms of how we look at the dashboard against which we run the projects that we have. And from there, we continue to move towards digitization, and we've upgraded our procurement programs and apps. JAGGAER has been of particular benefit to us. This is now rolled out across all of our geographies and being used actively. We launched My Contribution, whereby we engage our employees in terms of new ways of doing business and creative ideas and that we engage all of our employees in terms of that through the My Contribution app. In terms of MSite, we use turnstiles to have people access and leave our sites, but more importantly the value is actually in the data. So people, in a touchless way through their phones, log in and log out a site. That then feeds how we pay and invoice people for the supply of labor. Recently, on our M4, we've now just launched our new goods received notice, where we can track aggregates and concrete lorries coming on to our sites. We can move them and divert them if there's an issue. They will log in. They will clock in touchlessly with their iPhone. They will deposit their load. And that will then automatically go into our payables system, and they'll be paid in 30 days following the goods receipt. All of it is totally contactless and no paperwork involved. In terms of our power BI. That's the data analytics on which we run the company. And just to talk about something for a few seconds which I call [ COVID speed ]. We all know what Teams is and we all know what Zoom is. At the beginning of this year, we launched Microsoft 365. We had a 1-year plan for how we would roll out Teams and teach people. With the lockdown, we rolled this out in 2 days, and so the thing is that things can happen quicker. And as a company, the fact that we've got this platform on which to build it is a real competitive advantage. And then finally, in terms of Bouncing Back: We use Bouncing Back to say we're in lockdown. How do we think about how we're going to work and behave when we come out of lockdown? So we launched a new digital future, getting people back to work, creating a great place to work, new markets, new capabilities. We used our My Contribution platform to get over 550 different ideas from the U.S. and the U.K. and generally a real success in terms of engagement. It's that sort of engagement which has driven our employee satisfaction up to its highest level to date, plus the confidence in the fact that we've got a strong balance sheet and we're cash rich. So finally, right back to the beginning. Our #1 priority at the beginning of the lockdown and the COVID period was really around keeping our sites open and maintaining our capability. We did this through generating cash and driving liquidity through our supply chain in order to keep all the companies that work for us and our employees engaged and employed. The strength of our balance sheet is really a credit to the foundation that we put in place in terms of Build to Last in terms of management of cash. Cash is a way of life within Balfour Beatty. We've got a record order book; and really we've got a record, in my view, outlook to the market. We're the largest player in the U.K. in the large infrastructure market. And as I've said before, on a rising tide, all ships rise. So if you ask me, net-net-net, this is probably the most positive outlook I've seen for this business in the last 5 years. So on that note, I'll hand over to you for questions.

[Operator Instructions] We have a question from Jonathan Coubrough of Numis.

Leo, Phil, 3 questions from me, please. Firstly, on the dividends, when you say it will be reinstated as soon as possible, in light of the size of the net cash position, should we interpret that as when there's better visibility? And would you be looking to repay government furlough money before paying a dividend? Secondly, looking at underlying operating costs, which have reduced during the period while revenues have grown, how are you expecting those to develop relative to revenues as you execute work currently new with the book? And then thirdly, when you say the trust of the customers has improved, particularly with large customers, have you seen a sustainable change there and particularly in terms of payment timings or risk transfer during the period?

Right. So on the dividend question and the furloughs, I think I laid that out on my first slide. First and foremost, the government, for Balfour Beatty, have chipped in some GBP 15 million. And as I've said, I think that's an inspirational scheme. Our shareholders have chipped in some GBP 30 million, depending on whether you want to look at the whole year or the half year. And our employees in salary sacrifice have chipped in probably GBP 5 million to GBP 6 million. So the question is -- this is not one size fits all. I think everybody has made a contribution. And I don't think we should separate out paying back government and paying back shareholders and paying back employees. So ask me in a year's time as to what we've done and I'll tell you, but at this moment in time, I'm very comfortable that all the monies that have been received have been used appropriately in order to protect jobs. And that was the purpose of the scheme. Second, in terms of the admin costs, I'll do that, if that's all right with you, Phil. It's that we've -- our overhead is running at a rate about GBP 200-odd million below where it was in 2015. Our job is to drive productivity through digital and our back-office systems in order to maintain that low level of overhead, which I think now is going to be about below 3%. Or we're targeting below 3%. So we don't see ourselves having any latitude to raise that. This is all about driving productivity through using technology. And then the trust with our customers. I'd have to say I think it's at an all-time high. I think we've really been praised by the fact that we stuck by our customers. We kept our sites opened. We accelerated our highways and our rail businesses where the -- we were afforded the opportunity for less traffic flows, and that's been recognized. And I think, as a result of that, that the customers have looked at us more as a partner than a supplier than they have ever before, and I'm confident it will actually show great dividends in the future. And again, they've been very good and flexible about liquidity and things like that, but in truth we haven't really needed it. So there we are. And I've got a little note saying "paying dividend." I'm not sure what it means, but the fact is we hope to resume the dividend in the new year. And it's not a shortage of cash because we've got plenty of cash, but you'll all remember is the cash isn't all ours, is it? Some of it belongs to profit. Some of it belongs to advanced payments. And in the current environment, GBP 50 million of it belongs to government and government support. So I think we're in a strong cash position. Would you care to comment, Phil?

No.

We have a question from Andrew Nussey of Peel Hunt.

Phil, Leo, again a couple of questions from me. First of all, when you look at the shape of the pipeline beyond infrastructure and both in the U.K. and the U.S., what are you seeing in terms of changes to commercial terms, whether that's driven by the customer or whether it's driven by competition? And the second question, around the FY '21 guidance and earnings being sort of in line with the earnings-based businesses being in line with FY '19, can you give us any color around revenue and margins? I'm just particularly interested given the progress the business has made through Build to Last on margins and how you might expect that to flow through to FY '21, please.

We will answer your second question first, if we may, and Phil will answer that one.

Andrew, I think where we see revenues for '21 are probably either a bit lower than probably FY '19. And therefore, to recover to the '19 position, we see progress on margins. As you know, over the last few years, we've progressively increased margins through the period. So we would anticipate FY '19 -- or FY '21 what we're saying, broadly in line with '19. The mix of revenues will probably be slightly down on '19, but margins will be improved.

And in terms of your first question. It's a good question because it's a point I meant to make during the presentation. Of all of the upsides we've seen around infrastructure and pipeline and the likes, we have seen a slight weakness in what I regard the short order, so jobs which will be started and completed within about 18 months. So that is an area of slight weakness in the backlog. In terms of commercial terms and conditions with the private sector, I think it varies client by client, but it is always challenging when you're in a bid situation where you're bidding against somebody on a large whether it be office, hotel or whatever that would be. And that still can remain challenging, but we're very, very clear. And we have really set guidelines and we have a review process of risks that we will not take on at any price. So we are managing that. And I can assure you I doubt if you would ever see us return, revert to the terms and the conditions that were accepted back in 2013 and '14, which have sort of taken in some cases 5 years to play through the portfolio.

We have a question from Gregor Kuglitsch of UBS.

I mean maybe some of the questions and asking them slightly differently on sort of conditions in the bidding market. So if you can just give us some color, I don't know, if you're perhaps splitting it into infrastructure and private nonresidential; how many competitors you're seeing kind of bidding for whatever contracts in, say, the U.S. or in the U.K.; if that has increased materially; and indeed if there is sort of big margin pressure. And perhaps linked to that, and I guess the answer and perhaps answering the question myself, but your comment of a revenue decline '21 versus '19, I guess, assumes that part of the business of the private nonresidential side declines, essentially offsetting HS2 and the ramp-up of some of the large infrastructure. I don't know if that's the right way to think about it. And then maybe coming back to cash. So obviously you flagged a few, GBP 50 million of sort of temporary benefit, but fundamentally as we think about your cash guidance [ and even a ] midpoint of something like GBP 450 million or something like that for the year, which I think implies, say, [ 400, 482 ], as in I've asked this before, but I would like to hear your new reassessment of the balance sheet structure that you think is appropriate. In other words, what's the average cash balance you just basically need to be operational, all right? So is it GBP 200 million, GBP 300 million and therefore only anything and -- over and above that is really distributable to shareholders?

Okay, good. I'll take your first one, in terms of really the bidding and the margins and give you a couple examples. And Phil will take the one on the cash, if that's all right, Phil.

Yes.

And if I talk to the U.S. just for a couple of seconds, it's best done through examples. The last 2 jobs that we've bid and won in the U.S., for reasons of historical performance, we've increased the contingency within those jobs by 5 points of margin, which is effectively to cover unknown or unknown unknowns, so to speak. So I will say that the amount of cover we have within jobs in bidding has actually increased. And even recently, in the case of Hong Kong where we've -- on the GBP 1.2 billion airport, we weren't actually the lowest bidder. And so I'd have to say my general impression at the moment is there's still a lot of active bidding going on out there, but in the infrastructure area we've got far better contingency and margins than we've bid in the past. And part of that is because some of our jobs in the past have actually been a loss. So there's something wrong in our estimating, so we're looking to correct that so that we're profitable in the future. And if I look to the U.S. specifically, on our buildings side of the business: And we run a business which is roughly 4%. We're construction managers, by the way. We're about 4% margin, 2% overhead and 2% on the bottom line. And we've seen a scramble in the last 6 months for people to win work, almost, but -- and what we would regard as quite low margins, 2% and things like that. We've decided not to play in that market because we're not interested in volume. It's a lot easier for us to have a smaller business and have a profitable one than a larger one which is unprofitable. So make no mistakes. There is a behavior of some pretty strong competitive activity in the bidding market out there at this moment in time, but I think you saw from my slide, the one where I showed the amount of work that's tied up with government infrastructure -- and I would say this. The government, throughout this entire crisis, has been exemplary in terms of the way they behave. There's conversations around contracts, the management of cash flow, the release of cash, just first-first class. That is -- I cannot say that behavior has been universal over a lot of our private clients, but generally speaking, our portfolio is so skewed towards government infrastructure. I still see our outlook to be very strong, and I'm very confident in that outlook at this time. And Phil, do you want to sort of do the cash question?

Yes, sure. Gregor, the -- I think the key for us is that we've executed on our plan. We wanted to get the pref shares out this year, which we've done successfully. We don't have any cash call now in terms of debt till 2023. That puts us in a good place. So we're -- our average cash, as I said, for the full year should be in the GBP 430 million, GBP 460 million range. We'll take a long, hard look at this at the end of the year in terms of what guidance we'll put out for '21. And that will take into account our review around the capital structure, but I think at the moment we're appropriately struck at our average cash of about -- in the GBP 430 million, GBP 460 million range, at this point. But we'll update at the year-end.

Yes. And I'd build on that. Look, at the current time, it's the lockdown, the COVID, it's not over. We just don't know what the next 6 to 12 months will bring, so we are living in a period of uncertainty and now is a really good time to have cash reserves. You never know what opportunity appears or what pops up. But it's a crisis or opportunity, by the way. So I think it's really important now and any time in the past to have a strong balance sheet, and I know that will steer us well for the future.

We have a question from Marcin Wojtal of Bank of America.

Firstly, could you provide an update on the pipeline of new projects for the Infrastructure Investments division for the U.K. and the U.S.? Do you think you will be able to win some new projects in the next 6 to 12 months? And more broadly, do you still believe there will be enough opportunities medium term for you to not only rotate assets but also find projects that offer attractive returns to basically keep that business as an ongoing business? And number two, this is on the impacts of COVID-19. Will you be able to explain how do you account for the additional costs that have been generated by the disruption due to COVID-19? Did you recognize these costs actually upfront in H1? And -- or do you actually take them in each period as they occur? So actually I'm trying to establish if there was like one-off impacts or it's a recurrent impact that we should also pencil in also for the second half.

I'll do the accounting one. You do the first one. You do the infrastructure part.

[indiscernible]. Yes, okay. That worries me, that you are doing the accounting one. And so on Infrastructure Investments. We have got a good pipeline. We're actively engaged in the U.K. on student accommodation. We still think there's opportunities there. We also see opportunities clearly around redevelopment, regeneration on brownfield linked to public bodies. That's still one of our key focuses, and we've got a pipeline ongoing in that area. So we will invest and we plan to invest more money in the business. In the U.S. we are -- also, again, got an active pipeline. I can see us making investments in the second half of the year in there. They're probably more to the fore at the moment versus the U.K., so I can see as doing further investments in the second half in that particular area. So I think we're -- we've got a good pipeline over the next couple of years that we're working on in Infrastructure Investments. So there's no -- we're not disengaging from that making investments in that business. And then on -- shall I do, can I have a go at the accounting? And then you can correct me. How is that?

[ Go ahead. That's plausible ] [indiscernible].

[ It's probably the ] better way to do it. So on what we've done at half year. Clearly there are certain costs that are period costs. So for instance, anything that where we had to enhance PPE or security, anything that didn't mean that it moved the job on but was actually a cost of the period we've taken, but we also have to under long-term contract accounting reassess where we are on the contracts in terms of whether the schedule is out and whether we'll be able to recover monies for that schedule or we won't. And typically we take a -- as I said, a prudent approach because the bar to recognize those revenues is very high and highly probable. So I think we have tried as best we can to cover all of the COVID-19 impacts in the first half, yes. There may be some productivity things in the second half that we'll have to work through, but I think overall we've tried to cover off all of the COVID-19 impacts in the first half as best we can.

Yes, I'd say that, that answer is broadly right.

[ That's great ].

Having said that, on the first one, a couple of things on just the infrastructure pipeline. Back in April, we decided to decline the opportunity to proceed on a couple of U.S. opportunities for no other reason as we made the decision that we wanted to conserve cash. Those deals are still around and on the table. Funny enough, the price has actually come down because the people that -- doing the selling actually need the cash more than we do. So we will be revisiting some of that pipeline and continuing to be very selective. We have seen a delay in some of our projects around student accommodation and universities, where people have decided that student intake is uncertain and therefore they'll move out the development of student accommodation for a year. So there have been delays in that portfolio. I think one of the ultimate ironies and, funny enough, one of the areas I perhaps remain most optimistic is actually in military housing. And whereas for a number of years now we haven't really built any new military houses in light of the downside -- sorry, in light of the situation around the quality of housing and the maintenance and the challenges around all military properties, there's become a pressure to actually renew and build new now. And there is talk of raising a sort of a $400 million bond around new build in terms of military housing. And when that will happen, whether it will be 6 months, 12 months or 2 years, there's no doubt in my mind now that it will go ahead in some form or shape or size of that. And again that is something which will be done within our buildings business. And so I think that actually would be [ a very positive Philip ] over and above any forecasts we have at this time in terms of investments and the like.

[Operator Instructions] We have a question from Joe Brent of Liberum.

3 questions, if I may. We're now some way through the first half reporting for many companies, and there's quite a wide range of outcomes. I'd be a little bit surprised by you reporting a loss. Over and above the accounting answer that you've just given, are there any specific contracts that have caused a loss in the first half? And then secondly, more positively, on working capital, you've seen an inflow of about GBP 70 million partly caused by a GBP 50 million government help, but the GBP 20 million net inflow is still an impressive number given the revenue declines and unwinding of negative working capital. Can you just talk us through why that working capital number is quite better than certainly I would have thought? And finally, in the U.S. you've talked a little bit about infrastructure. You haven't talked much about the much bigger buildings business. Can you give us some insight as to the outlook for buildings and in particular the residential market which you already thought was slowing prior to COVID?

Will you do the first two? I'll do the third one.

Yes, can do. So Joe, on contracts, clearly we've looked at all our significant projects. I wouldn't call out any specifics on those contracts. Clearly, some of them will be impacted more than others just because of the situation that some of those contracts found themselves in. So for instance, in our highways business those contracts didn't have as much impact as, say, in our buildings business because they were able to run more productively through that period. So there's not really a project I can call out on the first one. On the second one, for sure, we've had help in terms of support from the governments on tax deferrals. I think the other thing that Leo alluded to is that we did see from government faster payment cycles in certain areas. That did help us. Some of those faster cycles, of course, the quid pro quo is we pass that straight down the supply chain to others, but I think in general we've had a tremendous focus as we have over the last 5 years. But I think people got even more focused, in the lockdown, in trying to drive working capital even harder. So I think that focus really did help us because people were looking at this daily, but we did get some help, I have to say, from government in advancing some of their payments. So they're the 2 things I would say are the -- I'd [ point on ]. And then you've the third...

Yes. I do think, Joe, just very quickly -- and Phil. I sort of I don't often give Phil credit, but it is appropriate from time to time, but that's in the area of how the finance team has engaged with the operation and the regular review cycles and how cash is managed within the company. We realized from the beginning not only about maintaining capability, keeping our sites open, but we had to maintain liquidity. And we went to war in terms of making sure we were doing all of the right things around cash, particularly paying people on time because, you've got to remember, it's cash flow. [ The idea ], as soon as we get it, we want to get it out because we want to make sure that we keep the capability in place. And I think, if you talk to the industry, I think we've been an exemplar on that. In terms of our U.S. buildings business and -- superb performance. They've sort of not missed a beat. They've had some real challenges. As you know, our largest contract in the Northwest shut down for about 6 weeks. Florida as a state almost stopped when the entertainment industry stopped, but they've worked through that and they've kept sites open. You've got to remember is that, although it's a building business, we're the largest school supplier in California. We're building hospitals in Washington, D.C. and the Northwest. Texas is largely a office commercial-type environment, but net-net out of that portfolio, I think it performed very strong in the period and a real credit again to our leadership over there.

I think it's true to say, though, that one of the things we are conscious of going forward into '21 is around the -- and we still think about the residential and the commercial space in the U.S. We have seen, it would be true to say, less orders in the period in that particular space. So that is an area that we are monitoring. I think we're -- because of our order books, we're in reasonably good shape for '21. I think, if we're going to see something happen in that area, it's probably a -- probably impact us more in '22 than '21.

But having said that, we've already taken action in that business despite actually a good, a strong first half. We've consolidated some of the areas. We've taken out about 100 people. We've moved a couple of layers of leadership in certain regions. So we've actually acted now for what we anticipate in '22. So again, hopefully, we're ahead of that particular curve.

We have a question from [ Stephen Robinson ] of Applied Value.

Stephen Rawlinson here. Can I just ask 2 questions really in and around what you've been able to think about in terms of the customers and the future? First one relates really to the commercial viability. I mean, are they good for the money to complete the projects which are currently underway? Recognizing of course that 75% or more of public sector are regulated industries, that still leaves some exposure to private entities which may or may not be good for the money in COVID-19. And secondly, to what extent [ have you been able to ] examine the projects to understand whether there may be calls, issues with regard to delays of COVID-19 possibly around customers' willingness to actually complete projects and so on? So have you been able to examine both those 2 issues with regards to customers' willingness to -- or ability to pay and also willingness to go through to continue with the projects and the timescales given that there have been delays? Have you been able to look at that and making the comments about the future based on some examination of that?

Yes, on the first one, obviously you pointed out if 75% of our portfolio is largely government and local councils and whatever. Security of cash is there and really doesn't come into too much question. You could be delayed and you could have a dispute. And we stay on top of all of our jobs pretty regularly. And at this moment in time, there is only one developer in Hong Kong who owes us a few million pounds, and we can't get paid until he sells his flats [ for his building ]. And of course, Hong Kong is a very unique environment at this moment in time. And I'm just trying to think out loud and across such a large portfolio. I'm not -- there's nothing at this second in time other than the Hong Kong one which is on my desk and, by the way, is being tracked by the joint venture board every week. We get a report on it. Can you...

We've taken a position on a couple of U.K. areas. We assessed their viability to pay and we've taking -- we've taken a view accordingly. That's probably the -- and the U.S. has done a similar assessment, but at the moment, in the U.S. we haven't taken anything on those. They're pretty much okay at this point, but we have done a couple in the U.K.

Yes. And I think, on that thing, on that point, I mean, the real impact from COVID isn't going to -- hasn't happened. I mean you're going to see it towards the end of this year, into next year and whatever. So your question is a good one and it's something that we're definitely alert to. We just haven't seen much of it at this moment in time, but that's not to say it won't happen and happen with speed. Your second question, do you want to repeat it, Stephen? Or did you get it?

Well, yes. It was just in and around the whole issue of projects that may be delayed. And we know in this industry that calls can occur. COVID-19 clearly has caused some delays, but the performance of some of your contracts may not allow you adequate relief within those. And I just wanted to know like to what extent you've been able to examine that. Clearly, some of them may have a clause with regard to pandemics or disease. Others may not. And others may have issues in and around what defines mitigation from such issues. So just in and around the whole area of risk on project delays and the subsequent typical industry calls that can occur around that and to what extent you've been able to understand that and reflect that in what you're telling us today.

Now I understand the question. I'm very comfortable. We've reviewed every single one of our contracts in terms of that so that we know whether or not we can apply a force majeure clause, whether we can claim back. And we know where we can claim time. We know where we can claim time and cost, and we know where we've got no entitlement because of the way the contract is written. So we've been through that in great detail. And do you want to add any more to that?

Only that we've put that into our reassessments of contracts in the first half and taken a position accordingly.

Yes, [ of course, I'm sure ]. I guess you've had but wanted reassurance on that [indiscernible].

[ No, no, we have, yes ].

We definitely have. Whether we've got it right is another matter, but we've tried our best.

Yes. While waiting for the final question, maybe just a quick summary: Our #1 priority throughout this crisis has been to maintain capability. We need that to deliver our GBP 17.5 billion record order book, which is growing. And we are looking into a very favorable market outlook in terms of infrastructure, where I think we're perfectly pivoted, and the liquidity we have in our balance sheets which will keep our supply chain intact is very strong. And our sort of brand with our customers is better than it's ever been. And my summary is that I think what we've seen in the first half is an event. It's not the future. Net-net-net, I don't think we've ever been better positioned in my 5 years, so I'm looking forward to the next few years with confidence. I think we're done. Thank you all. Appreciate it.