Balfour Beatty plc (BBY) Earnings Call Transcript & Summary

Good morning. I'm Leo Quinn, Balfour Beatty's Chief Executive, and I'm joined today by Phil Harrison, our Finance Director. You know him very, very well. Phil will take you through the 2020 results, and I'll take you through the outlook for 2021 and beyond. It's obviously been an interesting, challenging year. And I'd have to say that what we're announcing today was really what we would have liked to have announced a year ago. So in a way, 2020 feels like a little bit of lost year. But I think the outlook remains very positive and encouraging. And it remains positive and encouraging for what I think are the following reasons: Balfour Beatty is very well positioned geographically in respect of Hong Kong, the U.K. and the U.S.A. All of these markets will benefit from what I think will be a fiscal infrastructure investment over the next 5 to 10 years. And we're also uniquely positioned in sort of a green gold rush in that we provide electrification for railways and wind farms and the likes of that and also new nuclear power, which means we're uniquely positioned to take advantage of what effectively is the uplift in that market. In terms of our order book, we have a record order book, some GBP 16.4 billion. But I think more importantly in that order book, it's tilted towards a lower risk profile, which I think gives us a better outlook in terms of earnings. We actually have to turn that backlog into revenue and profit. And build to last has left us uniquely positioned over the last 5 years to have the capability to do that and to execute well. Effectively, we've invested in maintaining capability and building capability over the last 5 years. Over the last 12 months, we've paid the price to maintain that capability so that we can deliver that backlog for the future. Those future earnings for me will deliver themselves in cash. And as you know, in this business, I've always said the one priority we have is cash because cash is the one thing that doesn't lie in our business. If you look at our cash performance over the last 5 years, what you'll see here is, effectively, every single Friday at 3:00, I actually get a cash forecast. And this actual data, if you expand it, is the weekly cash flow for the last 5 years. And what you can see is you can see the warts and all, peaks and troughs and how it performs over the period. But net net-net, what you can see is a steady march towards net cash in our bank account. And over the period, our cash has actually increased by approximately GBP 150 million a year. Over the last 5 years, in respect of our gross cash, we've paid out from that our dividends; we've paid out from that our debt, over GBP 425 million of debt has been paid down, over GBP 110 million in private placement has been paid down; and also, we've covered some very thorny commercial issues over that period. And yet, we still managed to perform at this level, which I think is outstanding. If I actually look at our cash requirements going forward, the amount of debt we have is quite minimal. We have a strong backlog with good earnings in there, which we can turn to cash. And we also have an investment portfolio of some GBP 1.1 billion, which effectively we'll be looking to actually trade, invest in and actually sell down over the next few years. So when I think about all of that, I think we're actually in a very strong position to look at future cash returns for this company. I know as we've all worked from home over the last few months, we've gone through the kitchen and, invariably, the television has been on, and we've been tortured by things like catch phrase or some other of these quiz programs. But if I was to think about the best analogy, if you've actually watched Tipping Point over in America where the bases are all loaded, it just feels that we've reached that tipping point within Balfour Beatty. And it's that confidence, which actually has had us increase our 2021 cash returns to GBP 150 million rather than the previous GBP 50 million that we have announced, so I think a rather optimistic outlook. I'll now hand over to Phil who will take you through 2020, and I'll return and give you a bit more detail. Thank you.

Thanks, Leo, and good morning, everyone. If we move to the headline numbers, 2020 was an unprecedented year for the company and the countries that we operate in. The pandemic touched all aspects of our business, both good and bad, as we adjusted to operate in this new environment. The business has been very resilient. We maintained strong liquidity with a positive cash performance. The order book grew 15%, our investment portfolio was stable at GBP 1.1 billion and we returned to profitability in the second half of the year. The strength and resilience of our business provides the platform to make the right long-term decisions such as repaying GBP 19 million for the U.K. Job Retention Scheme, reinstating the dividend and commencing a share buyback program under our new capital allocation framework. It also provides us with the confidence that 2021 will be in line with 2019 for our earnings-based businesses. Over the next few slides, I will take you through the impact of COVID-19 on each segment. If I move to Construction Services. This is a business area where operations have been most impacted by COVID-19. Despite site closures, particularly in the second quarter of the year, revenue was resilient, following a double-digit increase to the order book in 2019. However, profit from operations was materially affected. U.K. Construction was impacted by the following 4 factors: site closures, most notably in Scotland, which was effectively closed in the second quarter of the year; lower productivity as a result of disruption to operations, most notably in London; additional operating costs across all sites; and a lengthening of site programs, which triggered a reassessment of the group contract and forecast positions. In the U.K., the loss from operations at half year was GBP 23 million, which increases to a GBP 34 million loss after adjustment for the intended repayment of funds received through the job retention scheme. U.K. Construction did return to profit in the second half of the year by GBP 8 million. But specific sectors, such as aviation, have seen a material slowdown throughout the year, which means that for the full year, the U.K. reported a loss of GBP 26 million. U.S. Construction was also negatively impacted by COVID-19 as all geographies were affected, most notably Washington State, where sites were closed in the second quarter, and in Florida where the hospitality sector was materially impacted throughout the year. Although U.S. nationwide forecasts show a decline in the overall construction market, Balfour Beatty is positioned in regions that are expected to perform better than the national forecast as demographic shifts continue to favor the group's chosen states in the medium term. Gammon performed strongly. Both revenue and profit increased in the year as the impact of COVID-19 in Hong Kong has been lower, in part due to its experiences from previous viruses such as SARS. Gammon has a material share of the Hong Kong market, which has historically benefited from significant public sector investment. This appears set to continue, with the government recently announcing ambition in its February 2021 budget to increase spend materially over the medium term, including long-term plans for hospitals, housing and low-carbon infrastructure. Now turning to Support Services, which has been a good success story in the year as most of our contracts were designated as critical infrastructure. Revenue increased by 4% as a result of higher volumes of power and transportation. Underlying profit from operations for the year was broadly in line with last year at GBP 46 million as the increase in volume was offset by disruption caused by COVID-19. The group was able to accelerate road and rail maintenance programs for some customers due to lower volumes of traffic in the year, but this was offset by other customers reducing maintenance expenditure given the economic uncertainty. Following the decision to exit the gas and water sector, Support Services is now focused on power and transportation, both road and rail maintenance. The power sector is expected to see a wave of new demand as the U.K.'s Build Back Better initiative is underpinned by key environmental targets that are likely to result in more wind power and new nuclear generation capacity. The highways maintenance market is forecast to see significant investment following the announcements of an additional GBP 2.5 billion in funding, which will increase local council budgets by 45% over the next 5 years. Further, over GBP 700 million of outsourced contracts are up for renewal between 2021 and 2025. And finally, the rail maintenance market also has a positive trajectory with an additional GBP 10 billion of funding for renewals as part of the latest network rail control period, CP6. Turning to Infrastructure Investments. Underlying predisposals operating profit decreased to GBP 8 million, primarily due to a provision for an estimate of historical military housing incentive fees, which Balfour Beatty has proposed to repay. The provision was calculated for in the group's own independent investigation, which is now substantially complete. The group's findings have been shared with the U.S. Department of Justice, and Balfour Beatty is currently seeking resolution with the DOJ. As the investigation is still ongoing, we are not able to provide any further indication with regard to timing or quantum of any possible final penalty that may arise. As a result of the market uncertainty generated by COVID-19 and the strong liquidity position of the group, we did not dispose of any investment assets in the year. In 2021, the group will recommence selling investment assets timed to optimize value to shareholders. If I turn to Directors' valuation. 2020 was relatively stable for the business as the value increased by 2% to GBP 1.086 billion. The group invested GBP 46 million in new and existing projects. Cash yield from distributions amounted to GBP 72 million. The continuing yield during COVID-19 demonstrates the essential nature of the infrastructure investments portfolio. Unwind of discount at GBP 83 million as a function of moving the valuation day forward by 1 year. And operational performance movements resulted in a GBP 39 million decrease, partially as a result of foreign exchange movements, which was circa GBP 20 million. The next slide demonstrates the value created from the Investments portfolio. Before we look at the disposals, it should be noted that we have historically invested approximately GBP 50 million in new projects each year. 2020 was no different with GBP 46 million invested. The business continues to see significant opportunities for future investment in its chosen geographic markets, particularly in the U.S. where the focus is on student accommodation, multifamily housing and public-private partnership opportunities. When we invest in new projects, we do so where expected returns meet the group's internal hurdle rates, including a 2x end-to-end multiple, calculated as the sale proceeds plus distributions received over time. Looking back, the group has realized, on average, GBP 100 million of disposal proceeds per annum with the realized average end-to-end multiple greater than 3x. Looking ahead, the group continues to see a strong secondary market for its investment assets and the ability to generate good returns through the active management of the portfolio. Now if we move to cash flow. Another year of positive cash flow as we've generated a total cash inflow of GBP 69 million in the year, increasing the group's net cash position to GBP 581 million. The increase has been driven by almost GBP 300 million of operating cash flows with working capital, the most material line item. The working capital performance in the year was underpinned by movements in net contract assets, which benefited from a number of settlements during the year, both in the U.S. and U.K., including the Aberdeen Western Peripheral Route contract earlier in the year and the mobilization of a number of highway projects in the U.S. The group expects to operate with a working capital percent of revenue between 10% to 12%, with the range dependent on contract mix and the timing of project starts and completions. In terms of other material movements during the year, in March, we repaid $46 million of our U.S. private placement notes. And in July, we fully redeemed GBP 112 million of the preference shares, which will save GBP 12 million per annum in interest costs. Following this redemption, the group now has no more debt to repay until 2023. Now turning to the new long-term capital allocation framework. Balfour Beatty understands the importance of delivering attractive total cash returns to shareholders. We are, therefore, committed to maintaining an appropriate balance between investments in the business, maintaining a strong capital position and cash returns to shareholders. As such, the framework comprises the following 5 points, 2 of which we've already covered in Infrastructure Investments, namely, continued investment in organic growth opportunities, which meet the group return hurdle rates, then active realization of investment assets with disposals, timed to optimize value. Following on, we want to maintain a strong but efficient balance sheet, which provides the financial platform to make long-term business decisions in response to both opportunities and periods of market dislocation. In terms of capital returns, we are committing to pay a sustainable ordinary dividend targeted at a payout ratio of 40% of underlying profit after-tax, excluding gain on disposal of investment assets. The Board expect the ordinary dividend to grow over time, in line with earnings, and an additional cash returns via share buybacks or other mechanisms depending on market conditions. This will be broadly based on surplus cash from disposals from the Investments portfolio as well as the surplus of operating cash flows, which are not required to meet business needs, such as capital investments and pensions. So turning to the outlook. What does this all actually mean for 2021? In 2021, we expect the earnings-based business to be in line with 2019, Construction Services expected to recover strongly, while Support Services should continue to perform well. Looking further ahead, the quality and quantity of our order book provides clear visibility that we should continue to grow earnings into 2022. In our Investments portfolio, we will continue to invest in opportunities that we believe will hit our minimum returns and have the potential to return 3x our initial outlay. In 2021, we'll restart this virtuous circle through asset sales from the portfolio. As we go forward, the cash generation from earnings and asset sales in excess of business needs will provide multiyear opportunities for additional shareholder returns over and above the ordinary dividend. As Leo said at the beginning of the presentation, given our strong outlook, we are increasing the initial share buyback program by GBP 100 million, so the group now expects to return GBP 150 million in the year. At this time next year, based on business performance in 2021, we'll set out our additional cash returns for 2022. Thank you, and I'll now hand you back to Leo.

All right. Thank you, Phil. As I said in my introduction, the outlook for 2021 and beyond, I think, is quite optimistic, and I'm very encouraged by it. First and foremost, if I look at the markets into which we play, if I look at the U.K., U.S.A. and Hong Kong, it's been a deliberate strategy over the last 5 years to concentrate our efforts in those economies. I believe that they will be the economies that will recover first and strongest from the pandemic. Secondly, as I look towards all the governments, there will be a move towards fiscal expansion and, specifically, investment in infrastructure. Whether it's Biden's Build Back Better or Boris' Build Back Better -- Project Speed, acceleration, et cetera, or in the case of Hong Kong, the Climate Action investment in green, all of those will actually talk to, what I think, is a very encouraging positive market that we're selling into. If I look at the green agenda, Balfour Beatty is uniquely placed to take advantage of these markets. We're a major supplier of electrification of railways in the U.K. and also some in the U.S. HS2 is our biggest order in this area, but there are other projects coming down the pipeline. In terms of renewable energy, we are the largest provider to the likes of National Grid and SSE in terms of transmission cables and substations to take the wind power across and connected to the grid. And then finally, in the case of new nuclear, we are supplying the cooling tunnels for the nuclear power station plus all the mechanical and the electrical, and we're working on size we'll see in terms of advanced studies on that particular plant. So fundamentally, in terms of green, sustainable infrastructure, we're very, very well placed for the future. In light of that, what we've done is we've republished and renewed our sustainability strategy for the future. We're looking at the environment in terms of carbon, we're looking at waste in terms of materials and we're looking at effectively communities and social value and how we put things back into those communities. We set targets for CO2 around achieving net zero but actually going beyond that; in terms of material, 2040, looking at zero waste; and in terms of the community, impacting over 1 million people. In the interim, we've agreed to put in place science-based targets for 2030, an interim target for reduction and also GBP 3 billion of social value. These are all very bold targets, but I think they're meaningful, and they set out a very clear declaration to which we wish to be held accountable. Sustainability, our green agenda, is not something new. We've been actively engaged in over the last 10 years, whether or not it's opening up quarries and using the rock for road base and then returning those quarries to the natural state. But if I look across the group today, in Hong Kong, for example, we've looked to replace site diesel generators with battery-powered backup, which is an 85% reduction in carbon emissions. On the Hinkley project, we specifically built this slurry treatment plant whereby the 1.6 kilometer of tunnels that we'll build for the high-speed rail, the tunneling material will actually be poured into these settling tanks, the solids will settle out, they'll then be pressed dry, and that cake will then be used to firm up the embankments and stabilize them. So effectively, we're moving 0.25 million cubic meters of materials and actually taking nothing off-site, all around the fact that we're recycling in situ. And this has gone on for many years on all of our projects. And then in the case of actual people and actually investing back in the next generation, as you know, Balfour Beatty and myself are a great driver of The 5% Club. The club today actually represents over 1 million employees in the U.K. alone and 60,000 of those are actually apprentices. So there's nothing more important in terms of sustainability than investing in sustaining capabilities, so people have the skills in order to do the jobs required of them in the future. And this is a very interesting study in Seattle whereby 26% of the project hours were undertaken by apprentices at the request of the client. And I think that's a great leadership example, and we should see much more of that across the globe. If I then look at the second area. We talk about the fact that we are selling into a growing market supportive of what we do, the second area is our order book. And you can see over the last 3 years, our order book has grown from GBP 11 billion to GBP 16 billion. What's actually impressive about that is just that we weren't actually even trying to grow the order book, it's just that we're positioned in the right place and at the right time where our skills and capability lend itself naturally to take advantage of the growth opportunities. You can see that we've exhibited growth here primarily in the U.K. around infrastructure and also in Hong Kong. In the U.K., it's highways, it's High Speed 2, it's Hinkley, it's Thames Tideway. The primary driver in Hong Kong is actually the airport infrastructure. The 2 areas where we've seen a decline are primarily in our Services business in the U.S. In our Services business in the U.K., we've exited the gas and the water business, contracts which we've had in framework for 7 years-plus. And we've exited those for 2 reasons. One is we're not making any money and two is the onerous terms and conditions that lend themselves to our balance sheet are unacceptable. So we've said that we're not going to play in that market. In the U.S., the reduction that you see here is 2 factors. First and foremost, it's coming off an all-time high in 2019. Exchange rates have seen it reduced. And we've also exited the water market in the United States in terms of our ability to actually execute those contracts profitably going forward. So I'm encouraged by our order book, and I'm encouraged by the market that supports that. What's actually more important than just the size of the order book is actually where the risk profile is leaning. And it's leaning towards what I think is a much more favorable environment in order to enable us to deliver satisfactory returns. So you can see right across the board, and I'll explain the nuance in the U.S. in a few minutes, we are very heavily gauged towards public and regulated markets with a small amount in, actually, the private market. Support Services, for example, is primarily now power, transmission, plant and equipment, road and rail businesses. In the U.K., our civil infrastructure business is around nuclear, roads and railways. In the United States, the model is slightly different because we have a lower risk profile where we do construction management where, effectively, we get a fee on cost. So we are responsible for delivering against schedule. We're not naturally responsible for the direct cost. And if costs rise, we get a fee on that cost or if they lower, the same. So fundamentally, in the U.S., we have a smaller infrastructure business and a larger construction management contract business, which means the U.S. is generally a lower profile, lower risk business for us. And in the case of Gammon, we're seeing big impacts in terms of tunneling, roads and airports. Generally speaking, the position of our backlog is such that I'm more confident in our ability to deliver earnings growth. Going forward into the future, particularly in the U.K. with the new construction playbook, there's a much better, fairer playing field for us to play on whereby it will actually be easier to ensure that we've got the right contracts, delivering the right returns for the company. The final area I'd point out here is actually the nature of the actual business within the portfolio itself and the types of contracts. And you can see here, in the case of the U.K., just how much it's grown over the last couple of years. And the 3 major reasons for this growing are, effectively, highways, Hinkley and the likes of HS2. But you can see that that's actually disposed in target cost. So effectively, we'll have a target cost. And if we achieve that target cost, we'll achieve our margins. However, if we actually do better, we can get an enhanced return. And if we do worse, we get a slightly lower return. But our actual returns are banded. And so in effect, this is a much, much lower risk environment, which encourages us to play. We have -- 10% of our portfolio is in effectively cost plus, and we still have about 20%, which is fixed price. And that's an area that, over time, we'll look to reduce further. So fundamentally, we've got a rising market in terms of infrastructure. We've got a strong order book with a lower risk profile and throughout Build to Last, what we've built over the last 5 years is the capability to deliver on that. So good market, good backlog, good capability to deliver. And within Build to Last, we have Lean, Expert, Trusted and Safe. Lean was about cash in and cost out. And what you can see here is that our cash profile is such now that it's above the zero line, and you can see it's far less sinusoidal and much more forecastable and predictable. So Lean, we're performing well. In terms of Expert, which is really around employee retention, you can see that we're up year-on-year by almost 10 percentage points. In terms of Trusted and customer satisfaction, 2 years in a row now we've been voted as the most admired in our industry sector by competitors, employees and customers, which is a great accolade to how far we've actually come. And then in terms of Safety, safety for me is really a forward indicator of how the business is performing and the efficiency and effectiveness and productivity on our sites. And you can see how this is continuing to trend down to achieving 0.1 for the first time, which is equivalent to 1 lost time accident for 1 million hours worked, which is a really good target for us. For the first time, what we've done is we've included our sustainability statistics and our CO2 emissions. And you can see how they've nearly halved over the last 5 years. So effectively, all of these leading indicators talk very well to a prosperous future in terms of execution for the business. In the last 5 years, what have they really delivered for us? I think it's really, really clear. From '14 to '20, we've delivered nearly GBP 1 billion of free cash flow out of these activities. Our overheads have actually halved from GBP 470 million to 2026 or -- GBP 226 million. That's just 3% of revenue, and we're looking to maintain that going forward in the future. Our attrition rate has reached below 10% for the first time, and there's a real cost to churn in our business. So the lower that number is, the better it is for us. And so therefore, we've gained the benefits there. And in terms of earnings, we're still positive. But looking to 2021, we're looking at 2019 earnings or getting back there, which is another GBP 100 million increase on our earnings for this year. Also in terms of execution, we've driven an awful lot of efficiency through our digital agenda. And back in 2015/'16, what we were doing is we were standardizing around a single platform, be it R12 or JD Edwards in the U.S. Around that, we created our Project on a Page, so we could transparently look real time at how projects are performing or our definition of real time. Our data lakes meant that we could extract information in a way and a format that we need to run the business. And then built on those data lakes, we've put in a better procurement system, in our case, it happens to be Jaggaer. And then what we did is we got ahold of site productivity by actually access, control and entry in and off of our sites and the monitoring of labor. We've looked at design integration through BIM models and the ability to exchange seamlessly between consultants and ourselves to drive efficiency around the movement of data. As we all know, this year has been interesting in terms of the likes of Teams, and that's done some remarkable things in terms of actually granting us quicker, faster access. And I was talking to our Head of HS2 the other day on the material difference that Teams has actually made to getting faster, quicker decisions and executing and mobilizing jobs in a very safe, efficient way that we haven't done in the past. So I see this as a productivity tool that will be with us for a long time and a lot of benefits. Out in our field and our operations, we're now putting together digital models. So we're effectively building things twice, building them once digitally and then executing. This is a picture of the M25, which we maintain, monitor and keep open. And we can monitor all of our service and maintenance of the road service, response to accidents and the likes of this. So this is a real step forward in terms of our efficiency. And most recently, we opened our operating skills hub whereby, in conjunction with HS2, we're training young people in terms of simulation, autonomous vehicles and real live excavators and trucks as to how to acquire the skills to operate on site. So digital for us has done well and will continue to deliver as an investment in the future. Back in '15 and '16, you can think of it as if we're building out a housing estate. We put in the utilities, the pipe work, the water, the sewers. And what we've done is we've continued to build on that, and we'll continue to build into the future. So really, in summary, I'm optimistic about the future and our outlook for 3 reasons: we've got a growing infrastructure market, both in terms of the countries we're in, infrastructure investment and the green, what I call, gold rush; we've got a record order book, which is not only large but is actually tilted towards a lower risk profile than in the past; and our ability to execute based on the skills of Build to Last where we've built them over the last 5 years. 2020 was a year that we paid to maintain them, will allow us to execute, coupled with our GBP 1.1 billion investment portfolio, leave me confident that cash will grow, both from earnings and investment, which I actually think will give us significant capacity for long-term shareholder returns and gives us confidence today by announcing a GBP 150 million share buyback for 2021. On that note, we'll hand over for questions.

[Operator Instructions] Our first question comes from Gregor Kuglitsch from UBS.

Can you hear me?

Indeed, Gregor.

Yes, a few questions, please. Maybe one, and you mentioned the construction playbook and sort of the mix of contracts, particularly in the U.K., but if you could just give us sort of a flavor what that all implies for margin. And maybe it doesn't imply that much for margin, maybe it's more a risk point, so thinking about the level of margin in the U.K. and the sort of variation around that. And maybe related to that, and maybe this is more a question in the U.S., what you're seeing on new tenders. So is there more competition? I'm thinking specifically on non-res in the U.S., whether it's become a little bit more challenging or maybe it's not the case, but that would be interesting. The second question is maybe a technical one, but you flagged a few exits. So I think in the U.K. Support Services business and also in U.S. Construction, if you just give us some quantum of the revenue that is likely to fall away with that. Maybe I don't know, what time horizon, maybe it's already happened, but that would be interesting. And then maybe one for Phil, what your expectation is for average net cash for this year after, obviously, the strong performance of last year.

Okay. I'll leave Phil to deal with the facts and the net cash. In terms of the Construction playbook, I think the primary advantage for the Construction playbook is it allows for a much more sensible dialogue with the client around terms and conditions because, quite often, if the terms and conditions are onerous, such as consequential loss or some onerous liquidated damages, it's really a case that we won't play. So the first point is, by having sensible terms and conditions, it gives us the chance to play. The second is the Construction playbook is largely a 2-step process whereby you're effectively -- you win by virtue of capability. You are then sort of paid for your selling expense in terms of when you put your bid together. And then finally, you can assess the risk. So you have time to consider the risk and actually quantify it, and then you go back to the customer. So I think the playbook will be a major step forward for us and the industry, by the way, not just Balfour Beatty. If I look at U.S. tender margins, it's a really interesting question. Over the last 45, 50 days, let's say, 60 days now, we have unquestionably seen much more competition in our construction management business. So this is a business where we normally bid it like, for example, 4%. We have a 2% overhead, and we deliver a 2% return. The turnover is about GBP 4 billion as a business. So we've seen that, in some cases, some of the numbers around the fee is actually, we think, quite suicidal, below 2. So invariably, we don't play. But you have to balance out the short term and the long term, and we're being very selective. But I think we will, in the short term, see pressure on the bidding in U.S. margins. But I think that will normalize as the economy recovers more. And of course, the Biden, what is it, $1,200 or whatever or $1,400 for every family, that will see everybody going back to Disney and then, hopefully, those projects will all reopen for us. In terms of business we've exited, you asked for revenue. The U.K. gas and water business, Phil will correct me, is about GBP 300 million a year. But you got to understand, if it doesn't make any money, the revenue is largely irrelevant. So the 2 contracts we have in question is one in the U.K., one in Ireland. The U.K. one has 14 more days to run. So that finishes at the end of March. And the Irish one runs through the end of, I think, it's June or July, but it's in that period. So the reason we didn't go forward with them is that the terms and conditions associated with them would put our GBP 8 billion balance sheet at risk and was onerous. And if you're not making money, why would you do that? In terms of the U.S. business, in terms of water in the U.S. where we're effectively trading down the last remaining contracts, that business historically was about $300 million, I think, just there or thereabouts, a little bit below that. And it's a very unusual market because the client that we invariably deliver -- sell and deliver to will only build a water treatment plant every once 20, 25 years or something like that. And invariably, they're a very inexperienced buyer, and you end up with lots of complications. So again, the risk profile around that was just deemed to be not worth the effort. And we've got plenty of other work in the likes of highways and schools and areas like that where we're focusing our efforts. So I think that just leaves the net cash question to you, Phil.

Yes. On average net cash, we're not giving guidance on average net cash at this point. Clearly, with the GBP 150 million cash share buyback, it's difficult to forecast how that will play out. I think the more important thing is what we laid out in terms of how we're going to treat this as we go forward. So clearly, we'll be updating everybody on what we think the surplus is and what we determine is going to be the kind of next share buyback in a cycle. So it's a constant reassessment that we'll now do on an annual basis in terms of what we believe is surplus to one or 2 requirements.

I think Phil feels that we've judged it correctly, and he doesn't want to be embarrassed by his riches, do you, Phil?

Fair enough.

Our next question comes from Andrew Nussey from Peel Hunt.

Yes. I mean, I guess, following on from Gregor's question where you expanded on the U.S. Leo, could you do something similar in the U.K. in terms of that commercial sector, what you're sort of seeing in terms of headwinds, potential around receivables from clients who might be in a slightly tougher place and margin outlook? And secondly, sort of more generally, obviously, historically, the aspiration to get to sort of industry-leading margins. When we look beyond '21, should we expect your ability to continue on that trajectory to improving and getting towards that industry-leading position?

Yes. Let's take the second one first, if we can. As I look at '21-'22, if you look at the U.K. mix of the portfolio, I would be encouraged to see improving industry-leading margins. But I'd qualify that in one context: not all infrastructure construction companies are the same. We don't carry really a housebuilding portfolio. And typically, the returns in housebuilding would be between 20% and 25%. And so when you put that into the mix of construction, it will actually lean you towards the 5% mark. But I would say, as you -- if you look at the mix of our portfolio and the risk in our portfolio, I'd say I'd be extremely disappointed if we didn't start to see some earnings growth, and that we were at industry-leading margins in '21, '22, '23. I don't think this particular outlook, although we talk '21, is really about '21 in itself. This is really an inflection point for the business. And then I see us moving forward strongly in the future. In terms of the headwinds, I -- there will be headwinds. But I'm actually very positive around what the government is doing, the need to restart the economy, the need to invest in construction, the need to get people back to work. And we're in a very logical place to start in terms of infrastructure investment. So I'm encouraged by what I see in terms of the road pipeline. I'm extraordinarily disappointed by influence planning still continues to have in terms of stopping jobs getting started. And the reform of the planning system is required urgently, especially around our type of business. But I'm encouraged by road investment. I'm encouraged by rail investment, the nuclear investment. So I think the outlook is very bright. I think there will be this challenge around commercial offices in the London and other regions. And I can see that reducing, but we don't have a huge exposure to that. We have some. But we are predominantly large infrastructure. Is there anything you want to add to that?

No.

Does that, Andrew, answer your question?

Yes. Sure.

Our next question comes from Jonny Coubrough from Numis.

Can you hear me okay?

Yes, fine. Yes, carry on.

Yes.

Brilliant. Three questions for me, please. Firstly, on U.K. Construction, I'll be keen to hear where you're seeing productivity on the ground now and how that's progressed during the current lockdown and also whether you're seeing any offsets from the digital productivity initiatives that you outlined in your presentation. The second question would be on the Investments portfolio and what's leading to the increased investment in student accommodation. And also if you can give any kind of outlook for where investments and disposals could likely be focused going forward. And then working capital, I appreciate you're not giving average net cash guidance but would be keen to understand kind of what that could look like in 2021 and also whether you'd expect there to be any impact on working capital and the payment terms from the VAT reverse charge.

Right. I'll do the first one, and Phil can do the next 3. So outlook for U.K. Construction, I suppose on balance, I can see -- provided the economy recovers and that we don't have another outbreak of COVID, I would be balanced about it. I think it will be a steady positive recovery. I would point out here and now, and I think it is important, is that we're not through the disruption that COVID has caused. And interesting enough is that when we have somebody tested positive here in some of our contracts, we found that there might be a couple of people get tested positive, the actual biggest issue is that all the people that are around and associated with who get pinged have to self-isolate. So that does cause disruption. I'm hoping it's getting less and less. And we've seen reductions across some of our major projects where we saw in January, some, after the Christmas period, people coming back. So it's not clear blue water out there, but it is a very positive direction of travel at the moment. If I look at U.K. Construction, I think highways will do well, HS2 will do well, Hinkley will do well. These are all big projects under control where we're delivering and delivering very, very effectively. The digital agendas and the things that we put in place around the movement of materials, wireless access entry and all these things, I think, will enhance productivity. And digital mapping also allows us to do things remotely, which, in the past, we've had to go out and do it on site. I did make the point in my presentation around the impact that Teams is having in terms of access to people, the speed of making decisions and getting in front of people is really accelerating progress. There are disadvantages. It's very difficult to train people, it's difficult to bring on young people. But it's having a material impact, I think, and will do for a long time. The airports, I think, will start to recover in U.K. Construction. So I would say 2021 is going to be a transition year for U.K. Construction where I think it will make steady progress. I think 2022 will be, I think, a very good year, and '23 beyond that will be very strong as well. I'll just touch on student accommodation only, and then you could just touch on Investments. We did have a number of student accommodation projects delayed whereby we are the -- so design, build, finance and operate. There was some uncertainty around students coming from abroad in attendance. And so there were some deferments around building out campuses. We're now starting to see positive conversations about those being reengaged. And of course, we make our best returns when we have a successful delivery of a campus where we're doing the finance and then the maintenance thereafter. So I would say that market is going to come back again for us for the -- and we'll be building this year for the student intake of 2022-'23. Phil?

Yes. No, I agree with Leo. The -- clearly, we've got a pipeline in student accommodation, both in the U.K. and U.S. We're very selective. Clearly, we're -- typically, we're on campus. It's been one of our key things usually working with the universities. And we still believe there's good returns to be had there if you've -- if you take a selective approach to it. So we'll continue with that. On the average net cash, we will report average net cash. We're not -- that's a metric that we'll continue to show. I think, as I said in my comments earlier, one of the key things here is around what's going to happen with working capital, so what's working capital movement is going to be. We've kind of set a range that we think we'll operate in, which is 10% to 12%. All things being equal to 2021, I'm not anticipating huge swings in working capital for '21. I think we'll see more movement in '22 and '23 as our natural mix and mobilization, demobilization happens. So I think we'll be relatively stable in '21. Clearly, as we progress and our performance is good in '21, we would anticipate that we'd have earnings growth and, therefore, we anticipate at least some cash to come from that. In terms of the impact of domestic reverse charge, it will be a benefit to the group as we'll be passing that on to where we're holding and then passing it back to the HMRC. So it's a small benefit to us, but it's not material in the scope of the whole group.

So just reverting to one fact. In terms of the weekly cash flow that I received is that our cash flow year-to-date on a weekly basis is ahead of last year, and that's obviously encouraging in what we want to see.

[Operator Instructions] Our next question comes from Joe Brent from Liberum.

Three questions, if I may. Firstly, on the PPP or the investment valuation, a little bit surprised to see that not growing despite the fact you've made no disposals. And I see a GBP 29 million operational outflow. Could you talk through that and why you've chosen not to reduce the discount rate? Secondly, a follow-up on an earlier question. On Support Services, I know that the sales you've lost were not profitable, but can we have an understanding of what the future sales will be, so that we can apply some margin? And is that margin that we'd apply now higher than the 5% given you've exited unprofitable areas? And then finally for me, could you just talk a little bit about some of the ongoing opportunities in the U.K. for PPP? Notably wind, is there an opportunity to invest in those OFTOs as you have done previously?

Okay. Just to get the easy one out of the way, Support Services will operate between 5% and 6%, so above 5%. Phil, do you want to talk about the PPP portfolio and GBP 29 million?

Yes, Joe, one of -- clearly, in other -- that's where we have the FX, which was circa GBP 20 million. So that's probably half of the movement. And then we have ups and downs usually typically in the normal area of performance that's been in the -- there's nothing that I can think of that's abnormal in those numbers. When we -- we always, at half and full year, do a full look at discount rates, and we do it by project. And we've determined that the discount rate is correct and within the right place. So that's why we haven't -- it hasn't moved. It's where we think it's justified. And then on kind of what do we see in the U.K. in terms of PPP, I still think PPP in the U.K. is still not fully formed from the government. There's really no replacement to PFI, PF2. They have been talking about the infrastructure bank recently, and we're hoping some things may come from that. We've not -- we've looked at OFTOs in its current form, and we can't see that we can get to our hurdle rates currently in OFTOs in terms of the cost of capital. So we've -- we're not, at this point, engaged in any OFTO area. We're keeping it under review. We do think that the whole area of climate and renewals will give us opportunities, but we see that more in the medium rather than the short term at this point.

Just going back to the Support Services question. Leo, just help me on the margin rate...

Yes, let me give you a -- yes. Let me give you some color on that. So Support Services, I think this year, we did about 4.3%. We've always said we want to operate consistently up at the 5% level, and that's where we're determined to get to. We did tell the market that we were exiting the gas and water in 2019. And we did guide people that we would be -- roughly, I think, between GBP 50 million and GBP 100 million per annum would be the impact of exiting gas and water. And that's roughly what -- the way we see it at the moment. So I think we finished the year at about GBP 1 billion, GBP 1.067 billion. So I can see us operating in the GBP 900 million -- high 900s as we go forward. And clearly, we see opportunity in power and in road and rail maintenance. So -- but if you start from a base of the 9 -- high 900s and apply that -- the margin that we think at the moment, so I think our view is that we'll -- we want to operate at that 5% level. Once we're there, we can think about going further.

[Operator Instructions] Our next question comes from Marcin Wojtal from Bank of America.

Some follow-up questions on infrastructure investments, if I may. So you stated you are going to restart asset disposals. I mean do you see appetite from investors and valuations of assets for infrastructure investments back already to pre-COVID levels? So that's one. And second question, do you see enough opportunities in the U.K. and the U.S. to actually grow the portfolio in terms of capital employed for infrastructure investment over the next few years or it will be more stable, let's say?

So on valuations in the secondary market, clearly, we're out testing. We think that the market is in relatively good shape. Clearly, there's a supply and demand -- there's a lack of supply. So clearly, we view that as positive. So we think we'll get good returns from whatever assets we dispose of in '21. I think in terms of how we see the next few years in terms of infrastructure investments, as I said earlier, we do see that there is opportunities. There's opportunities probably to spend, as we've done in previous years, around about GBP 50 million a year into investments. We are selective. We are trying to be very disciplined in getting the returns that we want from the business. Clearly, if we see opportunities greater than GBP 50 million to hit those returns of 2x or 3x multiples, then we'll do that. But we're pretty disciplined in what we want to do. We think there's enough capacity in the market in the U.K. and the U.S. to support a GBP 50 million a year investment from the business. That I think will yield as we churn, and I talked about this virtuous circle, I think we'll probably see a stability around our DV and the actual size of the portfolio, notwithstanding anything that comes at us over the coming years because it's naturally lumpy, and we'll take advantage of the marketplace.

And currently, I suppose our largest area of interest is student accommodation. It's well funded, and there's a lot of demand. So that's where we're focusing our primary attention at the moment.

[Operator Instructions] We have a follow-up question from Joe Brent from Liberum.

Just one question, if I may. You've mentioned student accommodation a number of times on the call. And my understanding is that some students are not kind of paying their rents, feeling they've got a bad deal out of COVID. Could you tell us about some of the impacts from any of your campuses?

Yes. Look, it's not so much nonpayment of rent. It's really the occupancy level. And I'm just thinking one case in Glasgow. We're at about 60% occupancy. So there is a hit this year in terms of rental income. But for us, it's -- the scale of it is actually very small. But I think this will be an anomaly for 2020 and coming back into next year, provided we release the lockdown as described, I think things will return to normal, but it's not material to us at this time.

One follow-on from that, Joe, is that for quite a lot of our student accommodation, we have agreements with the university to take all of the rooms. So to some regard, we are protected.

There are no more questions, so I'll hand back to Phil and Leo.

Well, just really to summarize and before you all rush off, the presentation we made today, I think, really is a presentation we would like to have made a year ago. 2020 really has sort of been a bit of a lost year. But I think you'll agree with me, when you look at the numbers, 2020 was a command performance in terms of the fact that despite the chaos, we've delivered. But as I look to '21 and beyond, I think we're looking at a very favorable market and a rising tide. We're looking at a strong order book with a risk-reduced portfolio within it. And the benefits of Build to Last have been sustained throughout 2020. So it's there to deliver on that backlog. Earnings plus disposals within the Investments portfolio, I think leave us very, very well positioned for cash returns this year and into the future. So look forward to delivering on that. Thank you.