Balfour Beatty plc (BBY) Earnings Call Transcript & Summary

Good morning, and welcome to the Balfour Beatty 2021 Half Year Results Presentation. The presentation will now commence this video after which you will hear from Balfour Beatty Group Chief Executive, Leo Quinn; and Chief Financial Officer, Phil Harrison. [Presentation]

Good morning, and welcome to Balfour Beatty's Half Year Results 2021. Quite incredible watching the video reminding ourselves some of the extraordinary things that we do all around the world. And it's a very worthy reminder of just our capability and how far stretched it is. I'm going to take you through the half year results. Before I start, at the full year last time, I gave a presentation and I was very, very buoyant about what I see in the future for infrastructure. As I stand here today, that optimism and buoyancy remains as strong as it was 6 months ago, if not even more so in terms of the developments that are continuing all around the globe post pandemic. So I'd like to frame these results in 2 ways. One is looking at the medium and the long term, but also talking about the short-term decisions that we've made. The foundation for this business for the next 5 and more likely 10 years is going to be infrastructure growth, and it's going to be funded through fiscal expansion in all of the geographies we play in, U.K., U.S.A. and Hong Kong. If that wasn't enough of a driver when you look at the actual quantum of money that are going to be pumped into the economy, if you look at the new decarbonization, the new renewables, material recycling and the likes of that, all of that goes to the very heart of what Balfour Beatty's capability is. And this is another real growth engine for us. What we do day-to-day is we electrify railways. We actually connect wind farms to the National Grid. All of these things go right to the essence of what Balfour Beatty stands for. We also, on occasion, plant trees as well, but the real difference we can make is actually in what we deliver as a company. Further, we see more growth within the portfolio, particularly in the U.S. around the stimulus, which is now coming into our Investments business. And what we're seeing is strong growth and a real emphasis on bringing the private sector into infrastructure expansion using PPP and the likes, and I'll talk about that more later. In the short term and medium term, we've made a number of portfolio choices. And I think these are really important because what these will allow is reliable short-term earnings and in the medium term, real confidence in terms of what we'll generate in terms of cash and returns to shareholders. And as I've often said, cash is the one thing that you can count on in this business. It doesn't lie. And again, if you look at our performance over the last 5 years, whether you're looking at the peaks or you're looking at the troughs, every year, we've improved year in, year out. And again, the first half of this year, our average has gone up nearly GBP 100 million over the prior year average, and that our peaks are higher and our troughs are higher. That's on top of GBP 100 million of share buyback in the first half of the year. So it shows that the cash engine is still working and delivering for us. This is all underpinned by what effectively are our Build to Last operational capabilities. And again, I want to use the same information that we've used at previous presentations and comparing with 2019, which is the last real full year that we can actually look at. But in 2019 versus now, our cash is up GBP 611 million versus GBP 290 million. Our earnings are flat, but we shouldn't be surprised about that in terms of we are coming out of a pandemic period, and turning in GBP 60 million profit as a portfolio is actually -- is a good outcome, and we shouldn't be embarrassed by that at all. Looking at our operating expenses. You can see they're now down at GBP 105 million compared to GBP 134 million in 2019. They're actually down over the pandemic period as well, which has been a real focus and a hold in terms of operating costs. And then in the area of voluntary attrition post the exit from our Gas & Water business, we're at 10%. I think you've read everywhere that the industry materials are a challenge and the likes of that, but also retaining people and actually recruiting is very, very difficult. With Balfour Beatty, for example, in the U.K., being the largest contractor and some of the best trained people in the industry, we're a very attractive proposition. So our job just means that we need to double our efforts in retaining our best and brightest talent and also recruiting those for the future. And we've been doing this for the last 5 years in terms of investing in apprentices and graduates and building the next generation of leaders. So on that note, I'll hand over to Phil, and then we'll pass -- we'll go through the financial numbers, and then I'll bring it back down to Earth. Phil, over to you.

Thanks, Leo, and good morning, everyone. As you can see from the headline slide, Balfour Beatty continues to progressively recover from the pandemic as we reported a significant recovery in profitability in the period. For the first half of the year, underlying profit from operations was GBP 60 million, broadly in line with the first half of 2019. Both average net cash and period end net cash increased in the half as positive operating cash flows and working capital inflows more than offset the share buyback program. Average net cash of GBP 611 million and period end net cash of GBP 625 million both demonstrate the strength of Balfour Beatty's focus on cash management providing balance sheet strength to make the right decisions for the group. At the half year, Balfour Beatty's order book at GBP 16.1 billion and the Directors' valuation at GBP 1.1 billion were broadly flat with the 2020 year-end. The Board declared an interim dividend of 3p as we deliver on our multiyear program of shareholder returns. Moving to underlying profit from operations. In 2020, the pandemic had a material impact on Construction Services, while Support Services was relatively unaffected. This trend has continued into 2021, with outperformance at Support Services offsetting underperformance in Construction Services. The significant outperformance in the first half of the year at Support Services has a result of improved performance across the portfolio, coupled with end of contract gains and the group's strategic exit from gas and water -- from the gas and water sector. Whilst profitability of U.S. construction and Gammon returned to pre-pandemic levels, U.K. construction was negatively impacted by a small number of private sector property projects in Central London. Overall, profit from the earnings-based businesses in the first half of the year was GBP 60 million, broadly in line with 2019, which underpins the Board's confidence for the full year that PFO from the earnings-based businesses will be in line with 2019. Turning to Construction Services in a bit more detail. Both U.S. construction and Gammon recorded profit from operations at or above pre-pandemic levels. In the U.S., the current phase of the Microsoft Redmond Campus in Washington State and the I-635 highway project in Texas are examples of the underlying operations performing well. With tendering activity returning to pre-pandemic levels, the focus is on continuing to win quality work and the group recently won another significant school project in Southern California. At Gammon, Balfour Beatty's 50-50 joint venture with Jardine Matheson, project execution and work winning continue to be positive. Gammon recently completed the M+ museum project in Hong Kong and the order book continues to increase in a positive market. Key U.K. infrastructure projects such as HS2, Hinkley and Highways continue to perform well. In line with our focus on key infrastructure projects, over 90% of U.K. construction revenue was from the public sector and regulated industry clients for the first half of the year. However, U.K. construction recorded a GBP 23 million loss in the period. Performance issues of private sector property projects in Central London have been exacerbated by COVID-19 disruptions, leading to a lengthening of project schedules, triggering write-downs on a small number of contracts. Balfour Beatty continues to be focused on public sector infrastructure and we will no longer bid for fixed-price residential property projects in Central London. Now turning to Support Services. Following the strategic repositioning of support services, power, road and rail maintenance, it is now characterized by profitable recurring revenues underpinned by long-term contracts. The power and rail maintenance businesses continued to perform strongly and together have just completed testing of the Eurotunnel ElecLink project, despite delays caused by regulatory approvals. The project recognized a significant completion bonus and represents an outstanding example of Balfour Beatty's successful delivery of complex infrastructure for its clients. The ElecLink project contributed to the outperformance in the period, along with the group's strategic exit from the gas and water sector. Given Support Services' robust order book and positive market outlook, the group is raising its margin target range from 3% to 5% to 6% to 8%. Turning to Infrastructure Investments. Pre-disposal operating profit in the period increased to GBP 8 million, broadly consistent with the pre-pandemic level. Last year, as a result of market uncertainty and the strong liquidity position of the group, Balfour Beatty did not dispose of any investment assets. This year in June, the group recommenced asset disposals with the sale of its stake in the Children's and Women's hospitals in Vancouver, Canada for GBP 20 million. Subsequent to the half year, Balfour Beatty sold a bundle of U.K. assets for GBP 48 million. Demand for infrastructure assets from the secondary market is expected to exceed supply and Balfour Beatty will continue to maximize shareholder value through selective disposal of assets from its portfolio. Now an update on DoJ investigation, which remains ongoing. Balfour Beatty's own investigation is substantially complete, and we've shared our findings with the DoJ. The group's external resolution counsel is currently engaged with DoJ with the intention of seeking resolution. Because the investigation is still ongoing from the DoJ, the group is not able to provide any further indication of timing or any quantum of fine penalty or damages that may arise. If we now turn to the Directors' valuation. First half of 2021 was relatively stable for the business. The group has invested GBP 8 million in new and existing projects. 2 new assets were added, a multifamily housing project in Houston and a student accommodation project at Vanderbilt University. Balfour Beatty was also appointed preferred bidder at the University of Massachusetts and the Royal Holloway student accommodation project in the U.K. Balfour Beatty's competitive expertise to finance, develop, build and operate infrastructure puts the group in a strong position to capitalize on new investment opportunities, notably in the U.S. P3 projects. Cash yield from distributions amounted to GBP 32 million and sale proceeds were GBP 20 million. The continuing yield during COVID-19 demonstrates the essential nature of the Infrastructure Investments portfolio. 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 4 million decrease. Now if we move to cash flow, another period of positive cash flow in which we generated an inflow of GBP 44 million, increasing the group's net cash position to GBP 625 million. The strong performance was driven by operating cash flows, which were in line with underlying profit from operations and working capital inflows. The most significant movement in the period was working capital inflows with the following 3 key factors: continued mobilization and milestone payments from Highways projects in U.S. construction; collections from the Gas & Water business following exit from this sector; and the introduction of the U.K. VAT domestic reverse charge for the construction sector which benefited the group by about GBP 60 million at period end. Looking ahead, some of this working capital benefit will unwind. The group expects negative working capital as a percentage of revenue to be between 11% to 13% in the medium term. It is over 14% at half year, with the range dependent on contract mix and the timing of project starts and completions. Turning to our multiyear capital allocation framework, which we launched earlier this year. As a recap, the framework comprises the following 5 points: continued investment in organic growth opportunities in our Infrastructure Investments business; the active realization of investment assets with disposals time to optimize value for shareholders; then maintenance of a strong but efficient balance sheet; in terms of capital returns, we're committing to pay a sustainable ordinary dividend; and additional cash returns via share buybacks or other mechanisms depending on market conditions, broadly based on surplus cash from disposals from the investment portfolio as well as surplus level of earnings not required to meet our business commitments. Turning to how the capital allocation framework translates into shareholder returns, this slide summarizes our current position. In 2021, PFO from the earnings-based businesses is expected to be in line with 2019. Looking ahead, the group is raising its margin target range for Support Services from 3% to 5% to 6% to 8%, which represents an increase for the group for 2022. In March, the Board reintroduced the dividend at a targeted payout ratio of 40% of underlying profit after tax. The Board has declared a 3p interim dividend for 2021, 43% higher than the corresponding pre-pandemic dividend for 2019. Finally, Balfour Beatty's GBP 150 million share buy program for 2021 is progressing well with around GBP 100 million completed in the first half of the year. The group has recommenced asset disposals with around GBP 70 million received year-to-date. Our progressive recovery in earnings and the recommencement of our asset disposals reinforces the group's confidence in its capacity to deliver attractive multiyear shareholder returns. Thank you. I'll hand you now back to Leo.

Thank you, Phil. I appreciate it. Good. Just a quick reminder for everybody. We are quite a diversified group. Not only are we based in 3 geographies: U.K., U.S.A. and Hong Kong, we're also diversified across our portfolio in terms of a GBP 1 billion investment business plus our construction business. And construction is further diversified in terms of projects and delivering infrastructure and services and recurring revenue in that area. In terms of our portfolio and balancing the risk in the portfolio, we've progressively moved to be more and more driven by and dominated by public and regulated markets. And you can see this as the black on these particular graphs. So you can see there's a strong bias to actually working with governments where it is a more managed risk profile than any other form of development that we participate in. Looking at the background for a growing infrastructure market. If you look across the geographies of U.S., U.K. and Hong Kong, everybody is actually driving very, very strong stimulus packages, and last time we showed you these graphs in terms of where we see the trend. Subsequent to that, there's been a lot more emphasis in terms of how do you recover post the pandemic? And really, how do you drive fiscal expansion? Infrastructure is a very savvy way of doing that, creating jobs and prosperity and sharing the wealth. So in effect, what you're seeing is not only infrastructure mentioned in every region, but you're all now also seeing decarbonization, renewables, the idea of bringing the private investor into play, both in the U.K. and the U.S. So net-net-net, infrastructure is big and it's being driven, but it is being underpinned by what effectively is a green decarbonization agenda, which really goes to the heart of what we actually do as a company. So I'm very, very buoyed by the future that we see here. In terms of our carbon decarbonization, renewables agenda or credentials, we launched our strategy last year. And again, we're focused on beyond zero carbon, zero waste and actually giving back in terms of positively impacting our communities. Internally within the company, we've been driving this for over 5 years, and we've actually halved the amount of carbon that we generate. We've signed up for such things as the UN Race for Zero (sic) [ UN Race to Zero ] campaign. And again, what this is really about is it is a commitment, and it's something that is really important not only to our shareholders, but also to our employees. We have to be seen to be a good citizen. It's almost a license to operate. And interestingly enough, if you look here, we've recently did a crowd sourcing of some of the best sustainability ideas across the group. And we came up with 750 internal innovations around things that we could do to give something back, but also to better enhance our business going forward with these credentials. And the level of engagement here is really phenomenal in terms of the interest that it takes on these days. And also some of our actions that we do day-to-day, apart from recycling of material and actually having zero waste, we've refitted our entire fleet on HS2 with new technology, which actually helps reduce the emissions and makes it acceptable in terms of the scrapers and the dump trucks in meeting the environmental standards. Day-to-day, we're connecting up such things as wind farms to the grid in all of those areas. So sustainability is really at the heart of what Balfour Beatty does. We don't have to do anything extra like planting trees, which, of course, we are doing. But the fact is this is the heart of our business. In terms of Support Services, this is actually -- I'm going to spend a few minutes on this slide because this is quite an interesting transformation story. If I look at power, some 3 years ago, power was actually losing money despite a business, which has actually has extraordinary high barriers to entry. What we've done is we've actually rationalized what we offer in this area in terms of back to our core knitting. We've actually rationalized our customer base. There are certain customers that we don't want to do business with, and we won't. In that respect, we've also looked at all of the terms and conditions and that all the contracts, which have come up for rebidding. We've challenged the terms and conditions, as I said, these are risks that we are prepared to take, and these are the risks that we aren't. So as this business goes forward and as has been operating for the last 2 to 3 years, we see an increasing trend in terms of profitability and cash flow in the business. The business has a future, which actually, I think, is quite outstanding. If you think about back in 2014, we concluded a project called Beauly Denny. It was about GBP 400 million to GBP 500 million, where we took in Northern Scotland from the wind farm across the Highlands to National Grid. Very difficult, very challenging project, not that anybody I could see would want to take that on. In the next 5 years, what you're going to see is down the East Coast of the U.K., all the way from Scotland down to East Anglia, a lot of wind farms being put up. And the size of that investment is going to be in the order of 4 to 5x the size of Beauly Denny, just for this business here. So the capability we have within power is really and truly a foundation for a very long successful growth future. If we look at our rail business, another interesting story back in 2017, there or thereabouts, we exited the service market because we were actually losing money in services at that time. We put all of our effort into projects. And with electrification and the likes of that, that served us very, very well. But in light of the fact that those projects were coming to an end, we reflipped the portfolio, went back into services on a more profitable basis with better terms and conditions. And so now rail is actually growing where most of the competition is actually declining, and we're making good returns from this business as well. We've also combined the capability of rail and power in the ElecLink project. And that's a project where if there were 7 wonders of the world in terms of engineering, this is the 8th, and that's where we've pulled a 58-kilometer cable through the Channel Tunnel in order to connect the French National Grid with the U.K. National Grid, and an amazing feat of engineering, all back to base design principles within the company, and that's the extent of the capability that we have. In terms of our road maintenance business, we have 2 big areas here. We have our Living Places business, which is a very successful maintenance business to local authorities. Obviously, it's benefited from the investment in pot holes. But we run a very good business. We weren't attracted by the low bidding of 3 or 4 years ago, and we stayed out of the market. The market now has normalized, and we've seen numerous local authorities, at least half a dozen coming back to market as their 5- and 10-year framework start to renew, and we'll be looking to bid that. We also, within this area, have our M25 CPS contract, and we've been making marked productivity gains in that business in terms of digital technology and the likes as to how we run a more efficient operation. So net-net-net, in services, we're firing on all 3 cylinders, and we're very, very confident about the future, and that's given rise to what we see is enhanced profitability going forward. In terms of Gas & water, specifically, if I look at the GDSP contract, which is some 8 years in the framework, that's been running for the last 3 years at a loss. When I spoke to the CEO of Cadent, we've been sending Cadent a GBP 1 million check every month for the last 3 years, while we concluded on this contract. It had onerous terms and conditions. It was signed, I think, in 2013, '14 and was deemed to be a growth engine, but it was fundamentally a no-profit zone. There was no money really being made in this contract over the 8-year period. And for a Tier 1 supplier, this is not a place that we should play. So from my point of view, we've decided that we're out of this business because it is fundamentally a no-profit zone. If I move on to U.K. construction,and I look at Central London, this is another area which I would classify as a no-profit zone for the Tier 1s. And although Phil's talked about the write-down on 3 or 4 London projects, if you look at the industry in London, and you look at the results of the likes of Multiplex or Lendlease, they've experienced the same challenges. This is an extraordinarily difficult market. And if we were to have our time again, strategically, we wouldn't be there. But I suppose it's a little bit like our children. We can't sort of rechoose them. We're with it, and we have to see it all the way through. What's actually happened here is that these projects have suffered from an extended schedule primarily around the chaos that was created during COVID. That extended schedule causes extended overhead and then you end up with a dispute in terms of liquidated damages. The commercial situation gets very, very challenging. And then that then feeds back into the actual developers themselves and they have to go back to the banks for refunding. And that causes stress at the cash flow and the payment end. And of course, our supply chain gets under pressure because then everything becomes difficult and disputed in terms of cost overrun and overhead. At the end of the day, if we weren't in a COVID world, that these projects would have been finished at the end of this year. As it is, it looks as if 2 of them will extend to the end of next year, which is a considerable overhead and a considerable cost. And of course, we're still disputing the commercials, which we're looking to enforce our full entitlement. However, if I set this off in terms of the equity that's been displaced here against where we could invest to make great returns is, our Major Projects business, our Highway business and our Regional business post London are doing exceedingly well. If I take Major Projects, first and foremost, HS2, we've agreed a program best it with the client. We've agreed to design joint venture program where we can deliver the right designs at the right time in order to make sure we stay to schedule. But more importantly, we've agreed and signed off a fully cost-loaded program for the project. And I believe we are sort of further ahead in this endeavor than anybody else on the project. So really, really strong performance, and we've started to mobilize. To date, we've moved 0.5 million cubic meters of earth and by the end of October, we'll have moved 2 million cubic meters. So real performance. In terms of Hinkley power station, we've completed the inlet tunnel and the outlet tunnel. We still have 1 more tunnel to do, which is another inlet tunnel. But I want to point something out here because I've not seen this in the industry as people have reported out. The impact of COVID, post-COVID, long-COVID, whatever you want to talk about it, it is still out there and it's still relevant. And we had a great example on Hinkley where we had 2 tunneling machines working. 60 people were actually pinged or found to have the virus, and we had to take them off site. And therefore, we had to shut down one of the tunneling machines and then move all the resources on to the critical path. So there are real impacts that are actually affecting the industry. But despite that, our performance is a phenomenon. We've just finished the last of 38,000 nuclear-grade concrete segments, which actually go into the tunnel. We've probably been running the largest off-site manufacturing in the U.K. for the last 3 years in actually building these segments. And we're just about to start on the marine works in terms of actually laying the heads that the tunnels will actually attach to. Finally, in terms of Major Projects, if I take Crossrail, something which I'm sure we're all very interested in, in terms of when it will open, we've handed over the Woolwich station. We're handling over the Whitechapel station this week. Crossrail for us has been a successful project. And what we've delivered when you go and look at these stations is truly remarkable. In terms of Highways, Highways and Highways England is our largest customer. We're their largest supplier. We're also their best supplier, and I believe, by a long chalk. If you look at what we've delivered in terms of the A14, which was in joint venture and also what's happening around the M4, it's an amazing achievement. And actually the M4 would be finished on time if it wasn't for the additional safety measures that have been put in on the smart motorway. So really strong performance. In terms of Regional, what's very important in Regional is we run a lot of frameworks. The SCAPE Civil framework works very, very well for us. We recently completed the mega lab in record time using the Crown Commercial framework. And in health care and hospitals, we're doing the Midland Met Hospital in Birmingham, and that underpins our credentials for when the government puts up the next 40 hospitals for building. So we're really focused on this. One last thing is our Investment business, which I haven't included on here is that where we are in the regions and in London, where we actually have an Investment portfolio. We deliver those projects internally, and we will continue to deliver those. It could be student accommodation, could be housing and the likes. But that's an important part of our portfolio going forward. If I look at the U.S. U.S., a good business delivering to expectations. It's worth pointing out our buildings business here is about 80% of the revenue where civils is about 20%. Buildings is performing well, underpinned by the education market, strong performance in California, where we're actually the market leader. The leisure and entertainment industry in Florida was on its knees 12 months ago. That's coming back extremely strong the likes of Disney, have come back, Universal, hotels and the like, the Broward Convention Center we're building out. And a new area for us for the last 7, 8 years, maybe a little bit longer, the federal market in the U.S. has really been in the doldrums. We're now seeing that come back, and we used to be a very strong player in that market. That's now coming back on stream. We've recently won a couple of projects in that area, which is extremely important for our credentials in order to start looking at some of the bigger schemes that will be coming out over the next few years under the Biden stimulus. In terms of civils performing strongly in our road sector, we're dedicated to the Texas and the Carolinas market. Rail, another area of great interest. And of course, this is all going to be underpinned by the GBP 550 million of stimulus from the government. We're also looking at driving projects across the piece as one, whereby the LAX, which is actually an investment scheme, and this is the people carrier at the airport. The civils is doing the guideways, and buildings is actually building the station. So a real team effort here. And again, this is in joint ventures with 3 or 4 others. So meeting all of our expectations at this time. Infrastructure, worth just a few seconds here. Whereas the U.K. has sort of never really replaced the private partnerships of 10 years ago, the U.S. is moving forward. Our U.K. business at this time has about 2,400 new student accommodation bedrooms on its books, which is the University of Sussex and Royal Holloway. Both of those projects are in the pipeline and they are being delivered by our U.K. construction business. In terms of our U.S. business, what we're seeing and what is very encouraging is the emphasis on P3 and the active encouragement that's actually coming into that area. That's being underpinned by a couple of 2 things. Firstly, in the new packages coming out, there's going to be GBP 100 million dedicated to P3 feasibility studies, which actually will effectively look to stimulate the market over the next 3, 4, 5 years. So that's very, very encouraging. And then in order to ensure competitive financing, there's a private activity bond of some GBP 30 billion, this is a tax-free bond and is designed to actually give low interest rates and returns so that people could -- or low cost, should I say, in order to encourage people to take on infrastructure and join into partnership with the government. The LAX People Mover was actually financed through one of those private activity bonds and the like. The last 2 points I'd make here is just that our capability to finance, develop, build and operate is really unprecedented in the marketplace. LAX is -- here you can see that's well underway. These are 2 areas where we're strongly in the last 2 or 3 for winning the -- Clackamas State municipal courthouse and also the Broward municipal building. Those 2 between them are about GBP 1 billion. Interesting in the case of the Broward, that's right next door to the Broward Convention Center, which we're building at this moment in time as well. So a very positive trajectory for US P3. If I look at Gammon, Gammon has been a consistently strong performer, about 3% post-tax each year. What we've seen is a real movement from buildings to civil. So whereas our portfolio used to be about 75% buildings, 25% civils, it's now 50-50. Strong health care market coming through. We've bid 2 or 3 hospitals in the last year. We've been unsuccessful, but there was HKD 500 billion, which is GBP 550 billion is going to be spent in that area. Housing in the municipal area is looking to grow. We're a little wary of what effectively is the high-end private market given the uncertainty in Hong Kong at the moment. And data centers, whether actually in Singapore or Hong Kong, we're really a market leader and that's an area we look to push through and do more of and also to take that capability around the world. In terms of civils, the airport is an enormous contract. We recently won a GBP 2 billion contract there for the new concourse and also the People Mover. So that's underway at this moment in time and moving ahead very aggressively. We're a strong player in roads. And again, we'll see a lot of stimulus in that area. In terms of rail, we built the Kowloon Terminus. We don't see a lot of work at the moment on our backlog, but the forecast expenditure says that there will be growth in this area. Our relationship with MTR and the others in Hong Kong will serve us very well. So again, meeting our expectations and a very encouraging outlook for the business at this time. Finally, it's worth perhaps summarizing what you've seen today. First and foremost, let's not underestimate that we are recovering from a pretty dire period where the COVID pandemic has impacted all of our business. And I think as a portfolio, it's a significant recovery in profitability. The strategic choices we've made, whether it be London, Gas & Water, will actually help to serve us with reliable earnings over the short term and also in the medium term. The focus on infrastructure, and I'm extremely buoyed about it is where the heart of Balfour Beatty is combined with those capabilities that deliver a net zero world. So I think a very positive trajectory all around for our core businesses. But then when you actually lay on top of that, the positive future for our Investments business, particularly P3 in the U.S., I think we're sort of in the right place at the right time, and I think we've got a very strong nailed-on future, which will drive cash, profit and shareholder returns at an enhanced level going forward. Thank you.

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

Three questions from me, please. Firstly, on U.K. construction. Just ex the private sector contracts in Central London, what's been the ability to pass through cost inflation and material -- sorry, what's been the ability to pass through cost inflation in H1? And then also what you've seen in terms of materials availability, and if these persist, whether these could impact into H2? The second one would be on Support Services, including the exit of Gas & Water contracts has been benefits to profit. And you flagged previously that there will also be a revenue impact. Just keen to hear kind of beyond next year, whether you'd expect revenue growth within the division from power, road and rail no maintenance contracts. And then the third one on investments. And you set out the opportunities at the moment in terms of the feasibility studies within P3 projects. Keen to hear just a bit what you said in terms of [ guesses ], but for translating this into new investments and kind of what the magnitude could be there.

Okay. Right. I'll take the first one -- why don't you take the second one, and then I'll try and do the third one. Okay, great. First and foremost, you asked about our ability in terms of cost inflation to pass it on to the client specifically in the case of London. That's an interesting one. I'd say very difficult because of invariably the contracts are sort of fixed lump price lump sum. So that's the bad news. The good news is that the contracts are largely bought out. They're probably 80% finished, maybe a little bit less 70% in the other case. So most of the materials are bought out. So I don't see that as a big, big issue. I can see there's going to be some impact. And the impact is not the cost inflation. The impact is that some of the subcontractors who are distressed effectively have underestimated the cost in the job, and to replace them would be virtually suicidal, so we're having to fund and pay that increased cost. So I don't think you've got a direct material cost increase, but you do have a distressed subcontractor situation where we are propping them up and keeping them going. And in terms of material availability, I think for the London jobs, we're in a pretty good position. Overall in the portfolio, material availability, cement is a real problem even for companies like us at this moment in time, plus the Board was, but that's less of an issue now. Biggest issue is reinforcing bars and the likes of that. And that's actually causing schedules to have to be altered in order to move workforces to where work can be undertaken, because you can't actually get on and do building the cages and casting the concrete that was scheduled in the first place.

Exactly. I'll take the Support Services one. The exit from Gas & Water that we announced last year, they're running down now. So we'll end -- revenue will end this year. I think the impact, we have about GBP 100 million, GBP 150 million of revenue that won't be in our 2022 numbers. And then from '23 on, I would expect from that base will start to grow. So you should see the dip in revenues in '22, and then we'll start to grow back from there.

Yes. I should build on Phil's point is that we're very, very optimistic about the outlook for the business, particularly from the point of view that the growth that sits out there in '23, '24, '25, the capability to do that really doesn't exist. So our customers who are sort of large, very large FTSE 100 companies are looking to work in partnership with us around the delivery as to how do we sort of align our resources with them to deliver those jobs. So you're getting to a point where these things are starting to look at this, they'll be negotiated going forward in the future. In terms of investments, a difficult one to answer because every scheme is different in terms of the amount of equity we put in and whether or not we're in joint venture with somebody. I'd say typically, if I was trying to do a rule of thumb, if it was GBP 100 million project, you might find that there's GBP 25 million of equity goes into that. And we would sort of manage our risk at about 25% of that equity, along with other partners in a scheme. If you look at our first half, I think you'll see the amount we invested is relatively low. I think it's 8 from memory. The -- as you see cash going in, that usually aligns with an investment coming to the completion in terms of it's actually constructed and ready for use. And that's when our cash goes in because what we're doing is we're actually putting that in at the end of the construction period, not upfront. I don't know whether that answers your question correctly or not.

And I add to that. I mean, as we've said, we're always looking at spending about GBP 50 million a year at this point in terms of deploying that. We're positive on the U.S. As we said, we'll always look at the mix of how much to invest. Clearly, in P3s, there's usually more debt than equity. It's a higher ratio because typically, their availability, and that's some of the things that we're now seeing in the U.S., P3 space that these will be availability-based investments. So that's a positive to us. So we may take a higher percentage as we go forward in that U.S. P3 position.

Yes. Phil raises a really good point that I meant to make it in my presentation around the fact that all of these pipeline we're looking at is all around availability. So I think that makes a big difference. But the other emphasis I'd make is that we're sort of being more selective in terms of the projects we are taking in the majority will be constructed by our U.S. buildings and civils business, which means that we get the wall-to-wall return as opposed to the fact we're just investing in the asset.

That answers my question. Very helpful. If I just go back to materials inflation. What's been your ability to pass that through on the public and regulated side in the U.K.?

Should have actually answered that. We have a number of contract protections. So for example, HS2, which is our largest contract at this moment in time, that the material inflation will go straight through to the customer, and they carry that risk. In the case of Hinkley, which is our second biggest contract, it's the same there as well. So a lot of our portfolio does have contract protections, which actually shield us against that. Also, if you remember, it's an interesting debate, whether or not this is post COVID or whether this is Brexit, and no one can ever separate them out. We advised everybody that we had, even our regional construction business, put a clause in around Brexit inflation and any extraordinary inflation we would look to pass on. So I'll never say never, but the fact is in the majority of our backlog, I'd say we are protected against material inflation. I'm also hoping that it's a blip and it doesn't -- it isn't a sustained increase in the business.

We have a question registered from Pam Liu of Morgan Stanley.

I also have 3 questions, please. Sorry, I hope that has reduced the feedback. I have 3 questions, please. On restructuring, after exiting Central London residential in U.K. construction and Gas & Water for support, I'd like to understand on your order book standing today, what is the percentage exposure that you think could be also exposed to some more risk or future restructuring risks? So basically, are we likely to see further restructuring in the next half of this year or in 2022? Number two -- sorry, question number two is about the U.S. P3 market. Is it fair to say that the majority of the U.S. P3 market pipeline today, it's in transport infrastructure instead of social infrastructure? And would you remain focused on social infrastructure that you have done with the U.S. military housing and student accommodation? Or would you consider venturing into transport infrastructure as well? And so in to that, what's your thought on the U.K. infrastructure market? We know that the golden days of PFI have gone, but could there be a chance of them returning or something similar to that returning one day given the ambitious sort of infrastructure building plan that the government has? And my final question is on green construction. So could I please understand how much of that is driven by your customers' requirement such as a customer specifying that they want to use low carbon concrete in a tender, for example? And how much of that is Balfour Beatty proactively driving for positive change or helping your customers to understand what more they can do?

Yes. Okay. So on restructuring, London, which is the specific now, clearly, we've exited Gas & Water. There won't be any kind of runoff of -- from this year. All of the order book will be off the books. So we don't anticipate anything further on Gas & Water. On London, we probably have an order book in the region of GBP 150 million that we have to get through over the next couple of years. Could be GBP 150 million, GBP 200 million. That's our London exposure. We're not exiting buildings per se, we should make that very clear. It's just the -- a very unique situation in Central London and the value is around about that GBP 150 million of order book.

Okay. I'll take your last one thing around green construction and who's driving the change. Let me be really, really clear on this is that we respond to customer demands. So we're not out there pushing the frontiers of new technology around 0 carbon concrete and the likes of that, because the technology is just too new and too nascent and it will come with an awful lot of risk. So at the end of the day, we're making sure that we're compliant with the market. It's also, I think, very important to realize that in tendering to local authorities and councils, what you're doing around community value, what you're doing around the green agenda is a license to operate, and it's a prerequisite. So the idea is we're all moving along in tandem. We're taking a step forward, local authorities, customers taking a step forward. There's no -- from our point of view, we're not wanting to be out on the bleeding edge of this. We're too big of a company to take that risk at this time. In terms of U.S., the private market, did you want to say something on green?

No, I was thinking more on P3, actually.

Right, you do P3, and then I'll build on that.

Yes. So I think on P3, I think the key thing here, Pam, is that we are actually in transport. LAX is one of the biggest transport P3s going on in the U.S. at the moment. So we are deploying into that transportation sector. The one area we won't touch in U.S. P3s in transport is toll roads. A lot of people have been burned in toll roads in terms of investments. So that's an area that we were not particularly interested in, but we will look at the right transportation. I think at this point, we see some very good return opportunities in social infrastructure particularly in the building side. So that's a focus. But I also should remind people that we're also intent in continuing investing in our U.K. Investments business as well. We have, as we said, Royal Holloway in student accommodation. There is a pipeline there as well. But we're going to be selective as always in P3 and get the best return. But we will -- we can do transport.

Yes. I think you've covered that well. In terms of social as well, don't forget, the municipals, which were in our statement, whether it be the Broward County or the Clackamas. Also, Prince George's Schools, I think, in Washington. Again, schools is a very, very big market in the U.S. and as this takes off, we want to really be at the center of that because it's a very good market. In terms of the U.K., of course, we're all aware of the infrastructure bank, which has been rolled out. I know it's still finding its feet, but that's the U.K.'s version of how they're going to fund some of this public and private investment. But again, it's still to be finalized in the wash. And as Phil said very importantly, is student accommodation, very, very important. We're very focused on on-campus developments, and we've got about 2,400 rooms on the books at the moment that we're building out. Hopefully, that answers your question, Pam.

Yes, these are perfect. Can I squeeze in more and just asking for a quick update on the contingent liability for cladding, if that's possible. Have all the risks been identified? And is that already included in the contingent liability assessment?

Phil, do you want to touch on that?

Look, the contingent liability note on -- in the half year, it's a very initial area we've got. There's a big level of uncertainty, that's why it's a contingent liability. We've had a 1 development in London where we have a stone cladding on the building. And the concern is the performance of that stone cladding in terms of durability and lifespan. So we're now looking at what's the next stage is to see how do we fix it. We'll then move on to how much that would cost to the fix as soon as we know what the fix is. And we'll also look at who's going to pay for it because clearly, there's -- there'll be a level of ownership in the supply chain and probably insurance. So it's an emerging issue that we'll report on as and when we know more.

Our next question comes from Marcin Wojtal of Bank of America.

I've got some questions on the numbers, if you allow me. So can you just confirm that in the construction division, you expect your performance in the second half in the U.K. to be normalized or, let's say, close to normalize despite the loss in the first half? And question number two. Thinking about construction division for 2022, do you expect to hit the industry standard margin of 2% to 3%, which was something that you previously defined? So is that a realistic objective for next year? And lastly, a different topic, but considering you are pulling out from certain types of projects in London, does it have any implication for your pipeline in infrastructure investment? Or the pipeline is the same?

Yes. I'll touch on the third one first. There's no implications for infrastructure investments. We will continue to do what we do. We'll complete the projects that we're working on, and we'll be looking at the right investment opportunities going forward, whether it's in Central London or other parts of the U.K. Phil, do you want to do the...

I'll do the numbers. Look, there's -- we're not changing our view on the second half. So that means we are anticipating that we're going to normalize. We've taken our best estimates of the London jobs at this point. And therefore, we think we've covered that. In terms of next year, we're planning to be in that range in terms of our target range of 2% to 3%. So no change to those things.