Balfour Beatty plc (BBY) Earnings Call Transcript & Summary

Good morning, everybody. It's quite interesting actually. The future of our industry and especially in the next 5 to 10 years is all going to be predicated on our ability to attract the best and the brightest. It's not about the demand, it's about the ability to actually supply and satisfy that demand, which is a nice place to be. It's quite interesting, as I talked to apprentices and graduates and people within the company, what I talk about is engineering is really cool. But more specifically, what we do within Balfour Beatty is even cooler. And this photograph really sums that up because what you're looking at here is actually one of the tunnels that will feed the cold water from the Bristol channel and cool the reactor of the new Hinkley Power Point Station. So if ever there's been a good picture to talk about cool industry, this is the one. Good morning. I'm Leo Quinn, Balfour Beatty's, Chief Executive, and I'm going to talk about the group's first half performance for 2022. If you look at the financials, it's a really strong performance for the first half. It doesn't matter what measure you look at, whether it be profit, the value of the investment portfolio, the order book, cash flow or whatever. However, the numbers are flattered by the fact that when you compare it with the first half of last year, we did have the long tail of COVID. So that didn't actually give us the best performance that we would have liked. But I think even in light of that, this is a strong performance. What you can't see in the numbers is really the fact that the underlying momentum in the business is extremely strong. And I can take you to the takeaway on this slide is that really gives us confidence in upgrading the full year. So it's a really good position to be in. I'm also very pleased to say that we've repositioned the portfolio over the last 2 or 3 years. And it's a larger portfolio, but it's significantly derisked, and that derisking makes us more confident that we can actually deliver the returns within it. The portfolio is underpinned by a set of capability, which I'll present the slide in the next section, which shows a decade of infrastructure growth and all those things that you've seen in the video, how they come to bear in making us probably the preferred choice of supplier in that market. We've got a very attractive portfolio of investment assets, which does 2 things. One is it's actually it's a store of value. And coupled with that, it's also a good future growth pipeline that we've got. And we put all of that together gives us an awful lot of confidence. So we've raised the dividend to 3.5p and a 17% increase. So why are we confident? Well, if you look at the Construction Services, there's a number of things going on here, which actually allows us to take ourselves back to the 2% to 3% margin or average margins that we see in this sector. The first is that we've pivoted the business towards infrastructure. And that has 2 benefits. One is the market is very, very large. It has a very sensible customer. And we have terms and conditions which are much more manageable. The second thing is, is that in the U.S., over the last 3 years, we've been looking very strongly at the federal market and that moves us away from -- in times of high interest rates. It moves us away from the developer market. So therefore, it mitigates some of the risk. And then thirdly, we announced last time that we were suspending developer work in high-rise buildings in London. Again, that's given us another fill-up. So we feel very confident about the 2%, 3% industry average margins that we've talked about in the past. If I look at Support Services, again, we've transformed that business where we completed the framework in gas and water. Those have now largely been concluded and tied out. That leaves us with 3 businesses in terms of road, rail and power. All 3 businesses are performing very well at this moment in time. And therefore, as a result, what we're talking about is moving to the upper end of expectations in terms of the 8%. And we're pretty confident about that for the full year. And then thirdly, if you look at our Infrastructure portfolio, it was a superb asset to have actually in the books. Not only is the valuation increased by some GBP 200 million and we can be confident about that, exchange rate has helped, inflation has helped. But if you look at the divestments of Purdue and you look at the other assets we've got, they're all being sold at significantly above the Director's valuation. So again, another store of value and also a store of future growth. All businesses are sort of performing well at this time. Now I always talk about the cash doesn't lie. And here is our cash flow performance. And although it irritates Phil, my Finance Director, enormously that I should talk about cash because he feels it's his domain. If you look at how we've progressed over the last 5-year period here, it is year-on-year consistent performance. And that does come from operating profit, but it also comes from the management and the effective management of working capital. If I compare the first half of 2022 with the first half of 2021, we're up by some GBP 200 million. And that's despite the fact that we've done a share buyback of some GBP 180 million. And we've actually done a dividend as well. Put those 2 together, the cash we've spent on buybacks and dividends is some GBP 227 million to date since the beginning of 2021. And there's also a material cash expenditure in the second half of this year. So cash performance is strong. That gives me a lot of confidence in terms of underpinning future returns and our capital allocation model. Phil, over to you, and you can take them through the facts.

Thanks, Leo, and good morning, everyone. Let's start with the headline numbers. We have reported strong financial performance for the first half of 2022, with total underlying profit from operations of GBP 85 million being 42% higher than the first half of 2021, with all businesses performing well. Profit from operations from the earnings-based businesses was also GBP 85 million and up 42%, with U.K. construction returning to profitability and improved underlying margins at Support Services. Earnings per share at 12.9p is significantly ahead of the 7.7p delivered for the same period last year. Our total order book at GBP 17.7 billion has grown by 10% in the first half or 4% excluding foreign exchange movements, with increases across all construction geographies, while the Directors' valuation increased to GBP 1.3 billion, up from GBP 1.1 billion at year-end, of which nearly half was due to the weakening of the pound. Average net cash at GBP 811 million and period end net cash of GBP 742 million continues to underpin the group's competitive advantage and supports our long-term capital allocation framework. As a result of this strong performance, the Board today is announcing an interim dividend per share of 3.5p. Moving on to the business units, and let's start with Construction Services. Underlying profit of GBP 49 million reflected higher contributions from each of the 3 geographies. In the U.K., profit from the operations of GBP 18 million with an achieved margin of 1.5% represents a return to profitability compared to a loss in the first half of 2021. Profit at U.S. construction and Gammon were both slightly up with margin percentages in line with the first half of 2021. In the second half of the year, we expect the profit margin in U.K. construction to improve as our remaining fixed price residential property projects in Central London move towards completion, and the proportion of revenue earned from public sector infrastructure projects increases further. We currently forecast full year margin for U.K. construction in the range of 2% to 3%. Touching on the U.K. construction order book quickly, which is increased by GBP 200 million to GBP 5.8 billion in the first half of the year and has continued to derisk. As you know, we are actively pursuing a shift away from fixed price projects and now have a much higher proportion of target cost and cost plus work in our U.K. order book. Similarly, we're reducing our exposure to private developers. And at the half year, 92% of the U.K. construction order book was from public and regulated clients. This is aligned to Balfour Beatty's focus on selectively bidding for contracts where it holds expert capability and can achieve improved contract terms. This has resulted in a higher quality order book with enhanced risk protection, providing more predictable outcomes. In comparison, in the U.S., our order book has grown 17% to GBP 6.3 billion. U.S. market is predominantly bid on a fixed price basis, which we managed through early subcontractor buyouts typically within 30 to 60 days. The supply chain is then covered by bonding insurance, mitigating the risk in the business. Moving on to Support Services. As Leo said, the impact of repositioning the business to focus on power, road and rail maintenance can be seen in the results delivered for the first half. Revenue declined by 28% in utilities following the group's strategic decision to exit gas and water and focus on the more profitable power and transportation markets. After adjusting for GBP 20 million of prior-year one-offs reported in the first half of 2021, profit from operations increased by GBP 2 million despite the reduction in revenue. This represented a 7.2% profit margin in the top half of the targeted margin range of 6% to 8%. And we have now upgraded our expectations for the full year, with margins forecast to be at the top end of this range. Support Services is underpinned by long-term frameworks in power, road and rail maintenance, giving us visibility and confidence that we can remain in the top half of our targeted range in the medium term. Turning to Infrastructure Investments. Pre-disposal operating profit increased by GBP 2 million to GBP 10 million as a result of increasing returns on projects as income has increased with inflation. We also realized a gain on disposal of GBP 7 million following the sale of a multifamily housing project in Houston in June with the transaction above Directors' valuation. The business continues its disciplined approach to target a 2x return on its invested capital as we continue to see good market opportunities. During the period, the group invested GBP 17 million in new or existing projects, including a multifamily housing project in San Antonio. The Directors' valuation increased to GBP 1.3 billion in the first half. However, we would expect this number to reduce by year-end as the previously announced Purdue disposal completed last week, and we anticipate at least 1 further disposal in the second half. We now expect full year profit on disposals to be in the range of GBP 55 million to GBP 65 million. Looking briefly at our track record on investment disposals, as I've just covered. With the disposals in Houston and at Purdue University, we now have 2 further investments sold above the Director's valuation. These disposals further demonstrate the strength of the secondary market for infrastructure assets and the value which our investment portfolio brings to the group. We will continue to time disposals to ensure we maximize value for shareholders. Let me now talk you through the valuation. The GBP 190 million increase in the Director's valuation since year-end. The first 4 items here largely net out. So I'll focus on the 3 blue columns -- the final 3 blue columns. The valuation has benefited from a weaker pound in the first half, 57% of the portfolio's value was in North American investments at the start of the year, and the shift in exchange rates has driven an GBP 86 million increase. Furthermore, higher inflation than forecast has led to an increase in the value of some U.K. projects, totaling GBP 52 million, and I'll cover this in more detail on the next slide. Finally, there was an additional GBP 41 million increase, largely driven by the revaluation of various projects including those disposed to date, giving us a half year Director's valuation of GBP 1.3 billion. Let me cover inflation now and the impact which we're seeing across the group, starting with the investments portfolio, which is benefiting from the increase. In the U.K., most of the contracts are linked to RPI, and recent rises in inflation have resulted in a GBP 52 million increase in the Director's valuation. In the U.S., the portfolio is also positively correlated with inflation, but indirectly through the link to the rental market. So you would expect income to increase over time. However, in the construction and infrastructure markets, we are seeing inflationary pressures in relation to both labor and materials. Whilst the group is not immune to these pressures, we are currently mitigating these risks through contractual protection and early buyout using the group's scale and supply chain management. As a result, we do not expect to see a material impact from inflation in 2022. Moving on to cash flow, which has once again been strong in the first half. Average month-end net cash of GBP 811 million was GBP 140 million higher than 2021, although the closing balance was GBP 48 million lower than year-end. As forecast in March, we've seen a working capital outflow in the period, while all other items have largely been in line with expectations. Our share buyback program started in mid-March, so will be second half weighted with GBP 47 million of our stated GBP 150 million target completed in the first half. Our consistent cash flow performance gives me confidence that our full year average net cash will be in the range of GBP 740 million to GBP 780 million. This includes a further working capital outflow in the second half prior to a more material working capital outflow in 2023, as we move towards our long-term 11% to 13% of revenue range. Turning to our multiyear capital allocation framework that we launched last year. We continue to see a wide range of opportunities to invest in organic growth, and Leo will touch on the scale of this in his section. I've just mentioned 2 great examples of us realizing value from the investments portfolio, and we'll continue to do this with a higher Director's valuation demonstrating the opportunities available. The balance sheet remains strong, and we have raised new U.S. private placement debt in the first half in anticipation of repaying debt falling due early next year. The refinancing has extended the debt maturity profile of the group. These factors give us confidence to grow the dividends with 3.5p per share recommended for half year. And our 2022 GBP 150 million share buyback program is on track to complete in the second half. We expect this framework to be in place for a number of years to come and to give our shareholders confidence in the returns available. This is underpinned in the short term by our full year guidance, which I'll recap now. We now expect U.K. construction to deliver profit in the industry standard margin target range of 2% to 3% for 2022. This is an improvement on the first half. At U.S. construction and Gammon, we remain in line with expectations for the full year. We are upgrading our expectations for Support Services at the top of its range of 6% to 8%, above the 7.2% achieved in the first half. And in investments, profit on disposal for the full year is expected to be in the range of GBP 55 million to GBP 65 million. Moving on to cash. We will complete the remaining GBP 103 million of the '22 share buyback in the second half. And we now expect average cash at year-end to be in the range of GBP 740 million to GBP 780 million, and that includes a further outflow in the second half on working capital. We are pleased with the financial performance to date and to be able to upgrade expectations for the full year. On that note, I'll hand you back to Leo.

Thank you, Phil. That was very instructive. The thing I would point out is that it's great to show and demonstrate a set of numbers. But what's really important is what's behind it and what differentiates us and what actually makes it repeatable because one-off events are not bankable. And this is really what makes it repeatable. We've got highly differentiated capability in the company built around our infrastructure assets. And these are just some examples, and they're really quite stellar. The top left is actually the Hong Kong airport. It's the new terminal building there. And that roof is assembled on the ground and yanked into position. Again, nothing revolutionary about that, but it's safer, but the scale and the size of it is quite incredible and the logistics to do it. If that wasn't impressive enough, the top right here is what's going on at Hinkley as we speak. The 2 cranes either side are the size of a football pitch, just to get your eye into this. And that little white concrete thing in the middle is 5,000 tons. And it's a tandem lift to the seabed where that head will then be connected with the cooling tunnels that I showed you earlier in this industry of ours, which is cool. And that will then form the mechanism for the water to flow into the reactor and to cooler. Just an absolutely major engineering feat to pull this off, and I think it's almost a world first. Up in Boston, we're just completing the Green Line. We've opened the first section. I think the second section will open shortly. And that's where we're connecting to an existing train line. We are building 5 kilometers or 5 miles of track with 5 new stations and refurbishing 2 existing stations. Again, a real challenging engineering project. And then the bottom right, High Speed 2. This is the first tunnel that's being completed on HS2. And what you see here is the tunneling machine breaking through. That tunnel is about a mile. It's under an ancient wood. And again, it was completed about 2 weeks ago. So again, really interesting stuff. And not only do we do this for a living, we actually get paid to do this for a living. So how exciting can it get. This is probably the most important slide in the pack for me. And really, what it's doing is now describing how that capability that I've shown you is going to demonstrate and create recurring value over what effectively is the next decade. And if you look at HS2, just as an example, you can see that the revenues are starting to peak '23, '24, and then it will be coming off. You can see that the HS2 track and OCS, that's effectively the track that the train will run on, and the cabling that will provide the electricity in terms of the catenary above. And 2a is the extension to Crewe and then 2b is up to Manchester. So you can see that this revenue stream is going to go on for a long, long time. We sometimes don't make a lot about it, but we're doing all of the northern section around Birmingham, N1 and N2. But also we're doing the Old Oak Common down in Acton. And that actually, for us, is a fee-based contract. So we get a fee on whatever we spend and the risk and the cost flows through to the end customer. So that in itself is really exciting. If you look at Hinkley, where we're doing the mechanical and electrical, we're doing the heads that you've seen. We've done the tunnel boring there as well. And you can see that's going to peak about '23, and then actually tail off to -- after about 24%. Coming then, you've got -- coming on stream, you've then got the likes of Sizewell. And although Sizewell at this moment in time is talked about in terms of whether it will or won't go ahead. If you look at energy security, invariably Sizewell or something equivalent to it has to actually go ahead. So Sizewell, you can see, is a sizable project where we'll have a major stake. And then modular reactors will also come into play as well, whichever offering it is, whether it's Rolls-Royce or Westinghouse or General Electric, doesn't really matter, but it's going to be a market for that as well. If you then start to look at some of the new areas, which effectively are supported by government but they're not necessarily funded by government, this is your Net Zero Teesside, your hydrogen for Humberside and they're going to have a material play for us in the future. Then you've got also your offshore wind. If I think about these as actually major fiscal expansion effectively funded by government, it's a very different game to playing with private development. And so there's a lot more security. The good news is provided you follow the right processes, you get paid, and the client actually has the money to pay you, which is not always the case in other markets. This actually -- this growth sits atop of what effectively is our core business. And our core business in the likes of rail, and I'll touch on this more later at CP6 and CP7, which is the maintenance. You've got your highways, whether it's your RIS or your smart motorways. You've got our CPS, which is a 25-year -- sorry, 40-year M25 maintenance. You've got the power contracts and then you've got our regional work, whether it's through our defense, whether it's through the SCAPE framework and the likes of that. So, all in all, you've got this growth opportunity here, sitting really on top of what is our core business. And this for us will designate a decade of infrastructure growth for Balfour Beatty and for the U.K. industry. Offshore wind is a really important area because not taking into account in what you see here is this next slide. And the U.K. energy security and the Net zero, the size of the opportunity is about GBP 20 billion. And that's actually making sure that our infrastructure onshore is effectively resilient enough in order to take what are all the new mixture of cocktails of power coming onto the grid. So whether it be wind from the Eastern -- East Coast or the Irish Sea, all of that has to come onshore, it has to be connected and then actually has to be to a robust and reliable infrastructure. And if you look at our experience, ElecLink is where we took an interconnector from France through the channel tunnel connected up to the U.K. grid. Littlebrook, we just recently upgraded and serviced the substation here, which serves 1.5 million customers. Our work on Hinkley, Net Zero Teesside and the idea of how we put substations in place to take offshore wind. All of those represent quite unique capability. And this is all founded on top of what are our specialist engineering areas, whether it be design, ground engineering, mechanical power transmission. This is a highly differentiated end-to-end solution, which makes us, I believe, quite invaluable to our customer base. So really, really encouraged by the future that I see spelt out for our industry, but in -- Balfour Beatty in particular. If I move to the United States for a few minutes and have a look here. First and foremost, it's a very interesting 6 months. The first 3 months was quite stark. There wasn't a lot going on. And in the second 3 months, it was almost like a Tsunami of orders actually hit us. It was quite important because in the first quarter of the year, we stayed away from getting caught in a market where everybody was bidding to get volume. So we held our nerve and then the second quarter, the market came back and normalized. We've had, I suppose, a record first half in terms of bookings and what we call awarded but not contracted. So we know awards that we're going to receive. And that gives us very, very good visibility in terms of '23 and '24, which is quite important. The second thing is we have 2 businesses in the United States or 2 business models. There's the building business and then there's the civils business. About 80% of our portfolio is buildings. And the way buildings works is that we will effectively go out and look at a job with the supply chain. We will cost it up, and then we will add a 4-plus percent fee to that job. When the job is awarded, it is immediately passed down to the supply chain that they contract it with their supply base. What this does is it means that the inflation risk is actually in the estimate or it's contracted back into the supply chain. It doesn't sit with us. And then our fee of 4% plus is virtually guaranteed. Now when you take overhead of that, that means that your operating profit is around -- between 1% and 2%. So it may not sound like a big profit, but effectively, it's a mitigated risk profit because the risk lies with your supply chain or ultimately your end customer because our fee is guaranteed. That represents about 80% of the volume you see in the United States, and I'll touch on that volume in a second. The other area we've got, which is the remaining 20%, is our civils business. That's largely fixed price lump sum. It can be the area of some of the completion of the water works that we do in rail and also in roads. That's a higher risk model because it is at risk lump sum fee. So what we decide is how much of that we want in our portfolio at any one time. And we can moderate that up or down depending on the bids that we see. Where do we operate in the United States? We've said this 100 times before. We operate largely in The Southern Smile, which you can see really is the yellow on the graph. And if I do a quick whistle-stop tour around the geographies, what we're seeing, in the Northwest, Washington, Oregon, Portland, around there, highly dominated by tech companies. So what we've seen is a real softening of the tech market and the associated commercial office space with that, not surprising given tech stocks are down and they're starting to lay people off. If I go to Southern California, really robust business and that we're the largest provider of schools. We've recently received 5 school awards. So a really strong business there that keeps turning out schools. And funny enough, some of the schools are over $100 million, which is astonishing in terms of value. In this area, on the civils side, we've got the Los Angeles Airport, where we're doing the people mover and we've got the Caltrain, we're electrifying the train line from San Jose to San Francisco. Two very large contracts, and going well at this moment in time. Caltrain, as I said last time, we've renegotiated the fee from, I think it was about $700 million to about $1 billion. In terms of Texas, what we're seeing in Texas is, Texas is benefiting from really what is a population, because there's a lot of people and corporations moving to Texas. So we haven't seen the downturn in the commercial market. What we've seen is very strong growth, both in commercial office space, hospitals, but also there's a number of banks moving to the area. We've actually got the largest pipeline we've seen in a long time at about $7.5 billion. Our challenge, I think, in Texas is going to be how we actually manage the demand that's coming through in '23 and '24. If I move to the Southeast, this is a $10 billion pipeline of opportunities. And this is largely hospitality, entertainment. I think Disney recently announced with its themes park sort of a record first half of the year. And we're now seeing the projects that they mothballed during COVID now coming back out again. Now these were previously awarded to us and they're looking to actually continue to -- for us to implement. So what we see here is this market is coming back and coming back very strongly. And then the last area I touch on would be the Mid-Atlantic. And the Mid-Atlantic has -- it does have the developer market, but we've been moving away and reducing our exposure in that area towards federal. And we were hoping to get 1 federal project, we ended up getting 2 major federal projects and over $1 billion of orders. The other thing I would say that's in these numbers as well or in this picture is that we've received our first instruction around military housing to actually do a demolition at Fort Carson of some of the old properties there, which are really beyond maintaining and repair. And that's very encouraging in light of the history with the DoJ. So we are seen to be a valued supplier going forward in the future. Hong Kong, we don't spend a lot of time in Hong Kong because there's really no change, except this is -- this order book flattered by exchange rate is up by some 20%. We see Hong Kong as being a very robust market going forward with good, reliable, consistent performance. Again, the growth is going to be in the Northern Metropolis, where they're going to be building out more cities. MTR in terms of infrastructure is a big customer of ours and some where we want to stay very close to and play with. They've still got their hospital program. We're not a big player in that, although we're trying to participate. But the one thing I would say is that there's a great emphasis and it comes from the recent visit and the 25-year anniversary of Hong Kong on young people and getting them to stay in Hong Kong and ensuring that they've got the right sort of housing and accommodation. So there's a big thrust here around attracting young people, particularly to do start-ups and keep the entrepreneurial spirit. Whether that will be successful or not, I do not know. But this is going to be -- continue to be a strong market for us. Let's move to Support Services, where we've announced that we're going to be performing at the upper end of expectations. If I look at rail, road and power for a few seconds, if I add all this up, it's about GBP 1 billion of turnover. So it's -- for us, it's a material business. If I look at the opportunity, if we double that business in terms of percent of market share increase in this opportunity, it wouldn't even be negligible. So there's plenty of growth to be had in this area. The challenge is, is to get the people to actually do -- to capitalize on the growth. So again, we're not constrained in this market by opportunity, we're constrained by capability. If I look at the rail business, really exciting. We are performing very well on CP6 and CP7. Challenging, demanding, but we're actually doing a very, very good job. We are bidding other areas, which potentially, in 2024, could see that business double. Now that all -- that depends on awards. But if we were to get another award of another area, it would double our market share. In the meantime, what we're doing is we're looking to drive the business for productivity improvement because if you can't get more people, you've got to become more productive. You've got to use modular manufacturing, you've got to use digitization. So that's where we're driving and we're looking to see increased productivity in this area. In terms of road maintenance, there's a number of local authorities who will be coming out with their road maintenance to tender. This is usually a 5-year contract. We've bid 3 or 4, we've been successful on 1. And in the case of Buckshire -- sorry, Buckinghamshire, it's worth GBP 176 million, which will actually show a 5% approximately growth next year as that contract comes online. So again, a big market here, a lot of opportunity. Also within road maintenance, we have our CPS contract, which is the maintenance of M25. You can't actually change the revenue on that. So what we're doing is we're driving productivity. So in the next time frame, what we're going to see is productivity improvements from the CPS contract and then growth in '23 and beyond in the council road maintenance. In the area of power, I think I've described the offshore and the wind power, the resilience and how robust our network is. This is a highly differentiated offering of ours. We've got tremendous capability. The challenge is it takes 5 years to bring people up to speed in this area. So this is all about how do we drive productivity in order to satisfy the increasing demand. Again, I think it's -- you can comfortably see why we are talking about the upper end of margin expectations. We're often asked a question about our infrastructure investment pipeline as to, is it actually simply a store of value as in a battery? Or is it actually something that can be supercharged in order to drive growth? Well, fundamentally, it's both. If you look at the divestment track record, as Phil has described very ably, we've done extremely well in terms of the divestments themselves, but also exceeding the book value that we have. And I don't see that abating. In terms of the other question, in terms of the growth engine, well, if you look at the U.K. very, very quickly, there hasn't been an effective P3 or PPP market in the U.K. for 10-plus years. And in effect, our only real growth is around student accommodation. We've got 3,500 rooms tied up between the Royal Holloway and the University of Sussex. So they're good projects, and there are other ones in the pipeline. But again, it's not really a dramatic growth market for us. However, last time I presented, I talked about P3 in the United States. And although it's early at this moment in time, if you just look at all the clutter that's up here, there's an awful lot of things going on and an awful lot of people exploring the opportunity. And interestingly enough, we're starting to engage. I talked about schools last time in Prince George's County in Washington, D.C., Virginia -- actually at Maryland, but you're seeing also bridges and roads now coming into play. And with some of our customers, we've been able to sort of combine offerings to say, why don't you put your road and your rail bridge together and start to create some real value? So rather than building 2 separate structures, you can do it on one. We're looking at a lot of civil hall -- civic offices and the like. Student housing is still a big deal. But fundamentally, I see this as a -- over the next 3 to 5 years, a considerable amount of growth will actually come through this channel. And that will then underpin our U.S. construction business. So I'm very optimistic about the strong pipeline and it will emerge over time. In terms of, for us, building new futures, really, really important that we buy into this, not only because the government said so, but this is sort of the right thing to do. And the way I think about it and characterize it, it's a little bit like safety. But we've already laid out our ambitions for 2040, 0 carbon, 0 waste -- beyond 0 carbon, 0 waste and positively impacting 1 million people. We've laid out our science-based targets for 2030. And we've also prepared and are in the process of preparing for submission the waterfalls as to how you're going to do that step by step. And that will be really important. But the real thing that I want people to take away here is, I talk about -- we run a safe company because we design for safety. So we think about it at the front end as we're doing design. The sustainability, decarbonizing whatever is actually the same context. You've got to do it by design, you can't retrofit it. So for example, we have dedicated carbon and energy teams. I think we're one of the few companies in our sector that actually has that. So you hear about the greenwashing, we've really got people whose full-time job is to get this right. And if we actually design for sustainability, impacts such things as water in terms of how do we recycle it and use the minimum amount. So on that tunnel that you saw built at the beginning, that actually uses high-pressure water to cut out the earth. And that is actually recycled and we reuse 70% of that. In the case of mass haul, if you've got your design early, you cut the material ones and you place it where it will rest for the rest of its life. We don't believe in double touching materials. So if we get all these things right, in the same way where we get safety right, we'll end up with a business that actually is at the forefront of decarbonization and achieving our science-based targets will be, I think, fairly comfortable. But very important and a big differentiator for us. So fundamentally, in summary, and the outlook feels giving you every single possible combination of numbers. So even the less [ number ] of us can actually work out how bright the future looks. But fundamentally, the first half performance gives us confidence in the full year and that actually underpins our upgrade. Our unique capability, which I've emphasized all the way through this, talks to what is a decade of infrastructure growth. I mean we really couldn't be in a better position than we are in today. In the short term, the way we've moved our order book in terms of the example of federal infrastructure, how those contracts and terms and conditions are put together, leave us with a much more derisked position than we've ever had in the last 6 or 7 years. Our investment portfolio up GBP 200 million. Yes, it's flattened by exchange rate and inflation, but what an asset to actually have, almost equal to the market capitalization if it wasn't for the sharp rise in the share price this morning. And as Phil has talked to ad nauseam, our capital allocation model gives us confidence that we're going to continue to give future returns back to shareholders underpinned by the cash flow, which I showed you. So net-net, good set of results, optimistic about the future and our positioning in infrastructure, I think, gives us real confidence that this is going to continue for the next few years. Thank you.

This is Pam Liu from Morgan Stanley. I have 1 question, but it's quite a big one. So it's on Infrastructure Investments portfolio. So first of all, on divestment. So if I think about what are remaining to divest, is it fair to say that out of the sort of remaining portfolio, the operating or operational assets, mostly U.S. military housing, and U.K. PFI. If that's the case, then U.K. military housing, I think in this sector, in general, there has been very limited secondary transaction in terms of the equity stake? And in U.K. PFI, I assume -- the reason you haven't sold them is probably because you have an operating interest and, therefore, you're probably not likely to sell them. And then that will leave it to some sort of assets still under construction, which are probably related to U.S. housing or student housing which, again, may not be right for divestment. So the first bit of this question is, what can you sell in the next 3 years where you have a void of not having sufficient assets to sell at attractive timing? The second bit of the question with that is, obviously, we are in an environment with rising interest rate. So how do you see that affecting investors' appetite, their cost of funding and, therefore, the price they're willing to pay? And then on the investment side, so it's really great, by the way, to see the pipeline being put on the chart. So thank you very much for that. But I'm interested in the return profile. So can you give us a bit of guidance on how attractive are these P3 investments? And who are you competing with?

I thought you're going to ask why Phil wasn't wearing a tie. And the story behind that is we've only got 1 tie, and I -- he wore it last time, I'm wearing it this time. So where do we start? I'm going to give some general points and Phil will sort of fill in with some facts. It's a really interesting question you ask, what is available for sale? And as I look at the portfolio and we talk about it day-to-day, I think the number of assets in the portfolio available today as asset items are at the highest level in terms of the fact that they're coming to maturity. And I'll give you 1 example, I won't give you the specifics of it, but we recently had an asset which was underperforming for the last 3 years. We recently enacted upon cutting out 7 kilometers of cable under the ocean and replacing that cable with a new cable. That asset is now operating at 100% of its capacity where it was operating at sort of sub 50. The reason I make this point is at sub-50, we weren't going to sell it. Having paid for the upgrade and we will hopefully be refunded for that payment through the regulator, that asset is now available for sale. So sometimes, there are operational issues around them, which we then endeavor to improve. So I'm not sure exactly what the question is, but I would just say that we have more choice today in terms of the number of assets that we can sell than we have had for the last 3 or 4 years, which is good news. And that comes back to ensuring that the performance is at a level where we can actually ensure the return. Do you want to say anything on that?

Look, we typically, in our forecasting and budget thinking, we look at a 3-year plan. We look at that in terms of what we think is we're going to get -- maximize our value on divestments there. We are going to continue, over the next 3 years, divesting at the right time for those assets. So I don't see us having a void period. we may have a smaller period at a given time, but I can't see us having a year where we aren't disposing of an asset. I think we've got -- if I look at Purdue, which we've been successful on, we got that asset in 2018. We're turning it now 3, 4 years later. I see quite a few of those assets that will come up in that time frame as we go forward in the next 2 to 3 years. So I can see some U.K. assets that we will sell. So I don't just think it's going to be U.S. assets. We think there's some U.K. assets that will go to market as well.

Yes. Just in terms of the military housing asset, there have been transactions which have happened in a different way. There hasn't been outright sales as a whole portfolio. Some of them have monetized part of the revenue stream. And I can't remember the exact details, but it was something like 25x the earning value or whatever, but you can look that up and you probably know better than I do. So I do think those assets are extremely attractive, where they've got 30 to 40 years cash flow. And the market is, at this moment in time, paying a premium for such cash flows in our experience. You asked about interest rates. There's no doubt that interest rates are having an impact on the market, especially if you're looking at some sort of private development. Cap rates are at an all-time beneficial level. And so therefore, they're looking to describe better valuations than we had anticipated in our model. So with cap rates where they are at the moment, we're looking to be a divester rather than necessarily a buyer. But then these things change over time as well. The -- it is more difficult to get financing around projects, there's no doubt. And when we go to the banks, they're looking for more onerous terms. But the fact is the money is still out there, it's just a little bit more challenging to get. I don't know if you'd like to say anything on the interest rates at all?

No, I think you've covered that. I think on the return profile, what I would say is that we take a very disciplined approach. We're looking at 2x return. That's our goal. That typically equates to 15% IRR kind of hurdle rate for us. So there -- as we look forward, we are seeing attractive things in this space. So -- but we're disciplined. So we are not -- we are -- and the investment team has been very good at selecting and keeping with that discipline. And we benefited from it, as you can see, in terms of our divestments. And actually, we're still sitting at GBP 1.3 billion of value -- even after all of these divestments.

And 1 of the 2 things we're looking at is we're looking at a little bit more of an innovative approach in terms of some of the things we're investing in and at the full year, we'll announce some of these things. But we are just about to launch a GBP 10 million investment fund around start-ups and innovative technologies, which is sort of a departure from our more traditional PPP assets. But I think when you see what we're talking about, you'll find it quite innovative.

So just one, P3. On P3, who are you competing with?

P3s, you'll find other contractors. Let's call them Europeans. That's probably the way I'd have them, and then a combination of some infrastructure funds teaming up with contractors is what you typically see. So they're the kind of people we've seen in the market. If you look at -- but you've got to be careful, that's in the P3 space than when you move into student accommodation, a different set of competitors in that market. So we do vary in terms of the competitors we see.

Yes. Sometimes those competitors are people who actually buy our assets as well.

I've got the mic, so I'll carry on, if that's okay. So Jonny Coubrough at Numis. Firstly, on Support Services, I mean you've spoken previously about how the improved margin is being driven by exiting the gas and water markets. Keen to also here if you're seeing improved contract terms or improving contracts as a result of demand, particularly within power from rail. And also, you spoke a few times about the challenge around human resources. Could you give us an update on where you are with salary reviews? And within Support Services, what the impact to the margin would be there and ability to pass that through? And then the final question is around the multiyear capital returns. You referenced there, Leo, the sharp rise in the share price today, so just keen to hear what your appetite is in future years to continue with buybacks versus special dividends.

Great. I'll let Phil do the last one. I'll do the first 2. First and foremost, if you sit down and you read the contracts carefully, you would never sign up to the gas and the water terms and conditions, especially when you look at the tail that comes with them, which could run for several years after you actually finished the work. So just a relative comparative basis, we're in a far better position around the contract Ts and Cs. The other thing is, is that the contract Ts and Cs need to be managed, but sometimes it's not the terms and conditions, it's actually the technical specification that you sign up for and how difficult that can actually be to achieve. So we, in our GTIC process have now gone back and we can't change the contracts, but as each order would effectively come out and you would be tendering for it within the framework, we're very careful to look at what's the technical scope that we're taking on so that we don't expose ourselves to risks that we can't actually manage. So fundamentally, the terms that we've negotiated in the new frameworks, we've pushed back on certain items that we're not prepared to accept. That's in the master framework. But then on each job, we've pushed back in terms of the technical scope. So I think we're in a far better position which allows us to make the returns. When we get those technical specifications wrong, and we delivered 1 job recently and a large job in London, we actually -- in the power business, we actually lost money. So the point being is being aware of that learning from it so it doesn't repeat itself is really, really important. That loss was last year, by the way. So no need to worry about that. Rail business, again, the terms and conditions are well understood. I don't see big risks there, provided you perform in line with the contract. In terms of salary review, this year, our salary review was in January. We went out with 3.5%. We had 4% in a year, changes another 1%. So that's where we are. We all realize just how difficult it is for people with the rising energy costs and all of these sorts of things. So we're sort of remaining constantly vigilant about it and see what's required. If you go back to COVID, if you look at how we responded in COVID, I don't regard energy as the same crisis as COVID, but the fact is, we're a responsible employer and we want to make sure that we look after our people. In terms of -- we do have some unions -- we have quite a lot of unions as part of our business. And we're looking at discussions around 4%, maybe as high as 5% in some of those direct labor areas. And we're very much in line with what National Rail will be doing and our other end customers. So we're not stepping out and saying we're something different. It's all part of a negotiated agreement. So we'll follow what government and the major customers actually supply because, ultimately, they pay for it. It does flow through back to them. So here we are. And in terms of the, the capital allocation.

Look, we've always said we'd use the most appropriate method to return surplus to shareholders at some point. If that's not a share buyback, then it will be something else. But we'll get to that when we think the share price is not as attractive to buy back on. I don't think that's as yet.

We have enjoyed a particularly low period for the last 6 months. So we've been trying to buy back as many as we possibly could. So -- but then we'll keep that under constant review.

Joe Brent, Liberum. Two questions, if I may. Firstly, you've reduced the amount of fixed price contracting and you still got some single-stage contracting there. Do you expect to reduce that further? And then secondly, on rail. Rail transport has declined quite a lot, which is something we think that CP7 should be a reduction in regulatory spend. I'm interested in your thoughts there. And then finally, actually this one is for Phil, your working capital absorption is trending down, but actually in the first half, it trended up [indiscernible] at a group level. So interested just why working capital absorption trended up in the first half.

Okay. Look, we're always going to have some fixed price work in our portfolio. The important thing is that we are set up to handle that. And clearly, the fact we've done it historically in the U.S. civils business means it's an area we can manage. We do get surprises on the upside, we get disappointments on the downside. But in balance, it's a business worth staying in and we have that capability. In terms of rail, if we think of London underground, which is not network rail, but I think it's back up at about 75% to 80% of where it was. Weekends are 100% recovered. If they do cut back on it, I don't think we're going to be too concerned because you can't not maintain the network and your CPS is about the maintenance. If you cut back, you'll cut back on capital programs. One thing I forgot to say on my slide was by having that capability footprint in rail, we are very well positioned, and we've bid for the work on HS2, the track slab and the catenary. That's over and above anything that we are actually looking at in our services business. So the same people that do the work that -- on the maintenance side, we will then move to the capital side. So I don't really see there's a risk in that at this time. I may live to regret my words, but I'm pretty confident that it's underpinned. And then Phil?

The working capital one in total on the negative, that's exchange rate. Let's push that. On the table, we show on the working cap is pre-exchange rate.

Our next question comes from Gregor Kuglitsch from UBS.