Costain Group PLC (COST) Earnings Call Transcript & Summary

Ladies and gentlemen, hello, and welcome to the Costain's results for the year ended 31st of December 2020. My name is Maxine, and I'll be coordinating the call today. [Operator Instructions] I will now hand you over to your host, Alex Vaughan, CEO of Costain. Alex, please go ahead, when you're ready.

Thank you, Maxine, and good morning, and thank you for joining us, everyone. I'm Alex Vaughan and as Maxine said, I'm Chief Executive of Costain. And I'm delighted to introduce Helen Willis as our new CFO. She joined us in November, and we're already benefiting from her experience as well as her fresh perspectives, and it's great to have her on board. I'm going to start with a brief business overview, then Helen will present our financial results, and I will close with an update on our strategic progress and outlook for the group. Last year was undoubtedly a challenging year, but I'm very proud of how everyone at Costain responded and the resilience shown across all teams, which enabled us to continue to operate effectively with strong safety measures and remote working in place. Despite these challenges, we achieved an adjusted operating profit of GBP 18 million, in line with our revised expectations. On a reported basis, the loss was GBP 96.1 million, which reflects the charges in relation to the Peterborough and Huntingdon and A465 contracts as reported at the half year. On the back of the contract issues, we've taken a number of steps to ensure that there should be no repeat of those issues. We've also made a number of other important structural changes, which will make us a much stronger business. And I'll talk through these shortly. Winning new work and the right sort of work was certainly a highlight last year, and we saw real momentum following our capital raise last May. We secured GBP 2.3 billion worth of new contract awards and extensions, more of which was in line with our strategic focus and encompass our broadened offer. Additionally, we have a healthy net cash position of GBP 102.9 million. So overall, Costain is in good shape and well positioned for the future. The infrastructure markets we target remain strong with significant long-term underwritten investment programs in place. All of this gives me confidence that we'll deliver significant growth in profits and margins this year. Throughout the pandemic, our priority has been ensuring the safety and well-being of all of our teams and the communities in which we work as well as protecting our business and continuing to serve our clients effectively. I would again like to pay tribute to our teams, our partners and our clients, who have all done everything they can to successfully look after one another. In the second half of the year, we maintained our strict safety measures and remote working which insured the effective operation of our business across every contract. Whilst remaining alert to changing circumstances, we are building back as a better, more efficient and more productive business. In responding and adapting to the challenges presented by COVID-19 at the outset, we took decisive steps to reduce our cost base and as a result, we were able to mitigate some of the impacts on our profitability, with the net impact on profitability being around GBP 9 million. As I said earlier, our reported results reflect the exceptional charges for 2 long-standing contracts. On the Peterborough and Huntingdon contract for National Grid, we entered into a mutual termination agreement with the client last June, where we agreed to cease work following a significant change in scope. We are continuing to work through a legal process to agree a number of identified compensation events to recover costs incurred and to eliminate the potential liability to National Grid for completing the work. This resolution process is ongoing and will be concluded by the end of this year. Supported by external advice, we believe we have a strong entitlement to retain as a minimum, the reported position with no further cash outflow. However, for complete transparency under the terms of the agreement, the range of outcomes is from an additional receipt of up to maximum of GBP 50 million to a cash payment which would not reflect our banking arrangements of up to a maximum of GBP 57.3 million. Any adjustment for the current contract cash position would be made in the first quarter of 2022. On the A465 contract, we announced that we had reached assessment agreement with the Welsh government last month. The financial terms of the settlement are in line with the provision that we made at the half year. And pleasingly, we now have certainty of the final account sum and are progressing to complete the outstanding work by September this year, with further milestone payments due as we proceed. I've made a number of significant changes to improve and strengthen our business since becoming CEO. Starting with the senior leadership team. Helen, as I mentioned, joined us in November, and already, we benefited from her approach and fresh eyes. I also put in place new heads of both of our operating divisions, and a CDO to spearhead our digital evolution. Importantly, we also have a new group legal counsel who is helping drive a revised approach to risk and contract management. And a new HR director, not just to help attract, retain and develop the best people, but to help our team be at their very best. The new team is working well. And I have set the expectation to challenge what we do, how we do it so that we can consistently improve and develop at place. Secondly, I've made a number of changes to how we're structured. We've now got a flatter structure, which is improved communication, both internally and with our clients. Teams share information quicker and are more responsive, driving better outcomes for our clients. We also have a new operational excellence model, setting higher expectations for our delivery against which every contract is monitored monthly. Positively, our margin performance has already improved. Perhaps the most important change of all, we have made big changes to how we assess and manage risk. Our contract selection, tender and contract management processes have been improved over the past 18 months, reducing contract risk with better control. On our existing contracts, we've completed a thorough review of every single contract. This has been an important exercise, and the outcomes of the review supports our adjusted profit outturn of GBP 18 million. Importantly, we have clear confidence in our contracts performance and our ability to deliver them to plan. When it comes to new work, we are now having clearer discussions with our clients as to the assumptions and conditions of our offer. Our independent risk and assurance review is positively challenging our assumptions, and our new contracts have greater mutual clarity of the scope of work to be completed and risks surrounding the delivery. With all of the opportunity around, sometimes it is important to say no. And if we believe the risk profile is too high, we will walk away. And to be clear, there have been a number of times where we've done exactly that over the last 12 months. I am in no doubt that these changes have made us a significantly stronger and more resilient business, where we can be confident of delivering our existing and future order book to plan. I'm now going to hand over to Helen to take us through the financial results. Helen?

Thank you, Alex, and good morning, everyone. I'm absolutely delighted to join Costain in November last year, a challenging time to start in a new company, but Costain has reacted well to COVID and adopted good working methods that have allowed me to settle in well. Before I move to the slide, I thought I'd share some initial observations. When I joined Costain, my belief was that the company has much potential and is well positioned to benefit from the investment in infrastructure. And since starting, that belief has been confirmed. What's impressed me most is the people. I've been lucky enough to visit some sites, both in person and by means of virtual tours. And the overriding impression is a passion and commitment to Costain, and it's really infectious. This carries over into those who are not on-site as well. It's clear that a huge amount of work has been done to improve contract risk management, and there is more we can do. My focus will be to drive financial performance with more rigor and to improve cash generation. And I'm really looking forward to working with Alex and the team to drive growth and results. As Alex has said, 2020 was a challenging year. However, we delivered adjusted operating profit of GBP 18 million, in line with expectations and remain profitable throughout the year. This is in spite of the impact of COVID in the first half partly mitigated by efficiencies as well as the impact of the contract review carried out for the year. There were significant one-off contract adjustments. At the half year, we announced adjustments on the A465 and Peterborough and Huntingdon contract. And as part of my year-end review of contract positions, we've also adjusted a legacy contract ASF South completed back in 2016. This contract has not been finalized in the usual way, and we've now agreed a resolution with the customer. We completed a capital raising earlier in the year, and I'm pleased that year-end cash collection was strong, and hence, the year-end cash balance of GBP 102.9 million was well ahead of expectations. An average month-end cash for the second half was GBP 94.4 million. These are a complicated set of results, and I'm going to do my best to navigate you through. You all have seen from the results announcement that in order to provide clarity on the performance of the group and divisions, we've reported profit on an adjusted basis, which excludes most significantly the A465 and Peterborough and Huntingdon contracts impact. The completeness on this slide, I've set out the full statutory income statement and the reconciliation to the adjusted numbers. The table shows statutory results on the right, moving towards the left shows the adjusting items, and hence, on the far left-hand side, the adjusted results. So I'll focus here on the statutory results, and then I will give more color to the adjusting items and then move on to the adjusted results, which gives a clearer picture of the group's underlying performance. The statutory reported loss for the year is shown here on the right-hand of the table, was GBP 96.1 million compared to GBP 6.6 million for 2019. The group had a tax credit for the year of GBP 18.1 million arising from recognizing a deferred tax asset in respect of losses, giving an effective rate of 18.8%. We expect the effective rate to remain close to the statutory tax rate of 19% until 2023. Statutory reported basic loss per share was 36.7p compared to a loss of 2.3p last year, whilst the adjusted basic earnings per share was 5.8p compared to 25.1p last year. Moving on to the adjusting items. These fall into 2 categories: firstly, contract adjustments; and secondly, other items, and these are shown in the 2 tables here. The impact of the A465 and Peterborough and Huntingdon contract charges were reported at half year totaling GBP 94.7 million. As Alex has already mentioned, the settlement agreement has now been approved on the A465, and we're working to complete the contract later this year. We continue to move to the legal process to resolve the Peterborough and Huntingdon contract. As I just mentioned, as part of my year-end review of contract positions, we've also adjusted a legacy contract ASF South completed back in 2016. This contract has not been finalized in the usual way, and we've now agreed a resolution with the customer. The other items for the year totaled a charge of GBP 10.3 million, shown in the right-hand table. This included an impairment of legacy goodwill held within the Natural Resources division, having considered the current forecast. Also included are a number of items in pairing and selling non-core assets, such as the Marina in Spain, our hotel business, and also in [indiscernible] and PFI assets, netting to a profit of GBP 1.8 billion. There's also a charge of GBP 1.2 million for advice received in renegotiating the group's banking facilities for the year and a charge relating to GMP equalization of GBP 0.9 million. This slide is a year-on-year comparison of both statutory reported profit shown on the extreme left and right of the chart. Moving to the central box area showing the year-on-year movement on adjusted profits. So adjusted operating profit in 2019 of GBP 37.9 million decreased to GBP 18 million for 2020. This decrease was in part driven by the impact of COVID-19 in the first half of the year, estimated at GBP 9.2 billion and mostly from lost work. During the second half, we were able to operate effectively, and hence, this impact was contained. As Alex has already mentioned, an extensive review of contracts conducted during the year. And the impact of this as well as volume and mix changes principally explains the remaining decrease of GBP 10.7 million. The impact of COVID on revenue is seen in both divisions. The Transportation division revenue was down 2.2% year-on-year. The growth in contracts that have moved into the construction phase, such as HS2 Main Works, Preston Western and Gatwick Station, soft increases in volume in a number of contracts and new contracts that have entered the ECI phase on the regional development program is more than offset by decreases in volume on A14, A465 and the Crossrail portfolio. The Natural Resources division revenue was down GBP 84 million year-on-year. The significant growth and performance improvement at [indiscernible] was more than offset by client water contract affordability issues and phasing of AMP6 as well as the termination of Peterborough and Huntingdon contract in 2020. These volume and mix impacts as well as the contract review conducted in the year have resulted in a reduction of both divisions margins with transportation decreasing to 2.8% and Natural Resources margin decreasing to 1.7%. Year-end cash was strong, with net cash at GBP 102.9 million, ahead of expectations. This was comprised of cost saving cash as well as cash held in joint operations, offset by borrowings. Cash held in joint operations has reduced from GBP 83.5 million last year to GBP 61.1 million. And there's real focus on prompt distribution from these accounts. The group has in place banking facilities of GBP 179 million, a revolving credit facility of GBP 131 million and a term loan of GBP 48 million. These mature in September '23. The group's defined benefit scheme is significant, with assets and liabilities of about GBP 890 million and GBP 880 million, respectively. At the year-end, the scheme was in deficit by GBP 5.6 million from an accounting perspective compared to a purchase of GBP 4.9 million last year. The last triennial valuation in 2019 has been approved and a deficit reduction plan was agreed with the scheme trustees. This commits Costain to annual payments of GBP 10.2 million per annum, increasing with inflation, and you'll see this on the cash bridge on the next slide. During the capital raising in 2020, the company stated balance sheet targets of net assets of GBP 200 million, current asset ratio to be greater than GBP 1.3 million, high positive net cash and no structural debt. These targets were important to the business, tendering for circa GBP 3 billion worth of contracts. Most importantly, HS2, the Smart Motorway Alliance and growing the high range regional development program. And I'm happy to say these were all successful. And as Alex said, we continue to win business. As we now develop our strategy and broaden our services, we'll keep these targets under review. The cash bridge shows net cash increasing from GBP 64.9 million at the end of 2019 to GBP 102.9 million at the end of 2020. This is a detailed slide, so I'd first draw your attention to the cash movements on either side of the dotted box. The capital raising generated a net cash inflow of GBP 93 million in May. An average month end cash has increased from GBP 41.8 million for the full year last year to GBP 94.4 million for the second half of 2020. The cash timing differences of GBP 35 million unwound at the start of the year, and there were GBP 17 million of timing differences from early receipts at the end of the year, and these will unwind during the first part of 2021. As I mentioned earlier, the agreed contribution payments to the pension scheme of GBP 10 million per annum. We've also taken advantage of the government scheme to defer VAT of GBP 10 million, and this will be paid in installments starting from this month. This leads us with the operating cash shown in the dotted box, cash outflows on contract costs for A465 and Peterborough and Huntingdon contracts that fit-out and hence, cash from operations for the year was GBP 36 million. The prompt payment code is a real focus for us. We reported average supplier payments of 32 days. And importantly, we continue to pay over 90% of invoices within 60 days, hence, meeting the prompt payment co target. In conclusion, I believe we are well set for 2021. The balance sheet has been strengthened, the cash performance has been strong. We start the year with a significant order book and higher secured revenue than in previous years. Importantly, with margins in line with strategy. With that, I'll hand you back to Alex.

Thank you, Helen. Now the infrastructure markets in which we operate have remained strong, and this is reflected in the level of new work that we've won. Supported by the strength of the balance sheet following our capital raise in May, as Helen has said, we secured GBP 2.3 billion worth of new work opportunities last year. Our order book stood at GBP 4.2 billion at the year-end, and we have a good level of secured revenue for this year at just over GBP 1 billion compared to GBP 940 million last year. We also benefit from preferred bidder positions of GBP 1.2 billion, predominantly being the Smart Motorway Alliance contract. And we have positions on around 60 significant consultancy and digital frameworks. These frameworks provide opportunity over and above the order book and preferred bidder positions and put us in pole position to pursue and be awarded works orders throughout the term of the framework to deliver services to the client. This is a significant part of our approach to building our consultancy and digital services. The forward work is of a high-quality, being long-term in nature, where we are involved at the earlier stages, which plays to our higher-margin offering. And increasingly represents a changing mix of the business in line with our strategic objectives. What I am clear on, as I've said before, is that we are focused on delivering this good work well and to enhancing the performance of our delivery. Clear long-term investment plans are shaping the increased investment in the U.K.'s strategic infrastructure. To meet and benefit from these, Costain is positioned as one of the U.K.'s leading smart infrastructure solutions company, operating across the transportation, water, energy and defense markets. Supporting the delivery, enhancement and operations of the U.K.'s critical infrastructure. Our markets are shaped by the national infrastructure strategy, energy white paper, regulated private sector, investment commitments and the defense spending review. These significant long-term investment programs are underwritten by government policy, regulation, legislation and critical national need. They are evolving rapidly and driving the national need to level up the economy, return the economy to grow and address climate change as well as responding to growing customer expectations, improving standards, upgrades of aging assets and the need for efficiency and performance improvement. All present significant opportunities for Costain in meeting these changing needs and investment priorities. Operating responsibly and sustainably is a business imperative for Costain. The safety and well-being of our teams, our clients, partners and the general public is our #1 priority. Aligned to the UN's sustainable development goals, we deliver on our purpose to improve people's lives by making positive contributions to society, helping to build a sustainable future and ensuring that Costain is a safe, inclusive and great place to work where everyone can be at their best. 00In February last year, we set out our climate change action plan, which confirmed the group's commitment and our plan to be net zero by 2035 at the latest, including the services and the physical infrastructure we provide. In delivering our responsible business commitment, I'm proud that Costain was included in the FTSE4Good index for the first time, demonstrating our strong environmental and social and governance practices. We have made good progress implementing our leading-edge strategy, aligning our services to responsibly meet the changing needs of our clients across our chosen markets. We will become increasingly valuable to our clients, as we broaden our offer from purely complex program delivery to one which also incorporates our consultancy and digital capabilities. And we have confidence in achieving our strategic objective of 6% to 7% divisional margins with 55% of our profit derived from higher margin services. The breadth of our services, as demonstrated on this slide, shows our strong position across a number of complex construction programs with a purple border and our growing position as our value and implementation oriented consultant, the blue border and digital performance improver the orange border. Our expertise in complex delivery is the bedrock of our business. Costain has built a strong position on the long-term 5 to 10-year investment programs for our clients, including HS2 and Highways England's Regional Delivery Programme and the other programs you can see listed on this slide. These long-term programs enable a strategic approach to our services becoming increasingly safer, faster, greener, better and more efficient. Including, for example, our [indiscernible] products, which automates elements of the design process, our digital PMO and BIM models, which allow for better planning and scenario simulation and our use of new low carbon alternative materials. Alongside our complex delivery, we're successfully building our position and reputation as a trusted adviser and consultant to some of the U.K.'s biggest infrastructure clients. Today, we have over 1,000 consultancy experts with backgrounds in design, project management, risk management and systems thinking, for example. Many of whom have joined us from some of our industry's leading consultancy businesses. Our advisory and consultant facilities range from assured delivery partner, design services, advisory commissions and positions on the forward investment frameworks I referenced earlier. Last year, we won positions on 27 new frameworks as well as a number of new contracts. Many of them, you'll see on this slide. It is this sort of work, which demonstrates why Costain has for the second year running, being recognized as one of the U.K.'s leading management consultancy businesses by the Financial Times. By leveraging our client relationships, insight and digital expertise, we are increasingly improving performance and productivity through the delivery of digital solutions. Our digital team based out of our technology center amongst many contracts is developing and delivering a new digital solution for Network Rail, through our [indiscernible] solution, which is moving from development to deployment on the rail network. As I have said previously, a significant focus for us this year is embedding all of our operational changes and delivering all contracts and business performance to plan. I have set a number of key short-term milestones to ensure we achieve our strategic objectives and ultimately deliver a step change in the performance and the value of this business. The 5 key strategic outcomes are listed on the left-hand side of this slide. Being cash-generative with the outcome for this year being positive net cash generation from our underlying operations, in line with our long-term objective. Increasing margins, we are targeting margin progression across both divisions in the 3.5% to 4% level this year. As part of our plans towards 6% to 7% margins. Profitable delivery requires consistent returns from our complex programme delivery project. The strong measures I have previously mentioned and the quality of the work we've secured will enable us to achieve this. By the end of this year, every one of our complex programs which commenced from the third quarter of 2019, will be delivering 3% to 5% of margins. Growth of higher-margin services. In growing our higher-margin services, we will deliver the work secured, win further work and unlock the opportunities in those frameworks that we've secured, so that 40% of our profit represent our higher margin services. Moving towards our target of 55% and improved efficiency. I've previously talked about the efficiency gains we're making, which are enabling us to both invest across the business and to ensure that we can deliver the best value proposition to our clients. We have a good line of sight to achieving GBP 12 million by the end of this year and GBP 20 million by 2024. In closing, it's encouraging that all our contracts are operational and have effectively adapted to cope with this extended pandemic. We are clearly working to resolve the outstanding issue on the P&H contract, and I have taken strong actions to improve the business. We have secured over GBP 2.3 billion worth of new work, much more of it incorporating a broader mix of our services. We have a strong net cash position, our targeted markets remain resilient and positive, and all of the above gives me confidence in delivering significant growth in profit for 2021 this year and beyond. We'll now take questions, and I'll hand you back to our operator, Maxine, who will guide us through the Q&A. Maxine?

[Operator Instructions] Our first question comes from Andrew Nussey from Peel Hunt.

A few questions from me, if I may. First of all, just in terms of the digital and consulting work, which has been won through the second half of '20. Has that been secured at levels, which give you the confidence in reaching those margin aspirations? Second question, in terms of the independent review on contracts, is that all contracts within the Costain portfolio or just those that relate to complex delivery? And then what's sort of the current profit run rate in terms of higher-margin services, so we just get a feel for what needs to be achieved to get to that greater than 40% at the end of the year, please?

Okay. Good morning, Andrew, and thanks very much. I'll take the -- it's Alex. I'll take the first and the last question, and then I'll hand over to Alan -- sorry, Helen, not Alan. Helen to answer the independent review question. Just regarding the digital and consultancy work that we've won. So we have set a minimum margin expectation on that work at the lower level of the range. So 8% net margin is what we've said. So we are -- all of the work we are winning on an individual contract by contract basis, is securing a margin north of 8%. So that gives us confidence that our value proposition and our competitiveness is enabling us to do that, which is good news. Just coming to the -- the run rate. I think as we've said before, we are still not yet at the volume of consultancy and digital work that is allowing with the cost base that, that carries, allowing us to have that margin come right through. We're very close, and we would expect that this year, we should be able to see the benefit of the margins on the digital and consultancy work come through as the volume has increased. Helen?

Yes. So the question on the contract review. We've locked all significant contracts as part of that review, making sure that we are comfortable with the position at the year-end. We continue to look at the best profiles of new contracts, as Alex mentioned in the presentation, so thinking about how we can mitigate risk by understanding scope to a greater extent before we even embark on contractor. There's all sorts of work going on, but the contract review for the year-end was very extensive, and I'm comfortable with where we've landed.

Can I just follow-up on that? I mean, I think in your commentary, Helen, you did sort of flag that you felt there was probably more that could be done on risk management. Can you sort of expand on that?

I think that's what Alex was referencing with the approach to work and the sorts of conversations with customers to understand scopes in a different way at the outset. I think that's the way of the industry behaving differently from the past, and that's -- I firmly believe benefits both us and the customer with that greater visibility -- ability to manage risks and opportunities right from the outset. So I think that's where, certainly, Alex and I are really focusing at the moment. And I think that gives us the greatest opportunity for success on all of these contracts and to potentially increase the margins on those contracts. That's really where we're on focus now.

Our next question comes from Jonny Coubrough from Numis Securities.

Two questions from me, please. Firstly, looking at the adjustment to the 2020 results for the impact of the pandemic. Just wondering whether your expectations for the current year now include the anticipated ongoing impacts of the pandemic and particularly thinking about whether there are any productivity impacts that you're seeing on the ground during the current lockdown or whether they've also been reflected in last year's adjustment? And then the second question would be, given the strategy is to get to about half of the profits from higher margin services. Going forward, will this be reported separately within segmental information, just so that we can kind of see what progress is there?

Do you want to take both of those?

1 I'll take both of those. So the impact from COVID in 2020 equated GBP 9.2 million. As we've gone into '21, we are operating as we've planned to do. And therefore, there's no ongoing impact of COVID in our 2021 planning. Obviously, we're all living with COVID still, and there is that layer of uncertainty. But for now, I'm happy to say we're up and running, and so no impact anticipated at the moment. In terms of reporting of those higher-margin services of digital and consultancy, at the moment, our segmental reporting is by division, Natural Resources and Transportation. Certainly something I am considering and have not yet landed on is how we need to change that, supporting to give greater insight into this mix of services and therefore, be able to tell the story more clearly. So certainly, one that I'm thinking about, we would hope to come up with something in the future. Does that help?

Very helpful. Perhaps just a follow-up, given this target to get to about 40% of profit from those business areas is for the end of the current year. Just wondering your sense of how confident you are of hitting that, given where we are at the moment?

Yes. Jonny, it's Alex. Yes, look, we've made really good progress, but we've now secured our fourth delivery contracts, which is sort of where we are, the clients, program managers. So we've secured an extra 2 over and above what we talked about at the half year, which is really good progress. So we've got -- those are good volume. We've got increasing demand on the framework that we've got. And as I said, we've now got 60 frameworks with clients that we get a drawdown on works orders to deliver consultancy and digital services. So we're pretty confident. I wouldn't have given you a number of 40% if we weren't confident. So we're pretty confident that we're going to get there and deliver that growth. And we're trying to fill the vacancies we've got as quick as we can.

Our next question comes from Joe Brent from Liberum.

Three questions, if I may. And maybe just take them one at a time. You very helpfully reiterate your margin targets. Could you give us an indication of whether you see the same trajectory for both businesses or whether Natural Resources will slightly lag Transportation?

Yes, that's a good question, Joe. Look, there is a greater proportion of consultancy work in Natural Resources. I think the key determinant in the pace of that will be how quickly the development of the green energy happens within the energy sector. So at the moment, we're seeing a downturn in conventional energy but we're not seeing the pace of the take-up in the new greener energy. And positively, we've said within our statement, we're really well positioned in hydrogen consultancy for clients. We're leading one of the industrial clusters and involved in 2 others, and we're seeing some momentum growing with those. So it should -- Natural Resources should lead the charge in the margin because of the greater proportion of consultancy. But that is going to be driven by the pace at which we grow and develop the energy business, Joe.

Fantastic. And secondly, you haven't talked a lot about HS2. I mean there's an awful lot for you that you can talk about, but it seems to me that's really got some momentum behind it. And I think there's an announcement today that Phase 2a will start construction in 2024. Can you give us just an update on where we are with Phase 1? And what other opportunities do you see coming from high-speed 2, including Phase 2a and b?

Yes. And Joe, you're absolutely right. I mean HS2 isn't just going well in terms of landing on the ground and getting into delivery. But it's also starting to really shape the way that infrastructure will be delivered in the future, the development of low-carbon materials and low-carbon plant has been a real testimony to some of the work going on HS2. So our contracts on Phase 1. So we've still got another 1.5 years to run on the enabling works contract, and that's going very well and sort of clearing the way for the route and then our contract for S1 and S2. So coming out of Euston, going up to the M25 is progressing well. So mobilize and a lot of the work is, is well in train. And then as you say, positively, the government has given approval for Phase 2a, and we are bidding currently about 4 other contracts on the HS2 program. Some of them are right across the program. So for example, the M&E fit-out for the tunnels, the signaling contract and then in addition, we are currently tendering some of the work on Phase 2a. And as you say, they're looking for mobilization, not to be too far away. So yes. So a very significant contract for us receiving a lot of our focus, but so far, it's going very well.

Just following up on that, could you give us an indication of what those 4 tendering contracts might be worth? Are we talking about sort of GBP 1 billion of work type of thing or is it?

Yes. All of those together are in excess of GBP 1 billion worth of work.

Yes. Fantastic. And then final question for me, a bit of a technical one. But I think you said that the [ GBP 57.3 million ] worst-case outcome on National Grid wouldn't affect your banking arrangements. Could you just explain what that means?

I'll take that, Joe. So in our negotiations with our banks, we have been able to carve out any impact from the Peterborough and Huntingdon contract from our covenant ratio calculation. So the banks have been very supportive to the group, which I'm very grateful. And hence, whilst clearly, we don't want to pay any cash outs, and we're negotiating very hard for that not to be the case. Should the worst outcome arise in Q1 of 2022, it wouldn't impact our covenant test.

[Operator Instructions] Our next question comes from Samuel Dindol from Stifel.

Three questions for me, if I may. Firstly, on the 6%, 7% margin target, is that still going to be -- is the target to get there by FY '24? Or has COVID perhaps delayed that a bit, sort of quite understandably? Secondly, on wage inflation, post Brexit, are you or subcontractors seeing any initial wage inflation on general labors who -- given change rules on entering the country has seen any impact yet. And then finally, on the P&H contract. In terms of the range you've given, is it fair to say your current provision is the same zero cash? And how does the range work? Is there sort of 20 items that are outstanding? And you assume you win half or sort of any sense of how you've got to that conclusion, would be great.

Okay. Well, thanks, Samuel, I'll take the first 2. And then if I can hand over to you, Helen for the P&H. So just on the 6% to 7%, look, we are still focused on trying to achieve that by 2024. But undoubtedly, 2 things that happened. Number one, the pandemic come along, and we've been very focused on adjusting the business and being able to drive and operate in the current circumstances. The second thing is that I've just been absolutely uncompromising in our focus that we will deliver every contract that we've got really well and to plan. So those 2 things have been a priority for me. And therefore, that may well extend the period by which we achieve the 6% to 7%. But we've still got a very clear road map of how we get there and to delivering that. Secondly, moving on to the wage inflation. At the moment, we're not seeing great wage inflation. Actually, I think the biggest challenge for us on wage inflation is the impact of HS2. We are finding that the demand for resources in London and the demand because of the work -- the volume of work on HS2 is creating -- is creating a bit of a sort of macro market. So we're keeping an eye on that and doing our best to manage that. But otherwise, regarding wage inflation linked to Brexit and that, we're not finding that at the moment. Helen?

Yes. So just to take those P&H questions. I think you're absolutely right. The current reported positions suggest no cash inflow or outflow. So there will be no cash movements in 2021 relating to that contract. So I think that's absolutely fair to say. And the worst case, as I've already said, would be 57% and that would hit in Q1 of 2022. As the process, it's a sort of fairly complex level process. There are a number of adjudications that we're working through, and that work will continue all the way through 2021 right until December. And that's why any settlement would be pushed into Q1 of 2022.

Our next question comes from Kevin Cammack from Cenkos Securities.

Just had a couple of questions here around consultancy side of the business. And just to help me understand that a little bit more. I mean, historically, when the consultancy businesses essentially has been tried to brought under the umbrella of a contracting type business. This often proved quite difficult to -- or a, attract them, which you've obviously addressed. That we -- maintained them, in essence, a lot of consultancy tie-up individuals tend to be quite independent thinking -- tend to be used to working in partnerships and be sort of rewarded on a narrower basis, if I put it like that. I'd just be interested to know how you feel that you can keep your sort of army of 1,000 consultants interested, motivated, enumerated within Costain? There are 2 subsidiaries to that. I wonder if you have any start turnover numbers in that side of the business that you're prepared to share with us? And secondly, I'm guessing your comment around margin uplift on consultancy in a sense being held back by a lack of volume or the need for volume to grow to maximize your margin. I assume that's an issue of the rate of utilization that you can -- to your consultants out there. And if that being the case, can you give us some idea of where that sort of level of utilization might be at -- you can say 2020 and projected '21?

Yes. And Kevin. So look, I'll go at those questions and depending on how Helen thinks I've done, she might jump in. But just on the consultancy, so look, I think for us, there are various types of consultancy work that we do. So as I've said to you earlier, as I referenced earlier, the delivery partner contracts that we've got operate on a very similar basis to our construction contracts. In other words, we have them in place for 5 years. And we'll have a project management team in there overseeing the clients' contractors for a period of 5 years. So there's good long-term stability in that work, and that work is really good for using the skills and capabilities of our teams to be able to deliver that. What the clients love about our approach is we don't just sit there and monitor the performance and score the supply chain and the contractors out of 10. We're actually a consultant that rolls their sleeves up and helps make things happen and gets the work happen. So people are attracted to being part of the team that is proactive and driving performance. But then we do have a lot of -- we operate a utilization. So we have a time sheet system in the business. People are on utilization, and we manage that work. People are attracted to us at the moment because of the type of work that we get involved with. People are attracted to being involved in -- we've been doing design work on Phase 2a of HS2 for some time. We've been helping the government with their Brexit preparations in doing assessments on the infrastructure readiness for Brexit. We've been doing some readiness reviews recently for a number of the airport companies in how ready they are to remobilize and how -- what state of condition their assets are in. So people are attracted to the type of work that we're getting. We're not getting a mundane sitting there designing something. This is very much a client engaging us to go and solve a bit of a challenge that they've got. And positively, we haven't had a problem attracting good people, which is great. The staff turnover rates have been very low. I think it's a bit difficult this year because I should think that COVID has had a positive impact from staff turnover because people are unlikely to move, but we're not seeing a challenge on the turnover rate. And then just coming back to the margin piece and the volume. It's really the impact of us recruiting people ahead of the curve. So we've been building a bench of people. And therefore, because we've got a bench and we're carrying that cost, that has just led to a depression in the margins as we go through the growing pains of our consultancy business. Utilization for us is normally around about 86% and now because of COVID, we have seen this year, utilization is a lot higher than that because people aren't taking as much holiday despite the fact that we are encouraging them to take it. But that's normally where we bag utilization is about 86%.

Okay. Sorry, just to be clear then, some of the projects that you're involved in, essentially, your consultancy element of that is priced into an overall agreed margin with the clients rather than specifically charging out those consultancy services. Is that -- perhaps it sits within the longer project that you might have with the client. Is that correct?

Yes, that's correct. So I mean, our charge-out mechanisms. So we have a -- we have an operating cost base for our consultancy part of the business. And just to give you a bit of context about the carrying cost of the bench ahead of the curve, we won a contract this year. And on the day of starting, we had to mobilize 130 people. So we had to get those people ready. And yes, so -- and then we charge-out on cost to employee plus a margin.

Do we have time for another question?

We do. Last one.

Our final question comes from Stephen Rawlinson from Applied Value.

Thanks for the [indiscernible] so far. But just on the forward order book and looking at -- following on from some of the questions that have been asked in around what we're now facing or we see ahead of us in terms of when we're talking to the merchants about and others is inflation in commodity prices, inflation in materials prices. And I think we've already touched upon labor shortages and inflation there. Can you just give us a clue as to generally how you've covered those in the contracts? I mean, that might -- why I ask is because these are relatively new things in the last 3 to 4 years. And we seem to be facing a period of some higher level of inflation in the future. So I just wondered if you could help us a little bit. It is a risk. I'm sure you'll -- you've covered most of the risk, but they're more technical necessarily than inflation ones. So I just don't want to sort of -- I thought that might cover up any surprises that might occur the next year or 2. If you could just help us out a little bit at this stage, please?

Yes, Stephen. So yes, look, I mean, the forward order book, most of our contracts have an inflation mechanism and an adjustment. So we do have protection from increased inflation, especially on things like steel work at the moment. So our contracts protect that. So HS2, some of the highways contracts, they give us that protection on those. And also, some of the water frameworks. We agree prices as we go at various phases. Yes. Are you still there? Is that okay?

That's fine. And just one further one, if I may. Much less emphasis this time around on the impact of technology on your business and the contribution it could make. We've talked a little bit about the impact of the consultancy side of life. But is there a reason behind the lessening of emphasis on the technology that you bring to the party?

No. There's no -- it's obviously an omission by me, Steve. There's no lack of emphasis. I mean, we're making really good progress on that, not as much as I would like, but we're making good progress. I mean the robotics process automation that we've rolled out has saved just 24,000 hours last year. So there is a lot of good stuff to do. I suppose we've just spent a lot of time talking in a much broader concept. I think one of the things I am focusing on, Stephen, is this is all about productivity and efficiency. I want to talk about productive and efficiency rather than digital and consultancy. Okay, Maxine?

Yes, please continue.

Okay. So look, I think we've run out of time. Thanks very much for all of your questions. Thanks very much for your time. I know it's a busy morning. But that concludes our presentations for today. Please stay safe, keep well, and we'll see you soon. Goodbye.