Costain Group PLC (COST) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen. As you just heard, I'm Paul Golby. I'm Chair of Costain Group PLC. Since it's now 3:00 p.m., I'm pleased to welcome you to our 2021 Annual General Meeting, which we are broadcasting from our office in Maidenhead. My preference would have been to welcome shareholders in person to our AGM this year. However, as you are all aware, public health guidance and legislation by the U.K. government in response to the pandemic means that there remains restrictions on public gatherings and travel. And so shareholders for the second year running, unfortunately, are unable to attend the meeting in person. Alex Vaughan, our CEO, is here with me. And therefore, as the necessary quorum is present, I declare the meeting open. Before proceeding to the formal business of the meeting, I would like to take the opportunity to mention a few points. Firstly, as you've seen from the RNS statement issued to the stock exchange today, our current trading is in line with the Board's expectations and that the Board remains confident in delivering profit growth in 2021. Secondly, we received a very small number of questions from shareholders in relation to the business of the AGM, and we've responded to those questions directly. No pattern emerged in the subject of those questions, so I would not be tabling them at today's meeting. Finally, as announced on the 27th of January 2021, Jane Lodge, our Senior Independent Director and Chair of the Audit Committee, today steps down from the Board after 9 years of dedicated service. On behalf of the Board, I'd like to thank Jane for all that she's contributed to Costain as a director and wish her well for the future. We have also announced today that Alison Wood, Non-Executive Director and Chair of the Remuneration Committee, will become a Senior Independent Director of the company immediately following the conclusion of today's AGM. Also, as previously announced, Tony Quinlan, Non-Executive Director, will take over as Chair of the Audit Committee. I would like to take this opportunity to also pay tribute to our people, clients and supply chain for their efforts to look after one another, to protect our business, each other and the communities in which we serve during the extended period of this pandemic. Now let's proceed with the formal business of the meeting, following which, Alex is going to present to you a commentary on the company's 2020 performance. The notice of the meeting was distributed to shareholders and made available on our website on the 1st of April 2021, together with the 2020 annual report and accounts. The notice included 17 items of business. And now with Alex' consent, I would take those as read. All votes tendered by proxy form for the deadline of 3:00 p.m. on Tuesday, the 4th of May, will be included in the vote for the poll on each resolution. Many shareholders entered a proxy appointing me to vote on their behalf. I will vote as they have instructed me, and if they have given me discretion on how of vote, I shall be voting in favor of the resolution concerned on their behalf. Resolutions 1 to 13 are ordinary resolutions requiring a simple majority in order to be passed. These are being shown on your screen now. Resolution numbers 14, 15, 16 and 17 are special resolutions requiring 75% of the votes cast to be passed. And these are now being shown on your screen. I'm pleased to confirm that we have received over 98% support for each of the resolutions set out in the notice of the meeting, with the exception of the resolution for political donations, which received support in excess of 88%. As we stated in the notice, it is the policy of the company not to make political donations or to incur political expenditure. We seek approval, as many companies do, to avoid any inadvertent infringement of the regulations. The results of the voting for each resolution will be announced later today by the way of a stock exchange announcement and will also be published on the company's website. That now concludes the formal business of our AGM for today. But please stay with us while Alex now presents on the company's 2020 performance. But for me, stay safe and well, and we hope to welcome you to our AGM in person next year.

Good afternoon. Thank you, Paul, and thank you all for joining us. I'm going to present a brief business overview and update on our strategic progress and outlook for the group. Last year was undoubtedly a challenging year, but I am proud of how well 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 contract 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 make us a much stronger business, and I'll talk through these shortly. Winning new work and the right sort of work was always and is 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 were in line with our strategic focus and encompass our broader offer. Additionally, we had 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. And 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 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 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 ensured the effective operation of our business across every contract. While remaining alert of changing circumstances, we are building back as a better, more efficient and more productive business. As I said earlier, our reported results reflect the exceptional charges from 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 a potential liability to National Grid for completing the work. This resolution process is ongoing and will be concluded by the end of this year. On the A465 contract, in February this year, we announced that we had reached a settlement agreement with the Welsh government. 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. Now I've made a number of significant changes to improve and strengthen our business since becoming Chief Executive. Starting with the senior leadership team. Helen Willis joined us in November as Chief Financial Officer. And already, we have benefited from her approach and fresh eyes. I also put in place new heads of both of the operating divisions as well as a number of other management changes. The new team is working well, and I have set the expectation to challenge what we do and how we do it so that we can consistently improve and develop at pace. Secondly, I've made a number of changes to how we're structured. We've now got a flatter structure, which has improved communication, both internally and with our clients. We also have a new operational excellence model, setting higher expectations for our delivery against which every contract is monitored monthly. 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. 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. As I previously said, last year 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 was 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 in the year. There were significant one-off contract adjustments. At the half year, we announced the adjustments for the A465 and Peterborough and Huntingdon contract. We also completed the capital raising earlier in the year, and I am 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. Now the infrastructure markets in which we operate have remained strong, and this is reflected in the level of new work we have won. Supported by the strength of our balance sheet following our capital raise in May, as I 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 of 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 have positions on around 60 significant consultancy and digital framework. This framework provides opportunity over and above our order book and preferred bidder position and put us in pole position to pursue and be awarded work 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 the changing mix of the business in line with our strategic objective. 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 operation of the U.K. critical infrastructure. Our markets are shaped by the national infrastructure strategy, the energy white paper, regulated private sector investment commitments and the defense spending review. These significant long-term investment programs are underwritten by government policies, regulation, legislation and critical national needs. They are evolving rapidly and driving the national need to level up the economy, return to growth 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 of this presents 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. In February last year, we set out our climate change action plan, which is the group's commitment and our plan to be net zero by 2035 at the latest, including the services and the 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, 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 profits 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, which have a purple border; and our growing position as a 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, Highways England regional delivery program and other programs 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 U-Route 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. Now 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, systems thinking, et cetera, many of whom have joined us from some of our industry's leading consultancy businesses. Our advisory and consultancy services range from assured delivery partner, design services, advisory commissions and positions on forward investment framework. Last year, we won positions on 27 new framework as well as a number of new contracts, many of them you'll see on this slide. It's this sort of work which demonstrates why Costain has, for the second year running, been recognized as one of the U.K.'s leading management consultancy businesses by the Financial Times. And by leveraging our client relationships, our 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 new digital solutions, including enhanced track safety for Network Rail through our Meerkat solution, which is moving from development to deployment on the rail network. As I've said previously, a significant focus for us this year is embedding all our operational challenges and delivering all contracts and business performance to plan. In closing, it's encouraging that all of our contracts are operational and have very effectively adapted to cope with this extended pandemic. We are clearly working to resolve the outstanding issues on our P&H contract, and I have taken strong actions to improve the business. We've 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 give me confidence in delivering significant growth in profit for this year and beyond. Thank you once again for joining us today and for your continued interest in our company. Stay safe and well. Goodbye.