Costain Group PLC (COST) Earnings Call Transcript & Summary

Good morning, everyone. Thanks very much for taking the time to join us this morning and for Costain's sort of half year results for 2023, our presentation. I'm Alex Vaughan, Chief Executive of Costain, and I'm going to sort of give you a sort of headlines to our results this morning. And then Helen Willis, our Group CFO, will come and take you through the financial results, that's the bit you're really interested in. And then I'll return and sort of give you an update from a business point of view of the strategy and the outlook that we've got for the business. Look, I'm really pleased to be able to report a strong set of results this morning that demonstrates the sort of resilience and strength of the business. And we're absolutely on the road to be where we want to get to: an increase in adjusted operating profit in line with expectations. Cash conversion remains a real strength of this business with a period-end net cash of about GBP 132 million. Our strong cash performance is really benefiting from the risk management that we've got in the business and the sort of contracts that we select and the assured delivery that we've got. And we remain highly confident that this cash generation will remain an aspect of how we deliver our business in the years ahead. Look, as previously reported, we took some key actions in the year. We've reduced the cash payments into the defined benefit scheme, which is great. So that retains more cash in the business. And thanks very much to our banking and surety group for your support that we've now secured a further 3 years working with you. And the good news was that we were able to move to a green finance deal as well. So it just shows the confidence in the business and the strength of the business moving forward. Look, we're really confident in the market outlook as we look at it. And if I look at what the customers are saying to me and what they're going to invest, huge investment to meet some of the challenges that I'll talk about later on. But that is evident by the sheer volume of work that we are bidding at the moment. I've got to say we've probably never been as busy as we are right across the business in terms of the amount of work that we're bidding across all of our markets. And all of that work is that the margins that we aspire to meet. So we've got really good visibility with GBP 2.5 billion worth of high-quality, low-risk order book, together with another GBP 1.5 billion worth of preferred bidder. So that GBP 4 billion worth of secured work together with what customers are saying to us, together with how much work we're bidding, gives us really strong confidence for how we're taking the business forward. So our continuing momentum is really growing and how we're transforming the business, both in terms of the broader customer mix and in terms of the broader service that we're doing. And our ambition continues, and we're on track to deliver those growth in margins that we talked about at the full year. So as a result of that confidence and the strong balance sheet position, the Board is currently considering an interim dividend payment and we'll update you on that very shortly. And there's a process that we have to go through that some of you in the room will know more about. If I can move on to sort of the operational performance. So in Transportation, we've certainly -- we've seen a very small reduction in volume and activities. That was what we expected and then adjusted operating profit and margins that reflect the inflationary impacts. If you remember, when I presented the full year results last year, I did talk about the fact that there was a couple of contracts that their margins were being a bit depressed by the inflationary cost impacts. Look, as has been publicly reported, following high inflationary costs, the Department of Transport has had to re-phase and re-scope a number of their investment programs and our HS2 contract has been affected by that. And that's really so that they can meet their departmental Department of Transport spending limits. We see this as a very short-term issue at the moment to just rebalance the books following high inflation. Certainly, the conversations I'm having with the Chief Exec's of the Department of Transport agencies is that spend will return to sort of normalized levels that we've got. In our roads business, we're continuing with delivering 6 infrastructure projects at the moment with them, together with mobilizing the A303 contract, where we are the assurance delivery partner. And we have announced and we did announce previously that we'll be ending our involvement on the A66, and that will happen probably in the second half of this year. In rail, our activities on HS2 continue to progress and progress really well, and we're working to a revised schedule of work and a revised budget, which is what we expected and what we said would happen when we ended the year last year. We're continuing to deliver the Gatwick Airport Station for Network Rail, but also we're working on quite a number of other Network Rail contracts from a design point of view in shaping future investment plans for them. And I think if you look at integrated transport, which is sort of how the rest of the U.K. gets connected, we saw the completion of a significant highway scheme in there, but we are now beginning to see the growth coming through from having secured framework. So the 5-year program of work we've got with Heathrow Airport, the work we've got with Transport for London, the frameworks we're on with Manchester Airports Group and a number of local authorities. So we're really beginning to see that work coming through that will give us growth in those areas as well. And from a Natural Resources point of view, look, it continues to perform strongly with good progress from defense and nuclear energy and in particular, water, where many of our customers are increasing their spend as they get towards the end of AMP7. And then the industry is really gearing up for the challenge of the sheer volume of investment that's going to be made in AMP8 and AMP9, with all of that starting in 2025. So revenue and profits have grown in Natural Resources as a result of really strong operational performance and consultancy growth across energy and defense. And our adjusted operating margin has also improved in line with the road map that we've got for how we're going to move the group margins up. And in water, we're working for 6 of the major water companies at the moment, delivering a range of services for them, and those are going particularly well. And we're continuing to deliver the Tideway contract in London, which is also going well. And we've secured our first AMP8 contract for United Utilities, which I think is a real positive sign in terms of customers' confidence in the investment that they're going to be making moving forward. In energy, we've now moved nuclear into defense, and that's really because it's all about nuclear and nuclear capabilities, nuclear expertise. So that's why we've moved them together. But in energy, we're continuing to grow, and that's mostly consultancy work, a really big focus on the industrial clusters for carbon capture. So we're leading the charge, working with BP on the Teesside industrial cluster. That's making really good progress, but we're also involved in the high net cluster and the Acorn cluster and positively both Acorn in Scotland and Viking on the East Coast have been added. So we've now got 4 industrial clusters that the government is really prioritizing. So a really good opportunity there. And then defense and nuclear continues to grow, a lot of activity around nuclear energy and nuclear decommissioning. But in defense, our work on the submarine program continues to expand. So if I step back, overall, a really solid financial performance for the business, especially the cash performance in the business, and we're really confident moving forward. So Helen, I'll hand over to you.

Good morning, everyone. So thanks, Alex. So I'll take you through, first of all, the financial results, a quick run through those. And you'll remember from previous results announcements, in order to give clarity on the group and the divisions, we've reported revenue, operating profit and earnings per share on an adjusted basis as well as a statutory basis. So for now, I'll focus on the adjusted metrics, which were in line with how we manage the business. And as we go through the slides, I'll point out the differences to that statutory basis as well. So adjusted revenue, flat first half of last -- compared to last year. Adjusted operating profit, GBP 15 million for the half, and that's in line with our expectations and up 7% on last year. And we returned an adjusted operating profit margin of 2.3% for the half. That's an increase of 20 basis points from the same period last year. Adjusted basic earnings per share for the half, 4.4p, an increase compared to the 3.9p of last year. And we returned a strong free cash flow of GBP 26.5 million in the half and more of that later in the presentation. So as Alex already mentioned, we saw 1.5% adjusted revenue decline in Transportation, and that's a growth in rail driven by HS2 and then re-phasing and re-scoping of certain contracts in road. And this is offset by a 3.9% adjusted revenue growth in Natural Resources, primarily defense and nuclear. As the bars at the right and the left-hand side of the chart show, there were no contract adjustments again for the first half of 2023 or 2022, and therefore, no impact on the reported revenue. So this is a demonstration that there have been no further contract issues identified. So that's for the first half of this year and the whole of last year. So focusing on the middle of the slide here, you can see the adjusted operating profit has grown by 7% in the half to GBP 15 million, as I just mentioned. Profit in Transportation did reduce by GBP 3.7 million in the year -- in the half year, and that's increased volumes more than offset by the impact of the reduced margins in road, primarily due to the dilutive impact of inflation. GBP 4.9 million of growth delivered by Natural Resources due mainly to an improved operational performance as well as revenue growth. On the left-hand side, you can see other adjustments made in the first half of last year. It's GBP 2.1 million, and that was made up of GBP 2.6 million of transformation and restructuring costs, offset partly by GBP 0.5 million profit on the sale of a noncore asset. On the right-hand side, you can see other adjustments totaling GBP 7.4 million made in the first half of 2023, GBP 2.1 million of costs relating to transformation and restructuring of our business as well as GBP 5.3 million charge on the impairment of intangible assets relating to the repositioning of digital towards service growth, and Alex will cover this later in the presentation. Costain enjoys good overall forward visibility with our combined order book and preferred bidder book at half 1 '23 of GBP 4 billion, slightly down from last year end. This holistic view is increasingly relevant as we anticipate a shift in our business mix towards the preferred bidder book as we secure a long-term, that's 5- to 10-year framework positions with our customers. Our order book stood at GBP 2.5 billion at the end of half 1 '23, lower than the GBP 2.8 billion at the end of FY '22; however, an increase on the previous first half. This reflects the timing of major contract bids, our customers' investment programs, maintaining discipline in contract selection and the shorter lead time of consultancy and digital work. As I mentioned at the full year, it's important to note that our order book no longer includes any fixed price construction contracts. The preferred bidder book was GBP 1.5 billion at the end of half 1 '23, slightly down from the GBP 1.6 billion at the end of last year with contracts in road, water and integrated transport, including Heathrow. The preferred bidder book comprises awards for which there's no other competitor, and we are in final negotiations prior to entering into a contract or exclusive frameworks where further work is -- further works order is required. As an example, at the full year, we had included work with United Utilities in the preferred bidder and following the approval of the contract that we announced, this has shifted into the order book. We also note that some of our framework and consulting revenue is not recorded in our order book or preferred bidder book, and it's expected to represent an increasing proportion of our future revenue. So our strategy is delivering a transformation in the business in terms of assured delivery, lower risk contracts in our order book and a broader business mix. During the first half, we continued to invest and upgrade. For example, we further invested in strengthening our risk and assurance team, embedding activities to raise risk awareness and build risk mitigation approaches. We've invested in a group-wide procurement and supply chain function, mindful of the need to manage the supply chain for our customers and indeed the opportunity this presents. Our [ gating ] and governance review is being further enhanced to provide stronger financial [ squeezing ]. As a consequence, we've continued to maintain our discipline in bidding, stepping away from unattractive bids. We've created timely improvement plans where needed. And of course, we've had another half year with no contract issues. As I mentioned at the full year, this focus drives the pathway to higher margins, and we remain on track to deliver: firstly, adjusted operating margin of 3.5% during the course of FY '24 as we increase effectiveness within the business through the implementation of our transformation plan and the operating excellence model, growth in consultancy services and increased effectiveness in procurement and ongoing control of operating costs; and secondly, an adjusted operating margin of 4.5% during the course of FY '25 by improving margins within complex program delivery, further efficiencies from our transformation plan and OEM and an increasing mix of higher-margin contracts. The strong balance sheet position from year-end has been maintained with net assets of GBP 210.3 million as compared to GBP 211.2 million at the end of FY '22. This is driven by our strong underlying cash flows, and we also maintained a pension surplus of GBP 58.7 million against GBP 60.2 million surplus at the year-end. Noncurrent assets balance reduced on the year-end position, driven by the impairment of an intangible asset. Trade receivables and other current assets increased slightly on the year-end position. We saw increased contract assets, partially offset by decreased trade receivables in our continued good working capital management. Other movements include an increase in trade payables and other liabilities, driven by increased subcontractor accruals, partially offset by decreased trade payables. It's important to note that Costain was reconfirmed again this year as one of the Top 3 fastest paying lead contractors in construction. Now on to the cash bridge. I'd like to draw your attention to the green bar on this chart, representing adjusted cash flow from operating activities of GBP 26.6 million over the half year. This is a result of continued good working capital management, which benefited from further positive cash collection timings during the half. The red bar to the left of the chart shows cash flow on adjusting items of GBP 4 million, which represent payments relating to our transformation program in the period as well as final costs on the A465. It's worth noting that our operating lease expenditure, which is really a cost of us doing business, is shown outside of cash from operations under IFRS 16. We made cash contribution payments to the pension scheme of GBP 5.7 million over the course of the half. And after lease payments of GBP 9.4 million and receipt of net interest income of GBP 0.9 million, we've ended half 1 2023 at a net cash position of GBP 132.1 million. We expect our year-end net cash position to be broadly similar to that at the end of H1 '23 as the underlying free cash flow from the business is likely to be offset by the unwinding of positive working capital benefits, timing benefits accumulated at the end of FY '22 and throughout half 1 '23. The net cash position at the end of half 1 was strong at GBP 132 million, as I just mentioned. During the half, the group's average monthly net cash balance was GBP 127.9 million as compared to GBP 99.2 million over 2022, a demonstration of our continued strong underlying cash flows. On the 26th of July 2023, we announced that we've successfully concluded negotiations with our bank and surety facility providers to refinance a new 3-year agreement of our bank and bonding facilities. The new group -- the group's new facilities agreement to September 2026 comprises an GBP 85 million sustainability-linked revolving credit facility, which was previously GBP 125 million, and surety and bank bonding facilities totaling GBP 270 million, previously GBP 280 million. This new agreement replaces the previous 1-year amend-and-extend of our facilities from September '23 to September '24, as announced in November last year. This is backed by 4 banks and 5 sureties with NatWest joining the banking group. The sustainability interest rate margin linkage has 3 key performance indicators relating to reduction in greenhouse gas emissions, spend with small local businesses and charities and an increase in gender diversity. Next, a look at the positive impact of our pension scheme revaluation and agreement with the trustees during the half. The triennial valuation of the Costain pension scheme as of the 31st of March '22 concluded in June '23. A deficit of GBP 25 million was agreed, a significant improvement on the last valuation in 2019, and representing a funding level of around 97%. Reduced payments have been agreed with deficit contributions of GBP 3.3 million a year from July '23 to March '27, increasing in line with CPI inflation. This replaces the previous contribution plan to the scheme, which, from April '23, had increased to an annual payment of GBP 11.98 million paid in monthly installments. As a result of the new contribution plan, the full year '23 pension contribution payment by the group will total GBP 7.4 million and payments for 2024 and thereafter will be GBP 3.3 million annually, plus inflationary increases, as already mentioned. An assessment of the scheme funding position will be carried out each March, the 31st of March. And if the funding level is more than 101%, contributions will stop from the following July to June. If funding levels fall below 101% following March, contributions will resume for the next year, starting July to June at a new agreed level. This means we're able to respond to the change in funding each year rather than waiting for the next triennial review, which is more normally the case. Given the group's improved financial performance, strong net cash position and growth prospects, the Board is considering resuming dividend payments starting for the 6 months ended 30th of June '23. Dividends will typically be paid 1/3 at the interim stage and 2/3 at the final stage. Under the dividend parity arrangement with the Costain pension scheme, an additional matching contribution will be made when dividends for a financial year paid to the shareholders of Costain are greater than the contributions paid to the pension scheme. While the dividend parity arrangements remain in place, the Board is considering paying a minimum annual dividend to match broadly the GBP 3.3 million per year plus inflation to the defined pension scheme. Potential increased dividends above this level may be considered by the Board during this period, depending upon the group's underlying cash flow generation and the pension scheme funding level, in line with the group's policy of a target dividend cover of around 3x underlying earnings. We will announce the Board's decision on the resumption of an interim dividend payment shortly. So we continue to trade in line with Board expectations for FY '23. Our pipeline of future opportunities remains strong across the markets. We do remain mindful of the macroeconomic and geopolitical backdrop, recognizing the challenges it's created for inflation and energy costs and its impact on the re-phasing and re-scoping of some major contracts, in particular, in transportation. With our broad customer focus, further improvements to our operational performance, strong cash position and clear strategic priorities, we remain confident of navigating these market headwinds and are well positioned for future growth. As a result of the successful implementation of our strategy and ongoing operational improvements, benefits from our transformation program and our revenue mix expectations, we remain on track to deliver an adjusted operating margin run rate of 3.5% during the course of FY '24, and 4.5% during the course of FY '25. We remain confident of the group's strategy in our chosen markets and in our longer-term markets. And with that, I'll hand back to Alex.

Thank you, Helen. Right. I'm now going to give you a bit of an update on sort of the business strategy and sort of outlook on the business. So look, I think it's very evident. You only have to turn on the news this morning, turn on the news every single day and these mega trends we've been talking about for some time are front and center of daily life. We are -- infrastructure is having to cope with some pretty major challenges. The whole climate change, we have either got too much water or we've not got enough water, too much heat or it's too cold. And then obviously, resource and environmental and economic resilience is a massive challenge. We've seen it in the energy space with the war in Ukraine, we can certainly see it from a water point of view, the finite resource, and I don't know whether many of you were watching the BBC this morning talking about the lack of water that the world has. We've also got the need for transformation and affordability. The amount of infrastructure that this country needs compared to the budgets that the government can afford and our customers can afford is a big challenge, and we need to change the way our industry delivers. And we've also got to drive economic growth and social change within society and within the country, and infrastructure is a key enabler to that. So those are the really big challenges for the U.K. government. Those aren't decisions that you can just not make. We've got to make that. So when we talk about we're focused on where the discretionary -- the nondiscretionary spend is focused, we're focused on meeting those challenges. And the government has published its pipeline that says that the infrastructure ecosystem is going to spend about GBP 60 billion a year meeting exactly those challenges. And we've chosen to focus on those markets where we believe long-term strategic investment is going to be made and where Costain has a real clear differentiator, and we can excel in those marketplaces. And we've chosen to work for those customers who want to work with their supply chain in a very strategic way, where they want us to add value, they want to create the right environment that we can add value when we can bring our very best so that we can help them meet those key national needs. Now our customers in our chosen markets generally predominantly operate through 5-year business plan periods. So they get their business plans signed off, they get their investment budgets agreed and then we get appointed to work with them on a 5-year programs rather than one-off programs. And we've got a very strong track record for securing a position on these large investment programs so that we can help them shape, create and deliver pioneering solutions to solve their business plan needs. And these markets and the customers' committed investment programs, through our broader offer, provide a significant opportunity for us as a business for us to drive growth and increase the value of Costain. And if I can just sort of share some of the examples on here, you can turn around and see that National Highways is currently in the middle of delivering its RIS2 program. And I was only talking to the Chief Executive of National Highways last night about RIS3. They are focusing on developing their plans for RIS3 so that they can then come to market on that. I think you've seen both political parties, the conservatives and the labor party, both confirming that they need to deliver HS2 all the way through to Manchester. Yes, it's the largest scheme in Europe. Yes, it's a very challenging scheme, but it is fundamental to the economic growth and prosperity of the U.K. to deliver HS2. Network Rail in the moment, we're part of the teams bidding for GBP 40 billion worth of investment in England for CP7 for Network Rail. So we see that coming through. Heathrow Airport, Manchester Airport, Gatwick Airport, a lot of the local airports, they're all cracking on with delivering their growth expansion plans, their airport capacity. If you look at Stansted, the plans at Stansted are to double the number of passengers, and that's just Ryanair alone. We're talking about significant growth in this space. And then you've got the water industry shaping up. Am I whetting your appetite, right? We've got the water industry shaping up for a really big AMP8 program as they tackle in to addressing the major challenges, water resilience, water quality and release into rivers and coastal waters and addressing that, a really big focus. And then we're tackling into energy resilience and we're tackling into the net zero agenda. You can see the government has now added even more of the industrial clusters, huge investment going into the energy space and then defense spending is continuing to grow, as I said earlier. Key to the resilience of Costain's business and what will help us navigate the current short-term challenges that we've got around transport and government spending is the fact that we are offering a broader service to our customers. We're able to help them with their whole ecosystem. We're not just sat there looking at the capital delivery. That gives us a bigger market opportunity. We're also broadening the number of customers that we work with still, large, big blue-chip customers, but we're adding people. In the last 2 years, we've added Heathrow Airport, Manchester Airports Group, Transport for London, Babcock, Shell, BP, those major customers are now big customers for Costain. And our strong balance sheet and operating performance really gives us the ability to turn around and dial in and address into this market. And I've talked about our broadening of the service that we offer. And we are a very different type of company to anyone else in the sector, all right? We focus on our clients' whole ecosystem, not just capital delivery or front-end consultancy. And it's where we can really help them meet those business challenges. And we can do that by bringing together our unique mix of experts that we've got in our business with their solutioneering, project management, innovation, expertise to turn around and help deliver those challenges. And we act as construction, consultancy and digital partners to our customers. We are increasingly influencing, shaping and advising our customers doing design work for now over 12 customers and helping them shape the future solutions that they want to infrastructure, but also to bring project management and project controls expertise to help a number of our customers improve their operational performance. We expertly support the capital delivery programs, as you know, predominantly as a contractor on schemes like HS2, the 6 highway schemes, the 5 water frameworks that we're working across Thames Tideway, highway infrastructure and aviation and for TfL where we are the contractor, but also increasingly as a delivery partner, so as a consultant delivery partner program manager overseeing the clients' supply chain and how they deliver those programs. And we're doing that for Cadent, for AWE, for National Highways, Babcock and Heathrow Airport. And then importantly and growing in importance is helping our customers maintain and optimize the infrastructure ecosystem that they've got and help them get more out of it. And as I've said before, we're helping United Utilities, and we've had it extended for AMP8 on their maintenance transformation program where we manage the maintenance of their existing asset, where we're helping EDF manage a GBP 2 billion investment in extending the life of their nuclear facilities and helping a number of water companies really optimize their regulatory performance. I think our focus on our customers' whole ecosystem is a very clear differentiator and is really enabling Costain to grow and create greater competitive advantage. Today, we're very much a leading complex delivery organization as a contractor and as a consultant. And we deliver a number of schemes right across the U.K. We're also a growing consultancy business, but bringing that construction DNA, people that roll their sleeves up and make things happen and come up with the solutions, growing our delivery partner, which is the real bulk of our consultancy work, where we're the sort of construction manager, program manager for a number of customers, but also bringing our construction expertise to be that insightful designer in making sure that we increasingly -- and as I said, 12 customers we're working for, where we're designing, but also providing project controls, project management. And then we're also growing our advisory piece where actually people come to us and they ask us to influence some of their strategic thinking, some of their business planning and really help them think about how they're going to solve some of the big challenges that they're dealing into, a very different type of company. And then from a digital point of view, look, it's all about exploiting digital technology, digital know-how to be able to solve some of these challenges. So we certainly help customers optimize the performance of their existing infrastructure. We help them manage security. We help them manage use and optimize that as well. But as I said last year, we are -- we undertook a sort of market assessment. And we've been successfully growing the digital services part of our business, and it's been really moving forward. And we've decided that that's where we're going to focus all of our energy. And we're now going to discontinue our operations around being a product manufacturer. There is no longer a real market for making bespoke CCTV cameras or screens and things like that. So we're moving away from the hardware, which is going to reduce the fixed cost base within the business, which will be helpful, make us a lot more agile. And we're really going to focus all of our efforts on the services side of the business where in conversations we've had with the clients is where the real growth opportunities are and the higher margins. I hate having this slide, and I hate having this slide is because it looks like a token slide. ESG is fundamentally core to the culture and behaviors of every single person in our business. And our credentials are a very clear point of differentiation, and I've had that externally verified that Costain is one of the leaders in the pack in this area. And it's important for our customers, it's important for our stakeholders, and it's important for our staff and the general public that we really drive the performance in this area. And this ensures that we can target opportunities and work with our customers on the future opportunities, that we are able to secure better banking facilities, that we can attract new talent and that we can deliver better solutions in the marketplace. Our work in this area gives us a permission to trade, but it also enables us to deliver better results for our customers, a stronger supply chain, better solutions, greener solutions and new skills that are critical to the business. We see the whole ESG agenda as a key factor in our future growth as a business and is a positive force for change and we are a positive force for change for the industry in how we help our supply chain to develop and become better, how we create social value in the communities that we work with, how we're shaping clean energy solutions with our customers, the list goes on. So if I can just close, in final summary, look, I'm really pleased with the performance that we've delivered in the first half of '23 and in the continuing momentum in the business and the fact that we're on track to deliver Board expectations for the full year, really positive. We're on track to meet the margin milestones that we set out last year. We are considering returning to an interim dividend, which is a really positive demonstration of the confidence that we've got. The overall commitment to infrastructure investment and the challenges that we need to face into across the market remains very strong despite some of the very near-term challenges around government spending levels. Our focus remains on bidding responsibly and then delivering our work in an assured way so that we meet our margins and deliver against our risk profile. We've got a good level of work secured, incredibly busy bidding new work and have a lot of opportunities ahead of us. I'm extremely confident that we're on the right track. We're making really good progress. We've got a great team, and I look forward to updating you again at the full year. So thank you. And I think we'll go to -- Scott, we're going to go to questions. So we'll start in the room. I'll go and sit down. If you could just say who you are, even though we know, but just for the record.

Congrats on the results. Alex O'Hanlon from Liberum. Just a couple of quick questions, if I may. The first one is just on the preferred order book. What level -- what's the kind of the conversion rate from work in that preferred order book into the actual order book? And the second question is just, at Morgan Sindall's interim results, they referenced concerns around weakness in the supply chain. Is that something that you're also facing? And if it is, is there anything you can do to help the supply chain out, given that you're already paying them very fast at the moment?

Okay. Thank you. Shall I'll start with those, Helen? So in terms of conversion to preferred bidder, generally, the majority of that does convert. We have had one contract, which I think was in the public realm, which was one of the smart motorway contracts where the affordability, it just wasn't an affordable scheme and the risk profile of doing it. And so with National Highways and the whole alliance, we agreed that we wouldn't proceed with it. But otherwise, as you saw, United Utilities move from there. Some of -- a lot of the Heathrow work is now moving from preferred bidder into the order book. And we've also had, since the period closed, a lot more work on smart motorway alliances move from that preferred bidder. So generally, everything in the preferred bidder, provided nothing changes, should flow straight in, just to give you confidence. And the good news is we've added more opportunities to the preferred bidder book. I think the weakness in the supply chain is something that we're very mindful of, really because, whilst we're a responsible business working for responsible customers, that's not the same for every organization and every market. And so one of the things that Helen talked about is we've upgraded the sort of procurement function, brought in a very strategic leader to lead that. And that's really -- I mean, we're already very close to our suppliers. So we work very closely. So the same way our customers want to work with a fewer number of suppliers, we're the same with our supply chain. We want to work with a fewer number of suppliers in the supply chain. We want to work with them on a longer-term basis. So what we do to help them, we've got a supply chain academy for small businesses that we just help them develop themselves and become strong and thriving businesses. We give them good visibility of our infrastructure pipeline. We pay them promptly. We spend a lot of time briefing them, getting close to them so that we understand them. And we horizon-scan with them. We're very interested who else they're working for, what type of work they're doing, just so that we are alive to any risks that they might have.

Andrew Nussey from Peel Hunt. 3 questions, if I may. First of all, when we look at the Transportation margin, really a bit more color around the GBP 3.7 million reduction because one would imagine the growth in rail would have been at an attractive margin, given the primary contract in that space. So one would imagine most of the attribution is to road, which I think you alluded to in the presentation. Are there any one-offs in there to do with sort of re-scoping and rescheduling of projects? And how much was the inflation impact that you alluded to? I'm just trying to get a feel for how much is one-off as opposed to recurring. And then 2 questions around sort of balance sheet capital allocation. So net cash of GBP 132 million. I see sort of around GBP 50 million are still sort of sitting in joint operations, which has been pretty consistent. Should that level be broadly maintained over the sort of short or medium term? And then sort of allied to that, does the agreement with the pension trustees restrict your ability to do a share buyback or some other form of capital return beyond dividend?

Okay. Thanks, Andrew. So I'll take the first one, and then I'll allow the expert to answer the second and third one. So from a Transportation margin point of view, all of that is due to the dilutive impact that -- on the way the contract was structured on a couple of highway schemes and the way inflation has been dealt with on those contracts. So the impact of hyperinflation over sort of normal levels of inflation has diluted the returns on those contracts. So you could treat that as a one-off because those were historical contracts signed, call it, a while ago that are just trading through. And on the highway schemes that we're doing at the moment, we don't have that position. So -- but it's not a one-off contract issue, but it is just the fact that inflation -- those contracts weren't designed to cope with inflation levels that we've had, and it just dilutes the margin that we make on them.

So maintenance terms, there are fixed price contracts?

No. So they're not fixed price. So we get paid all the costs, but there is a dilutive impact on your margins. So you get paid everything, including the inflation, but your fee is regulated. So that's the thing, so absolutely not fixed price. Yes. Is that okay?

Yes.

And I'll hand over to Helen on the other thing.

So cash -- so yes, that joint venture cash balance of around GBP 50 million will probably remain similar for the next couple of years. Clearly, I'd rather have that in our bank account than in a joint venture bank account, but it is still our cash. On share buybacks, the pension scheme, yes, you -- we would have to dividend-match if we were to do a share buyback, for example. However, I'd point out the really important additional change in the triennial valuation agreement was this annual check. So because we're so close to being fully funded, we're at 97%, each year, we do that check such that if we then tip into actuarial surplus, the dividend matching stops and the contribution stops. So every year, we can take a new view rather than with the triennial. Clearly, clear in the title, you'd have to wait 3 years. So we think there's some opportunity there.

Jonny Coubrough from Numis. Could I ask firstly on the costs that are coming out in the transformation plan, what they relate to? And then also the digital hardware business that saw the impairment, when was that original investment made? And then could I ask secondly on Natural Resources, do you expect further margin improvement to come through? And are you seeing change in contract terms going into AMP8?

Yes, if you want to take the first one?

Yes. So cost out -- so the transformation program goes across the business. It's a classic look at business model and operating model, people process system. So we have been looking across the business to find efficiencies, take out duplications, find ways to automate what we do. So it's widespread, flattening out our organization and so on. So it's a classic transformation program, and those costs out are coming out across the business. However, as I talked about just earlier on, we're really investing in the business as well. And the places we're investing is really to drive the strategy really to underpin that margin resilience and our milestones. So investing in the risk and assurance teams, investing in [indiscernible] and so on that we help the projects to deliver with, investing in the procurement supply chain. As I talked about, across the business, we are reinvesting in the business where we believe we need those different skills and capabilities to drive our margin ambitions. So you're not seeing everything fall into the bottom line. We're really rebalancing our skills and capabilities to set us up for success on the strategy.

Okay. Thanks, Jonny. I think I'll try and answer the question. I think the digital business, I think we acquired a business, I think it was 2017, I might be wrong. So don't shoot me on that date, but I think it was roughly around that date. And we acquired that business and it did a mix of configuring hardware for operational technology assets, but it also did do the situation intelligence work that we've successfully grown. What we have found is that the world of hardware has significantly changed since then. If you look at CCTV cameras now, they are totally different. No longer do you have the rotating CCTV cameras, it's very cheap now to have a number of CCTV cameras that just point in every direction and are able to do that activity. So what we have found is that customers are no longer seeking services in configuring digital hardware to meet their particular needs. They're adapting and just buying what's available on the market and integrating it. And therefore, the big focus is how do we integrate technology and how do we do situational intelligence. And positively, in the period, we've significantly grown our digital twin capabilities, especially around operational twins as opposed to sort of BIM models. This is helping customers understand the relative real performance of their infrastructure, and that is really helping them optimize the performance. So hopefully, that gives you a bit of a flavor, Jonny. In terms of Natural Resources margins, look, I think Natural Resources margins reflects strong operational performance, which we'll expect for that to continue. But it also reflects the fact that we have a growing amount of consultancy work in that division, certainly, energy, defense, nuclear, and we would expect that to continue to be in place. I think Sam, who's in the room, who's the Managing Director of Natural Resources, he's been quite robust with the water companies in terms of terms and conditions around AMP8 and expectations. There are water companies that we work for at the moment that we have good terms and conditions for and we work well with. And those are the terms and conditions that we would like to work with, with more customers moving into AMP8 because it does bring out -- there's a direct correlation between the terms and conditions and your operational performance, which is quite interesting. In other words, where environment -- where the customer creates the right environment for us to succeed, we can be tremendous. And that's what we're trying to get across. Does that answer your questions on it?

Yes, absolutely. Perhaps, if I could just ask one follow-up on the margin. In terms of the margin target milestones, which I think is 3.5% for FY '24, should we then expect, over FY '25, that margin will be delivered at the group level?

Yes. So, we've used some sort of a caveated language you will have spotted. So during FY '24 getting to 3.5%. So that means the exit rate coming out of '24 will be 3.5% is our ambition. And then again, build through '25 such that the exit rate coming out of '25 is 4.5%. So...

Well, I think it's fair to say, Jonny, is that the margins in Natural Resources will be higher than transport just because of the mix of work. There is a greater volume of consultancy work in Natural Resources because that's what we do in energy and defense predominantly than there is in Transportation. Transportation will be dominated by larger construction contracts.

And I suppose the exit rate is maybe something you see, but we don't really. So if the exit rate is going to be 4.5%, what should it mean over the full year? What should the group margin be?

So that's what we haven't given you clearly. But you can see us building towards it. So when we get to this end of this full year, my hope is that we'll be pretty close to that milestone for '24 anyway. So I can't give you more than we've already put out. And you'll see our progression each half year as we move towards those milestones.

I mean I think one of the positives on margins is I think you now hear from every player in the market that's [indiscernible] talking about similar sort of margin levels and ambitions.

Alastair Stewart, Progressive Equity Research. 3 questions, please. The first is a bit broader. Looking 3 to 5 years ahead, where do you think the revenue split might be very roughly between Natural Resources and transport. Natural Resources was 27% in the half year. Given that transport can be lumpier, a bit of political football where Natural Resources is much longer term, do you see more of a narrowing in the divide there? So just very roughly? Secondly, how much was the nuclear revenue in H1 last year when it was in energy and how much is it in this half year in nuclear and defense just to get an idea of where that's going? And finally, probably for Helen, you mentioned the positive cash flow position could unwind a bit. Just in terms of the actual final year number, is it going to be higher or lower than we were here because usually it's higher at the full year level?

Okay. Thanks, Alastair. I'll take the first one, and then Helen can take the next 2. So we sat down as an exec, I think our expectation is, if you look ahead in 5 years' time, probably the revenue split between the 2 divisions is going to be pretty equal. And that's a combination of Transportation growing the consultancy as well. So if you look at the A303 contract that we've got for National Highways, that's a consultancy contract overseeing and being the client's advisor on assuring the delivery of the A303. And certainly, that's our focus, if I look at the work we're doing with TfL, Network Rail, people like that. So changing that mix. So I think it will -- and I don't -- I think the quality will improve and the size probably won't massively increase. I think Natural Resources, naturally, we would expect that to grow as certainly the water industry grows. So we'd expect our water operations to grow. And we've got big ambitions around growing the other markets as well. So I think it would be an equal split would be what the business would look like in the future.

On the transport element there, you say there'll be more of a fee element. I presume it will still be largely contract-driven, but the mix will change.

Yes. So it will -- I mean the target we've got is having a much broader customer mix and less sort of scale with big customers like HS2, National Highways. And yes, we anticipate working for Network Rail, working for National Highways, working for HS2, bearing in mind, HS2 has got a long way to go, TfL and other customers, doing construction work with them. But also the frameworks we're winning with those customers is -- we're also doing a lot of consultancy work for them.

So nuclear split, we haven't in the past and still aren't splitting out the nuclear element. So it was, as I said, in energy, now in defense and nuclear. We have restated, so the comparatives are consistent, just to help. So obviously 9.7% up for nuclear and defense, I think increases in both, but probably primarily defense. But yes, you've got consistent comparatives. Yes, exactly right. Yes. On the cash, so yes, there will be an unwind, just working capital movements, and we're thinking around about GBP 130 million for year-end net cash as we manage through the unwind during the balance of the year.

Anything else in the room? No?

So a number of questions from the webcast. First question is from Stephen Rawlinson who is from Applied Value. Can you talk about the relationship with National Highways on future contracts? Have final accounts been settled on the work around Preston mentioned in the release, Western Road project, which finished work in the period?

Okay. So thank you, Stephen, for your questions. Look, the relationship with National Highways is very good, very productive. I think that's evidenced by the fact that we're mobilizing the A303, and we're continuing to work with them on a number of future schemes at the moment and the fact that we're helping them with quite a number of their innovation projects as well. So certainly, the relationship with National Highways is productive and positive. And obviously, the A66, elephant in the room, A66 was a disappointment, but it was a decision that both of us felt was right at the time. And we've moved on. We've got a lot of other work that we're doing for them. So a very positive relationship. From a Preston point of view, yes, look, that contract has come to an end. There's no issues. We're going through the final account. We only handed it over, I think, Sue, last month? So it only completed last month. That was a contract for Lancashire County Council. So no, it's gone very well, and they've publicly turned around and said that they're very pleased with what's being delivered.

Wonderful. Thank you, Alex. A question from Mr. Crosby, who is an investor. Are you able to say when the possible interim dividend will be announced?

I can answer that. Shortly is the answer, very shortly. I can't give you an explicit date. It's in a process. It's a very short process, so it will be announced very shortly.

Super. We've got no further questions from the webcast. So I'll pass it back to you, Alex, for closing remarks.

Okay. So if I can just conclude, look, thanks very much again for taking the time to join us and for all of your support. Really appreciate you joining us today and for your questions. And look, we're very confident in the strategy. We're making really good progress on the back of these results, the actions we're taking, the strong outlook that we've got, and we look forward to updating you again soon. So thank you very much. Have a good day.