Costain Group PLC (COST) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the Costain Group PLC Investor Update. [Operator Instructions]. Before we begin, we'd like to submit the following poll. And I'm sure the company would be most grateful for your participation. I'd now like to hand over to Director of Investor Relations, Paul Sharma. Good morning.

Good morning. Thank you, Mark, and welcome, everybody, to our H1 call, I'm Paul Sharma, Director of Investor Relations. And with me, we have Alex Vaughan, CEO; and Helen Willis, the CFO. Before we start, I'd like to just make you aware of Slide 2, which is our cautionary forward-looking statements. You'll see this on the slides here also on our presentation and on our RNS. So please do take a look at that. I also recommend you go to our website and have a look at the presentation we did yesterday to the analyst, it's useful information. But also you can see the RNS and the full presentation as well. So with that, I'd like to pass over to Alex Vaughan to make some introductory comments.

Yes. Good morning, everyone. And look, thanks very much for your support to date and for your time this morning and joining us and a real opportunity for you to ask any question that you really want to of us today, and we'll do our best to answer all of those. So I just wanted to sort of give you sort of overarching summary from us. Look, we've been embarking upon a very clear strategy for a number of years now and a very purposeful focus for the business, and it has now built real momentum right across the Costain Group. I think 3 things I just want to bring to life. Firstly, I'm incredibly proud of all of the Costains that we're able to report another strong set of results for the first half of the year. This demonstrates the continued strong operating performance of the business, our robust financial position and how we are capitalizing on the clear strategy that we've got in place. And I'll let Helen in a minute talk about sort of key highlights from the numbers. The second thing is we said when we spoke to you 6 months ago that we were very busy bidding work and that we would secure work, and we've done just that. The team have secured a significant volume of really high-quality, long-term work in the first half of the year. And the forward work position stands at GBP 4.3 billion, more than 3x the annual revenue of the group, which, by any industry metric is at the top of the table. We also announced last week an award of a further 7-year AMP8 contracts for Southern Water valued at over GBP 500 million. And we've got the opportunity for a further 5-year extension after that. So that will bring 35 years to work continuously with Southern Water which I think is a great attribute for the good performance of the business. We also expect to be making further award announcements in the second half of this year. So continued momentum in that space. And then thirdly, look, our growth in the forward workload, the positive outlook is a result of our very clear strategy, focusing on those markets where essential infrastructure is being invested in to meet the critical needs that you hear, politicians and everyone talking about. We are successfully building a stronger, broader Tier 1 customer mix, which brings strong resilience and balance to the business. We're also continuing to develop and grow a strong construction and consultancy services business across that broadened customer base. So very pleased with the progress we're making, but excited about the opportunity that I hope for us. So I look forward to your questions, but I'll hand over to Helen.

Thanks, Alex. Good morning, everyone. Great to have opportunity to talk with you today. So just a couple of highlights. We'll note that the operating profit is continuing to grow and importantly, the margin alongside that. And of course, we're continuing to generate free cash flow. And all of that drives our stronger period-end cash position and is improving the strength of the balance sheet. And what's been very nice to be able to announce this half year is as a consequence of all of that positivity, we're able to continue the dividend with the interim dividend of 0.4p, and in addition to being able to announce the GBP 10 million buyback. So a really good indicator of our level of confidence in the business, its resilience and its future opportunity.

Great. Thank you. So we've got one presubmitted question first, which was please confirm the order book that does not contain any fixed price construction contracts?

Should I take that. So thank you for the question. It's a really important point for us. If you look at the RNS forwards, we're pointing out where you'll find that on our website on Page 6 of that we make a very clear statement that our order book doesn't include any single stage design and build, fixed-price construction contracts. Very important for us and in our assessment of risk and our ability to manage our contract and delivery ongoing. So that's something that we are very strong on maintaining.

I think the next one is going to be a Helen question from Andrew. You've announced a GDP 10 million share buyback program. How did the Board determined that this is the best use of capital at this time? How does this align with your long-term growth and investment strategy, particularly considering ongoing projects and potential M&A activities?

Thank you for that question. Absolutely. So we've got a stated capital allocation policy where we have been investing in the business through our transformation program and now you're beginning to see some CapEx investments as we're driving improvement in systems and digitizing the business. All of those are really important for us, and we will continue with those and our plans going forward, absolutely accommodate those. But with the strong cash generation that I referenced just a moment ago, we do believe we can start to think about the other parts of that capital allocation policy in that absolute years both possible mergers and acquisitions and then shareholder returns. So we are beginning to think about acquisitions. We are now a position where we can consider that. It's something that we will think long and hard about. But if something does match that we believe is value accretive for us as a company, we'll absolutely consider that. But I think alongside that, we're able to consider that alongside the returns to shareholders. And so we've announced the buyback alongside the maintenance of the dividend, the GBP 10 million of the buyback plus the 3.3-ish of dividend anticipated for the year builds at a sustainable level for us an appropriate level of return at the moment for our shareholders. But something we keep under consideration as we go forward.

I smell this is a pension question. This is from John H. Given the pension fund is now a surplus, is there any consideration but a buyout?

Absolutely. We keep that under consideration. We assess that on a regular but not very frequent basis. And at the moment, our assessment is that, that would be very expensive and would be at unaffordable for us as a business, given the size of the scheme it is in surplus, but it's still a sizable scheme, something you'll keep under consideration. An important point for us is that it remains in surplus and the business is not making cash contributions as we've announced into that scheme. But obviously, making sure it's suitably funded and supporting our pension scheme numbers.

I think this one is for Alex. With potential shifts in government spending priorities, how you position the company to adapt to the changes in infrastructure investment? Are there any specific policy changes that can materially impact your forward worth position or revenue projections?

Yes. Look, I think it's a really good question at this time. Look, we've had a very clear strategy for a while now that we've chosen to focus on what we believe will be the essential infrastructure that is going to tackle some of the big challenges that we have as a country and as a globe. And so -- and I think that rings true with what you hear from the current government, the new government. So it's all about driving economic growth. So if you look at road infrastructure and rail infrastructure, it's going to -- and transport and wider transportation infrastructure is going to be all about how are we going to drive economic growth across the regions in the country and unlock economic activity. If we then look at the energy investment, it's going to be all about how do we get towards net zero, so how are we going to transition the energy space because we got the safeguard the planet, but we're also going to have to adapt to a very changing weather conditions that we can all see and that again impacts the transportation networks in terms of flooding and some of the resilience challenges. Then it's all about cleaning up the water system and safe guarding the future supply of water. And then sadly, we're in a world that secure national security is even more threatened and therefore, maintaining a strong defense is pretty key. So I do think that the strategy we've embarked upon is positioned absolutely in the right space. Everything I see from government in terms of their missions and certainly the conversations we've been having with the government around their missions, their priorities is totally aligned to the market focus that we've got. I think naturally, the risk for us at the moment is we just see a very short and near-term period of time that they are under significant spending constraints, but also we'll be wanting to have a review of what investment is planned and for them to be able to make sure that it's adequately prioritized in the areas that they think it should be, but that will be a very short-term theme. As you can see from the work we've won in water, it's fantastic that you can see that we're getting on with that investment, and that is twice the size of what it's been before. If I look at rail, you can certainly see the investment at Network Rail is embarking upon GBP 43 billion worth of investment over the next 5 years, and we are actively pursuing a good volume of that. And then in highways, we can see that some of the projects that we're talking to the client have at and working on are all about how we unlock economic activity in areas. And then energy space, very, very clearly is aligned to the government's enhanced focus on driving the energy transition. So we're pretty confident that with absolutely facing into the right markets. I think one of the things I would say in closing is that we've had a few questions about the cancellation of the A303 and the A27. I think we should see that as a positive. I think we're going to have a government here that is going to decide what the priorities are make the hard decisions and then give us a 10-year plan of what we can get on with, which will give us consistency and continuity, which is great for us as we drive the growth of the business. So thank you.

That's a question, I think, is also for Helen, from Benji. It's a related [indiscernible] with the resumed dividend payments and current payout ratio. How do you see your dividend policy evolving? Are there any plans to increase the dividend cash flow improves? Or will share buybacks remain a priority?

So we're in an interim period at the moment where we still have the dividend parity arrangements with the pension scheme and we talked last year about that. Whilst the dividend parity clause is in place, any return to shareholders above contributions, which was set at GBP 3.3 million need to be matched. We carried out the annual check this March and that showed that we were in surplus and therefore, we were able to pause for 1 year the dividend parity clause that goes from this July to next June. And that gave us the opportunity to consider additional returns to shareholders. And as we've announced this week, remain -- our choice was to maintain the current level of dividends hence the 0.4p that we announced for the interim same as last year. But to consider additional returns, the choice there was to by the change the dividend level or to do a special or to do a share buyback. Our decision was to keep the dividend at a consistent level because we will have to do this check again next year. So keeping a constant level of dividend we felt was in important, it give certainty to shareholders. And then the choice then was whether we returned extra amounts to shareholders through a special or a buyback. And our choice was buyback as it's more value enhancing. Next March, we'll have to do the check again. Beyond that, I would hope that, that would no longer be the case. But whilst dividend parity is part of the agreement with the pension fund. Those are the sort of questions we need to consider. Very important to us that we do return to a progressive dividend policy as we put in our capital allocation policy, and we're pushing very hard to return to that and to make this more simple for people as well and to understand what to expect. But for now, a constant level of dividend was our choice and taking the opportunity to return an extra amount in form of a buyback.

The next question is from John H. I think it's for both, is the company is targeting revenue growth for 2025. Notwithstanding what AMP8 won't flow until 2026. Overall activity on the new government should grow and the company's current book looks very positive. So basically, what's the revenue sort of looking to look like for the next couple of years? And where do you see it after that with the government spending patents?

Yes, I think we would -- look, we would see revenue being fairly flat for this year and for next year. And that's really because we're at the early phases of new infrastructure programs. Therefore, we're doing design work. So the volume of activity is slower, and it will be the same as we start to mobilize for AMP8. But we then anticipate that when we get into 2026 and moving onwards, the revenues will be increasing as we start to get into the delivery phases of those contracts. So that's how we see things moving forward.

Yes. I think -- I mean, obviously, the analysts will be writing the numbers as well. So I'll be publishing consensus on the website for '24, '25, '26, probably in a week or so. So you can see where the market thinks we're going to be headed as well for the next couple of years. I've got 3 of the 4 analyst numbers in. There's one [ which writes ] the white note. So I think probably middle of next week, maybe late next week. I think we'll have the numbers, new numbers on the website. So this is I thing for Alex. How do you view your competitive position within the market? Are there any emerging competitors or industry trends that could challenge your market share? How are you planning to stay ahead of those competitors?

Really good question. And I think it's very variable within the different markets we're in. I think the most important part of our competitive positioning is the strength of relationship that we have with our customers. And so if you take the Southern Water award, we've been working with Southern Water consistently now for 24 years, and they've now awarded us a contract for another 12 years. So you can see that the intimacy of relationship is a pretty important characteristic. It's the same for Network Rail, it same from national highways, et cetera. So that's an important part. If I look at water, let me start with water because it's sort of flavor of the month. We've worked really hard over the last 5 years in AMP7 to totally change the way we operate in the water sector to change the commercial terms and conditions with our water customers. So we've had to really shape a lot of their thinking. And I think that's why when you look at our positioning, we're probably one of the leading players in the water sector right across the marketplace. So a really good position to fill, but that's been hard work, and the way of work we had to change the way we work. If I look at transportation, I would say we're one of the select few who operate across roads, rail and now aviation. And I think that's because we've got a really good reputation and expertise in delivering infrastructure and if you look at the major programs alongside a number of others, we're consistently the individuals that are on that. I think in the energy transition space, we've built a sort of market -- first-to-market, first mover advantage in the energy transition. So the depth of relationship that we're building with BP has meant that we've won the carbon capture contract. And we've now won the hydrogen contract. So that's really good. But again, that's based on the reputation that we've got with the customers, the fact that they really like us, which means we've now won our third contract BP upper Teesside. It's a very different picture if I look at the North Sea where we've historically had a reasonable position. It's just too competitive a market and therefore, we're not -- it's not an area that we have a strong positioning but energy transition, energy networks is certainly somewhere. And then if I look at defense, I think we've got really good, again, really strong position in that space. And I would say that we're up there with the top players and nuclear decommissioning, likewise, we've got a tremendous in-house capability, expertise, long-term relationships with people like Sellafield, and we're one of their go-to partners. So the markets we're in, we're definitely very strong in place. But as I gave you an example in water, we have to work really hard in helping shape our customers thinking about how the market should operate, and really change our operating model to make sure we are fit for purpose for the direction of travel in those markets. So absolutely focused on the right areas, tremendous capability and very strongly positioned from a competitive advantage point of view.

And this is from Max H. Can you confirm all the areas looking at to deliver adjusted EBIT margins in excess of 5%. And it's probably actually was worth maybe just going over the 3.5% to 4.5% margin targets anyway. So I think you've asked them by a few investors so far now.

If I let Helen come to the targets, I can confirm that not every single contract is going to deliver in excess of 5%. Our role of thumb, and we've got pretty good predictability and consistency around it, is our capital delivery programs should deliver a consistent 3.5% margin, but we do have the opportunity to outperform that where we drive greater productivity and efficiency and better outcomes. So that's sort of where -- and then we've obviously got the consultancy business that does deliver the higher margins that moves the blended margin up. So -- and just to sort of start there. And then, Helen, do you want to talk about the target?

Yes, I'll address the targets specifically. So we put out some time ago now, the margin targets that we stated as 3.5% during the course of FY '24 and 4.5% during the course of FY '25. I talk to them first. That progression comes from a number of different factors that were driving very hard through the business. So first and foremost, it's about driving operational performance, and that's what we've been really focused on for the last few years, winning the right work, understanding the risks within the work that we win and then driving delivery and excellent delivery such that we have predictable results. It's really important that they are predictable and really important that we're maximizing the margin on those contracts. So the first sort of big slug of improvement comes from that sort of driving those basics very, very hard. So pretty dull. We'd like to say we're predictively boring, but it's about doing a basic extremely well, and that really starts to drive that first improvement. And you can see that the second half of last year, our margin was 3.8%, and we think that, that will continue. Just bear in mind, and as I said that, bear in mind that we have a distinct bias to the second half in the way we recognize our profits. So H1 margin will continue to be less than H2. So important to look at both parts of that and then the full year that comes from that. So first of all, delivery excellence. Secondly, we've been restructuring the business and taking cost out and using that cost at to invest in the skills that we need, and therefore, not driving our cost base up. And then thirdly, driving the mix improvement as we increase the size of the consultancy business, and that's a really nice guide in the presentation that draws out 3 different types of consultancy that we deliver. And then on top of that, how do we get up towards 5%? Well, as we grow in scale, there might be some operational leverage as we are able to drive the business just a little bit harder. So there's not one item that drives us through to that improvement. There's 3 distinct areas, and that's what we're driving very hard. And we think we are beginning to see that success coming through as you see the margin progression in the numbers.

That's great. So I think that's actually all the questions for now. So Mark, maybe if you could maybe just a..

That's great, Paul, actually. Thank you very much indeed. Thank you to everybody for engagement. And of course, Paul and Alex, Helen, if any further questions do come through, we can make those available to you post today's call. Alex Helen, I know that -- and Paul, I know investor feedback is particularly important to the company. I will shortly redirect those on the call to give you their thoughts, their expectations, their feedback. But before doing so, I wonder, if I may, Helen, Alex, if I could come back to you just for a couple of closing comments. And then as I said, I'll redirect investors to give you their feedback.

Yes. Look, thanks very much for joining this call. It's really important that we understand some of the questions that you've got and anything. So please just do continue connecting with us and engaging with us. But in summary, just in concluding, I'm really pleased with the momentum of the business. We've got a lot of opportunity ahead. We're very driven by it. But what you've got is a really solid business performing really well in markets that present significant opportunities. And we look looking forward to taking advantage of those and continue to update you on our progress. So thank you.

That's great. Alex Helen, Paul. Thank you once again for updating investors. If I could please ask investors not to close this session as we'll now automatically redirect you for the opportunity for you to provide your feedback in order that the company can better understand your views and expectations. It's going to take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of Costain Group PLC, I'd like to thank you for attending today's presentation, and wish you all a good rest of your day.