Costain Group PLC (COST) Earnings Call Transcript & Summary

Good morning, and welcome to the Costain Group PLC investor Q&A session. [Operator Instructions] Before we begin, I'd like to submit the following poll. I would now like to hand over to Paul Sharma, Director of Investor Relations. Good morning to you, sir.

Good morning. And thank you very much, indeed, and thank you for the Investor Meet people for setting up this call as always. With me, we have Alex Vaughan, the CEO; Helen Willis, the CFO. Before we start though, I would like to draw your attention to Slide 2, which is the forward-looking statement. This is on the RNS and this is also on the presentation. We did do a full presentation yesterday. It's on our website. So please have a look at that. We won't be going through the presentation this morning. We went through yesterday. So take a good look at that. It's good. And now let's pass over to Alex for some introductory comments. Alex?

Yes. Thank you, Paul, and good morning, everyone. Thanks for taking the time to join us this morning, and we look forward to answering the questions that you might have. We were very pleased to be able to announce a good set of results for the company yesterday. Three things I think I'll draw your attention to. Firstly, it's another strong financial performance for the company, building on that over the past 4 years, an increase in the adjusted operating profit. And then growth in the margins, again, in line with the targets that we've set out. Obviously, adjusted EPS was up strongly and the cash and balance sheet position of the business remains very strong. So a really solid set of financial numbers for 2024. Looking forward to the business, we were really delighted that we've had a really good year, and we've secured a record increase of about GBP 1.5 billion to the high-quality forward work position. We've now got forward work position of GBP 5.4 billion, and that's over 4 years' worth of revenue. We've had quite a number of wins and extensions in the year. We're getting a lot of growth on the frameworks that we are already operating on. And as we sit here today, we've got very high volumes of tendering activity, and we look forward to announcing further progress through this year. What we've done is given everyone confidence in the growth of the business by indicating that there will be a step change in revenues and operating profits in 2027, building on the position that we've now secured. And then the third thing is very clearly, our strategy is delivering growth for the business and value upside for investors where we're growing in what are growing markets. We're broadening our customer base, broadening the services that we offer. And as a result of the Board's confidence in the growth prospects of the business and the strength of our balance sheet, we were able to double the dividend. So that's where I'll go in terms of an introduction. Paul, perhaps we can get to some of the questions.

Great. Thank you. We've also got some pre-submitted questions. I think from Max. So I'll just work my way through, if that's okay. So the first one is, do you feel Costain will be able to continue to grow, bear in mind the effects of the budget from last October when viewed that well by something in the market?

Yes. Look, from my point of view, as we set out in the results statement, we certainly see huge opportunities to grow if I look at investment across our markets. In transport, we've got the HS2 contract that's going to continue for at least another 5 years together with 2 major new wins on that contract for the next phases. So that's going to keep us pretty busy. Water is just about embarking on a record level of investment and Costain, we've secured strong positions for all of the major water companies. And that's going to proceed over the next 5 years. And then actually, if you look at the 5-year spending plan beyond that, it's going to grow again. Energy, we can all see the significant investment that's needed in energy and Costain is really well placed to take advantage of that marketplace. And then defense, look, unfortunately, the world -- there is a little bit more of a challenging space. So investment is being made, and we see that continuing. So -- and if I look at it, actually, the majority of investment in infrastructure comes from the private sector either through regulated or private spend, and we see that coming through and we've won a lot of positions to take advantage of that. And we see the government having sustained in critical transport infrastructure to unlock growth, which is obviously their #1 priority.

This is one, I think, sent for Helen. Can you give an update on the progress regarding the dual scheme of the pension scheme buyouts, et cetera?

So the pension scheme is in a much healthier place than it was a number of years ago. You can see on the balance sheet. It's an accounting surplus. But when it comes to our ability to reduce contributions to the scheme, it's the actuarial surplus that is key. We had a -- in our last triennial valuation, we agreed an annual check. We carried that annual check out last March. And that showed we were in actuarial surplus and we were able to pause our cash contributions and also our dividend matching and that gave us the optionality to do something additional, and we chose to make a share buyback that you saw in the autumn of last year. So we have another annual check this March, the end of this March, we'll hear about it in June. And depending on the outcome of that, we may again have optionality to increase the dividend, a special or a buyback. But of course, we have to consider the cash flow in the business at that time and the share price at that time. So I'm hopeful that we will have some choices to make there. The pension fund is in an increasingly good shape. And we are working with our trustees to think about possible other structural changes. So some options coming up for us.

And this is also another Helen one. Exceptional items in the second half were GBP 9.6 million. This obviously impacts your earnings and therefore, your P/E rating. So what exceptional is likely to be in 2025?

The exceptionals in '24 were around about 5 for the last year of our transformation program, that was a 3-year program. There won't be any of those costs going into '25. We are now moving into a period of what we're calling business as usual. So we're continuing to change the business, but we won't be putting any of those costs into exceptionals. You will probably see some modest CapEx coming through in the next few years as we start to invest in systems. So I would anticipate a minimal exceptionals going forward.

This is probably also another Helen one. How confident are you maintaining a progressive dividend given potential economic headwinds?

So we are confident. We've been cautiously moving into dividends when we started again in FY '23. And you can see that progress in '24. Our plans show growth as we've been talking about and Alex is bringing to life just now, and our growth in operating profit is cash generative. Our free cash flow will continue to be strong. Our balance sheet is ever stronger. And so we really are confident that we can modestly move to a different policy over time.

This is one for Alex from Anthony D. Well, the transport division sales in 2025 benefit from delays in '24 on top of any normal expected growth. So some point to ride will '25 revenue look like for transportation?

Look, I don't think -- you won't see a recovery straight away in 2025. Infrastructure takes a long time for us to design. So we're working on a couple of new highway schemes at the moment, but we're in the early stages of design. And if we've learned anything in the successful delivery of infrastructure, it is to prioritize more time to design the solution, get the planning agreed. And get that before we go to site. So certainly, it will be sort of 2026, 2027 when we're going to see the transportation numbers start to move up.

This is one for Alex from Chris G. How does the change of green policy away from the zero alternative energies by BP and Shell affect Costain's relationship with them and the profitability of this kind of future market?

Yes, Chris, it's a good question. I think energy is a sort of ever-changing space. What we know is that we have to decarbonize our energy system, and that's certainly what the Climate Change Committee has set out for the U.K. It's what the U.K. government is committed to and driving and therefore, Costain is actively involved in a large number of areas. Certainly with BP, we're involved for the carbon capture and hydrogen and BP are committed to that project, and that is funded by the U.K. government, because it's really a first-of-a-kind program. So that is being pushed and that's all about decarbonizing industrial clusters. But we're also looking to work with National Grid on the great grid upgrade because electrification is going to become a big part. We announced recently a win for Sizewell C, where we're providing project management support, and we all know there's going to be a huge nuclear investment in Sizewell. So look, it's an ever increasing change in space, but we're well placed to take advantage of what's going to happen in that market. Clearly, some of our customers are subject to global business strategies, which are different from our current government strategy.

This, I think, is for both of you. How much of the forward work position is contracted versus preferred bidder status? And what risks are there with contracts moving effectively from preferred bidder on to the order book?

Shall I take the initial part and then you can take the other. Yes. So there is a slide in the presentation that you could refer to, Slide 15, but the forward work position of GBP 5.4 billion is broken down as GBP 2.9 billion of order book and GBP 2.5 billion of preferred bidder. And the preferred bidder is really where the framework contracts are, and as we get work orders and those timings and values are firmed up, they will move into the order book. So you always see a progression from the preferred bidder into the order book. The nature of all of our work in both of those parts is a much better risk profile than perhaps in years gone by. There are no fixed prices on some contracts in there, and the risk profile of it is very much one that we are happy with and feel we can manage. Alex, can you continue?

Yes. Look, I think, Andrew, coming back to sort of the conversion rates of preferred bidder, that will definitely flow. So our customers, if I give you an example of a water customer they will have regulatory outcomes that they have to meet. And if they don't meet those, there will be penalties and also clawback on the investment that they've been given. So they will definitely have to spend that money. We've been allocating that work. So the reason we've put it in preferred bidder is because we've been given and allocated that, but we've got to develop a solution with them and we've got to agree the final price with them. And that will definitely come in, and it will happen over the last 5-year period for that framework. And we've got a track record of all of that preferred bidder. And the reason it is preferred bidder is because we've been awarded that contract, and we're just working through the customer on the precise scope and timing of that investment.

Next one, actually, I think I'm going to do this one, if that's okay? Can you repeat reference to step change in differential margins be any way you quantify the stage? So this is from Chris G. So the adjusted operating profit for '24 was GBP 43.1 million. Our consensus we're collecting at the moment, but looking at the numbers from the analysts and there's a couple more to come, probably should be about GBP 46 million adjusted EBIT for '25, probably about GBP 50 million adjusted EBIT for '26, and then GBP 60 million adjusted EBIT for '27. So Chris, that's really the big jump comes. And the reason that is, if you look [Audio Gap] Next question is from George A. Are there any notable upcoming contract renewals or new projects in transportation, water defense that could significantly impact the order book? So he is quite asking where water is going to come from in '25-'26?

Well, George, we certainly see opportunities coming in roads, and we're in discussions on those. So we look forward to being able to take those through. I think most of the work in water, we've now secured that's going to really affect the business. But there are wider opportunities like some of the reservoir opportunities that we're talking to customers about at the moment, but that water really is now unlocking work from those frameworks is exactly is the 5-year program we have with Heathrow Airport. Water transport for London, those customers, it's about now unlocking that spend from those frameworks and getting it on the ground.

The next question is about the 5% of operating margin target. How are you going to get there? Will that be from new work or from opportunities?

So with the target that we put out into the market in sort of fairly short term were 3.5% during FY '24, 4.5% during FY '25. And a way to think about that wording is that the second half margin would meet those targets. Clearly, we did pretty well in FY '24. So we had 4.4% in the second half of '24, and that certainly gives us a good platform. I'm confident to reach the 4.5% during FY '25. We've talked about 5% as an ambition, so that very much is in the medium term. And we continue to drive the business very hard. So there are a number of layers that contribute to this gradual improvement in margin. Really, it's -- a lot of it is coming from our construction work, which is the largest part of the business, and that's about winning the right kind of work at the right conditions -- right terms and conditions and driving performance really tightly, and you see that really pushing the margin up already. We've also been controlling our costs. There is a little bit that comes in from service mix as well as we do more consultancy that adds sort of icing on top of the cake. And of course, as we grow, you get operating leverage as well. So it's all of those things contributing to that gradual margin progression, but we're really confident to reach that next target for FY '25.

One from John H. Some infrastructure related companies have seen a problem in rail. Have you seen that? And how do you see rail coming out for the next few years?

Yes. Look, you've noticed some of those businesses that have been affected. I think one of the things that we've really made a strength in Costain is the ability to move people around the business. So we don't have people who are only rail specialists. We are able to move people around the business, which helps us be ambidextrous in how we grow and resource the business. But when we embark -- when we looked at CP7, we didn't anticipate a significant investment in the areas that Costain has a strength. Our capability is really being around overhead line electrification enhancements to the rail system and stations. So we certainly see CP8 as a bigger target. So as a result of that, we are not affected by some of the slowdown in rail spend in this 5-year period, but we certainly see big opportunities for us in the next 5-year period, which is exciting. But I think our ability to have people that can move around the business, which means as water grows, as energy grows, as HS2 grows and other of those contracts were able to move people around and support the growth of those business, which is great.

And I think that's all the questions for now. So Alessandro, I think I can hand back to you. That's okay?

Perfect. Thank you very much for answering those questions from investors. Of course, the company can review the questions submitted today, and we will publish the responses soon on the Investor Meet Company platform. Just before redirecting investors to provide their feedback, which is very important to the company, Alex, could I just ask you for a few closing comments.

Yes. Look, thanks again for taking the time to join us this morning and for your questions. And if you ever have any questions, Paul's e-mail is very easy to get hold of. So don't hesitate to e-mail him. But we're very positive about the 4 directions of the business, the progress that we've made. There's a significant investment in U.K. infrastructure being made to safeguard the U.K.'s future. It's all about building a more prosperous U.K., a more resilient U.K. and decarbonize U.K. And Costain is going to be forefront in ensuring that we deliver the solutions to unlock our future. So thanks very much. see you soon.

Alex, Helen and Paul, thank you very much for updating investors today. Can I please ask the investors not to close the session as you now be automatically redirected to provide your feedback in order that the management team can better understand your views and expectations. On behalf of the management team of Costain Group PLC, we'd like to thank you for attending today's presentation, and good morning to you all.