Keller Group plc (KLR) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Keller's preliminary results for 2022. Firstly, to safety. There is no planned fire alarms today. So if the alarm does go off, then it's following the green signs down the door here and then to the left. And there's an open stair wall to escort down there. Could I ask you all to make sure that your phones are switched to silent, please? And I'll start the presentation. First of all, I'd draw your attention to the header there, which indicates that the results we're presenting today are unaudited. You shouldn't get alarmed by that. That simply means that the auditors haven't completed their filing. They are -- they declared last night that they are substantially complete. This is just a question that there's some loose ends which they need to target for their filings, which they expect to do by the end of the week, by which time they will be audited. In terms of the results which we will present, David and myself, I think we have a good set of results for you today. The markets we've been working in have been a little bit choppy. And we've had a few self-inflicted wounds during the period. But nonetheless, through the hard work and determination of the team, we have what I think is a good set of results to show for you. Bear with me. Normal cautionary statements. On to the agenda. We'll be following our normal agenda today. I will talk through a summary and then David will take you through the detail of the financial results. I'll then talk on business performance, including ESG, cover some items on strategic progress before finishing off with a summary in the outlook before opening for questions, which we will give you answers for. To the summary. Rather than follow what we historically have done in terms of going through the highlights of the -- that's shown on the RNS, today, I thought we'd do it a little bit differently. And I'd really signpost for you the key themes at a high level to explore what's gone on during the year. And then when David follows up, he will go through some more of the detail and put some more flesh on those bones. And to that extent, the first thing to say is Austral. Austral, effectively for the purposes of today, there's no new news. It's effectively exactly what we said it was on the 9th of January. The external forensic audit is complete, is confirmed all of that and there's no cash leakage either. But David will follow up with a slide later on to give you a little bit more detail on that. In terms of revenue, we've got a record revenue number, 22% organic growth overall. And a lot of that's been fueled by the acceleration of the LNG contract at RECON, which has gone very well indeed. Similarly, Suncoast. Suncoast did very well during the first part of the year, added off a little bit in quarter 4. And indeed, there's been growth across the whole of the group, some of that inflation but a lot of it roll volume. All of that's translated into operating profit, which has clearly benefited there, it's grown by 12% organically overall. And operating profit is also being boosted by the turnarounds in Australia, Middle East and Africa, which is if you see the profit calls a little bit later on, it's come through very strongly. Unfortunately, I mentioned earlier, the contract performance in North America Foundations hasn't been as good as it could have been. Various different reasons for that, partly inflation, partly supply chain issues, partly project execution, frankly. Most of those issues were in the first half of the year. We have taken action, as you'll see later on in the presentation. That action is bearing fruit. The margins in North America Foundations, North America -- the whole division strengthened in the second half by 150 basis points from 3.5% up to 5%, evidencing the fact that some of the actions which we have taken are actually beginning to bear fruit. And I'm sure that momentum will continue as we go through '23. In terms of cash flow, and David will talk a little bit more detail to this a little bit later on, we did -- we have signposted for some time there will be an outflow in the year. And indeed, it came through more or less where we expected it to come through. There are 3 major elements to that. The first one is given we are a positive working cycle company, as the revenue has grown, so has the absorption of working capital. That's the first element. There's been a tightening of supplier terms in terms of credit as the emphasis of power as it was shifted to the supply base. They've taken advantage of that. And then finally, Suncoast, as the volume dipped off in quarter 4 we found ourselves with some surplus strand, which I think will unwind a little bit in 2023. We don't expect in terms of the core business any significant movement beyond that in '23. And then there's NEOM. NEOM, I know, is a topic -- a hot topic for all of us. That is going operationally and indeed financially to our expectations. The execution of the first works order, we will talk about later on has gone very well indeed. I think we're now at a stage where we're working our way towards the second and third works orders. But given it's right at the beginning of the project, things remain pretty fluid and pretty dynamic. So all in all, where we're at is a good but not great performance in the year. There's some things, as I said, we could have done better. But nonetheless, given the circumstances where the markets have been, it's a good set of results. And all of that has given the Board the confidence to move the dividend forward with a further 5% increase. I will now hand over to David, who will take you through a little bit more of the detail.

Thank you, Mike, and good morning, everybody. The format for the financial slides today is that I will show the income statement first and then take you through how the Austral Financial Reporting fraud has impacted the historical accounts, and I'll give you a status update on the incident. I'll then provide a comment on the income statement for the year, looking at underlying results firstly, and then move on to provide a waterfall analysis that identifies the key bridging items between underlying operating profit for 2021 and 2022, then talk through the nonunderlying items and then present the cash flow, some balance sheet highlights, including net debt, and finally, highlight some look-ahead modeling considerations for 2023. So let's start with the income statement. This slide shows the summary income statement for 2022 with the 2021 comparator to the right that has now been restated due to the Austral fraud. So let's turn to the Austral impact slide, and we'll come back and talk about the underlying and non-underlying elements in future slides. So this table shows the reconciliation of 2021 as presented last year to what is now included as a comparative in this year's accounts. From an underlying operating profit perspective, the impact to the discrete year 2021 is to reduce underlying operating profit by GBP 4.3 million to GBP 88.5 million. This is a combination of revenue and cost adjustments with revenue reducing by GBP 1.9 million. The tax impacts results in a credit to take the net impact of GBP 3.1 million. There is further narrative in the right-hand box that explains the impact elsewhere. In our announcement on the 9th of January, we estimated the prior year adjustment to the GBP 8 million to GBP 10 million from an underlying profit perspective. This is now confirmed as GBP 11 million, GBP 4.3 million for 2021 and GBP 6.7 million for years prior to this. The opening reserves of 2021 have been reduced by GBP 8.7 million, being the GBP 6.7 million operating profit impact I just mentioned and the GBP 2 million write-off of deferred tax assets. More broadly, we include the latest data on Austral. So there's no material change from what we announced in January. The external forensic investigation is now complete and confirmed that there was no cash leakage and no further collusion across the business. Management changes have been enacted and to reiterate Austral is a unique business from an activity process and system perspective and, indeed, from a client perspective. So there's no contagion from this specific incident. We are enhancing our management and control processes as a result of the incident. So let's go back to the income statement and look at underlying performance for 2022. Year-on-year revenue in 2022 increased by GBP 722 million or approximately 32%. This was driven by FX of 8%, bringing the constant currency rate to 24%. Acquisitions contributed 2%. So organic growth including the retail LNG contract was 22%. Volume was up in all divisions as we saw increased activity compared to the pandemic-impacted prior year, and on a constant currency basis, North America increased by 29%; Europe, by 19%; and AMEA by 9%. Whilst we have improved underlying profitability in the year, we have dealt with a number of challenges, particularly contract losses, inflationary pressures and supply chain issues that impacted the U.S. Foundations businesses and the trading performance of nearshore marine projects in the Austral business. Underlying operating profit for 2022 increased by 12% on a constant currency basis, but our margin rate came under pressure reducing to 3.7% from 4%. In the next slide, I'll bridge that operating profit performance. Net finance costs have increased by GBP 6.2 million to GBP 15.1 million. That's driven by the increasing interest rates and the higher average borrowing levels. Taxation at 20.3% is at an effective rate of 22%. We have maintained our level of R&D activity in the U.S. post pandemic, and this has kept a downward pressure on the rate. The underlying earnings per share has increased by 20% to 100.7p driven by improved underlying profitability and the lower tax rate, offset by the higher finance costs. The Board are recommending a final dividend of 24.5p to the AGM, and that will bring the 2022 dividend to 37.7p, which is a 5% increase as communicated in our November trading update. We'll now move on to the operating profit bridge slide. This seeks to bring to life the movement year-on-year. Moving from left to right, starting with last year's restated underlying profit of GBP 88.5 million. We highlight the FX tailwind, which was considerable at GBP 8.9 million given the stronger U.S. dollar during 2022. Coming to the North America division first, which is up GBP 0.8 million year-on-year, the historical claim related to a claim receipt in 2021 that is not repeated. The next block is an amalgamation of the performance of the Foundations business and RECON. We did have challenges in the Foundations businesses with contract losses, inflationary pressures and issues with the supply chain that impacted productivity. The RECON business performed very well in 2022, accelerating the delivery of the LNG contract beyond our original expectation. Suncoast had a great year volume-wise, particularly in the residential sector which boomed for 3 quarters of the year. We have seen that decline following the interest rate increases from the autumn onwards. Now turning to Europe, which was GBP 4.9 million up. Northeast Europe, primarily Poland was impacted by the Ukraine war, but elsewhere the division proved resilient, increasing volume and profitability across the remainder. The AMEA division was up by GBP 6.7 million despite the issues with the marine contracts in Australia. The first block shows the trading impact as identified in the descriptor was not the impact of the reporting fraud and relates to issues on these medium-sized contracts that are now moving towards completion. The next block relates to NEOM, where we have taken the hit on mobilization costs as incurred, and drilling did start in December but not enough to cover these costs. On Mozambique, we have now taken our equipment from site back into use elsewhere in the division with the block here primarily representing the reversal of an impairment we made on these assets in 2021. The recovery in both the Middle East and Africa and Australia are similar in that these regions were heavily impacted by COVID in 2021, and these improvements represent getting back to normal in 2022 along with some quality execution in the year for both these business units. Increased costs in the center gets you to GBP 108.6 million operating profit for 2022. So moving to the next slide, I'll cover off nonunderlying items. Again, the income statement but this time focusing on the middle column, nonunderlying items. Non-underlying operating costs increased in 2022 from the previous years. The operating cost plus the intangible amortization elements increased from GBP 12.2 million to GBP 40.3 million in 2022. The analysis box shows the items that make up the GBP 40.3 million, which we have split between cash and noncash. The big callouts are the goodwill impairment of GBP 12.5 million, that's on the Austral business driven by the uncertainty of future profitability; and in Sweden, giving a reduce in medium-term forecast for that business. We have commenced our ERP journey, and the cost of GBP 6.3 million relate directly to the implementation including external consultancy and the cost of the dedicated team. The GBP 3.5 million exceptional contract disputes related to a negotiation with insurers on the historical Avonmouth claim, this has now been settled and; the GBP 2.5 million relates to a claim that has come through on a closed business. Restructuring occurred in North America and Europe, management and property reorganization in Texas being the largest element; the Europe element related to exiting Morocco in the Ivory Coast. Analysis of the amortization of acquired intangibles is set out in the box on the right. The big increase this year is driven by the amortization associated with the RECON acquisition, which won't repeat in 2023. We do not expect a repeat of nonunderlying costs at this level in 2023. The net finance cost credit relates to us entering into an interest rate derivative on a highly probable USPP launch, which we postponed due to market volatility. The forecasted transaction did not take place, which resulted in a gain that we have taken to nonunderlying as it wasn't in the ordinary course of business. The tax credit of GBP 9 million reflects the tax benefit of the above items plus the re-recognition of deferred tax assets in Canada, which were previously written off through nonunderlying. The statutory EPS reduced by 19% due to the impact of nonunderlying items. And the sum of all items across underlying and non-underlying performance gives a post-tax statutory profit of GBP 45 million. I'll now move on to the cash flow. This page shows the summary net debt flowing from underlying operating profit down to net debt. Our net debt under IFRS 16 increased by GBP 105.6 million in the year, driven predominantly by the working capital outflow of GBP 110 million. The analysis box on the side there seeks to explain the reasons for this outflow. Growth is obviously a factor, and we have calculated the impact on the constant currency rate of 24% across the relevant lines of working capital. Our receivables is sitting below the growth rate, so our DSO has remained pretty static year-on-year and we are staying on top of our billing and collections. Payable did not increase at the same rate as receivables due to the behavior of our supply chain in the U.S. in particular. It was a seller's market for material with payment on delivery not being uncommon. The increase in inventory beyond the 24% relates to steel strand in the Suncoast, which we bought when prices became volatile again after the Ukraine war. Activity levels reduced in the final quarter, which left us with a higher level of inventory that should unwind in 2023. The other call-outs, our CapEx and depreciation continue to align the higher finance costs due to the average borrowings and higher interest rates, tax cash payments reflecting the holdback of the U.S. tax payment pending clarity on the amortization of R&D tax credits. We'll now end up making a double payment in 2023. Acquisitions are made up of small bolt-ons and the RECON contingent consideration. In contrast to profits, an FX headwind of GBP 17.3 million given the weaker GBP against the U.S. dollar. In the bottom box on the right, we highlight the net debt and IAS 17 covenant basis of GBP 218.8 million, an increase of GBP 99.4 million. Leverage on a lender covenant basis at the year-end was 1.2x, within our target range of 0.5x to 1.5x. More on net debt later. Just moving on to the summary balance sheet. This slide shows a summary balance sheet at December '22 compared with the amounts at December '21 that have been restated. The movements are set out in the tables. The movements on assets and liabilities are reflective of the increased activity levels referred to earlier. And the next slide provides some more detail on the net debt profile during the year. Looking at the trend in the graph. You can see the peak in Q3 with the reduction coming through as we get towards the year-end. As mentioned, net debt did increase by GBP 99.4 million on an IAS 17 basis driven by the working capital outflow with average levels of debt increasing by 70%. We have operated well within our covenants with a leverage at 1.2x at year-end against a minimum of 3x and interest cover at 15.7x against a minimum of 4x. Our facilities comprised of GBP 375 million multicurrency RCF expiring in 2025 and the USD 75 million private placement expiring in 2024 and a 2-year GBP 115 million bilateral term loan facility raised in November 2022. At year-end, we have GBP 258.8 million of undrawn borrowing facilities. Next slide shows some look-ahead modeling considerations. This slide is intended to provide some insight into how some of the drivers of actual reported financial performance should be thought about as we step through 2023. Suncoast volume on residential to reduce on 2023, offset to some extent by the stronger high rise. Large projects, Europe will have HS2, Tangenvika and Södertälje in Sweden. And AMEA will have NEOM in Saudi Arabia. M&A, we'll continue to focus on bolt-on acquisitions. Operating profit percentage improving in 2023 given the some of the items we faced in 2022. Profit phasing, Usual H2 bias. Interest costs will increase given the increased rate compared to the '22 averages, and tax rates, we believe, will be sustainable around the 22%. On cash and debt, we'll be in the range of 0.5x to 1.5x. Should the NEOM project ramp up to -- ramp-up in 2023, then we will be in the upper part of that range. That's it for me. Thank you for your attention. And I'll now pass back to Mike, who will take you through the business performance update.

Thank you, David. I'm now going to take you through the business performance, starting with the order book. The order book, the first thing to draw to your attention that whilst GBP 1.4 billion is slightly lower than the record we had at the half year, which was GBP 1.6 billion, it is, in fact, for the year-end the highest level we've ever achieved. Within that, it's pretty geographically evenly spread, and it's got roughly, roughly 6 months' worth of coverage across the whole of the group. In North America, you can see there that it shrunk slightly. That's basically the absorption through the year of the RECON contract winding down. Europe, you've had HS2 that's been rolling off that's been refilled by the infrastructure projects, which David just referred to principally in Scandinavia. And then in AMEA, you've seen a significant step up there, which is principally the NEOM works order, the first work order and also several infrastructure projects in Keller Australia, which has frankly set them up for a good year in 2023. Overall, it's a good even balance. And I think with the exception of probably the ASEAN business unit, certainly in the short term, everybody has got plenty of good work to get after in the short term. So that, frankly, gives us confidence as we enter the year. Moving on to North America. I think it's fair to say North America has had a mixed year this year. There's been some excellent growth from RECON in the LNG contract, which is accelerated. It's been executed really well. It's bringing some good work in Suncoast, especially in the first 3 quarters. The last quarter, residential came off a little bit. But nonetheless, a good performance. And indeed, there's been -- across all of the business units in North America there's been some good revenue growth typically year-on-year. When you move to operating profit, however, contract execution in some areas has not been as good as it could have been and indeed should have been. North America Foundations, especially in the first half, we suffered some supply issues. We suffered some inflation that we were slow to pass on and indeed some project execution issues. Now actions have been taken in the middle of the year second half, which are clearly beginning to take effect. If you look at the first half margin we declared, that was 3.5%. That's moved to 5% in H2, and it's those 2 numbers that give you the 4.3% overall in the year. And you can see as we move forward that those actions taking effect, and I expect that to build as we go through 2023. So we can do better and we will do better. In terms of moving forward and building on our success, you can see that we've also acquired GKM Consultants. It's a geo instruments business in Quebec. That not only strengthens our geo instruments or data business, but also strengthens our position in Canada, which is from a market point of view, is a particularly attractive market. Moving on to Europe. Europe has been quite pleasing actually. It's been -- certainly for me, it's been one of the divisions which is actually just quietly got on and done this business. And you can see there good growth in both revenue and indeed profit. I think it's fair to say they had some pretty difficult market conditions through the year, particularly in Poland, which I think has drawn the brunt of all of the economic fallout of the Ukraine war. And they suffered a little bit in the year, but it's fair to say that they did very well in very difficult conditions. And the rest of the business units in Europe kind of made good the shortfall in Poland. Overall, though, I'm very pleased with the way that they have moved forward. Strategically, you can see that there's been some pruning of what we do in terms of -- and recognition that we do need to service that. We've exited the Ivory Coast in Denmark. Neither of those businesses we were ever going to get to a satisfactory market share. So you step back and recognize that and exited those markets. Whereas in contrast, Norway, which is an attractive market, you'll see there that we've made investment in Nordwest Fundamentering. Moving on to AMEA. AMEA, again, it's been a bit of a mixed year. I mean, unfortunately, this year will be remembered in the AMEA division for Austral for both the fraud and also the fact that the nearshore marine element of Austral has been underperforming in the year. Their NPI business and their rail business within Austral has performed well, but unfortunately, the near-shore marine business through 4 or 5 contracts performed badly, and those 2 things will blemishes underperformance. Elsewhere, though, you had some very good turnaround in performance in Keller Australia, Middle East and Africa. Frankly, they did better than I expected. The 2 teams are to be congratulated on what they've done in the year, turnaround to previous year both operationally and indeed, post recovery from COVID in some respects, they've had some very, very good performance. Whereas both India and ASEAN have been pretty solid year-on-year. Which then brings me on to NEOM. NEOM, we are -- I'd remind you all, we're right at the beginning of this project. But it does remain for us a very exciting prospect. If you look at what we've done with works order 1, that has been very well executed. We started slightly late because the delivery of the rigs from Europe into country was delayed. We started work in the middle of December effectively and gradually ramped up through January and February, which culminated as finishing works order 1 early, which is a credit to the teams, their planning and execution. We completed all of the piles. We completed on the days we said we were going to do it. There have been no quality issues, no safety issues. And in terms of financial performance, we've been at or better than what we expected. So from that point of view, work order has been completed very well indeed. We're now at a stage though where we're waiting for the next works order. And this is one of those situations where the client is actively planning what they're doing and they're considering different options. And I think in the next weeks and months, we will get to see more of what the client intends to do and we will have to be responsive to that. But it is, I'd stress, a pretty exciting. But at least at this time until they get to a momentum, it's going to be one of the situations where we have to be pretty dynamic in the way in which we respond. But it will be -- for us, I think it will be potentially quite an exciting prospect, and there are some sizable packages of work that we can look forward to. Moving on to ESG matters and starting with SDG 3 and safety and well-being. There's been some great work here done again by the team across the world, and John Reign and the safety team and indeed the operations teams. But unfortunately, that's not really shown some of the statistics. We've had a slight decrease in performance, which is always in this area ultimately disappointing. We've had 22 accidents across our 1,000 employees, 11 of which we would classify as critical. And we've had 78 total recordable incidents in the year. Now a lot of those -- of all those categories are related to hand injuries where people have responded to a situation too quickly and haven't been thoughtful, so hence the stand down. We're getting people to actually stop and not immediately react but think about how they react before they do so. And similarly with PPE, just to remind people that it is the last line of defense, but it's something which you have to have the appropriate PPE for everything which you are dealing with. Not limited to that, though, there's been some good stuff in terms of, for instance, the -- all of our rigs now. We're doing a survey during the year and realized some of our rigs were not fitted with blind spot and rearview cameras. So we've rectified that during the year, made some standardized approach to that, which is great to see. And similarly, in some of the behavioral well-being and global health matters at the end there, given we have so many people working away from home, well-being and duty of care is something we take very, very seriously. And again, that's an area of activity for the team. Moving on to carbon. SDG 13. This is an area where it's pleasing to see. We're gradually picking up a little bit of steam. I mean, for us, it's a huge item. Scope 3 is by far the biggest of the elements of our carbon footprint, but it's the one which, frankly, we have the least amount of influence on at this stage apart from designing, which we actively do to try and design elements out on, say, both carbon and indeed, costs for our clients. It's an area which ultimately is in the decisions made by the client. But nonetheless, there are there other elements, Scope 1 and Scope 2, which we can impact, and we are. You can see there some of the activities that we've done this year but also some of the ongoing work as we move forward. Unpleasingly, Scope 2 is the one we know the most about and we've measured the most. We set ourselves a 10% goal last year, and we've outperformed against that goal. This year, we'll set ourselves a similar goal. And I anticipate beyond we'll gradually incorporate Scope 1, probably the year after next once we get our arms around that a little bit more, whilst we continue to pursue the other elements as well. But some great forward movement with this. And I must say, industry-wide, there's an increasing awareness on this issue, which is pleasing to see because some of these issues can only be solved on an industry-wide basis. Moving on to strategic progress. This slide is the slide which I copy and paste from presentation to presentation. It's frequently used, and quite rightly so, and I encourage all of the management team constantly to try and orientate their decision-making, their stewardship around this, which gradually is bringing more coherency to the group. And I hope you've seen that evidence in some of the presentations so far. In terms of our progress on that in 2022, you can see there that in terms of our portfolio actions, we have been busy integrating RECON into the business. I would not say that, that process is complete. There's still more to go, but we are seeing more cross-selling opportunities between the structural foundations business and the soil stabilization, which RECON does. And the teams are working more and more together. Similarly, RECON is giving more access to the Keller team in terms of some of the industry opportunities. As I mentioned earlier, we've exited Denmark and Ivory Coast. We've acquired GKM and Nordwest Fundamentering, which is basically recognizing that markets, which we can't really create a satisfactory market share on, we're prepared to exit; and the ones which we think are worth going after, we're bulking up, we're strengthening our position. And we will continue that process. In terms of performance, our business -- COGS are important in our business and performance is important. Both -- wherever it is in the P&L account, we will go after it. And you see there the first one, we consolidated the Midwest business unit, which in some respects was a little bit subscale into Northeast. And that process has actually gone very well. There's some initial stumbling blocks, but we've worked our way through that and that's bearing fruit now. And a much longer-term issue is that of the ERP system, which we are being mindful and very considered in the way which we're rolling out, but you can expect over the next few years, see that appearing more and more on our slides as it gets to be implemented. But it's a great program. It's a very considered program and is being well executed. In terms of looking forward, we will continue the refinement of the portfolio. We're always looking at the business to see what fits, and frankly, what fits the business would have a better owner, and we will continue to do that. And similarly, we'll continue to do selective acquisitions. I'm sure it's a topic that will come up in Q&A, but there is -- the environment now is something which is -- there are more things coming to the market. But it's an area where we're not in a hurry, and we will continue to be very selective in what we do. And whatever we acquire, we will be looking to make sure we properly integrate it because why else would we acquire it? If it's -- if we can't make more of it ourselves, then it's not something that should be of interest to us. In terms of performance, and this will be a key area for 2023, we will be looking to increase our focus on performance and our operating margin. We've had a year of growth. We just need to leverage that now in terms of turning what was good quality into great quality. And that's what we will do. One of the projects within that is a project called Project Performance Management, and this is systemically embedding over the year the best practice across the whole of the group. And it will take a little while. There's some excellent project management in the group but there's also areas where we can do better. What we're looking to do there is to make it level upwards in a genuine way, in a systemic way and making sure it's embedded. And then finally there, we are moving towards the first pilot of the ERP. We've gone through the design stage in 2022, and that will continue from a large element in '23 when we actually test it all out. But towards the end of the year, we will be looking to go live with one of the pilot sites. So finally, moving on to the summary and the outlook. 2022, I think from a market perspective, has been pretty difficult. Certainly, when we planned the year nobody anticipated the Ukraine war and the secondary impacts that would have on the world which is already impacted by COVID. Nonetheless, I think the teams have actually responded well to that across the globe. It's affected them all degrees to different extents. And some of those things have been very challenging, some of them less so. And to that extent, we've faced and dealt with a number of challenges, many of them external and frankly some of them internal and some of them self-inflicted, which is those elements, which if I'm a little bit down, a little bit disappointed. And I think overall, as we sit here, we reflect, it's been a good year but it could have been a great year. And that -- it's slightly humbling at this point in time. Nonetheless, we are in a situation where we've had a good year and we know we can get better. So as we step in moving into 2023, we've got a strong order book. we've got increased focus on operational performance and operational delivery because we know what we can do to improve. And we've got a good momentum as we come into the year. So far, so good in this year, we've actually had a good start. And to that extent, we'll continue to execute the strategy, which has served us well through difficult 4 years we've stuck to that, and it's worked well for us, and we'll continue to do it. And that's collectively what's makes us very, very optimistic for the 2023 year. And with that, I will open the floor up to questions.

Can you give a little bit more color in terms of what further restructuring of the business going forward you see? You've expanded a bit in '22. I just wonder how much more heavy lifting there is that you're anticipating.

I think in terms of the larger elements of our restructuring, the big elements have now been largely completed -- essentially completed. However, post-COVID and settling out of markets have now stabilized. The ones which, if you like, in the gray area we're now in a position to actually evaluate and decide, yes, this is a market worth backing or this is a market where, frankly, we will never get to the satisfactory market share. And its question of just quietly -- and in a considered way going through that process and figuring out what's in and what's out. We are a specialist group. We have specialist resources. We need to make sure we focus those and where we can get the best returns. And some of our markets have better clients than others, frankly. People appreciate what we do have, if you like, more challenging work that we are good at and have the investment and consistency of investment that actually make is worthwhile being there. There's other markets where that's not true. And we'll continue in that process.

I'm trying to get an idea as to how much heavy lifting there is to do. Is it an ongoing process? Is that what's...

It's an ongoing process. And I think now we're in the final strokes, as it were. We're not -- there's nothing that's going to be radically cut out in the portfolio.

Clyde Lewis at Peel Hunt. I've got a couple, if I may. Can we go back to on the slide on the waterfall chart. My hindsight is so bad. Is that Page 9? The North American trading performance, and you flagged the Foundations bit. Clearly, RECON, I think -- well, I'm assuming, RECON was better on the back of the U.S. LNG. So if that was up, the rest of the Foundations business was obviously back even more.

Yes.

I mean, that's -- given the market backdrop, I'm trying to sort of explore how much that can improved this year because clearly, resi is going to be a bit softer. So I'm just trying to work out what the levers are because the industrial, commercial and infrastructure market in the U.S. looks healthier than the resi side. So as we look at that, would you expect to see that largely flip those 2 resi back and foundations up?

Yes. I mean, what you could bear in mind is RECON, whilst we talk about it separately. RECON and the rest of the business have got cross-selling opportunities, which is why we haven't tried to separate them all out because I'm encouraging the team to get it more and more and more integrated. And if you can get some of the soil stabilization techniques which RECON have historically had and add some of the stuff which we've got from Keller, which can actually make that slicker and quicker and add to that structural foundations and add to that all the other stuff, that's what we're looking to do, which I'm keen not to separate out. From a market perspective, I think you will see a bit of a flip flop because the LNG and the industrial market, per se, some of those contracts are big and lumpy. We're just completing one of those near the LNG one. There are several more which, frankly, we're bidding on and one in particular, I think we're going to be successful on. But that won't start until H2. So that's going to be fairly lumpy, I think. In terms of general industrial activity in North America, there's quite a lot going on in terms of prospectivity right now. A part of that, I think, is driven by certain industries renationalizing in The States in terms of their investment. So there's lots of microchip fab plants, for instance. There's more battery type stuff going in there. There's several other industries, which are -- there's some reasonably big investments going in. But you're right, on the residential side, at the moment, it's a little bit quiet. Our team thinks it's going to be quiet. The Suncoast team thinks it is going to be quite throughout the whole of 2023. I think it will pick up in the -- towards the end of the year. And it's -- I think one thing to stress with this, it's not the same as it was the last downturn because there's still a shortage of housing. Last time this happened, the 2 years' worth of LNG properties around place. So I don't think this is going to be down for long. I think as soon as the tension picks up and the interest rate starts coming off, it will pick up reasonably quickly. I think the other thing to bear in mind is that most of our exposure is in the Southern half of North America, and there is a net migration into that belt between Texas and everywhere east of there, which actually is beneficial to us.

As we think about pricing and cost movements for this year, inevitably, given your geography, it's going to be quite a bit different. But that it would be useful to sort of run through, certainly Europe, North America in particular, but maybe Australia as well in terms of how you see that balance between prices of contracts versus the input costs in terms of -- because certainly, I'm still hearing average materials costs are probably still going to be up. Steel is the one that's probably down. But cement, concrete, there probably is still going to be more expensive on average this year than they were last year. So be interesting to hear your take on the moving parts there.

Okay. Go ahead.

I think you would have heard us previously say that we can deal well with inflationary pressures given our short cycle. I think we got, in 2022, because inflation ramped so quickly, I think we were a bit slow, particularly in the North America Foundations business in terms of repricing to cover that. I think the AMEA region is pretty good at dealing with inflation and making sure that, that is priced in because it's always been volatile. And Europe has done pretty well. I think the contractual environment in Europe is much more akin to having escalation clauses in contracts that's contractually better. North America, I think, is where the contractual environment isn't as strong on that front. And we've been slow in terms of picking it up. I think with the work that we've done this year and the actions we've now put in place, I think for that environment, which hasn't been used to inflation at the rates we had seen, I think they're now making sure that they do price that in.

If I could add to that. I mean, it's -- I think building on what David just said, in Europe and in North America, if you deal with government contracts, typically, the scope for inflation in there in terms of caps and colors is normally pretty limited. Poland, in particular, is very atrocious on that and anything you do for the state. Similarly with DoD-type contracts, quite often, it's very, very limited as to what you do. So you have to take a guess and as built in. And the only exception to that is union-stipulated contracts where whatever the union pays automatically gets flowed through. North America, some of our bigger contracts, specialty services, for instance, they were very good actually pushing through inflation. And that's worked. They've always been good at doing that, but that's because they're being with big numbers over a long period of time, and it's a shorter cycle work where people look caught out to an extent. And that's simply because people have deferred it and we haven't repriced it when it's come back. All of that's dealt with. The guys are on top of that like a rationale, and that's because we're trying to promote a learning organization and it's always to get -- it's got once but not twice. And that's the guys are picking up on that. I think in terms of economics looking forward, it's going to be quite interesting because if you look at what's happening to gas prices, which influences, a lot of our input policies be it concrete, cement or steel, it's varying across the globe, and as is the availability. Cement is becoming more available in North America, specifically in Texas and Florida, which had been in a shortage. And I think that will change the dynamic a little bit in terms of both our productivity but also the pricing side of it. And I don't doubt clients will be quick to come back on us through that to be recognized in our pricing. But there will be a period of time to enjoy a little bit more.

I also have one anyway was on the ERP system. Just in terms of as you build that out, are you planning to take those sort of costs as an ongoing sort of exceptional effectively in? And I suppose it be good to get a sort of update as to what you think those sorts of costs are likely to be over the next couple of years?

Yes. So we will continue to tag them as nonunderlying. So that cost this year is the consultancy and the dedicated team. As we ramp up this year and into implementation next year, we'll -- that cost will probably increase on this year and then we'll see it taper off. We do look at this as a 5-year program, but we do see the consultancy stepping off towards the back end of 2024 and then the cost of that implementation tapering off. And it really is around the step and repeat into the different business units across the group.

Alex O'Hanlon, Liberum. You mentioned there's clearly still appetite for M&A. Are there particular geographies that you're looking at to carry out the M&A? And then I'll touch on one more question afterwards.

Yes. I mean, clearly, our M&A, as you would have seen, is going to be focused on the markets where we want to build market share. And if you think about our 3 divisions, and this is a bit of a generality but it's holds true. North America and Europe, wherever we set a footprint down there that we are servicing markets which we want to be, and we want to build market shares. Whereas AMEA, as a generality, is very project-driven division. We go to a site, we execute a project and we come away. And you can see that typically in the likes of India, where the NRL Assam project we're in mid execution at the moment. When we complete that, we'll withdraw everything from that site and come away. So AMEA is very much with the footprint we've got works and frankly, we don't need much more. Europe and North America, however, at a local level, and it would -- I would stress it's at a local market level, you gain operational leverage by having more significant market shares of quality business. It's got to be quality. No use just being there and serving the volume. You've got to make sure that what you're doing makes a difference. And that's what we will be looking to do. So look for typically the things which I spend most of my time looking at are things which are in North America or in Europe in particular markets which we are already present. And therefore, the risk of execution in terms of geography is minimal because we know those markets, we know the clients, we know the way in which they're doing business, we know the cost base. Quite oftentimes, we also know the techniques that we're looking to buy because we'll have them somewhere else in the group. We just won't have it at that particular location. So to that extent, in terms of risk execution from a deal perspective, the things which I find most attractive are in places where we're already present with techniques we already know, but they're just not present in that particular location with an organization whose culture is aligned to ours. There's some business we compete against. Frankly, they held good positions. I could never ever, ever see us acquiring them or doing business with them because their culture and ours is not aligned. And you have to recognize that this is not just about the numbers. This is about making stuff that works.

Perfect. Could I ask one more? Just on the Austral fraud. You mentioned that there's enhanced control processes now in place. Could you kind of just elaborate a little bit on what those might be to ensure that something like that doesn't happen again?

Yes, sure. I mean, given the nature of that fraud and the nature of the people who actually perpetrated it is being in fiduciary roles, I think for us and the lessons we've learned from that, not necessarily about how we need to make wholesale changes to our control environment, but more around our checking and assurance around the execution of controls. So we will be enhancing our internal audit process and team. And we'll do much more checking with evidence in respect of the control processes that are being executed, making sure that we follow that through with underlying evidence as well.

Just on that subject, I've been quietly impressed. I mean, it's one of those situations where, best guide to use, you take all the learnings you can. People have actually been, generally across the division, nondefensive, and all of them we've been looking for incremental gains in pretty much everything, which behavioral, I think, has been really good. It's a horrible situation that triggered it, but it's been behaviorally quite good.

Jonny Coubrough at Numis. Could I ask on NEOM and you flagged the timing of ramp up there will impact working capital investment. Could you give us a bit of sense of what that working capital investment looks like? Is there a big investment in Keller that needs to go in here? Does that involve taking rigs across from Europe or buying new kits? And are you expecting the project to be quite stop start? I mean, how do you think about that in terms of putting investment in the ground?

Okay. I mean, just to give you a bit of sense and color to this, the -- given the nature of this project, they -- it is a huge undertaking. And in terms of the client, they are right at the beginning of this and they'll slowly ramping up and trying to find our way through it. I think the initial stages will be stop start. We will be, I think, a little bit frustrated by that. We will have to work with the clients to make sure that as far as we possibly can, we are working in step with them. That having being said, I think that there's positive endeavors on both sides. I think for the next 2, 3 months, we will be working at a low level of steady state. And my expectation is that as the client trades out -- so it's scheduled more clearly, probably May, June time, we will ramp up again and ramp up quite seriously at that point. And my expectation is that once that ramp-up starts, that it will be -- it will be sustained for a period of time. Now in terms of kit, we spent a lot of time working out what was the best equipment to do this particular job. And we did that off the back of the experience in which we've had in Dubai and doing similar jobs there and elsewhere in Saudi. And it's fair to say that the guys, the work they did upfront in selecting both that and the tooling and the methodology by which they put in the cages is actually paid huge dividends because they've hit the production rates and indeed significantly improved them. And indeed, the quality has been absolutely spot on. So that -- all our planning upfront has actually worked and has put us in a very good position with the client. There are 6 or 7 contractors on site. And in terms of operational performance, we are doing very well. And that will not be lost on the client who is keen. Time is important to the client. They're keen to actually make sure that they hit their schedule once they start it, which is a value to them, which is the sort of thing we deliver. In terms of kit, productivity is high, so in terms of rigs we'll probably buy a little bit less than we originally thought. But I am looking to automate some of the cage fabrication because that's a bottleneck. We knew it was going to be, but it's more of a bottleneck than we thought. And that's simply because the rigs are producing faster so the bottleneck becomes tighter elsewhere. But that is -- the CapEx, I think, is perfectly manageable within of normal CapEx budget. The thing which is going to be more of a challenge and frankly more difficult to call will be the working capital because that will be dependent upon the timing of delivery and how long they take to pay us.

Yes. And I think it goes without saying, we do need to be quite measured in terms of this. It is quite a fluid situation, as Mike has said. And it's -- we could -- we just need to make sure we don't get too much working capital tied up in this and stay on top of the billing and certification, look for advanced payments where we can get them. And with the CapEx as well, it is a new kit because these -- when they are in full flow, they are going 24/6, and it's the right thing, I think, to have a new kit for that project.

I mean, operationally -- just as aside, operationally, this is absolutely fascinating for me because us and all the competitors are dealing with exactly the same task in exactly the same geotechnical conditions and it enables me to look at our operational folks and just do a compare and contrast, which is as an external verification of how confident they are. Actually helps me a lot.

That's really helpful. My other question is on the U.S., and you mentioned that you decided not to go ahead with the P3 project. There seems to be quite a lot of movement on the P3 market there. Is that something that you see as an opportunity? Or is your focus very much on the private markets?

Come again.

P3, public-private partnerships.

USPP, it was a financing instrument.

Yes That was more fixed debt.

And that's simply because the markets at the time when we're going to launch it were very choppy. And we have decided actually now is not the right time. So as simple as that.

Sorry. Back again. I'm just wondering if you could say a little bit more about Canada and the conditions you're seeing there, particularly for this year and also the U.K. around HS2 and workloads and capacitive profiles on the back of obviously what is a fairly big project and pulling in a lot of ground engineering workers from outside the market as well.

Okay. I'll deal with HS2 first. HS2, clearly, there's a whole stack of politics behind all of that. And frankly, the fact it's slowing down and extended over a little bit period, and this has been happening in a practical sense for a little while, I think it's actually good. I think it's good for the project because you haven't got this huge spike, which inevitably would cause even more inflation in terms of some of the key skills than has already been caused. But it also means that as you solely alluded to there, that when this thing goes away, there isn't going to be a huge overcapacity that's going to sink the rest of the market. And I think there probably still will be a little bit of a surplus afterwards but nowhere near as much as there could have been if C1 and C2, C3 were all at peak at the same time. And if that happened, there would have been a massive overcapacity. And that's not happening. C1 is largely -- certainly from our point of view, it's largely complete. They've had some pretty difficult technical challenges, frankly, and they've done them really, really well. C1, in terms of government-run contracts and projects is actually one of the best ones you'll ever see in the world. And the contractual setup actually lends itself to that, to actually people working together. That will never make the press because it's not good news, but it's -- that's the fact of the matter. C2, C3 is now logically following on behind. There's more structures but they're less technically challenging. So that's more about a project management issue than it is a technical one. And I think that is more likely to extend over a longer period of time, and that will be fine, that's good, because we'll just move assets and equipment and people from C1 to C2, C3 as will most of the other contractors, which will be -- we'll smooth it out, which would be good. In terms of Canada. I like Canada. Canada, it's a good market. It's got a good stable economy. You can rely on the law, you can rely on the politics, you can rely on the investment because there's some big cities now with some quite innovative -- different but innovative developments going on. And it's also got -- as a country, they had some quiet barriers to entry for a variety of different reasons, be it language in the case of the Eastern part of the country or be it albeit work permits and, et cetera, or electrical standards and practical things like that. They're just slightly different. Once you're there and once you've proven and you're competent, gradually you can just quietly get better positions, better shares, and that's what we are doing. And even the business which we turned down in the prairies, I think downscaled 2 years ago, even now that's doing very well. And Curtis Cook has done a very, very good job turning that business around, and indeed his team. He's got some good guys working for him.

I still got another one. In terms of -- I mean, it was probably 18 months, if not, maybe 24 months ago talking about kit bottlenecks in terms of the manufacturers. Is that largely gone now and pricing sort of settling back down in terms of the availability of machines?

That's a really interesting one because I think in terms of capital equipment now, there is more availability and more intent by the capital equipment manufacturers to sell you stuff. The challenge actually is spare parts. The one residual thing from post-COVID now, we're getting materials, we're getting -- labor is back. But we've had, I'd say, half a dozen instances in the last year where there'll be an element of a rig. It could be a hydraulic pump or something like that where, historically, they would have been able to get parts on the shelf or the local service center and they haven't been able to get them. PCB boards, some of the control boards, simple things have actually knocked a whole rig out for weeks, and that's impacted productivity. And that's one of the beauties with NEOM. The fact that we've got the kit there, we decided we're getting exactly the same rig. And basically, there's 5 of them there, exactly the same spec. Something goes wrong with one, it's an easy swap. And more and more, I think that's what we'll have to do in the medium term. So generally, availability is beginning to pick up but spare parts and specialist parts is a key issue right now. And that's global. It's -- I'm the same problem in The States as well.

Just to follow up there on a CapEx. How are you thinking about investing in the kit now given regulatory changes that are coming or expected? Are you looking to sweat your current kit a bit harder and kind of wait to invest once you know what the landscape will be?

Yes. I think constantly looking at that. We do have an advantage because we're a global business where stuff can become obsolete in one part of the world because of legislation, it can be utilized elsewhere in places like India and so on. And we do know that, particularly in Western North America, there will be new rules coming in around rigs. So we constantly keep an eye on it. But we don't see yet any -- see change, that means we need to change our principle around keeping our CapEx in line with depreciation.

I think from a technical viewpoint, we are consciously investing pretty much at the top end in terms of the tier spectrum. So if there's a Tier 5, Tier 6 piece of equipment available, be it a rig or a truck, we will typically make that extra investment to go that extra yard. And we are actively working on environmental initiatives, for instance, HVO this year coming up. Each of the business units is tasked with making sure that at least 1 of their projects is using HVO as a substitute for the diesel. Now in Europe, that's pretty easy. In other places in the world, that's not. But the intent is to actually point them in that direction and put them on that train and push a little bit of demand. The other thing which we're doing is you know that we manufacture our own vibro and jet grouting equipment, which is -- what it does is the best in the world. And this year, we are going to be launching the first fully electronic version of one of those KB0E. And that's going to be a push to get it done by the end of the year, but that's what the team are keen to do. And they've been quietly pursuing this the last 2 years or so. And more and more philosophically, they're looking to actually disconnect, if you like, the execution end of a rig from the power source. And I think you'll find over the next few years more and more of the prime movers will move to electric. And it's just a question of what is the power source. Is it a generator, is it hydro set, is it plugged into the mains? And you'll find that it being substituted. Well, thank you very much, everybody. Some really good questions. I was surprised the control issue came up so late. I thought that would be the first question. But it's a good question. It's an important question. I'll leave you all now. We will leave you on that. And thank you very much.

Thank you.