Keller Group plc (KLR) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Keller's preliminary announcement for 2023. Firstly, to safety, there are no planned fire alarms today, so if the alarm does go off, it is for real, and we will be following James out of the building, which we believe there's a fire escape in both directions. Secondly, could you -- could I ask you all to switch off your mobile phones, please? Thank you. We have a great set of results to share with you today, as you will see as we go through them. They're slightly ahead of the consensus, which was established after the trading statement in January. And there are -- as we go through them, some really interesting things for you to see. The results also evidence the step-up in performance compared to prior years. Go through cautionary statements when we go into our agenda. This is our normal agenda. I will give you a summary, and then, David will follow with the detail in terms of the financial results. I'll then go through business performance and our strategic progress during the year and then wrap up with a summary and an outlook going forward before we move into questions and answers. Okay, the summary. Well, frankly, the summary of the results is actually in the banner line, it's been a record performance. And it's -- you'll see that as we go through in all the different measures. Revenue is up slightly year-on-year, but is a record itself. Operating profit is up 80% compared to the average of the previous 5 years, again, a record. And those 2 together serve to actually generate an operating profit margin at 6.1%, which is the highest in the last 5 years, and a ROCE at 23%, which is the highest in the last 15 years. In terms of underlying operating profit, what's the story behind that? Well, that gain year-on-year is characterized by 3 things. The first one and the most material is an improvement in margin in terms of our North American business. And this, we believe, as you'll see as we go through it, this we believe is sustainable because it's basically drawn out of things which are systemic and cultural and which we believe can -- we can carry forward into the future. The second item is pricing resilience at Suncoast, which has been a material nonrecurring benefit in the year. And we'll -- again, we'll talk about that as we go through -- both David and myself, which we'll go through in a little bit more detail a lit bit later on. And then finally, there's been a number of ebbs and flows in the year, which basically offset each other. I draw your attention there to Keller Australia and a disappointing performance in Europe, but frankly, there are a lot more items as you will see as we go through. Earnings per share at 153.9p, 53% up year-on-year driven by the operating profit. And the dividend, the dividend, the Board took a decision to move the dividend up by 20%, evidencing our confidence as we move forward and evidenced in the performance in the year. I stood here last year and I said that we had a good year but not a great year. To quote our Chairman, Peter Hill, he said that, "This year, we had, had a truly excellent year", and he is correct. He's absolutely correct. And what is more, as we move forward, we've got plenty of other ideas how to improve still further as we move into the future. And with that optimistic summary message, I'm going to hand you over to David, who will take you through the financial detail.

Thank you, Mike, and good morning, everybody. In the financial results section, the key highlights to watch out for today are the outstanding underlying operating performance. So I'll share with you the year-on-year movement. Followed from that, the very strong cash generation compared to last year and the result and strong balance sheet. And finally, we'll go through some look-ahead modeling considerations for 2024. Okay. Let's start with the P&L. So this is the full P&L showing underlying operating profit of GBP 180.9 million, nonunderlying of GBP 27.8 million, with a resulting statutory operating profit of GBP 153.1 million, an increase of 126% versus 2022. So let's look at underlying first. Just on revenue, not a year of big growth for us, year-on-year 2023 increased by just GBP 21.4 million, a little over 1%. Volume was down in North America by 6.4% due to the drop off in revenues following the completion of the large LNG project in RECON and the reduced volume in Suncoast driven by the contraction of the residential sector. Despite tough market conditions, Europe did increase revenue by 4.2%. AMEA increased revenue by 34.1%, driven predominantly by large infrastructure projects in Australia and the execution of the first work order on NEOM. We are very pleased to see our underlying operating profit increase by 67% and our margin rate increasing by 240 basis points to 6.1%. I'll bridge that operating profit performance in the next slide. Net financing costs increased by GBP 12.4 million, driven by increased interest rates with average borrowing levels reduced year-on-year. Taxation at GBP 38.8 million is at an effective rate of 25%. That has increased since the interims due to the mix of profits coming from the U.S. The underlying earnings per share has increased by 53% to 153.9p, driven by the improved underlying profitability with higher finance costs and increased tax rate, preventing the full profit increase drop-through. The Board will propose a final dividend of 31.3p to the May AGM, bringing the total dividend to 45.2p, a 20% increase on 2022. This significant increase underpins the rebase of the group's profitability and outlook. We'll now move on to the operating profit slide bridge. So moving from left to right, starting with last year's underlying profit of GBP 108.6 million, there's no FX impact due to the average rate alignment between '22 and '23. And coming to the North America division first, which is up GBP 88 million year-on-year. The first block of GBP 77.5 million relates to foundations, represents a phenomenal turnaround for the business after the issues of 2022. This improvement is predominantly margin-driven. Following the actions put in place in the second half of 2022, we now have a better quality business being delivered through more disciplined bidding, excellence in execution and variation order management. There are three jobs that contributed higher than normal margins, but the impact of these was offset by increased legal claims, loss on legacy jobs and a reduced performance from our Canadian business. The next block on Suncoast, where overall volume was down due to the general residential market, but pricing proved more inelastic compared to the lower strand input cost in the high-rise sector, resulting in a significant level of improved profitability. RECON is down year-on-year following the completion of a large LNG contract, which was a significant contributor to profit in 2022. Now turning to Europe, where it was GBP 27.8 million down overall with the backdrop of tough market conditions and specific contract execution issues. Volume was up by GBP 3.7 million, but contract issues in Norway and Sweden had a significant adverse financial impact of GBP 17.3 million. Mike will talk later about the actions taken to turn that around going forward. The market in Europe was particularly tough, leading to margin contraction across other business units of GBP 11 million, as the residential and commercial sectors remained challenging. We pull out Northeast Europe separately, as it was a tough year of volume and margin wise with the specter of the Ukraine war looming and the dampening effect of the October elections in Poland. The AMEA division was up GBP 16.2 million with well-executed infrastructure projects in Australia, delivering a great year-on-year performance for the business. The AMEA region, including NEOM, traded very well with Work Order 1 delivered in H1. The profitability was impacted by standing time as we await the second work order on NEOM, The Line. On Austral, as highlighted at the interims, the business has turned a corner after the issues of last year. The legacy contracts have been worked through, and the business has generated good profits in the second half, resulting in lower full-year losses year-on-year. AMEA Other is predominantly made up of the ASEAN business, which reduced volumes [Audio Gap] the GBP 4.1 million of central items is predominantly driven by increased professional fees for the investigative and subsequent control work after the Austral fraud and the swing in senior level bonus and LTIPs, given the low levels in 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. The analysis buck shows the items that make up to GBP 27.8 million, down from GBP 40.8 million in 2022, which we have split between cash being predominantly ERP and restructuring comprising of market exits from Egypt and Kazakhstan, and noncash being acquired intangible amortization and the impact of GBP 12.1 million on the impairment of goodwill on the U.K. business with us applying a more skeptical view of the forecast and the current markets and the impact of reducing HS2 volume. Now moving on to talk on cash. This page shows the summary net debt flow from underlying operating profit down to net debt. We are really very [Audio Gap]. Looking at the trend, you can see we had a storming second half and that the GBP 146 million level was delivered on the back of strong cash collections. There is covenant detail on the slides, and we are well within all our key metrics. We also set out our facilities. And at year-end, we have GBP 425 million of undrawn borrowing facilities and cash of GBP 151 million, so a really strong balance sheet as we look to the future. The next slide shows some look-ahead modeling considerations. North America Foundations, we consider the operational improvement in 2023 to be sustainable. Suncoast, pricing will normalize, so the associated margin levels of 2023 will not repeat. Europe, the market generally will continue to be tough, but we do expect improved project performance in the Nordics, given the actions taken. Austral, we do expect a full year of monthly profits. And Australia, we expect to drop back to normalized trading levels given the reduction in government spending. We are in 2024 going to restructure the divisions, just impacting Europe and AMEA. So we created a division called EME, being the Europe division as now plus the Middle East and NEOM, and following our decision to exit Sub-Saharan Africa, and then APAC being India, ASEAN, Keller Australia and Austral, and there's a slide on Page 28 of the pack that shows 2023 in the new structure. On cash and debt, we should be towards the bottom end of our range throughout 2024. That's it for me. Thank you for your attention. I'll now hand you back to Mike, who will take you through the business performance.

Thank you, David. Okay. I'm going to start with safety. Safety, John Raine and the team, I think, have had another very, very good year. Accident frequency rate of 0.1% is flat year-on-year. That represents 27 accidents across 10,000 employees for the whole year, 10 of which we classified as critical, which is actually quite a high bar. Similarly, TRIR has come down. We've had fewer recordables this year, which is very pleasing to see, and we have been increasing our monitoring in terms of near misses and leading indicators as well. When you look beyond that and you look at some of the actions we've taken, it's very pleasing to see that the assurance program, which we've invoked is actually proving to be very successful. This is basically making sure that all of our processes and standards are actually embedded in the company. And I think this process of trust and then verify will be something which we will implement across various different functional streams, here it's working particularly well, and it's pleasing to see that with a few exceptions, things are actually embedded. Global Safety Week, we ran for the second year, that was incredibly successful. I was actually traveling at the time, came back and came to a whole host of very positive feedback from employees at various different levels. It actually did achieve what we set out to do, which was excellent. And you can see there, we continue our support both of UNICEF and also of Keller's own foundation, which is supporting our Ukrainian employees and their families. And both of those initiatives are enjoying both financial and indeed personal support. In terms of another aspect of ESG, carbon reduction, some very good progress here as well. If you look at Scope 2, we're now 48% below our threshold that we established in 2019. And this year, we're very confident we'll get through that 50% threshold. And that's ahead of our target in terms of becoming net zero by 2030. Similarly, with Scope 1, some very good reduction there, a 20% reduction year-on-year from recollection. And that's measured per pound of revenue, some of which was actually helped by the mix of product, but also there's actually a good push in terms of the use of different materials, but also the use of electronic rigs, and you can see there the KB0-E, which we launched during the year. It's actually proving to be much more successful as a prototype than anybody thought, so we're pretty hopeful there. And then finally, Scope 3. Scope 3 is the biggest element we can attack, but it's also the most difficult. There's been lots of training going on there. There's been lots of workshops in terms of material substitution. And I think -- quietly, I think in the next 5 years, we can see a lot more progress with that, but it is something which you have to influence more stakeholders and that will just take a little bit more time. Moving on to the order book. This is more or less record levels, just below the absolute record. And pleasingly, it's a good mix of steady run rate business in all divisions, it more or less covers us for 6 months, and it sets us up well as we go into 2024. So I'll come back to it in a moment. This is in a good position to start the year. Moving on to North America. This has had -- this division has had a really, really good year, tremendously pleasing. Coming off of 2022, which the first half was very poor, they put in place a lot of actions in the second half of 2022, which worked the way through the order book and basically came to fruition during 2023. And that's what you see in the results today, the work that was put in place in the second half of '22. And this -- I'd repeat earlier on, this covers the 3 different aspects which I talked about earlier. You've seen a major step forward in terms of performance of foundations, the block of the bridge line, the GBP 77 million, that's a big step forward, which we believe is sustainable. Why do I believe that? Well, because if you look at the list there, the introduction of standard operating procedures, that's endurable, that will last, improved project performance and project reviews. More and more, that's getting embedded in the psyche and the DNA of the management. System for tackling variation orders, that's just bringing more discipline about the way in which we follow up changes to the requirement given to us by the client. And they can be the forced changes or requested changes. Again, it's more systemic. It's more repeatable. And we've changed a number of the business unit leaders to hone on commercial as well as technical skills. And all of those things in combination have driven up -- forward driven up performance. And, as you say, all the things by character are things which will endure. The second feature of the results has been Suncoast, where the strand prices decreased in the year, and we've been deliberately quite slow in passing that benefit on to clients as have our competitors. So we haven't lost any market share, it's just been something which we've all gained a small -- say, smallish GBP 22 million, GBP 25 million worth of benefit in the year. But it's been transitory and it won't -- as margins normalize out, it won't repeat in 2024. And then finally, there's been a lot of pluses and minuses. Canada has had a sort of relatively poor year. We've had the benefit of the 3 projects, which David mentioned earlier. And there's been some legacy legal claims. So there's been puts and takes across the patch, which have more or less offset each other. But overall, North America has been a very, very pleasing set of results, and hats off to the team for their achievement. Moving on to Europe. This in contrast has been somewhat disappointing. The market in Europe has been very tight. It's been very atrocious. Volumes are down. People have been scrambling for market share and that's forced pricing down, which overall has led to a margin squeeze. And frankly, it's been a little bit more difficult in that respect than we had anticipated at the beginning of the year. I'm sure we're not alone in feeling that squeeze. On top of that, however, we've also had some self-inflicted wounds in the Nordics. There's been a number of projects there, which haven't been executed as well as they might have been. And in terms of cost management, again, there's things which we could have done better. Now the good news with that is the fact we've taken steps to correct some of those things. Some of those will be instantaneous in their impact. Others will take time to work through in 2024. But that, for us, represents an upside. And I'll -- I'm sure that we will see a significant rebound in the European results as we go into 2024. That said, we're not expecting any favors in the market either. There have been pockets within Europe that have done very well though. Central Europe, yes, there's been a big challenge there in terms of markets, and the team there have pivoted from their traditional work in terms of residential to doing more infrastructure work, and elsewhere across the Southeast Europe, there's been some very, very good, challenging, but good results coming out of the operation. So it isn't all bad, but it's something which we can definitely improve upon. In terms of AMEA, AMEA at the end of the year basically ended up where we thought it was going to. And overall, after a disappointing start in terms of Austral, it's -- the year has actually ended very well. If we go through the different business units, Australia had a boom time in terms of infrastructure with a lot of both federal and state sponsored infrastructure projects at probably at record levels, and they executed them very well indeed. So you had high volumes at a high conversion, which was brilliant. Austral, they worked on their legacy contracts in the first half, and there was losses. Second half, they turned to profit, and that profit we believe is going to be sustainable all the way through 2024. So again, this can be a turn around there. You go through ASEAN and India, steady performances. Middle East, a steady performance. Middle East, of course, had the benefit of NEOM in the first quarter of the year. And we're waiting for further news on that front. That having been said, we have won an order for Trojena, which is an $80-odd million project, which we'll execute during 2024 and complete in that period. But overall, AMEA is in good shape as we move forward. Moving on to strategic progress. This is our strategy slide, which is unchanged since 2019, in fact. And if you look at the 2 paragraphs, the first one really directs as to where we were going to do business and what the circumstances were will turn up. And the second piece is how we actually execute our business and how we go about converting it. If we look at what we've progressed in 2023, you'll see that we've had further steps we've taken in terms of shaping the business and we've been both organizing our existing business in terms of reshaping the business units in North America and basically pulling together business units of similar character, and therefore, making them more effective and more efficient. But also, in terms of the decision to pull out of Egypt, Sub-Saharan Africa and other activities, we're basically withdrawing from businesses, which, from our strategic point of view, don't give us the right level of returns. You'll see there in the performance section, some of the things which I've already talked about in terms of the performance in North America, Australia and the turnaround in Austral and the actual pricing control around Suncoast. I mean it's not a trivial thing. The team -- Tim and the team there were very disciplined about the way in which they split out the market and gauged the market sensitivities and actually slowly gave ground there. 4 years ago, that wouldn't have happened. They would have just immediately given up pricing. So the team there is maturing quite nicely, which, yes, from my position, I think, is very good indeed. Looking forward to '24. I think there'll be continued refinement of the portfolio, both in terms of where we play, but also how we structure ourselves. David made reference earlier on to the structural change. And that's really a refinement to again to make this more effective in terms of our management span of control, and therefore, execute better. There will be targeted acquisitions if we manage to get things which we like at the right price. But clearly, we'll maintain our discipline over that. And in terms of performance, clearly, having talked about 2023, there are opportunities which we can improve in '24. Europe is undoubtedly top of the list. We'll see a continued turnaround in Austral as well. There are other opportunities which we can improve year-on-year. And there are opportunities where we continue to embed best practice across the group. So some of the things we've learned in North America, we do fully intend to systemize and run out across the whole of the group and make sure we're getting that benefit everywhere, again, making it more embedded and more sustainable, and you'll see that encore, after encore, after encore in terms of that approach. So moving on to the summary and the outlook. 2023 summary, it has been, as the banner says, a record performance. So we're very pleased with that. It has been drawn from a sustainable improvement in terms of the North American Foundations business. We have had the material nonrecurring benefit of Suncoast. But again, I'd hold that out as something which I'm particularly pleased with, albeit that it's transitory and has been an ebb and flow of other items. Now, those items do provide us with further opportunity to learn and improve, and we want those. We will take those opportunities and exploit them as we move into 2024. And pleasingly, the rebasing of the dividend by 20% evidences the Board's confidence as we move forward, it evidences the performance in the year, it evidences the cash flow that we've generated. All of those things give us the solid confidence to make that decision, which at the Board was actually a very short discussion. People could see the rationale and the logic for doing it and it's actually quite an easy decision for the Board to take. As we move into '24, we have got a strong momentum. No doubt about it. We are cautious in some respects because there's continued political and macroeconomic uncertainty. But most of the places we operate around the world, we've got an election this year. And some of those elections undoubtedly will have impacts. That having been said, we've proven ourselves to be agile. We've got ourselves a good strong business momentum in the -- coming into the year, and we've got a good order book. There's no reason to believe that we won't be able to weather that. We just have to be mindful of it and respond accordingly. We also have a number of self-help initiatives, which, as I mentioned earlier, we will learn from our mistakes, pick ourselves up and move forward and improve. And we will continue to refine the shape and structure of the business. Strategic execution will continue both organically and through targeted M&A. And in doing so, we'll be busy building the foundations for a sustainable future. I think drawing strands to a free line conclusion, we've had a record performance in 2023. We've got a strong momentum as we move into 2024, and our strong balance sheet and our proven strategy sets us up well beyond that. And with that, we'll open to questions.

3 questions from me. Firstly, clearly, a big increase in the North American EBIT margin to 9.6%. Can you just talk around the dynamics that EBIT margin in '24, specifically how much exposure remains on steel strand? Are there any particular areas of strength and weakness within it? And secondly, U.S. nonresidential. Do you feel you're getting more than your fair share of work in that market or in line with the market? And then thirdly, on the Foundations business, clearly, a huge step-up in profitability year-on-year. A lot of focus on more disciplined bidding. Are there any points in the commercial contracting or pricing that still worry you? Or did it give you kind of opportunities to improve that discipline further?

Okay. In terms of the North American margin, if I answer these, and you chip in with any additions. In terms of North American margin, clearly, this year has benefited for the whole of the division. It's benefited from the pricing of Suncoast, and that is now abated. It's one of those things, which ebbs and flows every 4 years or so. So you will see it coming down from that peak. I would expect our margins in North America going forward to be in the 7% to 8% range on a sustainable basis. So you'll see it coming down in 2024 into the top end of that range, I think. So from that -- and I do think that given what we do, with the North American market being as strong as it is at the moment overall relative to the rest of the world, I think that imminently possible. In terms of your second question, was it nonresidential exposure you are referencing? The nonresidential exposure -- I mean, we operate in North America in lots of different sectors, and we are reasonably agile actually moving between those sectors depending upon what the technique and where you are in the U.S. So from that point of view, having exposure in any one area, it doesn't limit us. I think at the moment, you're seeing in North America, there's a lot more activity in Southeast than there was certainly 2 years ago along the coast line. You're seeing a lot more activity in terms of microchip fab plants, the likes of some of the electrical, automotive and battery type plants coming on board. Some of those specialist industrial units, you're actually seeing it more. You're seeing less warehouses being built, less logistics centers than probably 2 years ago. I suspect that's a hangover from COVID. But as I said, we're just pivoted to where we need to do. I think one interesting feature from our point of view, which I have observed is there are more clients who are time-sensitive in terms of delivery. And that's certainly -- I don't know whether it's a permanent feature or not, but it's certainly something which plays to our strengths at the moment. And then foundations, contractually, we are in a business where you -- in some way, shape or form, you're taking on unknown risks in terms of ground risk. And I mean, frankly, that's how we make money by managing those unknown or known sort of clients. What we do try and do though is everything we do know about as far as possible to either contractually or operationally mitigate those risks and manage them as much as you can. And some of them like weather risk, for instance, you all know that in certain parts of the world, you will have certain weather patterns and you make best estimate of what that impact will be on your business and your production. And sometimes the weather will be better, and we have a bad production rate, sometimes it will be worse. There's nothing you can do about it. You just have to deal with it. And those sorts of things, you know about, and you have to make a best estimate for. Others, in terms of ground conditions, you don't know until you hit them. And in some places, you can protect and claim. In some places, if it's just a productivity rate, we just have to manage it. I don't think that's really changed. What we have got tighter on, especially in North America, though, is rise and fall of materials, and that has got a lot better. I think the only thing which is still out there in that respect is delivery, and that's something which is actually quite difficult to manage, especially in terms of short-term supply losses and then concrete in aggregate.

Yes. I think, yes, that last one in terms of getting materials on time, so there are schedule -- we can work to schedule is just trying to contractually protect ourselves with that on the longer-term projects. I think on the short-term ones, there's not much contractual protection around that, so -- and that really did hurt us in 2022, but that's abated really in '23.

I would say the teams are actually a lot sharper, and this is across the globe, but particularly in North America, a lot sharper at managing those. One of the contracts, which -- projects, which David referred to earlier, 1 of the 3, the key to that project was actually securing the aggregate. It's like a lot of building materials. The cost of transport is a large portion of the actual cost. So the closer you can get the supply, the more opportunity and more margin you'll have. And they were pretty ruthless in tying up all the quarries and sources before the bid went in. So we're pretty confident we were well placed for that before we even started. And that was good because they had multiple sources and weren't dependent on any one place.

[indiscernible] idea on pricing and how things are evolving, and you obviously referred to Europe being quite difficult basically. It would be useful to get a bit of an update as to how that fell through. Clyde Lewis at Peel Hunt. And just on pricing, again, I suppose, just the more of a general catch up just as to the trends through the back half of last year and how this year has started to be quite useful to hear about. Secondly, on acquisitions. I mean, I suspect it's going to be very North American focused. Given your higher profitability and margins and performance across lot of the groups, is the bar now easier to hit in terms of finding deals that make sense. And again, it would be interesting to hear about what seller's expectations are like around their expectations on price. And the last one is on European margins. Obviously, just give us an indication of where you think North America would be. Where do you think Europe can get to on a sort of a medium-term basis in terms of sort of margins, some of the if's in terms of sort of geopolitical issues, but any sort of help there would be useful.

Okay. In terms of pricing, I think North America, I think, is the firmest end of the spectrum right now. This is quite interesting because Australia, Melbourne and Sydney, I'd say, 12 months ago, they'd run out of capacity of certain service lines [indiscernible] and high-power CFA, there was no more capacity left in the market. So you could -- if you had a machine, you could name your price. And that's beginning to abate a little bit now. And that was 12 months ago. That would have been the place where I would have said pricing was at its peak. North America, I think, is actually generally in good shape. On the West Coast, it's still pretty soft in certain areas, especially in California, but elsewhere, people are busy, and nobody is buying work. And there's been 1 or 2 contracts in the North East in terms of infrastructure projects, which have been reasonably challenging, where there almost haven't been enough bidders on public tenders to make the actual process valid. So it just shows how much is out there. So I think North America is okay at the moment. It's not glorious, but it's okay. Europe is tough. Europe is very tough. Volume is down. There's a surplus of capacity in a lot of places, and people are fighting for market share. And I think we'll see a bit of a shakeout. And indeed, some of our competitors we know are into places, and frankly, we understand that. A lot of that's because their geographic exposure as opposed to ours, but it's a tough gig. And then across AMEA, we tend to focus on individual projects there, which tend to be the more technically challenging ones. And therefore, we are -- it's not necessarily as price sensitive as it could be. I think Harry and the team in India have done a very good job on winning 1 or 2 public tenders by this much compared to the level 2 competitor, which to me evidences the fact that they do show astute cultural awareness and commercial awareness as to where to pitch their pricing because that is against other competitors. And they just reverse engineer what they think people can achieve with the same -- given the same circumstances. So overall, it varies quite a lot. In terms of acquisitions, you're absolutely right, North America would be the right place for us at the moment. We have been looking at some opportunities. We've got probably half a dozen that we're looking at, at the moment. We do have a gated, disciplined process. And to date, for a variety of different reasons, things have not made it all the way through that process, and we'll continue that discipline. North America has more opportunities, and they're all -- it would be easier to assimilate. And the business is in a good shape, whereas Europe, frankly, I'd rather get it back on stream and working well before we look at anything there. European margins, do you want to talk about European margins?

Yes. Yes. I mean, obviously, a very disappointing 2023. But we do expect that to turn around in '24 just by virtue of eliminating some of those contract issues in the Nordics. I think from an ongoing perspective in the short '24 to '25, '26, getting that up to between 3% and 4% margin is kind of where we're aiming at.

Lewis Roxburgh, Investec. First question is just on NEOM. And obviously, you've got that $80 million project for Trojena, but just looking sort of more long term, what's the sort of total market opportunity there. I know that you're being sort of conservative and committing to work, but it would be very helpful just to get an idea of the total opportunity for NEOM. I'll take it one by one.

Okay. NEOM is incredibly difficult for us. The project itself, the whole vision of NEOM is split up into 7 or 8 different subprojects, and each of them have different opportunities in terms of structural foundations. Trojena, which is the one I've referred to earlier on, there's an [indiscernible] up there, which very few people could actually do. And it's up in the mountains, and it plays to our strengths, and we'll make reasonable money out of that. And it's a discrete piece of work, which has to be done before they start building the ski resort. And there will be other elements like that in other bits of the project. The big one, which we talked about -- which we executed at the beginning of '23, the Works Order 1 on the line, that particular piece that they are -- they've moved the area of operation to what's known as the hidden arena, which is closer to the goal from where they feel like the most prestige part of that development will be built. But before they start work, they have to remove something like -- it varies between 30 and 40 meters worth of sand before they can get down to the level where we'll actually be working. And they're busy doing that now. And because it's close to the sea, they have also got to do water extraction because it's below sea level. And it's a massive, basically, footfall they've got to work with through. So in terms of when that starts again and who gets all the awards beyond the 4 that they've already awarded, it's a bit of wait and see. And what we're doing is being agile and responsive to that, and the kit that we had working on Works Order 1, all but 3 of the people and all but 3 of the machines are being redeployed on other work. And what we will do is we will wait and patiently see what comes out in terms of opportunities. And if something comes at a particular price that's attractive to us and terms we agree with, we'll go and execute it. What I don't want to do is become slowly sucked into it and dependent upon it because that would be a waste of the company's resources. And we have to be conscious about the opportunity, but also how it's executed because it has to be done the right way as well.

Second question is just on Europe. Just how much of that sort of disappointment on performance was just due to one-off project issues versus just continued weakness across the market? And how does that sort of translate to the outlook moving forward in that region? And also just you mentioned that it's a difficult environment, potential shakeout, could you see potential consolidation in that area? Are you just looking exclusively in the U.S. at this point for any acquisitions?

Do you want to do on the business?

Yes. I think in terms of the -- just the specific contract issues, I just look at the number in the bridge of GBP 17.3 million and just eliminating that. I think the market itself is much harder to call. It has been pretty grim in Europe during '23. And we don't see that changing all that much actually in '24. And as I said, I think we're kind of aiming for '24 to be between that 3% and 4% margin level.

Joe Brent at Liberum. I will ask 3 questions and maybe take them in turn. Firstly, on the dividend, clearly, a big increase there. Could you just remind us what your dividend policy is, please?

Our dividend is -- policies historically been -- you could phrase it as paying the dividend throughout the cycle because the world in which we work is cyclical, and there have been ebbs and flows over time, but we've always kept the progression to that dividend. And I believe it's just the CAGR for the last 30 years, it is just under 9%. And every year in that 30 years, we've paid a dividend through thick and thin. And step up by 20% this year, recognizes a step change in the business from here on, and we'll continue to progress it. And traditionally, that's been roughly 5% per year.

And secondly, on Austral, clearly, a turnaround opportunity there. Can you give us a sense of the performance in '23 and where that performance could get to in steady state?

Yes. So I think we had a tough first half just walking through those legacy contracts. But the management team did a very good job, swiftly organizing themselves such that by the time we hit July, we started to have underlying operating profits, and we expect that to carry on through to -- carry on through for the full year in '24. So it's roughly GBP 100 million business, and we expect decent margin from a general contractor type business.

They're in a good place. It's been -- it's one of those really interesting things when you got fresh pair of eyes because Deepak Raj, who has gone in there, he used to run India, then ran ASEAN, then ran Austral. And he challenged a few of the people in terms of some of the -- way in which they are pricing certain emergency jobs. And he just showed them how far they could push you and what the value was to the client as opposed to the cost to us, and it makes a hell of a difference. People got their mojo back pretty quickly, which is good.

And then finally for me, please. On working capital, going back to '22, you had a GBP 110 million outflow and then '23 seems to be more normal. Just wondering what would you expect for '24 and '25? Is that any reversal from what happened in '22, still to come? Are we now in sort of normal?

I think we're now into normal. There was a bit of a flip actually between -- in '23 between the inventory. We had excess inventory at the end of '22, which did come back, and then, we kind of normalized out our payables during '23. I think from now on, it -- that's the normal profile. And if we continue on the level of growth, low single digits, I'd expect that -- the operating profit that's coming out of the business to be dropping through into cash.

So the working capital sales ratio should be constant at the '23 level.

Yes.

Jonny Coubrough from Numis. Congratulations on the excellent year firstly. Could I ask on the capital base of the business? Capital returns materially improved the past few years and -- presumably that the benefits of topline inflation on a well-invested capital base. But at what point do you have to start investing again because presumably kit is becoming more expensive as well? So can you sustainably keep CapEx in line with depreciation without -- unless you're moving to much less capital-intensive applications, which you may be, so just your thoughts there, please.

I think our policy is to keep our CapEx in line with depreciation. And I must say from the business, we don't have people clamoring for more CapEx. So we don't feel we need to change that. And the return on capital employed kind of keeping that over 20% is kind of where we're aiming for. We've had an exceptional year in '23. But I think going forward, it's around that level. But we don't feel like we've got -- we're building up a head of steam whereby we've got to go and reinvest in our CapEx.

To an area where we are in the next 3 years, I think we'll be doing a lot more thoughtful management if put it that way. Our CapEx, we had -- to my knowledge, we've never turned down a project which made sense. From a capital rationing point of view, that's never really constrained us. But what we do need to do is to be more mindful as to the mix between generalist equipment and specific equipment and what we rent and what we buy. Because if you're in a remote area where demand peaks and troughs, it's far more sensible to hire the equipment and then return it. If you've got steady state, for instance, CFA in Miami, we own all the equipment there and with the teams actually getting a lot smarter at making those decisions. But if you take, for instance, the assets which we bought in NEOM, those 8 rigs were slightly more expensive because they were generally equipped rigs, and they were pretty high specced, but we knew that derisked them because you could redeploy them, which is what we've done. So instead of having 8 rigs, which are stranded assets, you've got 8 which are highly useful and can be redeployed. And those sort of decisions were historically. When I joined the company, we're having asset impairments and write-offs quite regularly, and that's decreased.

Perhaps a follow-up question to that point about NEOM buying general equipment. In terms of the rejig of the divisions, putting Middle East with Europe, I think the strategy for kind of large, lumpy projects?

It's certainly an area where we have -- we intend to have permanent establishments that run great businesses, and it's not all about the big projects. And clearly, NEOM was a step out from that, but both Saudi and the Emirates have a reasonable volume of medium, small size projects, which in the UAE, in particular, we've had 2 years where we've executed them really well. The Middle East has been an underperformer for Keller for the last 5 years up until the last 2 years, where we've actually -- beginning to get back on pace.

Yes. I think we've honed in on the Middle East as part of the restructure because we are disposing off the Sub-Saharan Africa. So we use the [ EA ] in the Middle East and Africa as part of this. And I think that's all part of the fact that we are just hunkering down in the higher profitability countries in that region.

Last one for me. Great to see the increase in the dividend as you say. I mean, in addition to that, given the delevering of the business, given the free cash flow profile and how attractive the shares are, is the most accretive thing you can do today not just to go and buy back your shares and shrink the share count?

I think that's a really interesting point. I think all things being equal, in terms of the capital allocation, there are clearly a number of different opportunities that are available to us as we go through 2024. And I don't doubt as we get into the second half that the Board will have a considered discussion and decision on some of those options. Clearly, we've got some M&A opportunities, which we wish to pursue. Share buybacks versus supplementals, it's really a function of value versus the share price at the time. I don't know, buybacks are now back in vogue. And we'll kick those ideas around later in the year. I think it is a -- what it highlights, though, is what the strength of the balance sheet and the fact that we are in a good place. I mean my trading remarks there, we are in a good place because we've got a strong balance sheet, and we've got a strategy which we know works. It's worked organically and with a bit more M&A, we can add a bit of a turbo of it. I'm very confident. Well, thank you very much, everybody. Some very good questions. I enjoy the Q&A better than the presentation piece because it's -- it brings you more to life a little bit more. So thank you for that, and thank you for your attendance on what is a very busy day for everybody. So thank you.