Kier Group plc (KIE) Earnings Call Transcript & Summary

Well, good morning to everyone, and thank you for joining us today. Welcome to Kier call following the full year results 14 days ago. My name is Robert Irvin of RMS Partners, and I'll be hosting the call today. With me on the call from Kier are Andrew Davies, you can see there online; and in the room, Simon Kesterton, CFO; and Andrew Collins, Investor Relations. Before handing over to the team, some housekeeping points. There'll be a short presentation first and then we'll be taking questions following that. Some attendees have taken the opportunity of sending their questions prior to the meeting. But if you do have any questions, then please do type them into the Q&A box by clicking on the button at the bottom of your screen at any time during the presentation. Now I'd hand over to Andrew. The floor is yours. And my colleague, Adam, is driving the slides.

Thank you, Robert. Good morning, everyone. Andrew Davies here, I'm the Chief Executive of Kier Group. If I take you through the FY '23 financial highlights and then just give you an update on our medium-term value creation plan. Then I'll -- first, I'll ask Simon to talk through some of the more detailed points, in particular relating to our cash position and also relating perhaps to our pension position as well. But starting on the FY '23 highlights. I mean, FY '23 was a very good year for Kier. We had good revenue growth of 5%, and that was driven really by strong operational performances in many of the markets in which we operate in. Obviously, we operate in those markets predominantly for government and our frameworks. And if you perform under the frameworks, you get opportunities to get new contracts under those frameworks. So the revenue growth was strong. It was most strong in Construction, where we had a 15% growth in their revenue. And that back ended as well. As we saw, many of the contracts negotiations, which have been delayed historically over the last year or 2, which we did inform the markets of by inflationary pressures on budgets and budget assumptions, sort of working through the system as we see a more realistic approach to setting budgets by the clients, and therefore, quicker 2-stage negotiations, and therefore, getting spades into the ground and delivering thereafter the cash. So particularly good growth in Construction backed up by the strong order book, which they out of the group have. We're seeing that continue as we tie the results into the first 3 months of this year. So operating profit was up 9% to GBP 132 million, and that produced the margin at the adjusted operating level of 3.9%, which is ahead of our medium-term target of 3.5%, which we set out in 2021. There are some mix issues going on within there. We're having -- at the moment in our Transportation business, in the Highways sector, we're seeing a preponderance of design effort in the capital works programs for national highways. That's a higher-margin piece of work, albeit at low. And what we'll see in the future is that converting into production, which will have a lower margin, but higher turnover. So you get a better return against your overhead but you get a lower return against the work done. So there is a little bit of mix there, which we think probably 3.9% will soften a little bit, but still be comfortably ahead of the 3.5% target which we set, as I said, back in 2021. Cash flow is particularly strong, GBP 132 million. That's a cash conversion of 130%, and that really did follow a very strong quarter 4 performance, and Simon can talk a little bit more about that later on in the presentation. And it produced the net cash of GBP 64 million in the year-end, which was significantly ahead of the GBP 3 million we had in FY '22, particularly so when you consider that we paid -- repaid the supply chain finance facility called KEPS, GBP 50 million was repaid of that. So extremely good cash performance in the business. Really, our cash position now is very, very clear, and Simon can explain what our approach to that is going forward later on. Average month-end net debt was GBP 232 million, slightly higher than the last year. But that, again, as I said, was after having paid off the KEPS facility -- the average KEPS facility. Again, Simon has got a slide, which he can explain that more fully to everyone on the call. But based on the strong operational performance, the good cash performance and having now paid off all the debt-like items, which we had last year, we can see a very strong future on cash flow. And that's giving us the confidence with the order book as well in the operational performance to be able to declare and resume dividend payments in FY '24, which will commence with an interim dividend after the half year results sometime after March next year when we announce them. So as said the order book remains very strong. Kier remains operationally a very good company, good relationships with clients, very strong framework positions which we convert into the order book position. We don't include those frameworks in our order book. We only included if they contracted or in a 2-stage sole-source negotiation. But as you can see, a 3% increase -- net increase in order book to GBP 10.1 billion, providing significant visibility certainly over FY '24 and thereafter into '25 and '26 as well. And this confidence as well has allowed us now to use the balance sheet to take advantage of an opportunity to acquire the assets of the former Buckingham Group in their Rail division. The Buckingham Group went into administration due to issues in their Construction and Leisure division relating to the construction of sports stadia and football stadia. The Rail division had many contracts operating for Network Rail on CP6, performing for EKFB, our joint venture in HS2 in the Chiltern region as well as operating for the West Midlands Regional Counsel, and will also fulfill pre-existing customers of ours. So it's a great opportunity to climb very quickly, allowed us to retain 180 highly skilled people out of Buckingham, preserve those jobs. And as we said, in our announcement, has allowed us to sort of hopefully forecast to trade between GBP 50 million to GBP 75 million of revenue in the rail sector in the forward year. So a great acquisition, quickly executed, preserving 180 skilled jobs. But even in a great position within Network Rail and CP6 and then into CP7 on the bids and accelerated our strategy in our Transportation division for the Rail business. So if we move on to the next slide, if I could please. Just reprise of where on the medium-term value creation plan. We said in 2021, we were aiming for a forecast revenue of GBP 4 billion to GBP 4.5 billion. We raised GBP 3.4 billion despite the delays I referred to over the last sort of 12, 24 months caused by inflationary pressures on budget assumptions. We're not seeing contracts going, but we are seeing -- we were seeing certain deferrals. But that's worked through the system now, and we're seeing much quicker 2-stage negotiations getting us into a situation to get spade in the ground, in particular in construction, which has allowed this revenue to grow with all the intended cash benefits as well. So if we extrapolate forward on that, we feel confident that we're on track to achieve within the 3- to 5-year time scale we set that GBP 4 million to GBP 4.5 billion budget -- GBP 4 billion to GBP 4.5 billion revenue target. We are hitting our adjusted operating margin of 3.5% to 3.9%. There are some mix issues going on there, and we'll be happy to take any questions on that. We see perhaps a slight softening of the 3.9%, certainly comfortably above 3.5% going forward as well. So we delivered that target. Cash flow conversion, we set a target of 90%. As I said, we achieved 130% this year, very strong cash flow, in particular, back ended in Q4 as well. So we're hitting that target. And then the month end net cash position, having now paid off all the debt-like items, whilst net debt did go up GBP 232 million, and Simon can explain that more clearly with a slide, it is an extremely good cash position. And having cleared away those items now, all of the cash generation will now be focused primarily on paying down the average net debt. And we're seeing that into the first 3 months of this year. So we feel comfortable we're on track. And that confidence has then, as I said, given us the confidence to announce a sustainable dividend policy and announce the first dividend and interim dividend in FY '24. So whilst we haven't achieved that, we are certainly on track to achieve it as well. So with that, perhaps I can just hand over to Simon to pick up on a couple of the cash flow slides and maybe then talk through the pension situation as well.

Yes. So we will move to Slide 13, which really illustrates the debt and debt-like items have moved. So this slide shows the history and yes, it looks a little bit forward as well in terms of our month-end net debt and, of course, our debt-like items, which if we go back to 2021 there, you can see a total stack of GBP 582 million, of which the blue line is reported net debt, so that's GBP 432 million; and then the remainder is KEPS in red, which is supply chain finance, which effectively is where you pay a bank in 90 days and the supplier has been paid in 7 days. So it's debt by any of the nature. It's just debt. And then you've got HMRC, it's the black item. What this is, is, during COVID, every company had the opportunity to defer, delay PA via the National Insurance over the A2. So of course, the company did that and would, of course, have to pay that back over time, which you can see there. So FY '21, GBP 182 million. You see that significantly reduced to GBP 296 million in FY '22, and that's a combination of selling our living business or our housebuilding business. It's a combination of raising equity and, of course, it's the cash flows in that year. So GBP 286 million in 2022, of which reported net debt was GBP 216 million. So that's Andrew referred to earlier, our actually reported net debt has actually increased this year to GBP 232 million. But you can see why? It's because a lot of cash has gone to reducing those debt-like items being supply chain finance and the HMRC debt. And then you can see looking into 2024, all of the cash now being allocated to paying down reported net debt, we will delever by circa. It's circa of GBP 100 million this year. And of course, given that's a look-back number, so FY '24 will be 13 periods looking backwards, where obviously the confidence Andrew alluded to earlier is because we can see that's happened already. So we know that's happened today and all we're doing is basically continuing to trade and we'll work forward that for. And then by FY '25, if you're reporting that between GBP 30 million to GBP 40 million, I think albeit depending on which analyst you look at. Average net debt for the year, clearly, but probably the last 6 months of the year, you've been running in an average net cash position. So really average net cash for us, not very far away now making great progress. Pensions, I think, was another good success story read of the business and how things have changed. So on Slide 16, and there's also a note on Page 28 of the announcement out 6th, which talks to the retirement benefit obligations. So firstly, well-funded schemes. So on an accounting basis, I think someone makes the point that there is a reduction of the surplus. You've gone from nearly a GBP 200 million of accounting surplus to an GBP 100 million accounting surplus. So very well-funded schemes indeed. And the accounting surplus is one thing, but I think really what's more important is the triannual valuation, the actuarial valuation, which in 2018, this was a deficit of GBP 233 million, in 2018. Now a combination of better returns than would have been in that actuarial calculation, allocating cash to it and, of course, now what's more important, I think, is the strength of the balance sheet and the strength of the covenant that the employer provides. We're actually in a situation where on an actuarial basis, we've got a surplus, a big surplus, albeit it's 6 schemes, 3 are in surplus. And unfortunately, 3 are in a small deficit. So we still have deficit repayment now, albeit, as you can see on this slide, it's a much smaller plan that will be by FY '28 reduced to zero. So well funded, and then I think there was one other question here about finance, and that's, of course, something we look at continually. So we'll be constantly reviewing that, but I'm not sure it's a really sensible use of capital for the company. So just to illustrate that, I'll talk about the BE scheme we've got, which is in the BE surplus. So here at one scheme, we've got nearly GBP 100 million actuarial allocating surplus. And yet to buy that scheme out by an insurance fund, you'd need to pay GBP 100 million. And it's quite a lot of capital. And of course, what's to return in that is probably actually nothing. So if you imagine that compared to our property business where you get 15% return on capital, clearly, it's much better to invest in the business. And I think that's really the best thing for all stakeholders, shareholders and pensioners really would be to allocate capital to the business, so that covenant just gets stronger and stronger and stronger. That's the most important, being really the company is here to ensure that the last pensioner gets paid everything to thereof.

Okay. Robert, should we open for questions?

Yes. Well, thank you, Andrew and Simon. We'll now open for Q&A. As a reminder, if you have questions, please do type them into the Q&A box at the bottom of your screens. We do have some presubmitted questions. So the first question is on HS2. It says, could you please outline the government's current position, which I think could be challenging. But could you -- the second part is, can you talk about what Kier is currently contracted for with regards to HS2 and what's the order book.

Okay. So I'll take that one. We participated in HS2 at a couple of levels, primarily as a labor and as a contractor of 2c, 372 kilometer section between north of the Chiltern tunnels up to south of Warrick as well. And in the JV, we're a 33% -- 35% shareholder with Eiffage, Ferrovial and BAM well. And I chair that JV as a Non-Executive Chair and Simon sits on as the Kier Director on the Board. We contracted for the main work civil, so that's everything that underpins the rail systems. So that's up to but not including the track slab and the foundations for the catenary, which is electrification of the railway. So we do all the main earthworks, the civils, the viaducts, the tunnels, the green tunnels on our section of it. This is phase 1. So this is the London to Birmingham section, currently, although common to Curzon Street section because the Houston bit is now officially delayed by 2 years, notwithstanding the media speculation this week. And phase 1 is contracted. And I can't -- I would defer to Simon exactly what is in our order book. But the amount for currently contracted Phase 1, net of any future anticipated changes and inflation, is all in our order book. But we do not speculate on what may happen with inflation or any future changes on HS2. We'll put it into our order book as and when those contracts come about. So we've got quite a conservative position. The debate -- that's the fact of the matter. The contract is also a cost reimbursable contract and then you have a fee on top of that, which has moderated based on your performance in areas like cost control, safety, like program adherence, et cetera. But in all circumstances, you get your costs covered under that contract, given the nature and the scale of the contract, the multiyear nature of the contract. So if we move to sort of this week's speculation, which I suspect which has prompted the question, this debate is really about the future of the London end of the railway, which is although common to Houston, we don't participate in any effect of that. That's run by an entirely different consortium. And then the other speculations about what happens north of Curzon Street up to Crewe on Phase 2a and thereafter on Phase 2b up to Manchester. The second part of Phase 2b was deferred about a couple of years ago under the Boris Johnson regime. That was the bid that went up to Leads. So that was indefinitely deferred. So we have no assumptions in any of our financial forecasts for any work on Phase 2a or Phase 2b. And indeed, on those phases, certainly north of Crewe, there is no budget within HS2 for the next couple of years anyway. So this is really talking about a deferral or potential cancellation, something that wasn't going to happen for at least 2 to 3 years in any event. There was a deferral of the piece, the spur north of Curzon Street, which is being done by again, a different consortium to us, BBV in the north, which was going out of Curzon Street up north towards Crewe. That's been deferred by 2 years as well. Pending that, I mean, the speculation is for everyone to see in the media. We've made representations, as you'd expect us to, as to what we believe to be the benefits of completing the railway up to Manchester, but ultimately, that's an entirely political decision. And as I said, in relation to our contract, Phase 1, I don't think there's any serious debate or speculation about the future of Phase 1, given the advanced nature of that contract in the ground. All this is a speculation about Phase 2a and Phase 2b, which as I said, we have no assumptions in any of our financial forecasts relating to it.

Great. And you touched on the order book there as well. The next question is the order book has grown again to GBP 10.1 billion, and there have been a number of framework bids to add into that. Part of the answer could be found with frameworks, I'll just -- because it's different. I don't know if you have the knowledge on the call. Could you talk about when work is put into order? And is there any risk that projects in the order book can fall out?

Well, the frameworks are a multiyear sort of overarching commercial programmatic and operational sort of contracts with entities, which people like Department of Health, Department of Justice, Department of Education, local authorities, there's many, many different types of frameworks. You can argue as far to many types of frameworks. But basically, they have their own types of frameworks. We stick to the type of contract under which they want to let future contracts. It dictates the type of contractor they want in terms of their qualitative aspects, things like sustainability, their approach to social value, their approach to the environment, et cetera, their approach to employment, et cetera, et cetera. The frameworks in of themselves don't actually give you work. You still have to have bids within frameworks. What frameworks do is filter the market. And they effectively act as a sort of a tuning bar above which you have to hit the record procurement note standards, which particularly government will set to you in respect to those areas of environmental, commercial, social value, et cetera. But then you have to have competitions within those frameworks. So if you have framework values as we do, and we say in our presentation, we actually have by urge to advertise value frameworks and the value of GBP 140 billion. Now clearly, you're not going to put GBP 140 billion into your order book. You're not going to be capable of delivering GBP 140 billion. That's just the advertised value. But if you look at the accessible market within that, i.e., contracts, which we think realistically really have the capacity and capability to deliver, we believe that figure is more around GBP 40 billion. None of that is in our order book because the criteria with which Simon, in particular sets, we're putting in our order book to make sure all of our future assumptions to the market are correct, are that you have to have a contract in place or you have to be in a sole-source, 2-stage negotiation if it's that style of contract. So for example, if you're into a negotiation to build a skill, you'll get into a 2-stage negotiation, off of a framework, there will be predetermined conditions relating to your social value, relating to your environmental standards, relating to some of the commercials. And very rarely those contracts are terminated, those negotiations terminate. So we always feel confident we're in a 2-stage exclusive negotiation that we can put the total value of that contract into our order book. Anything else that we don't put into our order book because it's a very conservatively put together order book, and we certainly do not include all of the advertised value of the frameworks in our order book.

Great. We've got a related question before, a follow-up on the pension. How under your management have you tightened up the controls in the bidding process to make sure that you're not taking on loss-making contracts?

So when I started 4.5 years ago and Simon started, we put in place an operating framework, which was put in place by our then commercial directors who were totally there under our construction business. The operating framework set the standards by which we've been operating this company in most assets, all policy guidelines as well as delegations of authority. Those delegations are very clear in respect of the type of contracts we were prepared or willing to accept. And if they went outside those barriers, who would take the decisions, including and up to the Board level. So as a general rule, we operate our frameworks, we operate in business-to-business markets, we operate with government, 70% of what we do is in the government, 15% is regulated. So it is really understandable, no cloud base we have in the business. That's our strategy as well. We don't take contracts such as single-stage lump sum DNBs because, effectively, what they're doing then is passing to clients, will be passing on unknown and unbounded risk to you. So 60% of our portfolio and our order book is in cost reimbursement contracts as a result, where the risk of cost inflation sits with the client. And for example, on some of the bigger infrastructure contracts, that's what you typically expect. Well, that's not a free hit, so to speak because obviously if there are inflationary pressures, clients have to bear those inflationary pressures and that does then put pressures overall on programs. And perhaps that's what's happening on HS2, for example. So it's not to it. There is a limit to what you can transfer in terms of risk or the clients can retain as risk. But on the other 40%, which is predominantly in our Construction business, clients there want to get a degree of certainty into their costings. So they like to fix out the prices, but they will only do so, and we'll only do so after a 2-stage negotiated process. Well, we understand all the risks in the contract and the program. We'll ban those risks, and will bring contingency as appropriate into either the program or into the costing. So then we will fix it out. And the clients like that because it gives them that certainty, and we like it because it gives us an opportunity to manage those risks better and then improve our margin. But the other point I would say about many of those contracts, the average size of our contracts in construction is GBP 16 million, 1-6. So therefore, the repricing of those contracts, if for any reason, they are hit by inflationary pressures, is frequent. GBP 16 million contract realistically will be built out in sort of 12 to 24 months period. So you're constantly repricing these types of contracts. And even if there is a pressure within the contract, you're not going to be unduly hit your margin as well. But the golden rule is we're happy to take fixed price contracts, but only in respect to contracts, which we understand the risks and have contingent against them and can manage them more cost effectively than the client can manage them. And that's what 2-stage negotiations are all about.

Great. The next question relates to pension. And it is, Simon, good answer on pension scheme. Pleased to see that profit and cash are moving in the right direction. Why have net assets raised shareholder value?

Yes. So I think that's the same point that we referred to. What's happened is it's an accounting for the pension. So it's an accounting assumption and it's based on predominantly the discount rate, which has moved from 2022 at 3.9% to 5.3%. So with that sort of change in discount rate, the surplus of our pension schemes on an accounting basis, which I have to say, is very subjective and very difficult to say whether that is, but you've moved from a surplus of GBP 195 million down to a surplus of yet not quite GBP 104 million. And that has impacted net assets. I don't believe that really translates to shareholder value. What's really more appropriate for shareholder value is how much capital you allocate into those funds, and there you see we've moved the triannual valuation from a massive deficit in 2018 to actually quite a significant surplus now in 2023. And what that means is our deficit repayment contributions have actually reduced at the latest valuation quite materially. And if you look at the presentation, Page 16, you'll see all the details.

And the next question is, you touched on the acquisition of the rail assets of Buckingham Group? Would you be interested in any other acquisitions that may present themselves?

Yes, we would. And we've proven, I think, with the Buckingham acquisition, we can move at speed. It was a very fluid situation. They were going into administration, and we had to sort it out and get the prepack sorted, which we did very effectively. We showed that we had the financial wherewithal as well as the sort of operational wherewithal to acquire them and devote those contracts. But a couple of things I would say about that. Firstly, it aligns strongly to our strategy. We were very clear we had a strategy in transportation. We're very clear within that line of business. We wanted to pursue rail maintenance and project opportunities, in particular with Network Rail on the CP7. So industrially and strategically, we had a real interest in this area. That's going to be the first prerequisite. This is a real accelerator for us. The second thing we did was, it had to conform to our overarching medium-term plan that any acquisitions would accelerate that plan, including the delivery of a average net cash position. So while GBP 29.6 million for these contracts and we bought contracts, we didn't buy the previous liabilities, so it's cleansed by the administration. So we only bought the future receivables under these contracts and the people, the skilled people as well. Those contracts, as I said, we will get the receivables. We will trade those contracts through. We will make a margin that's consistent with margins we make in Infrastructure Services, which will be cash back like that. And then like the other operating businesses, in the sector, we would expect the negative working capital. So the point about that is, we expect the payback to be very fast on that acquisition which, therefore, will generate cash and be consistent with achieving the average net cash position under our medium-term plan. So yes, we would, but it has to, firstly, meet our industrial strategic criteria; secondly, we're not taking undue risk, which we didn't here; and thirdly, it has to be consistent with our medium-term plan.

Great. And I guess related to an extent is, how will you think about capital allocation going forward? And do you see the resumption of the dividend being at the top of the agenda?

Yes, great question. I think Slide 15, basically the source is cash and uses of cash, so it's our capital allocation slide. Sources of cash predominantly free cash flow. We've seen great performance last year of GBP 132 million of free cash, being 130% conversion against our 90% target, which is great. In terms of uses, and it's CapEx, of course, but CapEx is really minimal. If you look at our free cash flow, most of the CapEx there is actually just related to leases. The real CapEx is sort of circa GBP 5 million per annum. So investment in the business is CapEx low. But what we do want to do is invest a little bit in our Property business. So our Property business, great business, very synergistic with the rest of the group. And we've been capital constrained over the last few years. So of course, we've been extracting capital from this business. And if you remember 2 years ago, very hot property market and pretty much sold everything. So we were very low in terms of capital invested compared to sort of the range that we'd like to be with that business. This year, much is more a difficult market. So actually, having sold everything in a hot market was actually very fortuitous. And now the guys are sitting there with capital to invest. So we're going to invest a little bit into that property market. We see that property market is probably going to start to recover now. So we do want to allocate a little bit more of it into the Property business, and that's also helpful from a point of view that we're growing in our negative working capital businesses to then throw enough cash. That cash, we'll have to keep back if those businesses shrink again. So we can allocate it for Property division and then extract it if that turnover starts to fall, and we need to return it to sort of our customers in our other businesses. Deleverage, so here, also very important. Andrew has mentioned it, we do have our medium-term value creation plan is to get to a sustainable average net cash position. And so really, most of our cash is really being used to deleverage at the moment. And if you look at the analyst numbers this year, circa GBP 100 million in terms of the net debt reduction. And yes dividend, we've signaled our intention to pay that. And it's a 3x earned to the cycle, so quite cautious about dividend policy in place. And we're going to get there over time. So analysts, if you look to what's in the market, I think they're expecting toward a 4p and 5p dividend. So that's not close to 4x earnings, rather than 3x this the year entering, so 1/3, 2/3. So we're expecting 1/3 of our dividend to be announced with our half year accounts. So that's half year ended December, that will be announced in March next year. So we're not very far away. And then the full year will be announced alongside our full year accounts in September next year. And then as you can imagine, if we're really deleveraging by GBP 100 million, we're expecting that deleverage to continue. I wouldn't expect it to take very long, which to be our targeted dividend at 3x cover. And then finally, M&A. As Andrew mentioned, we're fishing in a very small pond because it has to bring forward that medium-term plan, including getting to an average net cash position. So clearly, you can only buy [ comps ] there with a very short cash payback as we did.

Great. There's a follow-up question on the Property business. Simon, could you talk about the model there, please? Where do you see growth coming from?

So the model is brilliant. I mean, it's a great business, great team, and I mentioned earlier, quite synergistic. It's synergistic from a customer point of view. So the customers that we have in our Property division tend to be the customers that we have in our other businesses, network rail, as an example, or local authorities that want to redevelop a town center as an example. So great customer synergies. And also there's an operational synergy there as well because if you imagine if you're redeveloping the town center or a train station, you can use our artisan capability, you can use our construction capability. You can even use like utilities capability. And of course, you can use our highways business. So obvious synergies there from basic customer and the operational. And then finally, there's even a financial synergy because, of course, I touched on it earlier, if our businesses grow, they throw off negative working capital. But of course, if they shrink, you need that cash back. So what you can do is you take that cash and you get allocated to the Property division. You can enhance margins and returns. And of course, if you've done it on a course basis, as we do, you can't extract that again, so use it too because, of course. Unfortunately, life is just not like you're going to grow your top line. Straight line, it's going to go up and down, up and down, so you need to be able to manage that volatility and our Property business helps us do that. So that's the model. The other thing that's nice about this model is because last year, let's face it all property businesses, I think on average, they lost 50% in terms of capital. You didn't see that with our Property business. And why is that? We have a model with our JV partners, our customers generally, where value is put in the land, and the land absorbs any issues with the return. So if you make a really bumpy return, you get paid for the land. If we don't make the returns that we expected, the land gets put in at a lower and lower price to the point where it can be put in for free. So of course, with the market conditions last year at lot of our projects now, there's land going in for free. So what that does is, of course, it protects our earnings. So we don't get those losses. And now what we're seeing is going forward, where do we expect probably, there's a huge amount of opportunity for us now, especially with sort of net carbon zero. So that's where we see the growth and where we see the opportunity moving forward.

Very clear. Thank you. And the next question is a follow-up on the dividend. You referred to as a sustainable dividend. Can you give any indication of what this looks like for a shareholder?

Yes. Well, I mean, we've got our policy, it's 3x earnings cover. So it should be pretty simple really. You take our EPS, divide it by 3 and there's the sort of dividend you would expect per annum. And we said 1/3 -- we're going to follow a pretty traditional 1/3 interim, 2/3 full. So I think that's the reasonably clear. We think we'll glide into that cover, I think, pretty quickly. So you're right, we won't start immediately at 3x cover. We will glide into that. I think 3x cover, when we introduced that policy, it was meant to show how good Kier was. So probably over time, as we get to that average net cash position, and we're at 3x cover, there's probably going to be downward pressure on that, at least 3x tilt to the right number. It's probably a little bit cautious, and you'll probably find that we're able to actually lower that number and pay slightly bigger dividend to shareholders over time.

The next question is on supply chain. Could you talk about how you monitor the health of your supply chain? And are you worried about any of your suppliers potentially running out?

Yes, it's a great question that's something we do. Obviously, we do all of the traditional finance credit checks. But of course, when the credit check goes wrong, we're often already too late. So much more important is how we manage the risk on a project by project basis. So clearly, if you're buying a few screws, you can go to another shop and buy a few screws. So this is really key supply chain that's project is what -- we're fine with what we do. We have on a project-by-project basis a contingency plan pretty much. And that contingency plan can range from a whole bunch of options, from self-delivery, alternative supplier, so we'll make sure. And I think we're quite cautious on mix. So it's something we've had in our -- have had in the spotlight for the last couple of years. It's something we're very good at now. And so yes, we have absolute view on the supply chain value. But you don't see that in the numbers because of those contingency plans and our ability to mitigate it. And of course, Buckingham was actually a supplier to our U.K. FB joint venture. And that's gone from not risk, actually, the acquisition rose to an opportunity rather than a risk. So yes, something we're very cognizant of, something that we have seen an increase of, but something we're very good at managing ourselves in our day-to-day business.

And then we've got a couple of questions on collections. But just to put those together, could you talk about the -- in general terms, the impact election will have on the company? And then also, what you see might be the impact of a government of a different view?

So 2 answers I can give to that. There's a procedural one, and then there's a political one. If I start with the political one, I mean none of the parties really have issued their manifestos yet. So we can't really answer that question other than by a degree of sort of speculation as to where the parties may go. I mean, my belief, and anybody can have their own views on this, is that the existing government will stand on the manifesto of continuing to level up, that means investment in infrastructure and social infrastructure, in particular, which means prisons, hospitals, schools, et cetera. And I don't believe that any incoming labor government would necessarily spend more because that's been their indication. They wouldn't -- but I certainly don't believe they'd spend less. So I think what you have is probably around social infrastructure a degree of bipartisanship. And therefore, we don't anticipate, although this is only speculation, any change in demand for what we do in Kier with a change in government in the foreseeable future, whichever government is in place. Clearly, there's debates around some of the very big programs on HS2 that people can speculate. But as I said earlier, that doesn't impact us because we don't include it in our order book and our financial assumptions. And then the opportunity space elsewhere. When you get into the regulated sector, that's obviously in the private sector, not government, albeit it is government, which is regulated by government from the EA and Ofwat to the water sector. But the political pressure there on the water companies and on government to make water companies invest to stop them polluting, which is no longer deemed acceptable, albeit it is a common practice, but it's not deemed acceptable means that there's ranges of investment required in water companies into some of the speculated companies, which is moving to GBP 100 billion. So the opportunity space there is enormous, albeit that is not direct government spending. So look, I think from where we sit, we think our strategy is right. We think whatever government is in power, they want to continue to spend on social infrastructure in the regulated sector, we want to continue to invest in their capital works programs as well. So on the procedural point, there is always an issue around elections, where it's harder, where decisions can't be made. So if you're in a 2-stage negotiation, that needs a decision to enter into a contract. In the end, that can be delayed. So we're aware and alert on that. So a lot of effort goes into ensuring that we have contracted income in our order book, so that doesn't impact others, and in particular effects in the construction business. They are very focused now on getting continuity of throughput revenue by getting into contracts prior to that coming into place. But it's probably 18 months away. I think the election has to be, at the very latest, 2025. So we still got some time and we're working hard to ensure that we have a good position there.

Great. And the next question is around the passive environment. Could you talk about how you're seeing competition in both the construction and infrastructure elements of the business, please? And do you think that peers are behaving rationally?

I think when you look at the public companies, I think all of their results indicate the last sort of couple of periods that they are acting rationally. They're delivering good positive sets of results. So that's sort of the test in many ways in the marketplace. I think you always have competition. It is a competitive environment particularly in construction. As I'll go back to my earlier reply, we have a very clear set of delegations of authorities, which permit the businesses to operate within a framework. And if they're outside that framework, they need to seek prior approval either up to myself and Simon or beyond that to the Board. And the rules we have are, the multiyear contracts is, we will not take unbounded risk. So it's -- yes, there are -- it is competitive environment, but I think all the public companies operate within the government, and the government itself is setting out the construction playbook, put a sensible competitive environment, and that's what we're seeing at the moment. And I think the proof point of that is the results of any of the public companies.

Great. Thank you. Well, we've got 2 questions left in the question bank at the moment. So if anyone does have a question, then please do type into the Q&A box. And the next question is, will you see any opportunity from the RAC concrete issues we've seen in the school sector recently, I guess, more broadly?

So there's an opportunity to help your clients, certainly. This issue is one of a couple of issues, which private education have with an enormous schools, a state across just England, Ireland, Wales and Scotland, which is obviously controlled by different administrations, but commensurable commitments or issues as well as the health department, by the way, in some of the hospitals have been impacted by RAC. So there's an opportunity for the people at Kier on the framework certainly to help the clients. And we've done just that, both in health and education. We put teams into the departments to help them survey the extent of the issue they're dealing with. And I think you have to remember with the RAC concrete, this goes back sort of the '50s, '60s, '70s and '80s. And the contracting methodology then was very much traditional where the risks of the specification and the designs that were acquired and also the limitations on warranty, obviously, would mean that anything built in '60s, '70s and '80s is well out of warranty and indeed, their expected life expectancy of this material was probably sort of 30, 40 years. So it's beyond all reasonable assumptions of any liabilities within the contracting sector. And I think that's the approach, which these partners are taking. They're seeking help to solve their problem. So that's an opportunity to help your clients. And out of that does come various initiatives to try and sort of help the schools or hospitals that are affected. I think the government has been pretty clear, though, when the chancellor said, "We will do what it takes to solve this problem." The caveat was within existing budgets. So I don't anticipate new money being allocated, but I do anticipate a degree of reprioritization of which schools and which hospitals get built or rebuilt first or propped up first or fixed versus whatever the solution for that particular school or the hospital is. And that's what we work through with the client. So I don't think there's going to be 150 new schools. But what I do think, there will be a reprioritization. And those people with health department tend to be the ones who help them fix the problem as well. So I think there is a strong reputational opportunity. And indeed, we will get some work out of it. But there's no new budgets allocated for it per se.

We have a couple of questions submitted. The first one is, how much off-balance sheet debt does the group have in joint ventures? And is this increasing or decreasing?

Yes. I mean that's quite a small number there. I think a lot most of the sort of off-balance sheet debt, and when we're talking about off the balance sheet debt, I mean, these are joint ventures where we're one of the minority with lack of control. So there's outsets and liabilities that are off the balance sheet. Most of that went when we sold our living business. So I think it's substantially smaller than it has been. And yes, just it hasn't, I don't think, moved materially at all over the last couple of years.

Great. And the next question is, COVID is potentially on the rise again. How are you managing the potential risk of another pandemic?

Very topical. I actually have COVID at the moment, which is why I'm not sitting with you in that room today. But it doesn't stop me working, as I have been doing all week. But sensibly, the advice from NHS is that you should give it 5 days to isolate, not to further infect people, and that's the advice. So I've taken that, that hasn't stopped me working. So look, we -- during the last pandemic, obviously, much unknown situation, and we managed it extremely well. All of our sites adapted extremely effectively and very, very quickly. We've got extra accommodation. We did employ distancing. We reorientated the logistic management of ourselves to get adhered to the 2-meter spacing. And a huge difference this year and this time around and the advice, which I obviously am quite topical of versus the last time, was it you will separate to the extent you can, but 2 meters. Now the advice is you don't have to test because the vaccination program has created immunity within the population that the impact of COVID on any individual is going to be greatly diminished as well. The advice is very, very different now because of the vaccination program than what it was 2 years ago. But my point, 2, 3 years ago -- what I told you, we managed it very effectively 2 or 3 years ago. And I anticipate we'll manage it now. And Kier also has a lot of welfare and health policies in place. We do take great pride in what we put in place in terms of GP referral systems and other sort of app-based systems to ensure the health and welfare of our workforce. So we -- any advice that the government issues out, we will also take very seriously that. But at the moment, I think we are seeing COVID in the light of everyone else is seeing COVID, it's not the threat it was 2 years ago.

Great. And the last question is on margins. Margins look healthy and ahead of the medium-term plan. Can you talk about the outlook for this, please? And then do you think the medium-term target is still appropriate?

Yes. I mean that's a good question. So circa 3.5%, and we're hoping as we say circa 3.5% for us to be slightly above that than below it. But we've got, I think Andrew touched on it in the opening, a bit of a benefit from mix in both of our businesses. So let's deal with the infrastructure services, I mean, there's a Slide 19 there for Infrastructure Services, and there's Slide 21 for Construction, so our 2 biggest revenue businesses. There's some mix things going on that's benefiting the margin. So in Infrastructure Services, first and foremost, Slide 19, here, we've got a lot of highways work, so new build roads that are in the design phase. So in the design phase, you've got low revenue and you've got double-digit return on sales. And so as that design phase is going to come to an end over that 6 to 18 months for these projects, they're going to go into the construction phase, which is much higher revenue and actually adjusted operating profit probably in absolute terms of a bigger number. But it will be low single-digit return on sales. So that's going to dilute 4.7% that you saw and push it back down towards what is assumed as a good number, so 4.2%. So that's going to happen in the Infrastructure Services, so downward pressure on the relative margin, not necessarily absolute margin. I still think that's going to be a nice healthy going forward. And in our Construction business, you've got a similar mix dynamic as well. Two businesses in our Construction business, Regional Build and our Places business. The Regional Build is where the growth is going to come through. Regional Build is low single-digit business. In terms of Places, however, where the mix is swung towards at the moment, this is high single-digit margin. So there I'd expect downward pressure on that 4.2% in our Construction business, not for a bad reason but just because our regional building business is where you see the order book increase materially, it's where we expect growth to come from and it's lower than the sort of average margin, so it's going to come through that growth, but lower. So those dynamics mean we feel the circa 3.5% is still appropriate. And finally Property, where we'll expect a tailwind, I think unfortunately, that tailwind is not going to come from until probably 2 years out because, as I mentioned earlier, we've extracted capital from that business 2 years ago, pretty much it was way off the bottom end of where we'd like to have capital employed in that business. We're only just starting to deploy that capital into a market, which has had heavy distress this year. And so basically, I'm not expecting those returns to come through and sort of that margin enhancement to go through for the next 24 months or so.

Great. Well, that concludes the Q&A session. I know if I can hand back to Andrew for any concluding remarks.

Yes. Look, I'm very happy to conclude. I mean, it has been a very good year for the company. We've made good progress on medium term, outperforming the margin target on those plans. Cash has been very strong this year. We've got some cash [Technical Difficulty] and again that provides multiyear sort of visibility for us. And FY '24 now 3 months in has started well, and we're trading in line.[Technical Difficulty] So no change to the current outlook. And with that, I will close off. Thank you, Robert, and everybody for listening.

Thank you very much. Two final things to say. First, there will be a short survey, which will appear on your screens, and the company will very much appreciate your feedback to that. And secondly, the training update are scheduled for 13th and 16th of November. So thank you very much, and that concludes the call today. Thank you.