Kier Group plc (KIE) Earnings Call Transcript & Summary

So good morning, everyone, and thank you for joining us for our full year 2024 results presentation. And for those of you here in person, I'd like to extend a warm welcome, to those of you who are joining on the webcast and on audio as well. I'm Andrew Davies, I'm Chief Executive of Kier Group, and I'm joined today by Simon Kesterton, our Chief Financial Officer. So this morning, I'll walk you through the highlights from the last 12 months to the 30th of June 2024 and then hand you over to Simon to talk through the group's financial performance. And this will be followed by an operational review, which I'll give an update on ESG, and we'll finish off with our outlook. And then there will be an opportunity for questions and answers at the end, both here in the room and thereafter online as well. So if we go through the disclaimer and the results summary and moving to the highlights of the year here on Slide 4. So the past 3 years, we've seen the group achieved significant operational and financial progress. We've delivered a strong set of results for FY '24 with over GBP 560 million of revenue growth, improved profitability and strong cash generation, allowing us to significantly deleverage. During the year, we successfully delivered the acquisition of the Buckingham Group's rail assets, and we also refinanced the group. And these results are a testament to the hard work and commitment to our people who have enhanced the group's resilience and strengthened our financial position in line with our medium-term value creation plan. And I'd like to extend a big thank you to all of my colleagues in Kier for all of their hard work and efforts over that period. The future prospects of the group also remained strong with the group's order book increasing 7% year-over-year to GBP 10.8 billion, reflecting contract wins across our business and providing multiyear revenue visibility and over 90% of our FY '25 revenue is now secured. Our order book is supported by long-term framework positions and frameworks, as you know, are our route to market. We've maintained and grown our central and local framework positions. And given the significant progress that the group has made and given our continuing confidence in the business, a final dividend of 3.48p per share has been proposed, giving a total dividend of 5.15p per share for FY '24. This equates to an earnings cover of 4x, which we anticipate improving in the current year FY '25 as we move to a 3x earnings cover. Overall, we're in good shape. Our strategy has progressed well, supported by great people, excellent long-term order book and strengthened balance sheet. And we're, therefore, in a position to look forward to our next phase of evolution as we move to our long-term sustainable growth plan. As we look to Slide 5, our medium-term plan update. Since we announced the medium-term value creation plan in June 2021, the group has made significant progress against these financial targets with operating free cash flow conversion and profit margins met consistently over recent reporting periods. During that time, the group has significantly derisked, having deleveraged the business markedly, enabling the group to return capital to shareholders through dividends. The direction of travel is expected to be maintained going forward. During the year, we secured long-term funding through an extension of our revolving credit facility and the issuance of senior notes. And we believe that this funding alongside our cash-generative business model will comfortably support our organic growth plan, value-accretive acquisitions and further increases to our property investment. We're now in a position where we have capital allocation options to drive shareholder value over the long term. And accordingly, the group has evolved its targets into a sustainable growth plan. We're targeting revenue growth above U.K. GDP, driven by attractive dynamics of the markets we serve as well as our market-leading positions as we pivot from recovery to sustainable growth. We're targeting an adjusted operating margin above 3.5%, targeting cash flow conversion of at least 90% and we're aiming to achieve sustainable average net cash position and targeting to invest any surplus cash. In terms of dividends, as I said earlier, we're targeting a sustainable dividend policy of 3x earnings cover through the cycle. And we believe our long-term sustainable growth plan is supported by U.K. infrastructure spending commitments. The spending is in turn driven by structural trends, such as population growth, transportation pressures, aged infrastructure, energy security and climate change, which are substantial and largely nondiscretionary in nature. Given the public spending may be insufficient to maintain public assets, customer behaviors are moving to long-term partnerships. And these continue to favor Kier, given our scale, our integrated design and project management capability, our track record of delivery and our ESG credentials. These positive structural trends and customer behaviors are expected to expand our addressable market opportunities, particularly in water, environment, energy and affordable housing, as well as increased demand in our property business. And in particular, the group has recently been awarded a number of framework places as part of the AMP8 water investment cycle. Kier is well positioned with all the major water companies to support them with their water infrastructure upgrade and maintenance work. We've also started to increase the capital deployed in our property business, and I will talk to this later. But for now, I'd like to hand over to Simon, who will take you through the detailed financial results.

Thank you, Andrew. Good morning, everyone. Turning to Slide 7. This slide sets out the high-level income statement. Revenue in the period, as Andrew mentioned, is significantly higher than 2023 and reflects volume growth in both our Infrastructure Services and Construction segment, which I'll cover more on the next slide. We delivered an adjusted operating profit of GBP 150 million in the year despite continued, albeit lower inflationary pressure. The group achieved an adjusted operating margin of 3.8%, which remains above our medium-term value creation plan target. Statutory profit before tax is 31% higher than the comparative period, despite increased amortization arising from the Buckingham acquisition and interest charges as interest rates were partially offset by material reductions in debt. As a reminder, the amortization of GBP 23 million relates to acquisitions, and has increased as a result of the Buckingham acquisition. This additional amortization is provisional for 12 months and will be circa GBP 4 million per annum for the next 2 years. We achieved adjusted earnings per share of 20.6p. This represents 7% growth when compared to the 19.2p achieved in 2023 despite corporation tax rates rising to 25% from April 2023. Net cash is significantly better than the prior period at GBP 167 million compared to GBP 64 million for FY '23 as operating cash flows from profitable volume growth translating into working capital inflows and reduced pension scheme payments. As expected, the group materially delevered, this has resulted in the average month end net debt halving to GBP 116 million from GBP 232 million. This means that the run rate in the second half of the year was already lower than GBP 100 million. Turning to Slide 8, I'll walk through the group's revenue growth. Starting on the left-hand side, we start with 2023 revenue of GBP 3.4 billion. Infrastructure Services revenue increased by 16%, primarily due to HS2 volume growth and the successful Buckingham acquisition. The revenue would have grown by 9% before the impact of Buckingham. Construction revenue increased by 15% as strong order book we entered the year we've converted into revenue. We also saw higher property revenue resulting in the growth of the group's revenue of 17% in the period to GBP 4 billion, achieving our medium-term value creation plan target. Moving now to the adjusted operating profit bridge. We start with the prior year's adjusted operating profit of GBP 132 million. Volume mix and price changes have resulted in an increase of GBP 21 million. We have achieved management actions of GBP 13 million during the year. We continue to see inflationary pressure, albeit lower, and we continue to manage and mitigate this. Over 60% of our order book is made up of target cost or cost reimbursable contracts. And if we do choose to give price certainty to customers, it will be done after key risks and opportunities are understood. The result is an increase in adjusted operating profit to GBP 150 million. Adjusting items, excluding noncash amortization and interest, amounted to GBP 23.9 million in the year and a GBP 7 million lower than the GBP 30.8 million of costs in the comparative year. The main item relates to fire and cladding costs, which are GBP 2.4 million higher than the comparative. Given the nature of the construction projects we typically engage in and following regulation change, we estimate our net exposure to this could be further GBP 20 million. Of the smaller items, we incurred fees of GBP 4.5 million related to our refinancing, including the 5-year bond, property costs related to various legacy properties, and we've also experienced an FX gain related to our reduced exposure to international business. Other costs include some cost in connection with the Buckingham acquisition. The interest relates to IFRS 16, where leased office space has been exited. As previously guided, we haven't incurred any restructuring or related costs. Slide 11 sets out our order book position. Our order book is high quality and has further increased by 7% to GBP 10.8 billion compared to June 2023. We have secured circa 90% of our 2025 revenue as we continue to win work in our chosen markets. Significant effort has been made to improve the quality of the order book. We're focused on winning work with U.K. government and regulated authorities. We continue to focus on managing risk and reward when bidding negotiating and delivering work. 60% of our order book is under target cost or cost reimbursable contracts. Our infrastructure business has nearly 100% of its contracts agreed as target cost or cost reimbursable and is an important part of balancing our risk and reward profile. With our construction business, the majority of the contracts are fixed, but circa 95% of these are fixed following a two-stage process to identify, mitigate or retire the risks involved. Our average order size is only GBP 20 million and this relatively small average order size results in us regularly repricing contracts. The order book continues to be underpinned by significant long-term framework agreements. Our long-term framework positions are excluded from the order book. These represent further opportunities for the group. Moving on to free cash flow. The result of all the hard work done over the past 3 years with the group achieving significant operational and financial progress can be seen very clearly here with a material improvement in operating cash flow. Looking at the detail, we can see that adjusted EBITDA in the period grew to GBP 208 million. We then have GBP 68 million of working capital inflow, slightly below FY 2023 due to construction volume growth starting in Q4 of that year and as a result, partly benefiting for some of that inflow. This includes supplier payment days of 34 days. CapEx in the period amounted to GBP 57. However, GBP 41 of this relates to payments made under leases now capitalized under IFRS 16. Net interest and tax reduced by GBP 7 million in the period, due primarily to corporation tax payments restarting during the year being offset by interest payments due to new bondholders not starting until August 2024 after the year-end. This results in the group improving its operating cash conversion from 130% to 145% with operating cash flow now over GBP 200 million at GBP 217 million from GBP 171 million last year. Turning over to Page 13, we have the net cash bridge. We start on the left-hand side with closing cash of GBP 64 million at the end of June 2023. We then see significant free cash flow, inflow of GBP 196 million (sic) [ GBP 186 million ] that I've just talked about. We had adjusting items of GBP 37 million. This includes the payment of GBP 10 million for items that were accrued in 2023 and pension payments of GBP 9 million. As previously mentioned, we paid GBP 9 million to acquire certain contracts of the Buckingham Group, which are performing well, GBP 18 million relates to deploying capital to the Property segment. This will help drive future returns as the current market is affording us some great opportunities. The result of all our hard work improving the group led to Kier rejoining the dividend list and the interim dividend paid in the year was GBP 7 million. We then have the purchase of Kier Group shares. This is in respect of the group's employee benefit trust, which requires Kier shares from the market for use in settling the long-term incentive plan share schemes when they vest. The net cost of this was GBP 4 million during the year. This results in a significantly improved net cash position of GBP 167 million. Moving to Slide 14. As at the half year, this slide is a pleasure to talk through. As we move through FY 2024, it demonstrated the significant progress made by the group in reducing our month-end average net debt. If we look at the last 24 months, we have reduced our average month-end net debt and debt-like items by GBP 170 million, a significant improvement, resulting in just GBP 116 million of reported monthly net debt remaining, and mean that, as I mentioned earlier, during H2, the average month-end net debt was already less than GBP 100 million. During the year, we've seen operating cash generation lead to a material deleveraging. The GBP 116 million achieved across the year is half the comparative with free cash flow generation entirely devoted to reported net debt reduction. A key part of the medium-term plan was to generate cash and strengthen the balance sheet. The previous slide demonstrates the material improvement in our cash generation and reduce debt. This success provided the opportunity to put in place a long-term capital structure to support the strategy of de-gearing the business whilst retaining flexibility and optionality to deliver future growth. In February 2024, we secured long-term financing of the group through the issue of GBP 250 million 5-year bond and extending our revolving credit facility to 2027, both strengthening our debt maturity profile and diversifying our funding sources, an important step in the delivery of our medium-term plan. This slide shows the details of our debt structure and the changes we see over the next few years. Following the completion of the GBP 250 million bond issuance, our GBP 548 million of facility is now comprised of GBP 250 million of bonds, GBP 261 million RCF and GBP 37 million of USPP notes. The next key date is January 2025 when all of the USPP notes will be paid and GBP 111 million of the RCF matures and this will leave our facilities comprising of a GBP 250 million bond and a GBP 150 million revolving credit facility, which mature in 2029 and 2027, respectively. The maturity profile is reflected in the chart on the right-hand side. Moving to capital allocation. We're focused on optimizing shareholder returns and maintaining a disciplined approach to capital allocation. Accordingly, as we generate cash from operations, we expect to deploy that in a number of ways, whilst maintaining a strong balance sheet. CapEx is expected to continue to be minimal. Further deleveraging, we continue to target an average net cash position, investing any surplus. We plan to invest further in our Property business in order to generate consistent returns over time. At the half year, we increased its range to between GBP 160 million to GBP 225 million given the growth of the group. We will continue to do this in a disciplined way and are targeting the segment to deliver consistent longer-term return on capital employed of 15%. As Andrew mentioned, we're targeting a dividend cover of around 3x earnings through the cycle. With regard to mergers and acquisitions, the group will continue to consider value-accretive acquisitions in core markets. This evolved framework complements the evolving long-term sustainable growth plan, ensuring our commitment to our evolved targets. We've always recognized the importance of dividends to our shareholders and reinstatement of one is an important facet of the medium-term value creation plan launched during 2021. We said that we would deliver a dividend cover of circa 3x adjusted earnings over the cycle. We expect that we will pay the dividends approximately 1/3 as an interim and approximately 2/3 final dividend. The results presented today show strong operational and financial performance, and we've seen material deleveraging during the period. This significant improvement, combined with the strength of the order book and the future prospects of the group will allow us to declare a final dividend of 3.48p per share. This represents, as Andrew mentioned, a dividend cover of approximately 4x as we progressively move to the medium-term target. It's very pleasing that the results of everyone's hard work at the company and have been shared with our shareholders who have been extremely supportive over recent years. And now I'll hand back to Andrew for the operational review.

Okay. Many thanks, Simon. So now turning to the operational review, as Simon has said, we'll do Infrastructure Services first. Our Infrastructure Services segment saw a significant growth of 16%, largely driven by additional high-speed two capital works activity as well as the acquisition, as we said previously, of Buckingham's rail business. As a reminder, as part of the Eiffage, Kier, Ferrovial and BAM or EKFB joint venture, Kier is delivering the longest section of civil works, 80 kilometers from the Chilterns to just south of Warwick and we have the lead on the project management and the program integration in the joint venture. Our adjusted operating profit increased 41% in the division to GBP 112 million. And this was an excellent performance. Adjusted operating margin remained strong for the Infrastructure Services business at 5.6% as the volume growth translated to operating margin. We also had positive momentum in the order book with a 10% increase to GBP 6.4 billion compared to the prior year. And the order book consists of high quality and profitable work in our markets, reflecting the bidding discipline and the risk management embedded in the business. Our Transportation business successfully won a 2-year interim extension to deliver maintenance and repair services across Birmingham's extensive road network. Our Natural Resources, Nuclear & Networks business has won a number of frameworks with water companies as part of the AMP8 investment cycle. And these awards include works for United Utilities, where we've been appointed on a 5-year framework to deliver circa GBP 100 million per annum of design, engineering, project management and construction services work for clean and wastewater. On Southern Water, where we've been appointed to a GBP 3.1 billion 7-year strategic development partnership framework to increase capacity at water supply and wastewater treatment sites. And also with South West Water, where we've been appointed to their GBP 2.8 billion 5-year Mechanical, Electrical, Instrumentation, Control and Automation alliance, or otherwise known as MEICA framework to deliver their water infrastructure plan through to 2030. And I'm pleased to say that 86% of our FY '25 revenue is secured and this, combined with our recent wins, underpins our future revenue and infrastructure services. So we just have a look at the water operations within the business in a little more detail. The AMP8 cycle is, as you probably know, currently underway. Regulators are focused on the size and scope of the capital delivery program and are scrutinizing water expenditure for U.K. water companies. The delivery program is driven by aging asset base, which needs replacing or refurbishing increasingly stringent environmental regulations and a focus on the life of existing facilities through maintenance. As a result, water companies are forecasting improvements to their assets of circa GBP 88 billion following the regulator's draft determination. And this slide sets out our U.K. footprint in water. We are one of the largest Tier 1 contractors supporting regulated water companies with their asset optimization. And as of June 30, we had 14 frameworks with the 8 water companies illustrated on this slide. And the water companies are turning to Tier 1 contractors for long-term support, particularly those with specialist skills, including the MEICA skills, such as Kier to help them deliver the upgrade and maintenance program given the large increase in the capital expenditure. Moving to our Construction business. Construction business comprises regional build where we construct schools, hospitals, prisons and defense projects for the U.K. government as well as delivers projects for the private commercial sector. It includes our Kier Places business, and Kier Places includes our Workplace Solutions business, which is formerly our facilities management business, and our Residential Solutions business, which is formerly known as our housing maintenance business. Construction revenue increased 15% to GBP 1.9 billion, which reflects the increased volumes in our regional build business. Adjusted operating profit, as Simon said, remained consistent with the prior year at GBP 69 million and the business delivered an adjusted operating margin of 3.6%. The year-on-year reduction in margin was in line with expectations and driven by a change in mix with the prior year benefiting from a larger weighting towards the higher margin Kier Places business. The business has also experienced increased overheads to support additional site starts in our regional build business. And despite the reduction in the year, the 3.6% margin remains industry-leading. Within Construction, our Kier Places business saw volume grow across Workplace Solutions and Residential Solutions. As a reminder, Workplace Solutions is predominantly facilities management work for the Ministry of Justice and The Home Office. On the other hand, Residential Solutions delivers housing repairs and maintenance services for local authorities, and we continue to grow the capabilities and customers in this area with a focus on decarbonizing social housing through retrofit opportunities. The construction order book remains strong at GBP 4.4 billion as we continue to win work in our chosen markets. And has successfully won a number of awards, including the appointment to the Defence Infrastructure Organization or DIO's 6 year alliance to create 16,000 bed spaces for armed forces in single living accommodation. Within education, we've been awarded 4 projects worth over GBP 130 million. Our healthcare business has been awarded 3 projects worth over GBP 55 million. Justice remains a key sector for Kier, and we continue to win work following the successful delivery of HMP Five Wells and our ongoing delivery of HMP Millsike. Further awards include the design and build of house block projects for HMP Channings Wood, HMP Bullingdon and HMP Elmley, together worth over GBP 400 million. The house blocks are delivered using the T60 design, which is the most modern, fit-for-purpose design-enabling repeatability and therefore, cost efficiency across the sites. We've delivered 7 house blocks to date for the Ministry of Justice, and we're currently on site delivering another 10, which makes 17 house blocks in total. Our Kier Places business has been appointed by Heathrow Airport to deliver its Quieter Neighbour Support Scheme, a major program of works over the next 8 years to reduce the impact of aircraft noise on homes, businesses and community buildings around the airport. And finally, our Construction business has 97% of revenue secured for FY '25. Next, our Property business. So our Property business invests and develops primarily mixed-use commercial and residential schemes across the U.K. Business is well established in the urban regeneration and property development sector, and we largely operate through joint ventures to manage both risk and opportunities. The business has seen a challenging environment with scheme evaluations, developments and transactions being delayed due to market conditions. But despite these conditions, the Property business generated GBP 6.2 million in adjusted operating profit. The group is focused on the disciplined expansion of the Property business through select investments and strategic joint ventures. At the end of the year, Kier's capital employed in the Property segment was GBP 166 million, excluding third-party debt and fair value gains, and this reflects the group's cash investment in property. Given the group's increased operating cash flows, the benefit of building out certain projects such as 19 Cornwall Street in Birmingham, and market conditions showing tentative signs of recovery, we can see a number of attractive buying opportunities, and we've previously targeted a range of GBP 140 million to GBP 170 million of capital employed in the Property business. This range was reviewed earlier in the year, and we increased to GBP 160 million at the lower end and GBP 225 million at the upper end, and there is potential to increase this further. As a reminder, the Property division targets a return on capital of 15%. And we also recycled the capital from our property transactions, and therefore, these provide a future source of capital. We believe this will generate a return for our shareholders over the next few years, especially given the timing of deployment within the cycle and expected market recovery. And the Property division has synergies with our wider business model, with the cash generated from our Construction and Infrastructure Services division being deployed to generate higher returns in the property division, thereby smoothing the returns profile of the group. But we believe it takes time to selectively invest in sites to season capital and then transact. And over the long term, we expect Property business to deliver a more consistent return. During the year, the business has disposed of student accommodation asset in Southampton to Greystar. So with the investment in the Property business being expanded, we thought it'd be worth looking in more detail at the business, what it is, how it operates and the market opportunities available to it. So Property, as I said, is our commercial and urban and residential property developer. We've structured the business into three core areas: mixed-use residential, sustainable offices in core U.K. regional cities, and finally, industrial and last mile logistics. There are a number of market trends driving growth in this business. Firstly, the demand for carbon reduction resulting in energy-efficient buildings but also businesses relocating to regional cities with improved infrastructure. Secondly, the impact of population growth with an aging U.K. population, increase in single-person households, increased demand for build-to-rent properties and the shortage of affordable housing and restrictive planning policies. And thirdly, changing consumer trends with an increasing demand for high-quality, large-scale warehouses, global supply chain stockpiling and onshoring technology such as robotics and automation driving demand in that sector. Kier's capital allocations across these three asset classes is broadly balanced and we're targeting to grow the property portfolio and investment, as I said, up to GBP 225 million as opportunities arise. The Property business operates through joint ventures has access to GBP 1.5 billion of gross development value pipeline. Joint ventures are core to what we do. And we have a 70 strong in-house team, which is multi-disciplined, which is really what our joint venture partners value, their expertise in helping deliver urban regeneration. And by delivering projects through joint ventures, it helps us manage risk. And the property mix between public and private joint ventures is currently 50-50, which delivers really strong synergies to the rest of the group. So we look at the five steps of our value creation model in Property. First step is to source and acquire suitable land to bring into the joint venture or bring directly into Kier. The next step is to obtain planning permission. We use our in-house experience and expertise and the multi-discipline team that we've got to interface with local authorities to achieve this. We then build and manage the development. Within the building phase, we have the opportunity to use some really strong construction expertise within the rest of the group to help mitigate risk. The fourth step is to secure an occupier. This creates most of the value of the supply chain -- value chain, sorry. We have the potential to forward fund the opportunity and use that capital to actually deliver the scheme. And this derisks the investment and obviously, therefore, drives return on capital employed. And finally, we sell the investment, understanding our market and understanding what your customers want to buy helps us to deliver a product which is highly sustainable and in high demand, which gives us the best price. It's worth noting we do have the optionality to sell investments at one of these earlier stages throughout the process, as you can see from the diagram, and if we look at the group synergies and the key relationships, it does enjoy -- the Property business enjoy a number of synergies with our other divisions, particularly commercial and operational synergies. Our public sector joint ventures tend to be with local authorities and local authorities tend to be significant land owners with large portfolios where we have existing relationships from our Construction and Infrastructure Services businesses. Through these existing relationships, we're able to understand the strategic aims of the client and the system to unlock value within their estates. By leveraging our established relationships, we have access to a huge opportunity to provide services to clients where we are already a trusted partner. As well as these upstream synergies, there are also many downstream synergies within our Construction business able to tender for work within these joint ventures. Property maintains a number of existing public sector joint ventures across our Southeast and regional city target market, including Liverpool, Birmingham, Watford and the southeast focused joint venture with Network Rail. And these joint ventures are long term in nature, ranging from 10 to 20 years and provide a strong pipeline, as I said earlier, of opportunity with contractual access to land on fixed margins. The joint ventures are procured through a bid and scoring process where the score includes not just the financial return but also the track record, partner fit, ESG credentials, ability to adapt to the client needs and deliverability and these are things which set Kier aside from many of its peers. So if we move now to finally, sustainability. Last year, following the success of our first sustainability framework, we reinforced our commitment by issuing a refreshed framework. The new framework better aligns our activity to our major clients, the U.K. government and regulated companies. And this evolved framework focuses on three pillars: people, places and planet. As a reminder, our purpose is to sustainably deliver infrastructure, which is vital to the U.K., and as a strategic supplier to the U.K. government, ESG is fundamental to our ability to win work and secure positions on long-term frameworks. The U.K. government contracts above GBP 5 million require net zero carbon and social value commitments. In order to help achieve these goals, we are focused on our people pillar, which targets to build a workforce, which has the relevant skills and capabilities to deliver these goals, ensuring where possible that everyone receives equitable treatment and that our people reflect the communities in which we serve. Secondly, we leave a positive legacy in our communities through our places pillar. We do this through projects we deliver and the people we employ within them. And alongside this, we aim to further tackle inequality. And thirdly, as the stewardship of the planet is vital to all of us, we plan to reduce our carbon usage and support our customers with their infrastructure requirements as they manage climate change-related events. Our sites aim to protect and preserve biodiversity as well as efficiently use resources on our projects. So if we move to Slide 30, our environmental progress. So we see carbon reduction both as an obligation and an opportunity. We aim to ensure that we do the right thing and operate as a responsible business. From an obligation perspective, Kier has had its carbon reduction plan recognized by the Science Based Targets Initiative, including our target to achieve net zero carbon across Scopes 1 and 2 and 3 by 2045. We have reduced carbon Scope 1 and 2 by 9% in FY '24 as we progress towards our targets. This is the third year of reporting our Scope 3 emissions, and we're working collaboratively with our supply chain partners to target our most carbon-intensive materials and activities such as steel, concrete and diesel consumption. We've also enhanced our sustainable design capabilities to reduce whole-life carbon, including embodied and operational emissions, and we reported a 13% reduction in Scope 3 emissions in FY '24. For waste, we have committed to reducing the volume of waste by 2035, and we've achieved a 2% reduction in the year and 93% of our construction material and packaging waste is diverted from landfill or has been diverted from landfill in FY '24. And if we look at our social progress, safety, as we've always said, is our license to operate. The group's 12-month rolling Accident Incident Rate or AIR was 115 in FY '24, an increase of 76% over FY '23. The FY '24 numbers are an increase on the high-performing benchmark we achieved the prior year, and we are disappointed with that. But this result for Kier does continue to demonstrate the Kier does perform better than the historic industry league results. During FY '24, we rolled out our culture program, which complements our safety-specific behavioral training across the group. These programs have been designed to bring positive health, safety and well-being approaches to all of our operations and apply to all personnel, including our supply chain, and they sit alongside our existing policies and procedures. Kier is a people-based business, and our performance depends upon our ability to attract and retain a dedicated workforce. And during the year, we had over 660 apprentices participating in programs representing 6.5% of our workforce, a graduate intake comprising 36% women. We also continue to focus on Kier as a diverse and inclusive place to work to ensure we better reflect the communities we work within and serve. And turning to our suppliers, our supply chain partners are highly valued by us. They help us deliver solutions to benefit of our clients. And in FY '24, over 60% of our subcontractor spending was with small- and medium-sized companies. In addition, we continue to ensure our suppliers are paid on time. We adhere to the prompt payment code and our suppliers were paid on 34 days throughout the year. And with that, let's turn to Page 35 for the summary and outlook. I am particularly pleased that we performed or outperformed our medium-term target. Our order book has remained strong at GBP 10.8 billion and provides us with good multiyear revenue visibility. The contracts within our order book reflect the bidding discipline and risk management now embedded within the business. The new financial year has started well, and we're trading in line with expectations, and the group is well positioned to continue benefiting from U.K. government infrastructure spending commitments, and we're confident in sustaining the strong cash generation achieved, especially over the last 2 years, allowing us to significantly deleverage, increase dividends and deliver our long-term sustainable growth plan, which will benefit all stakeholders. And with that, I'm very pleased to be able to open up to any questions and answers.

Questions in the room. Johnny?

Jonny Coubrough from Deutsche Numis. Can I ask, firstly, on Construction, 97% of FY '25 revenue being secured seems a very high level. Do you expect to have less work won in year this year? And are you seeing any procurement delays as a result of the change in government? And then the second question perhaps related is on working capital. Slide 14 talks about a reduction in average net debt in FY '25 partly due to a working capital inflow. Is that the impacts on the average of the working capital inflow last year? Or do you expect just spot working capital inflow again? And how do you feel about the level of negative working capital relative to revenue on the balance sheet at the moment? Do you expect that to be a normalized percentage?

So shall I take the first, you take the second one?

Yes, go for it.

We don't anticipate any change. I mean the bidding is still very strong. The opportunities are strong. The pipeline remains strong in all regions within Construction across all sectors. Our average size of contract is slightly increasing. That's okay. We can manage that very well. So no, I don't think we see that changing. In respect to the government, I think the government is obviously going through a period of just evaluation of where it stands, having come into power only recently. But I think over the longer term, we see no change in government policy. We still see the -- as I said, the nondiscretionary nature of a lot of what we do means that we will -- we believe that they will continue the policy of spending. Simon?

Yes. Thanks, Andrew. Jonny, good question and important point, really. So yes, we're a negative working capital business. So as we grow, we get a working capital inflow. You can't have it twice. So if you grow to a certain level, you'll get an inflow, which we've seen. So you're right, the average will be mostly impacted by that inflow that we've already received. Any incremental inflow will just be based on the amount of further growth that's from there. And of course, that can also go backwards. So if we shrink, there'll be a working capital outflow as well.

And just a follow up, you don't expect a working capital inflow or outflow unless you see the revenue move.

Yes. So I mean, I think if you look at the numbers that are out there, they expect a small amount of growth. So we would expect a much smaller working capital inflow.

And then just one more from me would be on the updated long-term growth strategy in which you point to the potential opportunity for value-accretive M&A. Have you learned anything from the Buckingham acquisition in terms of the ability to integrate acquisitions into the group? And also, do you have a focus on Infrastructure Services relative to Construction?

Yes, we have learned a lot, and it's been good learning. We've captured that learning. And I think we've integrated it very, very well. It's gone extremely well. We transferred sort of circa 180 people over we brought with them, we bought the assets out of the administrators, and it has gone very, very well and very good integration. So yes, the second part of your question, Johnny, was?

Whether -- if opportunities do arise, whether there's a preference for Infrastructure Services over Construction?

There's no direct preference, but I think we'll probably see a little more opportunity in the infrastructure side. So -- but we've got an open mind, but that's where we see more of the opportunity, yes. Andrew, do you want to -- okay. We'll come back to you, Andrew. We'll come back to you now.

Andrew Nussey from Peel Hunt. Three questions, I think. First of all, on Slide 14, you obviously indicate that you should be moving into average net cash position in FY '26. On the basis of the new long-term plans or long-term targets, what do you think that might mean in terms of the level of cash, which you could potentially deploy either in property or M&A? And then sort of allied to that, in terms of new investments in Property, do you have a preference to maybe changing the shift in terms of those three buckets, which obviously are evenly spread at the moment? And I suppose allied to Jonny's question in terms of any strategic white space in that infrastructure area that you might look to build with potential M&A. And lastly, very high-level thoughts that if the government looks to use more private capital in infrastructure projects, how do you think Kier would be placed to potentially benefit from that?

Do you want to take the first one as to what we're going to do with surplus now?

I mean you've rightly pointed out, Andrew, that on Slide 16, we give our capital allocation. So we ran through that. I mean CapEx is obviously minimal. Deleveraging, you're right, to your point, there's not much further to go on that, and where I think we clearly said we're going to invest the surplus. So I think our targeted balance sheet is really plus/minus zero. So once we get there, and any of that surplus can be deployed. And we mentioned at Property, which is a great underpin, Andrew said, there's further opportunity from the GBP 225 million to go up there. And of course, that hurdle rate, 15% ROCE really underpins your M&A strategy. So we're only going to do an M&A where it's more attractive than that.

So to your question about Property, the relative investment in the three sectors, at the moment, we'll continue to have a fairly balanced portfolio. But I think there's going to be perhaps emphasis on the affordable housing, the build to rent and the urban regeneration going forward. But it does take time to come through. So government has made a clear commitment that it wants to sort of expand the house building program in the U.K., but you still have to find the land, source the land, go through the whole process of development planning, et cetera, et cetera. So that will be a little while before that really does kick in. So there may be increased emphasis there. But I think at the moment, we're going to be broadly balanced across the three sectors, and they're all performing very, very well. Infrastructure white space areas we're not operating. We're pretty happy where we're operating. I mean there's been a big focus in water, as I said, hence the reason we put those slides up, the draft determination from the regulator of GBP 88 billion, and we'll see where that ends up at the end of the year. But the water company has been very proactive in actually now locking down their supply chain, and they're looking much more towards the Tier 1s because we're obviously talking about quite large-scale capital expenditure here. So we're pretty happy with that. We see a lot of opportunity in the nuclear space as well. The pipeline is very, very strong, and that's building on our credentials already at Sellafield at Hinkley Point down at Devonport in defense and AWE. So we'll be continuing to follow that and build that out as well. And Transportation, we've got a preeminent position with both local authorities and with national highways as well. So we'll be looking to continue that position serving that customer as well. So I think that's where we want to sort of focus. We have built up our rail assets with the acquisition of the Buckingham Group. And as I said in response to Jonny's question, if opportunities arise on M&A, we'll look at them very seriously and probably more weighted towards Infrastructure than the Construction side. And your last question was on PFI capital. We have a lot of skills in this. We have a lot of contracts where we are the merchant supplier looking after a number of assets with the MoJ, looking after them for schools, education, defense, et cetera. We'll continue to have those skills. And obviously, in our Property business, we have the capital skills as well on the development side of any potential PFI. So we'll see where government wants to go, if he wants to go down that path, but we think we've got a lot of relevant skills and capability to offer if they do decide to pursue that.

Robert Chantry at Berenberg. And three questions. So firstly, could you just give a bit more color on, I guess, the expected divisional margin evolution in the coming years given the relative deviation last year, like 5.6% in Infra and 3.6% in Construction. Secondly, clearly focused on water in the slides. And can you just comment, I guess, on the competitive positioning versus the peer group? So where are you better? Where do you maybe lack teams? Is there anything you'd like to build up to really take good share? And then thirdly, going back to Property, I guess, if we get to GBP 225 million of capital employed, 15% ROCE, GBP 33 million EBIT or so, is that enough scale in each of the divisions? It's roughly, what, GBP 70 million, GBP 80 million in each of the three target areas. Does that strategically give you enough scale to be relevant and get the right opportunities and be really competitive at that scale?

Do you want to take the last one?

I'll take the margin evolution. So you're absolutely right about the margin. I think we, first of all, take the Construction margin, which has softened, that was always flattened last year by a higher mix towards our Places business, which is high single-digit margin. It was always going to move as the Regional Build business grew. And so you see that fall down because Regional Build really is low single-digit margin. And of course, as Andrew mentioned, the 3.6% is still industry-leading. In terms of Infrastructure Services, it is still flattened by a high level of design work that's going through it. So it's flattened a little bit there. So we expect it to soften a bit further going forward. It also had GBP 6 million claim in there, which won't repeat next year. It wasn't really a claim, it was work that was done previously and finally paid, allowing us to take that credit, but that won't repeat. So of course, I'd expect it to be slightly flattened from that as well.

Just to build on that, I mean, the Construction team, led by Stuart Togwell are really focusing on the quality of their business and ensuring they get consistency and resilience into those earnings. As Simon said, 3.6% is still industry-leading. So we're pretty pleased with the work they're doing. On the second point, sort of the water and the competitive position. I mean, I can't say whether we're 1, 2 or 3, but I probably can say we're probably the top -- in the top 3 suppliers. We do have differential capabilities, which the clients value in terms of project management, design capability, we can do D&B contracts as well as maintenance capability as well and MEICA capability, the M&E in water and obviously, the Tier 1 traditional skills which we have. So I think we're well positioned. And I think the recent wins we've had, as I said, the United Utilities, with Southern on top of the existing relationships and extensions we've got with Anglian, Severn Trent and South West really do put us in a good place in water into the future. But you've got to gain the ground. So we're winning these positions on frameworks, but we've now got to get these frameworks working, but the water companies are really progressive, they want to get going with us as soon as they possibly can. So whilst AMP8 doesn't actually technically start until next April, and the expenditure they really do want to get going, and we're talking to them all over the place by opportunities to get into the ground. And on Property, GBP 225 million, 15% ROCE, GBP 30 million EBIT, I think your question was, is it going to be evenly balanced across the three divisions within property? Was that the question?

It has more to do with, if it is, is that enough relevant scale to be really good at it if you have just GBP 70 million, GBP 80 million in each.

Yes, it is, it is, is the answer to that. And I think we've consistently said we wanted to get more money into Property because then you get more liquidity and then you can be able to do more deals within it, you get a higher velocity of capital use, therefore, you get the better ROCE as well. So we've always wanted to put more money into it. And as we said, there's opportunity for yet further money to go into that business. But it's a question, as I said, is a 70-person team, great team, really highly skilled. But they have to make sure that they can only work at a certain pace as well. So if you sort of inundated it with more capital, they may not be able to deploy that capital. So at the moment, it's all very measured, very business-like but we are looking at opportunities beyond that. But no, we think that's -- GBP 225 million is a good level of capital investment, but there are opportunities. Adrian?

Adrian Kearsey, Panmure Liberum. You partially answered one of my questions literally just moments ago, Andrew. On the head count within Property, you say head count is currently 70. In terms of skill set and scale, where do you need to invest in order to drive that business beyond the sort of 200 capital employed type business?

Okay. So to get more capital employed, you can actually just do bigger parts of the deals. Because we take a share of joint ventures, you can increase your share of the joint venture, and that doesn't require any more head count per se. So you can actually deploy capital more efficiently in the existing sort of deal structure. So we think that is a -- it is a barrier. Ultimately, you will have to step change if you get a market increase in capital, but we think that can go way beyond sort of GBP 225 million with the existing structure of 70 people by expanding the opportunity within the existing deals as well as doing more deals and getting more liquidity into it. So we're pretty comfortable with 70 as a number.

So by implication, the joint venture structure and joint venture profile of Property would evolve over the coming years, right?

Yes, it will. But we still stick to the principles of having joint ventures. It's good risk management, price liquidity, you can fund them, et cetera, et cetera, it's the technique they always use in it, but you can take bigger positions.

Okay. In the presentation that you talked about design more than you have done historically. What kind of areas are you particularly strong at in design? And what proportions of the contracts do you currently have design elements? And where do you think that's going in the future?

So we've just consolidated our design capability within our Transportation business, within our Infrastructure Services business, we brought together the MEICA capability, which we had in the water and the infrastructure and utility side, together with the transportation teams, together with our construction design capability. So probably the strongest area we have is in the Highways division, where we do take design and build contracts and do a lot of the design ourselves. So A66 at the moment, which we're together with Balfour Beatty in a broad alliance, we're doing a lot of the design work in this phase ourselves in-house. And then we have partners now to top ourselves up, but we have a real design capability, which I think is fairly unique in the industry. And that attracts obviously a higher margin as well, which explains some of the mix issues that are going on, partly the mix issues going on in the infrastructure business. But we think that's a real differentiator, but we also have it in the water sector as well. In Construction, it's slightly different. The clients tend to want to pick their own designers and then you innovate them across and you work with them, but they're all known to us within the Construction business. But probably the strongest area is we generally are a D&B contractor in highways. Stephen?

Stephen Rawlinson, Applied Value. Just three areas of topic for me. Firstly, and it's about risk, really the first two. Construction, average project size is GBP 20 million, but it's usually the big ones that get you. So could you just sort of give us clue as to the size of the largest two or three projects that are multiyear and whether or not they're for public sector regulated areas, just to give us a sense of the risk that you've got in there because I would say, GBP 20 million is a broad average, but it's the big ones that cause the pain?

Not necessarily. So by Construction, you mean -- in our definition, construction of schools, hospitals, prisons, not the infrastructure side...

Yes, yes, yes, GBP 1.9 billion that's in Construction.

Okay. So the first thing I think you've got to remember about these contracts is the average size of GBP 20 million, it means you can reprice them fairly regularly, building GBP 20 million school pretty much 18 months, you're going to be repricing it. So you do get a problem with inflation. A, the element that's going to be inflated within that contract is relatively small. So take a GBP 20 million contract, how much steel, say, for example, which is exposed to inflation, quite small. And you probably have it contingent within the price as well. So that's the first thing to remember, the nature of those contracts. The second thing to remember, we do fix them out. We fix them out after two-stage negotiation where you understand the risk, and you'll fix them out when you fully retired the material risk you don't want to accept, asbestos, for example, or ground risk when you're out on the ground, et cetera. And the client wants you to do that, he gets certainty and you have an opportunity to expand margin as well and please your client, et cetera, et cetera. So within Construction, whilst you always look at Construction, you think, well, that's where the fixed price contracts are and infrastructure, that's where all the cost reimbursable contracts are, the nature of how you get into the contract is vital. And our principal and policy in construction is overwhelmingly we get into fixed price contracts through two-stage negotiations. And we just don't take single-stage lump sum D&B contracts, unless some of them are heavily negotiated. They're called lump sum D&B, but they're heavily qualified and negotiated, in which case, that's fine, it's the same principles. But the basic principle of when we get into contracts and the disciplines we've put into place, in particular in Construction, mean that we have to understand the risks before we'll fix that out. That's the principle. And if you do, do that, then it doesn't matter if it's a big contract or a small contract, you're generally -- you've allocated risks, you understand those risks, you contingent for them, you provision sums in and it doesn't really matter the size of the contract. So I'm not sure I totally agree that bigger contracts equal bigger risks. A well-negotiated two-stage, off a framework, big prison, for example, 17th T block we are going to be building 17th. These are virtually identical and they're all built off site, means that you really do manage your risks effectively. And therefore, the bigger contracts tend not to be the riskier ones. So risk comes in many shapes and sizes.

On Property, one of the undoing of construction companies working in that area has been becoming their own anchor tenant, particularly in commercial projects and ending up with too many offices at the wrong place at the wrong time of the cycle. Can you provide some reassurance to us in and around that, you becoming your own anchor tenant on projects to get them kicked off?

It will not happen under my tenure. I can give you total and complete and utter assurance. That's just not what we're going to be doing. I mean, we're working very, very hard today, as Simon has talked to in the adjusted items, to solve that little conundrum. So that will not happen. Our Property business is focused on those three sectors, as I talked about, not on Kier at all.

And thirdly, on HS2 specifically, though related to what Andrew was asking about earlier, just two points. I mean, do you recognize the comments that appeared in the Civil Engineers Review that appeared yesterday. You may not have had the time because you were preparing for this, but do you recognize some of those comments? And secondly, given what your experience, would you -- if there is private money to go into HS2 specifically, would you be tempted to engage yourself in those discussions?

Well, I'll answer the second bit first. I mean the private money is probably referring to Euston and how they actually can get Euston built out with private development, et cetera. We're not participating in Euston. We're participating in the central section, the 80 kilometers in the country side pretty much Warwickshire down to the Chilterns. So that's where we are participating. So on that contract, the main work, civil contract, which we're participating in EKFB JV, no, I don't anticipate any private, it will just be built out on a conventional basis. In relation, I did have a quick look at the ICE, I mean it's a good piece of work. And I'm sure there's different opinions about what the causes of this are. But I think what's pretty clear is that there was a slight conspiracy of optimism around as there often is on these major projects and perhaps you haven't derisked the project as efficiently as you could have done, which means early investment to do ground investigations in that case to drive that specification and maybe an over-desire to over-spec it, produce that, as they say, the world's greatest railway for the last 200 years. I mean that all comes at a price. And I think there's an element of truth in that. I mean everyone's going to have their own opinion on what's happening on HS2. I can only give you the facts as they relate to EKFB. But that's their opinion.

Aynsley Lammin from Investec. Just two questions for me, really. First of all, on the kind of revised long-term sustainable growth pattern, it appears you've tweaked some of those targets and you're already kind of at most of them, in margin revenue growth, obviously. So just trying to get a bit more of a feel and understanding of where your priorities are, how you see the -- if you look 3 to 5 years out, I guess, what do those pluses mean? What's the scope for the margin over the medium term? How aggressive will you be to grow the revenue? Have you got capacity to increase the scale there? Or actually, should we just read it as more of the same? You're at the margin already, just better quality margins, delivery, cash conversion, how should we read that? First question.

Do you want me to go ahead?

Yes, go for it.

Okay. I think a lot of it is about the quality of the business. That's what we've worked incredibly hard at over the last couple of years is build a really good high-quality order book, which you can then mobilize into a good quality revenue stream, which will generate profits and cash on a consistent and resilient basis, in particular in those areas like Construction, where that's where most of our contracts sit, circa, I think, GBP 200 million in the Construction business of circa GBP 20 million, GBP 30 million average value. So what Stuart and the team there are really focused on is derisking the order book, really building relationships with quality clients, deploying our skills. MoJ is the best example, I'd say, at the moment of that, good client, invested early in a design, the modular design of T60 blocks. We're now deploying that out. I think we've built 7 and 10 to go I said or the other way around, I can't remember. That's a great example of building resilience in with a client into your -- from your order book through to your production like that. And that's our focus, I think, across the business. In terms of GDP plus-plus or plus, plus, plus, whichever you want to call it, I mean a company like ours and given our scale and breadth and our Property business, you should be able to sort of slightly outperform the growth in your client's ability to spend and the client over the cycle can only spend really, grow according to GDP. So we think we can outperform that because of our AR performance via our scale and size and see the Property group as well. So that's really what that refers to.

And then just on the second question, looking at the government's plans for social affordable housing. Just interested in your views of how they might fund that, what you may expect in the budget, how are you positioned to benefit from what we expect to see a big increase in social affordable housing.

Yes. I think the first thing they've got to do is sort out planning though, that's the first thing to allow it to happen. We participate in affordable housing already extensively in three areas: one, through the Construction business where we build under contract a conventional contract for either a developer who's got a contract with a local authority or a affordable housing provider or maybe directly for an affordable housing provider or local authority itself. So we've got a lot of capability, which we can evidence there in that sort of sense. Secondly is our developments in Property business due to urban regeneration, which includes a lot of affordable housing. So we get there as the developer. And our Construction business may act, has acted Watford being the example, as the contractor there. It's not necessary. We don't do it for that reason. We don't want to bottle up risk within the company, but that's a great opportunity for Construction if they're best of class, and they often are best of class. So that's the basis in which they can contract with our Property business. And the third area we participate is through our Places business in affordable housing maintenance as well. So we're well exposed. Do I think it will happen immediately? As I said earlier, no, I don't because I think they're going to have to acquire land, they're going to have to get planning regulations changed. They're going to have to get planning. There will be issues. It's not just going to disappear. They then got to get funding in place. They then got to get contract in place. So we're bidding happily at the moment on a lot of frameworks to get into affordable housing, in particular, through our Construction business, but we're also bidding through the development business as well. And we think that will come through in a couple of years' time. So it's an area of real interest for us. And we've got real skills and capabilities. Any more questions in the room? Were there any questions online, therefore, I ask?

We have no questions from the phone lines.

No questions. Okay. Well, just to summarize, therefore, the summary and outlook. We have outperformed our medium-term target. Our order book is very strong at GBP 10.8 billion, giving us great visibility. We started well in FY '25, and we're trading in line with expectations, and we're now pivoting to focusing on the long-term sustainable growth plan. So with no more questions, thank you all very much for coming today. Thank you.