Kier Group plc (KIE) Earnings Call Transcript & Summary

Good morning to those who have joined us so far for the call. We are live. But just giving a moment for people to join into the meeting as they get through the technology. So bear with us for just a minute, please. Great. Well, I can see that people are in the room, there are some people still joining, but I think in the interest of time we should get underway. So good morning to everyone, and welcome to the Kier Group call today following the release of results a week ago. My name is Robert Irvin, and I'll be hosting the call today. And with me in the room from Kier are Andrew Davies, CEO; Simon Kesterton, CFO; and Alpna Amar, Corporate Development Director. And before handing over to the team, some housekeeping points. There will be an overview first, and then, there will be the opportunity for Q&A following that. We're taking type-in questions today, and you can either type a question into the Q&A box at any time during the presentation, and I will repeat those questions before we get to the end. Andrew, if I could hand over to you now, the floor is yours, and my colleague Adam is driving slides.

Okay. Thank you, Robert. Good morning, everyone. Perhaps if I start with the FY '24 highlights, which you can have the packs, they're on Slide 4, if you could move to that, Adam. So I think what the message is, is we've made significant operational and financial progress over the last 3 years, delivering our medium-term value creation plan, and that's sort of evidenced this year by some numbers where revenue is up 17% to GBP 4 billion, our adjusted operating profit is up 14% to GBP 150 million. Our order book is up 7% to GBP 10.8 billion, and that's giving us tremendous visibility, in particular, in FY '25, where we have over 90% visibility of our revenues in our order book. And indeed, in Construction, we have circa 97% as well. And of course, our order book is made up of contracted or probable income. We're in a 2-stage negotiation, not probable, in a single-source basis to the client, and then, that overwhelmingly ends up in a contract as well. So all our framework positions, which by advertised value come to GBP 143 billion, are opportunities for us to pursue over and above that order book. And that operational performance and growth has allowed us to continue our strategy of deleveraging business. So we ended up with year-end net cash. It grew 161% to stand at GBP 167 million. And our average month-end net debt, therefore, halved from GBP 132 million to GBP 116 million. The confidence we have from that cash flows in the business and the order book and the order coverage, the visibility then has allowed us to declare a final dividend payment of 3.48p, which means for the year, we'll be paying a 5.15p or 4x covered dividend. And that's the first one in my tenure as well. So very strong operational performance and is allowing us to really deliver against our medium-term plan. Some other highlights before I go to that medium-term plan and then address the sort of future strategy of the group, we have acquired the rail assets out of the Buckingham Group and very successfully integrated those into our transportation business, and perhaps we can touch on that a little later if you have questions on that. And we have refinanced the group. And again, Simon is here who can talk to the state of our balance sheet, which is, obviously, at the moment, very strong as well. So if we move to Page 5, on the deck, if you could, please. So on the left-hand side here, this sets out the medium-term value creation plan, which we issued as part of our equity raise 3 years ago. We said it's a 3- to 5-year plan. And effectively, we've delivered it within the 3-year period. So as we say revenue has achieved GBP 4 billion to GBP 4.5 billion, so it gets a tick. We have hit our margin. We hit 3.8% this year. That's been consistently above our target of circa 3.5%, so again a tick. Cash flow conversion remains very strong, 145%, in excess of the 90% target because of the growth in the business. And then the last 2, we said we wanted to achieve a sustainable average net cash position with capacity to invest, and we've obviously halved our average net debt to GBP 116 million, and we're very much on track to achieve that target in the near term. And we are paying a dividend. And so, again, Simon can talk to how we're going to meet our aspiration to drive down to a 3x cover of earnings from the 4x we're now currently paying. So we're now pivoting, therefore, from recovery phase. We obviously grew 17% in revenues this year, that's GBP 560 million. That's not going to be achievable in the long run. But clearly, that's the final piece of the recovery we put in as part of the medium-term plan. But we are pivoting to a long-term sustainable growth plan there. And what we're talking about is revenues, which are realistically around our end clients who are the regulated sector or government, circa 90% covered by those 2 detected. And they effectively grid their revenue by GDP in the long run of the cycle. So what we're saying is in Construction, we're aiming to grow still by GDP sort of small plus to have a managed growth, really focused on the quality of earnings in Construction based on the excellent visibility we've got certainly into FY '25. And then in Infrastructure, because of areas like nuclear, and in particular, because of the water recapitalizations going now as part of the AMP 8 cycle, we anticipate it would be GDP plus growth. And of course, a company of Kier's breadth and capability and performance now you'd anticipate to outperform the market slightly. So, therefore, a GDP plus growth aspiration, we think, is highly realistic as well. We're going to continue to achieve margins above 3.5%. So that's now come a floor in our assumptions going forward, which in of themselves are already industry-leading margins across the sector. Maintain our cash flow, driving cash flow again at 90%. And then as we've said, we want to get to a position of average net cash and then invest the surplus cash. And we've got a slide on capital allocations, which may be if you have questions around that, we can touch on that later. And finally, as I said, we're going to drive down to a dividend policy of 3x earnings over the cycle from the current 4x earnings as well. So a very progressive long-term sustainable plan we're setting out here, which we think our markets can fully support, notwithstanding the change in government. All indications are that this present government, whilst it settles in, will be able to support and wants to be able to support the same level of spending on national infrastructure, social and major infrastructure across the piece. So at that point, I think I'll just pause and open it up for any questions.

Okay. Thank you, Andrew. And we'll now open for Q&A. And read my instructions on how to ask a question. [Operator Instructions] The first question that we have is, could you please talk about your exposure to telecoms, please?

Yes. We did, as part of our utilities -- from a Utilities business have relationships with a number of telco providers. As they've renewed their frameworks, we've gone to them and sort of approached them on the basis in which we'll be fair to trade and not trade. And for that reason we've been quite robust is because of the opportunities that sit in nuclear and water. And the allocation of resources to those opportunities provide us with better returns, we think, and more longevity in those returns. So we've deemphasized telco. We're not exiting telco by any means. We still have a couple of good contracts with good clients. But going forward, we want to put more resources into what we think are higher growth areas of water and nuclear.

Yes. I mean to put in context only 1% of revenue.

Great. And the next question is around the growth aspirations. The question is, with the average year-on-year GDP growth being around 2% for the past 20 years, targeted long-term revenue growth being GDP plus, is there any way you can be more specific? Or is there any way to go faster than that? And is -- how do you plan to exceed GDP growth?

Well, if you use water as an example, if you want to go to the page, we've got some information on water on Page 20 in the deck, I mean this is an illustration. Can we just go to Page 20? Okay. So this is the illustration of our focus in our organization on water. You'll see that the areas in black, which are United Utilities and South Southern Water, our new clients for us, we've got major framework positions to augment our preexisting positions on all of the teal-colored ones. I'm very happy to say that we've also got another new client, Wessex Water, next it's South West Water towards the left covering Bristol, West Hampshire, Dorset, et cetera. That was announced yesterday by Wessex Water. We've got 2, 3 of their major contracting lots. So we have complete -- virtual complete coverage of England and certainly all the major conurbations. And that's been an area of focus for us. The AMP cycle, AMP 8, is being draft determinated at GBP 88 billion versus circa GBP 50 billion for AMP 7. That's not settled yet. It's less than the water companies wanted. They're in negotiations, that I'm sure you know, with their regulator. But in essence, they're going to double their capital spend, and they're talking to us about potentially having a cycle between AMP 8 and AMP 9. And as all of these contracts and frameworks are signing up, they'll have options to extend into AMP 9, so we're looking at a 10-year opportunity here at double the revenue in capital expenditure. And that's why we've reorganized to focus on this area. We've put a major effort into bidding. We're now putting a major effort into mobilizing these contracts along with the water companies, and we're very aligned with them. So they clearly have to expend this capital if they are to avoid regulatory penalties. So strong alliance across all the pieces, some very good quality customers here. Obviously, let's be clear, Thames Water got their own issues at the moment. They are a client of ours. We're managing that very, very closely to ensure that we're not in any way overly expose them, but the other water companies are pretty robust and want to get on with it. So that perhaps explains a little bit why we've deemphasized telco and we've emphasized water. So water will provide a very strong growth area, well above GDP in the sort of short to medium term. But we think in other areas, if you look at in the construction areas, when you look at areas like prisons, you look areas like schools, hospitals, this government is committed to recapitalize that infrastructure as well. Now they haven't fully determined how they're going to fund it throughout the cycle, and probably some form of private finance will be reintroduced into those projects, but we think there's good quality growth there. So we think a GDP aspiration, which we think is 3% of the cycle, with strong pluses in infrastructure and sort of more measured increases in construction, will deliver sort of 3% to 5% growth across. And then we can resource it. And that's a key point I'd make. A lot of people are saying, well, can you accelerate it and go faster? Well, you have to be able to resource it. And it's not just a question of numbers, it's quality and quantity and maintaining the Kier culture in the leadership of a lot of these projects is very, very important to us. So we don't want to overtrade. And what we want to do is improve the quality of our business as well as the quantity of it. So we think this is a very measured and stretching plan.

Great. Next question is around balance sheet, which is the balance sheet has seen a strong improvement again. And you're now targeting an average net cash position. What's the appropriate levels of cash in the business? And how should we think about the use of any surplus cash?

Yes, it's a great question. So, yes, Slide 14, it's -- probably it's where we look at our average month end net debt because of spot points we reported a net cash position. And as you can see over the last few years, the question is absolutely right, yes, we've seen a strong deleveraging to the point we're at GBP 116 million. That would have meant we were running less than GBP 100 million average net debt for the second half of FY '24 with that deleveraging continuing into FY '25. You can see it's a very small block indeed. From a technical point of view, we've got a GBP 250 million bond in place. It's been trading very well. We've got very happy bondholders. So it's an excellent market, the capital market that's now open to us and very happy. So that's great. And we've got GBP 150 million RCF. I mean, it's -- the right size is to GBP 150 million in January '25 to a GBP 400 million of facilities. So I think really average month-end net debt plus/minus 0 is fine with plenty of liquidity, and that's why we said we'll reinvest, so -- at that point. So I really don't think the balance sheet where it is now is perfect. There's plenty of liquidity. The quality of the order book is very high. It's giving very consistent cash inflows and outflows, so you have really good visibility over 20 months. We're updating our investment in our property business as well, which means that will start to give consistent returns. It will also have enough capital in it, so we can extract some capital should we get a working capital outflow in any of our core businesses at any time to satisfy that and still deliver consistent returns. So we think plus/minus 0 is absolutely fine. And then you're looking at Slide 16 for our capital allocation where clearly, CapEx is important, but it's a CapEx-light business, where average sort of CapEx amount to the business is just GBP 10 million to GBP 15 million per annum. Then looking at deleveraging, what we've just seen on the previous chart, there's not much more mileage there for plus/minus 0. The dividend policy, we're at 4x cover in the reported year. We want to move to 3x, so we generate cash, we can hopefully move that quite quickly. And then where are we going to allocate capital? I've mentioned property, where GBP 166 million of capital employed at the end of the year. We're looking to get that up to GBP 225 million. So there's a reasonable amount of capital that's going to be allocated over the next 12 to 24 months. And then finally, M&A, yes, we had a successful acquisition in the period, Buckingham. That went well. So we've proven out that capability. And so we will consider where, of course, it's fit strategically, it's a good management team, and it's delivering returns better than the property, and you can consider sort of bolt-on M&A going forward.

And we do -- we might need to go back to Slide 14. We've got a follow-up question on debt and debt facilities specifically, which is, could you please clarify how you plan to deal with the GBP 250 million senior notes when they mature in February '29? And will the [indiscernible] over or will the principle be repaid from cash?

Well, when we made our debut, I think we were the first issuer in 2 years into the sterling high-yield market. We are also the first, I think, for U.K. infrastructure services business. And the point in time where we did it, interest rates were at the highest probably. So 9% coupon is reasonably expensive, albeit, but we priced that. It was a very good achievement. And since that, it's traded very well. So it's trading with a yield much lower than that if you want to go even buy some of that -- buy some sort of that debt. So we think that market is open to us. And I expect that market to be open to us. And I'd expect as we trade through probably our credit rating to improve a little bit. So why wouldn't you use that market if you can refinance probably at 6%, 7% with a tax shield compared to equity at about 12% cost of capital, and it makes sense just to continue to use that market? So I suspect that's what we do at the moment, but albeit, we're always going to keep that open and do the right thing for the business.

Brilliant. And then you touched on property and the investment there, and there's a couple of questions around property. The first one is, investments being increased in the division, could you talk about the rationale of that division within the group, please?

Yes. There's a good slide, if we go to Page 24 and 25 of the deck. I will start with 24. Just to be clear, the Property business, this is their cycle value creation model. Our Property business doesn't hold property, it develops it out. So it acquires land, it controls land, it obtains planning permission and it lets build contracts. Occasionally, those build contracts are in construction business, but only in the -- on the basis that they are best in class. There's no sort of preferential treatment for them. But I'll come back to that point of some of the advantages of having a construction business as part of the property business. And we have 70 experts in our property business who do these. They acquire the land, planning, let the build contracts. We then secure an owner-occupier, and then, we fund it. Because we could fund it at different phases of this, we could obtain planning permission on the site and then decide it's optimal to sell that site with the planning commission rather to develop it at. But our model is never really to hold it, is to get some sort of velocity into our use of capital and to do it generally in JVs for risk management and also accessibility to land. So that's the model which we operate to. The areas in which we operate, those 3 areas is industrial; last-minute logistics, which really does build off the COVID pandemic, the real move from retail into sort of distribution. That's the first area. Second area is sort of high-quality CAT A environmentally-friendly offices in regional cities, and we've got plenty of examples on those. And third is really urban regeneration or residential, which we very much do in partnership very often with local authority clients or entities like Network Rail. So those -- that's where we operate. And we have broadly the same amount of capital allocated to those 3 areas. To answer your question where it fits in the group, if we move to Slide 25, next slide, what this really shows is the synergies. So the first synergy is really financial synergy. So our Infrastructure businesses and our Construction business, they operate to negative working capital model. So as we've seen in the financial results, and Simon said, we do throw off a lot of cash when we grow these businesses. We allocate that cash in a very disciplined, judicious way into the property business for which we then target to get a 50% return, but you'll only get a 50% return when you have the velocity and the maturity through that cycle of development. So it does take a little while to ceasing capital, and we have stripped this business of capital historically, not for their reasons, but for market reasons, and then before that, for the reasons to assist the Kier's balance sheet in that sense. So we want to get to a critical massive capital where we can veer and hold with the capital in the business. So it's a very strong financial synergy with property with the rest of the group. The second synergy is the relationship. So if you look at the middle of this slide, you'll see people like Network Rail, Watford Borough Council, Birmingham City Council. Now these were all people for whom we operate. Now we are on CP7 with Network Rail in the Northwest lines. We built healthcare facilities for Watford Healthcare Trust with whom we are in a JV in Watford. We look after the road to Birmingham City Council. So when you're building to get into these JVs, which gives you access to long-term land banks, the car parks in the southeast adjacent to South -- to Network Rail stations. You're bidding on the basis of certain criteria. Obviously, your property competencies, which there are 70 strong expertise in our property business, but also we bring our utilities expertise, our road expertise, our understanding of planning. And we also bring a degree of confidence because they know we work for them in maintaining their roads or build their schools or hospitals or whatever. And that really then manifests itself in the third synergy on the left-hand side of this, which is the operating synergies. And just to give you an example, if we're building out a facility, and it's got utility problems, we know the utility people in other parts of our business. We bring that to bear. And this is a unique selling point when you're trying to bid to get into these long-term preferential JVs. Another example in Watford, we are building out residential, a phase of residential. We were using Jarvis Homes. They went into administration. Normally, you'd have a severe delay, costs would be borne by the JV. And if it were a financial partner, they just have to bear that and then relet the contract. Our Construction business stepped in straightaway to pick up that contract and have continuity, so saving the JV an awful lot of time, and therefore, money. And that's really one of the key differentiators, which gives us access to these JV, which are competitively tendered. And that access means that in that land, certainly with the government entities, their aspirations is to build out houses to regenerate town centers, to get more urban dwellings in, to get rental income, to convert assets/land assets into cash flow to pay for revenue-based services such as child care or whatever social services. So invariably, they're not totally focused on optimizing or maximizing the land value. They'll put it in at a rate that actually allows the JV to achieve the margin above which they bid. So the risks are much lower, therefore, in terms of holding or accessing land in these JVs and to get into them is very preferential. And that's why invariably, you don't take those risks. You'll have a 15% versus a 25%, but you don't have any downside risks either so much as you would in a commercial proposition. So the 3 real synergies is the financial synergy, there's a relationship synergy, which gives us good access to long-term landholdings with clients who understand and know us and then there's the operational synergies to derisk the programs once we get into the build phase.

You've touched on some of the answers to this next question, but perhaps if you could -- something else you might want to add to it, yes, which is could you talk about how you get to the 15% return on capital within property? And how much risk are you putting into the business with this division?

Yes, it's a really good question. But if you look at typical property development companies, I think they normally have hurdles that are much higher. So that 15% is cautious, and it's cautious because of the mechanics of how we do it, which basically a lot of our JV partners put in the land, but they don't receive any payment from the land until the returns go above a certain point. So it very much protects the downside, and we've seen that over the last 2 years where our property business didn't lose any money, but a traditional property development model has probably seen losses up to about 15%. So that protects you on the downside, but what it also does it limits you on the upside because obviously, as soon as you cross that hurdle, you share any future -- any other returns across yourself, your partner and the land. And so that explains how we get to the 15%. It's a blended model considering that.

Great. And then there's 2 other questions on property, which perhaps I'll put together, which the first one is how much capacity does property have to absorb capital? And is property liquid enough to act as a store of surplus construction cash...

Yes, another good question. So at the moment, it's not liquid enough, and that's why we need to put more capital in. To put that into context, over the last 5 years on average, we've disposed of 8 projects and only acquired 2 each year. So that's 24 projects down on where it was 5 years ago. That's quite a lot of liquidity because what we want if you look at the timeline that's on Slide 24, then you could see at that time you won enough projects that were on the various stages at that timeline to deliver a consistent return every year. So clearly, taking 24 projects away from where we are previously means we haven't got that liquidity. So part of the 2 of getting up to GBP 225 million is getting more projects in there, getting that liquidity back in, but also putting an extra amount here, so we can extract some capital and still deliver those consistent returns. So yes, great question.

Great. And then perhaps if we move to infrastructure, could you talk about the order book competitive environment and customer environment in the different parts?

Yes. I mean, order book is strong. You would expect it to be. These are the very long-term projects. I mean the infrastructure services business is made up of our nuclear networks, natural resources business. As I said earlier, I mean, the real focus has been in the last period on the water as they stood up for the AMP 8 and potentially AMP 9 cycle. It is competitive, but I think we're coming out very strongly with our positions on -- new positions on Southern and now Wessex Water, building on our preexisting relationships across the other companies. So I think we're very well positioned to have very strong growth there. And certainly, I think we'll be top 3. We'll see where we end up. I think when it comes to nuclear, defense nuclear is already very strong. We're in a JV with BAM to rebuild Devonport nuclear docks for the submarines, and we're well into the early works contracts there. We'll be shortly signing the main works contracts. We're bidding into Rolls-Royce for their facility to make the new nuclear rods to go in the next generation submarines. And we're in an early works contract with AWE in terms of their production facilities for, again, the next generation of deterrent. And on the civil side, we're building out at Sellafield, the medium-term storage facility to nuclear standards. And also, we've begun Hinkley for about 7 or 8 years. And we're now talking to Sizewell about transferring that capability once Hinkley finishes and Sizewell gets through their investment phase and builds up there. So very strong pipeline in nuclear as well. When you look at the transportation business, 2 elements to that really -- or 3 elements, HS2, which we're building the longest section of HS2 in partnership with Ferrovial, BAM and Eiffage. We lead on the project management of that. I chaired the JV. Simon sits on the Board as well with us. It's a very important part of our portfolio. And we think that will continue out under the current affordability phase probably towards the end of the decade. It will obviously come off from its peak, but we feel that they still will want us to complete as soon as possible because we're on the critical path to get into the rail systems delivery and, thereafter, commissioning of the railway, which will be done on the piece, which we do the main civil works for as well. And then the other side of that is the highways business where we're in local authority highways and we're also a main -- one of the major contractors to National Highways Agency. When we do both maintenance, we look after 3 regions for the National Highways, and we also did a number of capital projects under their RDP program. We just completed Windy Harbour at Fleetwood. We're in the build phase of the 417 missing link down in Gloucestershire, and we're in the design phase for the A66 as well across the Pennines. We think that RIS3 when it's issued, we will have greater emphasis, more on replacement and asset management-type activities, like what we're doing on the Lune Gorge viaducts, where we are replacing 7 viaducts. We're in a contract to design the replacement to 7 viaducts and then replace them for National Highways on the M6 of the Lune Valley. We think that is more typical of where RIS3 will be going, and obviously, it plays to our strengths as well rather than some of the major capital programs, which I think the National Highways are reevaluating or have reevaluated such as the A303 Stonehenge, which they have decided not to proceed with and the A27 in Arundel as well. So we think we're well positioned on the RDP. We're a quality provider of major capital programs under the RDP auspices, but also we think if there's a shift to more maintenance-oriented CapEx spend, we'll be well positioned for that as well. And final bit in infrastructure is rail. As you know, we bought Buckingham Group, their rail assets. We've integrated it very successfully, and we got reselected onto CP7 as well. So we're pretty excited that we're building up our rail capability and taking some market share there as well.

Great. And then if we look into construction where you see very strong revenue growth, how sustainable is that? And where is the division seeing more success?

Well, if you go to Page 40 in the appendix of the pack, so the first point I would make, the growth we've had over the last year is really recovery. We've got a very strong order intake in terms of probable work into 2-stage negotiations about 2, 3 years ago after we recapitalized. But then the inflationary pressures meant that government was delayed, and we signaled that to the market at the time, but there was a lot of pressure on revaluation, better engineering, getting extra budget, so it just put a delay into the process. But that's now come through as inflation settled down, budgets have increased, specifications have decreased, whatever the solution to it was, very little was canceled as a result of that. But we now have resolution, and that's why it's come through in strong revenue growth. We can't expect that to continue at 17% per annum, which is why we're saying we're pivoting that to a more sustainable GDP plus. But if you look at the areas where we operate in construction on Page 40, I mean, education, this government is equally as committed to that school's program, 500 DfE replacement project over 10 years, 100-plus of which are RAAC, they have to be replaced. And we're seeing across our regions very strong pipeline of fitting now into schools, and they're packaging together multi schools, which is excellent. You get more efficiency. You are going to get better pricing as well. Healthcare, they're reevaluating new hospitals program. The last one was unrealistic, delivering 40 hospitals in 5 years. It just wasn't going to happen. But they'll reevaluate that and focus on those hospitals they can deliver in the near term or they have to deliver, i.e., those RAAC-afflicted hospitals. And again, we think we're very well positioned for that more realistic program. And this government, I think, is equally as committed to do that, and it's probably more pragmatic in the way it's treating as well. Justice, we are probably the preeminent. We have under contract or are delivering or have delivered up to 17 T60 blocks. These are the prefabricated modern methods of construction blocks, which we're building, have built at Sizewell, are building at Millsike, which is this picture on the slide. And we've been using it for the accelerated prison program at Bullingdon, Elmley and Channings Wood as well. So we're very strong in prisons. And of course, we have over and above that the opportunity with the Scottish Prison Service to build HMP Glasgow to replace Barlinnie as well. And then in defense, I mentioned in the infrastructure, the nuclear dock program, but we're also on the Defense Estate Optimization program, which should be a self-funding program to literally optimize the defense estate. And we've been allocated one major project in Cranwell and a region in the southern region where predominantly the British Army are based as well. So we anticipate some work coming through that. And also on the alliance of the single living accommodation. I think we got on that based on our principles and practices of how we built the prisons in a modular form with much modern methods of construction offsite, and they want the same principles applied to the single living accommodation. So the point I'm making really is all of these, we think, are non-discretionary expenditure, and the government whilst they are obviously evaluating, having just come into power, their options, nothing we're hearing from any of the departments indicates that they're going to stop these programs. They're going to make them probably more realistic and affordable, but they're still committed to deliver them. And they may reintroduce some form of private finance as well. They're certainly looking at evaluating their models around that as well. But again, the point I'd make is we have 97% coverage this FY '25 for construction. It's a very strong line of sight across all these sectors.

Great. And the next question is, could you please tell us about capital discipline and, I guess, bidding discipline in the sector and the capacity for margin expansion, bearing in mind competition?

Well, there is always the ability to improve your business, and we will always do it. We've had our performance excellence program running ever since I joined this company that has, I think, then led to the industry-leading margins of 3.8%, which we've got in our results this year. So -- but look, I'm not going to sit here and say you can't continue to improve. But what we're really seeking to do is get consistency, get resilience into our business, get the order book and visibility of the order book. They have equal quality as we have now, that's the focus of the business, and grow in a very measured way in markets that we believe can sustain it. It's as simple as that.

And in terms of the capital, we allocate more human capital invested in bids because of course as those businesses grow they create negative working capital, as we mentioned, don't have any...

Super. And the next question is, could you please update on the Buckingham acquisition?

Yes, it's gone very well. We were fortunate, they were unfortunate, but it was our good fortunate that we were approached to buy the rail assets out of administration. They were very good assets. It was not the cause of the failure of Buckingham. It's in other parts of their business. We did acquire and innovate 11 contracts. We took across 180 expert practitioners with the requisite qualifications to operate on the railways. And we've integrated it very successfully into our rail business and our transportation business. And as I said earlier, on back of that, we've secured a position -- rebid and secured the position on CP7. So we're delighted with our acquisition and the people. We worked very hard to make them very welcome. They're very important to us.

Great. And the next question is on M&A, which obviously is part of the capital allocation framework. Could you talk about how you think about that? And are you thinking more about bolt-ons? Or are you considering something more transformational?

Well, we've got our antenna up having done Buckingham, it's proven that the corporate Kier can acquire and integrate and innovate and to do it very successfully companies of the scale of Buckingham, sort of GBP 100 million to GBP 150 million revenue. So that is a proof point that we do this very successfully in a value-added way. So yes, our antennae are up. People are now taking us very seriously in terms of when they're looking to dispose of assets, and all of the interlocutors as well look to us as well. And we're looking at certain areas, but it's more in the bolt-on, I would say. And in the capital allocation, I would say, you got to look where it fits into the capital allocations chart on Page 16 in terms of the criteria we've set, and that really is the same value as we'd expect to get return on capital in properties.

Great. And the next question is, I guess, of course, infrastructure, which is [indiscernible] made a big play of work written. Is that a market that Kier is in or would like to be in?

We focused on water. We focused on nuclear. We feel they're the right markets for us, and we have competitive differentiators. And I think we've been proven right. So we're very happy to work for other clients as long as the fair balance of reward and risk is taken into account. And if it's not, we won't bid or we will bid, but we'll turn the work down if we don't think it's fair and equitable. So no, we're delighted with the customers and the sectors we work in.

Great. And we've got 4 questions left at the moment. [Operator Instructions] And the next question is, could you please talk about the strength of the supply chain, please?

You can remember our construction business where the smaller supply chain tends to sit, and therefore, arguably the more vulnerable supply chain, although not necessarily, is very much a regionally based business. We think nationally with national frameworks, but we execute locally with local teams in local communities with local supply chain. So these relationships are longstanding. If you have a good order book, if you have a good payment record, strong balance sheet, good welfare facilities, good attitude to health and safety and site standards, you attract the best supply chain, and that's what's happening with Kier. And then we also -- because we know the supply chain options in each of the regions, we have backups if we have to have it. So I'm not going to sit here and say we don't have any issues with it, but I think it's not a material impact on our business. We manage it pretty effectively, and we've got a pretty good supply chain and good relationship.

Great. And I'm not sure how much we'll be able to say about the next question, but the question is, will labor market perform to add costs to the business?

Well, they are bound to, but I think if you look at government policy and are [indiscernible] setting out in the areas, it is really to drive -- it is probably to drive wages up and certainly to get to the minimum wage. But just remember, we pay, as a matter of policy, the real living wage already, which is above where they're trying to drive it to. And these results are based on that. So I think what you do is you just improve productivity as the wage price -- wage goes up. That's an emphasis where industry can invest and improve productivity, and I would argue with that. So yes, look, it will increase, but I think we're ahead of that game.

Great. And the next question, possibly one for Simon on pensions. Can you please explain how the pension scheme situation has improved, please?

Yes, so the pensions, there's a slide in the deck somewhere on Slide 42. So yes, I don't think it's actually improved in the reporting period, but it has improved significantly over the last few years. So if you look at the last tri-annual valuation, we've got 6 schemes here, some are in surplus and some of the smaller ones are in deficit. So all of the deficit repayments now go to the smaller ones. That's the deficit. The main scheme is actually in a surplus. And you can see the -- at the bottom there, the old schedule versus the new schedule. So you see FY '24, we had GBP 9 million worth of deficit we pay in the schedules. And then this current financial year, we reduced it to GBP 7 million, GBP 5 million, GBP 4 million and then it's GBP 1 million. That deficit on those remaining pension schemes should be then fully funded. So a massive improvement. The biggest improvement, of course, if you go back a few years ago, why did that tri-annual valuation improve? Obviously, the strength of the company improves the covenant that the company drives, which, of course, gives you longer to get investment returns, so it actually reduces your liabilities. So that's a big part of what's improved it. We obviously paid into the scheme money. And of course, it had investment returns as well, which was slightly better. So this has been a very big improvement in the pension position of the business over the last 5 years.

Great. A couple of questions have gone in, which is -- next question is, will Kier only focus on the U.K. market for the foreseeable future?

Yes.

Short but sweet. The next question is, again, looking at property. And I think you've covered some of this before, I don't know if there is anything else you would add, which is, how will it achieve the ROCE level when it struggled to do that for the last 5 years, I guess, thinking about what's the build?

Well, I mean 2 years ago, we achieved 14%. If you look over the last 10 years, it's achieved 15%, so I mean it definitely can achieve that. But as I said, what's putting in a difficult position is the fact that we're capital constrained. And ever since 2019, we couldn't allocate any capital to it. In fact, we were extracting capital from it, to the point where a couple of years ago, the capital employed in that business was GBP 120 million, which was well off the bottom end of what we were signaling could deliver consistent returns. So now we've got to build it back up again. So it's a shame. It's a great business, great team. They've supported the business during a very difficult time. And now we're just going to build -- we're going to be a little bit patient. We've got to allocate that capital. Of course, unfortunately, you allocate the capital and when you won't get the returns from that capital for 2, 3 years, so as you allocate the capital, you actually reduce your ROCE in fact. So you're actually holding it back. So we just got to trade through those couple of difficult years. And then once we've got up to the GBP 225 million, we've got enough in there to deliver consistent returns and also extract small amount should we need to, should we see that our other businesses are shrinking at any point during the next 5, 10, 15 years.

Great. And then the last 3 questions are all about dividends. I'll try and put them in 2 questions, which is the dividend has been reintroduced. Could you please talk about where the cover is at the moment? What the targeted cover is? And within that, also talk about why it's potentially higher than the cover was in the late noughties, early teens.

Yes. Yes, so cover was 4x last year. Our target is 3x through the cycle, circa 3x through the cycle. So I mean, obviously, we're going to get to that, continue to generate cash as we have been quite quickly. So I wouldn't anticipate it taking us too long to get to the 3x cover. And then why is that more that -- well, I mean the Nordics, I think the company was renowned for paying dividends that it didn't earn from free cash flow and probably increasing its debt and debt-like items to pay dividends, which, of course, isn't sustainable. So we very much wanted when we did the equity raise in 2021, every target to see realistic, achievable, arguably possibly on the side of caution. Now so we've overachieved on our margin target. We said it was a 3- to 5-year plan. We've achieved it in 3 years, and we want to very much to gear the business to continue to be like that. So yes, I would envisage a 3x nice cover. It's great. We know we want to delever, we want to allocate more to property. There's potentially M&A. But of course, we're also signaling we're not going to sit there with excess cash on the balance sheet since time goes through, then maybe we can expand those capital allocation items. And of course, there's no active projects available for us. There's the opportunity of returning more to shareholders, of course.

Great. Well, there are no further questions. So I mean that concludes the Q&A section. I don't know if there are any concluding remarks you'd like to make, Andrew, before we close out.

No, I think I'll just get back to the highlights page, right at the beginning, again, on Page 4, where we have made significant operational financial progress. As Simon just said, we have met the targets we set ourselves as the equity rose in the medium-term value creation plan. We're really now pivoting off the back of an excellent order book position, a great visibility, good client sort of markets. We're pivoting to a long-term sustainable growth plan based on those markets. That's my message. And we're rewarding shareholders with a dividend as a result.

Brilliant. Well, thanks to the team. Thank you, everyone, for attending and for your questions. There is a short survey, as you log off, so please do complete that if you can. The team appreciates feedback. And the last thing to say is a date for your diary, which is the AGM and a trading update, which is scheduled for the 14th of November. And that concludes our call today. Thank you very much.

Thank you.