Kier Group plc (KIE) Earnings Call Transcript & Summary

Great. And then thinking about your slides there on those growth engines, they point to roughly a GBP 900 million growth in those 4 areas over the next 3 years. Do you have the capacity and resources to be able to service that growth? And what's the risk of trading too hot?

Yes, I'm not going to overtrade. I've been -- I said it before, I've been in this industry 40 years. One thing you never do is overtrade. So in terms of a tendering process that we do, we don't sign up to any job unless we know that we've got resources either available or we've got time to get them in place. So some of these contracts under that PCSA, so GBP 2 billion worth of work working through the business is that they could be running in PCSA or early contractor involvement for 18 months, 2 years. So we then have the ability to either release some of our resources from elsewhere to do that or to go and source them. So I'm not worried about getting the resources. The other factor here is that in the GBP 900 million, remember, it's also there to try and offset or it will offset the runoff from HS2. So on HS2, we do GBP 700 million this year. So I've got resources on GBP 700 million of work that I need to redeploy. So this is just a -- it's a reallocation of some of the capability we have into these new sectors and it's a really beautiful coordination between runoff from HS2 and the buildup of some of these sectors, particularly when I look at the health care and the water as they grow through '28, '29, '30, there is a good chance to reallocate those resources.

Super. And then moving to the order book, and perhaps I'll pull the question out of it and merge that's been put in as well, which is you obviously touched on the framework positions. Can you talk about the scale and shape of the order book? How secure is it? And how does the public-private mix look? And just on the public-private mix, is there -- do you think there's potentially a risk at some point that you find that you become restricted because you become too big a counterparty for the government?

I won't be too big counterparty for government. If that was the case, they wouldn't be looking at doing European JVs on the mega infrastructure. So no, I'm not going to be in that position for a long, long time, if ever. But just going back there in terms of remember, we've got sort of roughly 60% public sector and then regulated body is sort of halfway house between public and private. So that's another 30% we've got there. And the private sector is restrained at 10%, predominantly more because there hasn't been that much work coming through, particularly in the London developer market. That model has struggled akin to the housebuilders that they just can't get the margin out of the scheme. So they haven't been building out. But I can see in the future in terms of having a little bit more in private sector and eating into that public sector and regulated body as we grow in terms of the mix. But I do like having that sort of mix because I can get to learn from the private sector in terms of particularly how they approach to low-carbon buildings. And I can take those learnings and I can leverage it across the public sector really quickly under those frameworks. And I can do the other thing in terms of the social value capability we have on the public sector and the regulated body work. I can move that into the private sector because that's becoming more of an issue for them regarding planning, so I can help them in terms of where they're going to get their apprenticeships from and how they're going to leave a legacy of local employment. So it works really nicely to have that sort of mix.

Great. And the next question is almost diametrically opposite, which is public sector work is clearly a big proportion of revenue. How do you think about customer concentration risk? And with half [indiscernible] budget in October, how discretionary do you think the spend is that you're exposed to? And lastly, to round that out, how cyclical do you think your markets are?

Well, individually, they're cyclical, but our skill is actually choosing the sectors that have the structural trends that we can see from the 10-year infrastructure plan where the money is going to go. And then we make sure that we have the positions on the framework ready for the call-off to go. So -- and we move. If you look at Justice, we did circa GBP 500 million in justice last year. But we know that, that cycle of work is starting to reduce. So that's why over 2 years ago, we started warming up to the defense sector and having long conversations about the defense sector about how they could form new frameworks and alliances and learn the lessons from the justice. So that when their spend started coming through and then the structural trend was there, we called it before government started even talking about raising to 3% GDP, and we start moving our resources over. In terms of the sort of the customer management, it's a good point. But if you think about it, we've got sort of 9 major sectors. And if you take the 120 frameworks, 25 of them give us about 80% of our revenue coming through. So we can focus very nicely around the customer needs. And a lot of these products we're doing -- we've been doing for decades. So we understand the product and the outcome needs very well with these clients. And we're seen as a trusted partner as they're giving you targets in terms of meeting in terms of how they can do it. So more recently, there was a heck a lot around energy efficiency and reducing energy costs. But we've got the skills and capability that we can bring in to make sure that we can drive really effective, efficient buildings at value for money level because we understand in terms of how these things get funded and what approvals they have to go through. And you get, again, trusted, so you get the repeat business coming.

And just quickly coming on the concentration risk, Stuart. It's a question we've been asked many times actually because they look at a lot of investors and us look at HS2 as our largest contract. It's about 16% of revenue, about GBP 700 million of revenue for FY '26. It can continue about that level for FY '27. And it will kind of gradually come down kind of FY '30 GBP 700 million, GBP 500 million about [indiscernible]. And so that's our largest concentration risk. And in fact, it often got flagged to us as a management team. So surely you have a risk when that comes off, your revenue is going to fall down. And that's why we deliberately illustrated to everybody and you'll see it in the presentation that our growth sectors substantially outweigh that decline in our kind of our largest contract. So GBP 1 billion. You see the reduction in HS2 over some time period is probably about GBP 400 million or so. So those 2 offset each other. To the extent that we've guided towards mid-single-digit revenue growth. So even with that reduction from our biggest customer, we still deliver mid-single digit because of the growth sectors and the kind of the spread and the diversity we've got.

And I think we covered the cyclicality point of this question, but it's really around bidding discipline. And the question was, if your market rent were to enter a cyclical decline, how do you think your bidding discipline would fare? And would you be happy to see revenue fall?

Well, I wouldn't be happy to see revenue fall. But if the market did go into that cycle, which I don't think it's going to, by the way, then of course, we would respond. So we're not going to put you and us at risk. What I would say is, though, if it went into, say, after the budget, and I don't think this is going to happen. They said, okay, we are going to turn off all the commitments we've already made. We're not going to build any hospitals. We're going to let people -- we're going to let the waiting list grow, and we're not going to deal with that issue in terms of it. We're not going to provide a clean water, drinking water, and we're going to allow people to pump stuff into the rivers as they wish. And we're not going to back the message that we've given to the world in terms of the growth around the defense. And actually, we're not interested in terms of energy resilience because we'll just pay the price that's available for -- to buy in whatever we need from outside of the country. And I can't see those things happening. And I also can't see them stopping building schools, which we've got a 10-year program. And I can't see them stopping in terms of roads, whether it's other capital or filling potholes. I just can't see these structural trends changing enough there will be no work. And then that's where our scale comes in place in terms of the breadth that we have because we've got the coverage through different sectors. As I said before, we can pivot. So if they decided to trim highways and put it into defense, I don't mind and both. I'm well suited on both. And I have leading positions on both. So if they are going to stop the work, they're probably going to affect other people on those frameworks rather than me more in terms of it because they still have to deliver, still got commitments to do. They still got regulators looking after them, and they'll put more pressure on them to make sure they've got the right people to deliver what they've got left over to do. And in terms of government is pretty good and regulated base, pretty good at managing the number of -- amount of market share they give to any one person, particularly off the back of ISG. They tend to keep anyone share around sort of 8% to 15%. So at the moment on these markets, I'm around about 10-ish. So I've got some headroom to go. But I've also got some capacity if they do give some haircuts in terms of -- it doesn't affect my short-term targets.

Great. And then moving on to capital. With capital coming out of property, you've outlined that you have between GBP 450 million and GBP 550 million of capital available for strategic allocation. And I think one of the slides might be helpful here, sort of 30, 31. Could you walk us through the capital build and then also your capital allocation framework, please?

Let me take that one. One of the great strengths of this business is the level of cash generation and the cash conversion. So you can see in this chart here, the left-hand block, the operating free cash flow of GBP 600 million to GBP 700 million over just a 3-year period in '27, '28, '29. Add to that property capital and then you kind of take away your tax, interest, you kind of one-off and fire. I saw a question in the chat about fire cutting costs. That's the net cost, by the way. So the fire and cutting cost there is about -- that's the cash outcome is about GBP 70 million. That's the net post insurance recover. And that gives you GBP 600 million to GBP 700 million of total allocable capital. I've just said on the earlier in the call that we will -- we commit to a kind of growing ordinary dividend. And then when you kind of cover off your maintenance CapEx, the result is about GBP 500 million of capital that's available for allocation. Now I'm now going to come back to a point from about 40 minutes ago or 30 minutes ago on cash on the balance sheet. So of that GBP 450 million to GBP 550 million, and I want to put GBP 200 million on the balance sheet. And we want to spend GBP 200 million on the balance sheet for a couple of reasons. One is to move closer to our peers. They will have much more cash on the balance sheet. And whether we like it or not, the feedback we get mainly from my algorithms is, well, you're not as strong as your competitors. So there is this point, which is the market can stay liquid for longer than you can stay rational, right? And so the market is telling us it wants more cash, okay? So we're going to add a bit more cash to the balance sheet. And that takes us to about 4% of our revenue. Now some of our competitors are up at 10%. We don't be up at that level. We think that 2% is too low. And therefore, moving to 4% to 5% like a nice number. That's the kind of art side of it. The science side of it says if you get to GBP 200 million of cash as an average, you have enough cash to cover the working capital swings in the business, which means you can repay your bond. When you repay your bond, you've got a very large kicker for interest. So the interest in the bond is GBP 23 million. Given that our earnings is about GBP 100 million, just over GBP 100 million, adding GBP 23 million to it is a lot. And you can add GBP 23 million to it by moving the bond in the first 3 years doing this. So I mean the math on that is that adds 6% earnings per share growth. So I commit to double-digit earnings per share growth, half of it if you pay that bond and using that GBP 200 million. So adding the GBP 200 million enables me to repay the bond. It also gives me offset by negative working capital, which is about GBP 550 million. So kind of when you triangulate those 3 components, closer to my peers, negative working capital offset and need enough cash to repay my bond, you end up at about GBP 200 million. That feels about the right number for us. And as I said, it's kind of a balance. So on that right-hand block there, I've got GBP 450 million to GBP 500 million, GBP 200 million of it I want to put towards cash, i.e., Tier 1 capital on the balance sheet. So I've got GBP 300 million left, and that GBP 300 million, we'll be looking to either do value-added acquisitions in our core markets, that means infrastructure and construction. So opportunities that would be value accretive and earnings accretive ideally to me or if we can't do that, then we will continue doing share buybacks. And as Stuart said earlier, we will do the share buyback, GBP 25 million per annum. We will continue that. But that GBP 300 million gives us the opportunity to continue those share buybacks to keep rewarding shareholders on this call.

So I would just add in terms of the acquisitions or mergers, if we are going to do, it's more like to be in infrastructure than it is construction. Construction is a more difficult sector to buy in or acquire in. And if you want sort of an idea of the sort of things we may be looking at, just go back and have a look at what we did with Bukingham in terms of how we secured that very well. I think we've managed to pay off within 6 months. And then in terms of it brought capabilities and access to the rail market, which I think will be a future growth market in probably years 5 to 10 of Tom and I [indiscernible].

Great. I need crossed off the next question as well, which also came up directly. But perhaps if we look at the medium-term targets, and the margin in particular. Can you talk about the levers of moving the margin up to 4%, 4.5%? And then blending in a question that's been asked as well, which is, is it sustainable? Is 4.5% a cap? And is it really stretching from 3.9%?

I do like one question. So previously, the plan was property would take the margin from 4% to 4.5%. The issue that everyone had with that was the volatility of the property market in terms of how sustainable was that and how consistent could we be. So what Tom and I have done is looked at the businesses and gone, well, actually, you're going to get some growth in margin just by changing the mix because our infrastructure business is going to grow quicker than construction business. And the infrastructure business makes a better margin than construction business. Construction business is still at the upper end of the quartile in terms of margin and it generates the cash, but infrastructure does deliver a lower margin. And then you've got the end-to-end capabilities in terms of what I spoke about before, where I'm not going to break it down in terms of how each of those will add the constituent parts, but it just does. When you are -- when you have knowledge and capability across the lifespan of an asset, it does provide you with greater insight, either driving value or not losing margin because you -- again, you get that consistency of delivery. And then when I look at some of the differentiators that we've got going forward and the difficulties to entry in some of the sectors that we're in, particularly around the nuclear area, that also shows me that I've got defense mechanisms to protect my starting position. And finally, if you've got that sort of growth, you'll be expecting to see productivity improvements coming through, and they can come from 2 areas. One will be in terms of digital and AI, which will either allow us to do more with less or drive some productivity improvements. And certainly, we're not investing in the naturally digital agenda without looking at how we can get our return on capital employed in terms of that work. And finally, it's always a lever in anyone's toolbox in terms of Tom and I to make sure that your costs are under control. one to protect you in terms of something you said before in terms of market vacancies, but also it is an option here for us that if you do it where you're growing, then you'll make margin out of it rather than protecting yourself. So I think it's a combination of all those things that gives us confidence. But for the first few years, we're saying, let us deliver at 4%, still up a quartile and let us have consistency of cash coming through so we can get the resilience on the balance sheet because the price in terms of being able to pay off the bond in terms of returns we get there is significant and worth going after. Then when we got that and we got cash, then we can start looking at the differentiators and the stuff I just spoke about in terms of moving the margin up. But we've also got cash. And I would hope that if we're going to use that cash, we're going to get some more margin off the back of it. In terms of its 4.5% cap, no. I'd love to get there first and then have a conversation. And in terms of what you're doing in terms of doing 4.5 billion across GBP 5 billion is exceptional work as well.

Super. And then just for clarity's sake because different businesses talk about margins in different ways. When you talk about your margin targets, is that a divisional margin or a full fat margin? If you just clear that, please?

Fat margin.

We wish everyone did it the same way.

The divisional margins we achieved this year, we achieved a full fat margin, 3.9%.incident, that's also 3.9% achieved in Construction and 5.5% margin achieved in infrastructure. So you add the 3.9% and the 5.5% and in property. And then you take away the kind of the corporate overhead costs, et cetera, then you get to that 3.9% [indiscernible]

Great. And then there's a question on cash conversion, which has been very strong at 121% this year. What drives that? And how should we think about the 90% medium-term target?

What drives that is this is a negative working capital cycle business. So when you -- particularly you're building large construction projects, you and the client will recognize the work, you invoice the client, you will see the cash payment terms kind of government payment terms. But it often takes a long time for the kind of contractors to bill you and then they get paid within 30 days. So you've kind of got this that you accrue, you can see our balance sheet, the accrual and then you get a trade payables, which is combined like 60 days. Those 2 offset each other. So you get kind of negative working capital of more like 45 days. So as you build revenue, that brings in cash, particularly in the construction business and particularly in large construction projects. And it's not quite as pronounced in the cost-plus models, which you get more in the infrastructure space. So what we've had in FY '26 is very strong negative working capital driving up the cash in some of our large projects, and that's why we're above 100%. But what we say in the future is we expect some of that large positive we've experienced in FY '26 to unwind. As that unwinds, that will pull down my cash conversion. And so I feel confident in the 90%, but the reality is it will fall off to about 90% level in kind of next 2 years. And that's why we're kind of guiding there. But you should think about it on average at the 90% to 100% level.

Great. And there's a couple of questions around shareholder returns. And the first one is on the dividend, which mentioned it should grow in line with earnings. The question is around the cover, which is, does it need to be 3x given the stability in the business?

We're currently 3x. And as I said, we are a huge cash business is a lovely problem to have in a year or 2. So a year or 2 time where we've got the cash in from property when we have repaid the bond. And at that point, we were looking at what's the M&A opportunity, what's the share buyback, what's the dividend. And if we see that long term, that cash conversion just keeps coming, we may shift that multiple. So it may shift down to 2.5. I can't just go to guide 1. But yes, that is a possibility that that may shift in the future.

Great. And then we've got a few more questions in the hopper about 7 minutes left, which should be enough time to get through them. And the next one -- sorry, just on finishing off on the capital returns, which is obviously, you've talked about buybacks. And the question spec is, would you consider tender offers as well?

I haven't really thought about that as an option kind of preferred buyback. I mean we haven't really explored it, but one that we can take away and think about.

Yes. As we said at the start, the beauty of the strategy is we've got choices, and we'll continue to make the right choices for all the stakeholders, so.

Understood. And then the next one is moving into inflation. Can I ask you to talk about inflation broadly and specifically around wage inflation as well?

Okay. I would say -- go back to the sort of starting point in terms of model. Remember, 60% of our work is cost reimbursable. So that's a straight pass-through. And a lot of that is public or regulated bodies. So that gets passed back to government. in terms of spend. And then the 2-stage work that we've identified in terms of presentation, so 35% of our work, which is in cost reimbursable is negotiated on a 2-stage basis. So that allows us to do 2 things. It allows us to decide and evaluate the risk at the time that we convert the contract. Remember, we've been working on some of these sort of tenders in one-to-ones for 12 to 18 months. So if we feel that the risk is too high on certain commodities, then we can leave that risk with the clients or make sure that we get paid adequately for it. And then quite often on the larger jobs, we hedge by the day that we sign our contracts with the client. We simultaneously sign subcontracts with the supply chain. So we transfer that risk down. transparently with us and the clients, everyone knows where it's sitting, but that does allow us to derisk it. So I'm not immune to inflation cost, but we do mitigate it particularly well. And of course, the one area, if you're going to pass over to Tom, he's made this point pretty well previously in the last couple of weeks, is that the area we did get exposed to in terms of inflation was property because we suffered because we had some lump sum pricing and it has affected the market in terms of the cost of the development appraisal. So our response to that is that we are going to move away from it because we believe that volatility is a risk that we don't need to take.

Great. Thank you very much. And the next question is on Kier Places. Which Kier Places has a strong operational capability and manages significant long-term assets and facilities, yet it appears to have lower market visibility than some of our competitors and other parts of Kier. What are your priorities over the next 3 years to strengthen the Kier Places brand and ensure that this translates into sustainable revenue and margin growth?

Yes. We don't do everything at once, do you. So in terms of the strategy was to simplify the model, deal with issues that we had around property, put a strategy in place that's going to generate that double-digit EPS. We don't stop there. I expect there is going to be new growth engines that come through over time. As the existing growth engines we spoke about become more mature, we'll be looking at others and Places could be one of those. But at the moment, what it brings to us is that end capability of FM. And also that we are working on a number of PFI contracts as the FM providers. So I like that capability because I'd like to see where the PPP market may go. But I would say comfort that I don't need that at the moment in terms of achieving this plan, but it's nice to know that I've got some other levers that I can look at in the future.

Great. And the next ones are basically around political risk, which is, are you concerned that having U.K. taxpayer effectively as a major customer, share buybacks might be considered politically excessive?

Not at the level that we're at. Certainly, when we -- we're a strategic supplier to the government. So we have more contact than most with them. And during many of my conversations I've had, I've not heard that as an issue to them thus far. In fact, yesterday, when I was with the cabinet office, they congratulated us on the results, and they were very keen to express back to my teams here in terms of keep doing what you're doing here. Now part of that will be the existing share buyback scheme that we've got, which at the moment is going to continue if it's appropriate thing to do at the levels that we've done for the last year. So I'll keep an eye on it. If I do think it becomes an issue, then it's something I'll make sure that we'll make the appropriate choice and decision at the time, but I've not heard it.

That's great. Thank you very much. Well, that concludes the Q&A. There were a couple of supportive comments in the questions as well. And I think those have been noted. And before I hand back to Stuart for any closing remarks, there is a short feedback form that will pop up as you exit and the company really value your feedback. So please do take a moment to fill it in. Now I hand back to you, Stuart, for any closing remarks before we look to wrap up.

Well, first of all, thank you very much. I thought the questions were very insightful in terms of our business. So again, I'd say for those long term, thank you for those who joined, welcome. And I hope you're as excited as we are in terms of the opportunity that we have in front of us. And if there are any questions, then please come back to us and we'll do our very best to answer it. But thank you very much for your time, and I hope everybody enjoys the weekend.

Super. Thank you very much. Thank you to the team. Thank you to the attendees and for your questions, which are great. The last thing to say state for dies, which is the provisional date for the AGM and next trading update is the 12th of November. So thank you very much. That concludes the call.