Morgan Sindall Group plc (MGNS) Earnings Call Transcript & Summary

Good morning, and welcome to our full year presentation. 2020 was dominated by COVID, and it continues to dominate and reshape our world. It has caused immense sorrow, and many of our colleagues have lost loved ones. Yet today, the group is much stronger than this time last year. We're stronger because our decentralized teams adapted, innovated with sensitivity and speed to rapidly changing circumstances. I've been hugely impressed by our people throughout the business who have done tremendous things in the face of adversity. I know that this would not have been possible without the very strong support of our clients, our partners and everyone in our supply chain. A huge thanks to everyone. Although our adjusted profit before tax was down 29%, turnover was actually only down 1%, and encouragingly, our order book grew by 9%. Our balance sheet has further strengthened. We are reintroducing medium-term targets today, and they remain the same as before COVID, except the medium-term target for Infrastructure is increased to 3.5% from 3% pre-COVID. We have had a strong start to the year and now expect profit to be materially ahead of our previous expectations and slightly ahead of that delivered in 2019. If I could move on to the agenda. Steve will go through the financial and operating review. I will then go through the medium-term targets and outlook, and Steve will then return to talk about how we are reducing our carbon emissions. Let me hand over to Steve.

Thanks, John, and morning all again. As usual, I'm going to cover the financial and operating review this morning. So just going straight in with the income statement. And as John said, it's been a year which has been dominated by COVID. Now although group revenue was down only 1% year-on-year to GBP 3 billion, not surprisingly, our margin and profit, both took a hit, with operating profit down 26% to GBP 68.5 million and profit before tax, down 29% to GBP 63.9 million. Still, though, a very resilient performance. EPS was down 33% to 108.6p. And then having reinstated our dividends back in November, we've today now declared a final dividend of 40p, giving a total dividend for the year of 61p per share. So if we just look at the revenue profile across the year, you can see here that it broadly tracked the COVID restrictions. We started off very strongly, up 17% year-on-year in the first quarter, then dropping off significantly, down 23% in the second quarter during the first lockdown period. As restrictions were then eased through the summer and our operations got back to full operation and activity, Q3 revenue was level with the prior year. And then through the tier system and the second national England lockdown, we were pretty much back to full speed, with revenue up 2% in Q4. So with the second half revenue up 1% on the prior year, our operating margin also recovered. And at 3% in the second half, our margin was also getting back to pre-COVID levels. So just a quick summary then on the main areas where COVID's impacted us. Well, firstly, additional costs incurred on site closures and site remobilizations, and secondly, reduced productivity and efficiency. In the early days, productivity was impacted by the reduced availability of certain building materials, then it was from the on-site implementation of revised safe operating procedures and social distancing. With so much lost time in Q2, contract periods were obviously stretched with additional overhead and support costs needed to support longer contract periods. We had a sudden reduction in volumes in property services, where services were reduced to essential services only, and this division did take longer to recover than others, with full activity really only getting restored again in Q4. Generally, work winning has been a bit slower, and we found converting preferred bidder situations into final contracts has just taken that little bit much longer, whilst decision-making by some of our clients and partners has also taken a little longer as everyone has had to adapt to new ways of working. Now in relation to furlough, we did initially claim under the scheme, however, have subsequently repaid all amounts. We think repaying this was absolutely the right thing to do on a whole number of levels. There's higher interest charge in the year as a result of us drawing down on our facilities on a precautionary basis at the initial stages of the COVID lockdown in March. Obviously, with hindsight, this wasn't required and cost us around GBP 1 million extra on interest. And then finally, one impact was also that we canceled the final dividend from 2019 in light of the uncertainty, which we all faced back in late March and April, and which, as I mentioned, we reinstated back in November. So hopefully, that gives you a flavor of the main areas impact of COVID. So this gives a summary of the divisional split. I'm going to cover more detail on each of the divisions later, but there's just a few immediate standout points on this slide. Firstly, once again, Fit Out has demonstrated what a high quality and resilient business it is, with a profit of GBP 32.1 million and a margin of 4.6%. And then secondly, within Construction & Infrastructure numbers, the Infrastructure business has performed really well and is well set to make further progress in a market which is earmarked for future investment, but more on the operations later. Onto cash. And we've had a really, really strong year on cash. This slide shows the traditional accounting operating cash flow statement for the year, with an operating cash inflow of GBP 178.7 million, driven by a working capital inflow of GBP 102.6 million. This was a tremendous result. Now of this inflow, GBP 32.9 million of it relates to the regeneration businesses. Now I need to point out here that this is driven by a significant amount of completions towards the year-end, plus the fact that we chose to forward fund some schemes to derisk them. In no way have we taken our foot off the pedal of strategic investment in these businesses just to preserve cash. Far from it, it's been investment as usual in these divisions right throughout the year. Another positive aspect of the cash performance is that the working capital inflow includes a significant reduction in receivables, about GBP 56 million of it is due to this. The rest is a reduction in inventory. It is absolutely not in relation to playing around with supplier payments and payables, and I'll talk more about this in a slide or two. Now you've seen this graph before. It really does tell the real story. It's our daily bank balance for every single day of the year, that's the thick green line. What you see is our average daily net cash for the year was GBP 181 million, up GBP 72 million from last year. The lowest level on any 1 day was GBP 86 million. We never went lower than that. And interestingly, that was actually pre-COVID. Now it's worth pointing out that we did also benefit from some deferrals of tax payments during the year, PAYE, VAT and the like. Within the daily average of GBP 181 million, around GBP 20 million of that was as a result of us deferring such payments. So in a way, the real underlying average daily net cash was GBP 161 million. As at the year-end, though, all previously deferred amounts had been repaid, and there was no money owing at all to any U.K. government schemes. So the GBP 333 million net cash at the year-end is a clean number, no deferrals at all in there. Now we also renewed our bank facilities in the second half at the same level as before, which we saw as a real vote of confidence in the business. So cash-wise and liquidity-wise, we're in really good shape. And based upon where we are now and our plans for 2021, we expect the average daily net cash for the full year, again, will be well in excess of GBP 100 million. Now just back to payables. I've said before that the group's relationships with its supply chains are of strategic importance to us and our actions and behaviors during these challenging times, we think, will play a major part in our future success. Now this slide shows our formal payment practices reporting for the second half of last year for our larger trading divisions. And what this shows is that we've made some significant strides forward in improving our payments. Particularly, a draw out Construction & Infrastructure, where in the last 6 months, we reported the average time taken to pay invoices of 27 days, an improvement of 5 days on the comparable period in 2019, and with 98% of invoices now paid within 60 days. Note also that Fit Out pays its invoices on average in the low 20s and has done this for many, many years. Now I'll come back to this later when I talk about Fit Out in more detail as this aspect has been a key part in why that business has been so resilient throughout the COVID crisis. Property Services had a few blips with processing in the second half, with its average time to pay worsening. However, we're confident that this is just a timing issue and will reverse in due course, whilst Partnership Housing is also now paying 95% of its invoices within 60 days. So in summary here, we've taken the opportunity this last year to accelerate our payments to the supply chain as fundamentally, we believe there is a real business gain to be had by doing the right thing during these current times. Briefly on the balance sheet. We've got good cash, no pension issues, and tangible net assets of GBP 208 million. So a really good position to support us as we move forward. Now I mentioned the one consequence of COVID has been prolonged client decision-making and the extended time taken to convert preferred bidder situations into final contracts. While notwithstanding this, we still had a very strong year of work winning. The total order book is up 9% to GBP 8.3 billion. On the Construction side, up 7%; while on the regeneration side, up 11%. Importantly, though, we've kept our discipline. We've not compromised on quality nor compromise on our expected returns hurdles. We've maintained the right risk profile for us. And with this high-quality order book, we feel well set up for the future. So that's the group picture. If we just now look at the operational divisional performances. Within Construction & Infrastructure, as I mentioned, we've got 2 starkly contrasting results. Infrastructure has done really well, a very strong year, while Construction has been impacted by COVID quite heavily on the cost side. For Infrastructure, it's had a significant volume growth, with revenue up 12% and margin growth now up to 2.8%, giving a profit of GBP 27.5 million, up 81%, a really strong performance from Infrastructure. Most of its work comes through public sector frameworks or regulated bodies, and clients have generally been very supportive of maintaining activity throughout the whole year. For Construction, revenue was up 8%, but it got hit by additional costs of closing sites, productivity issues and delays to program. Its margin for the year was 1.2%, and profit was down to GBP 8.2 million. However, importantly, the second half margin was up to 1.8%, reflecting a good recovery and progress towards a much more normalized run rate. Good progress, too, on the order book front for the division, which was up 12% to GBP 2.5 billion. Within that, Infrastructure was up 15%, whilst Construction was flat. However, for Construction, it's worth noting that we also have in excess of GBP 730 million worth of jobs sat in preferred bidder not yet reflected in the order book number. So we're still winning a good share of quality work. For Fit Out, as I mentioned, a very resilient performance, and I think this really does demonstrate the high quality of this business. Profits of GBP 32.1 million and a margin of 4.6%. Now I mentioned earlier that Fit Out pays its supply chain on average in 21 days and as has done so around this level for a while. Having such preferred relationships with its supply chain in this way has really come into its own in the last year, with the supply chain responding to new ways of working in a fast, efficient and flexible way. It really does give us a business advantage and a business benefit. Fit Out is a market leading business. Its order book at the year-end was GBP 410 million, down 15% on the prior year, with GBP 387 million of that secured for 2021, itself, down 8%. However, on top of this secured work, we've also carried over into the new year around GBP 450 million of bids, which are still pending a decision. And further, in addition to this, there are around another GBP 350 million of tenders identified to be bid for in the first quarter. So the market here for Fit Out is still very, very active. Now Property Services is probably the division which has been most impacted by COVID for us, and where almost overnight in March most of its activity on its response maintenance contracts dropped down to essential repairs only, while activity on many of its contracts actually cease completely. Contracts started to remobilize in the second half, and the division is now up to full speed, other than some slight delays on planned maintenance programs. Now in line with this second half recovery, the loss in the first half was reversed in the second, giving a profit for the full year of GBP 1.0 million. Now the division's order book is long term, up 7% year-on-year to GBP 970 million, and over 55% of it is for 2025 and beyond. So we've got good long-term visibility here. And here, there are around GBP 1.6 billion of bids, either awaiting a decision or identified to be bid for in 2021. So again, in this market, plenty to go for. Now Partnership Housing effectively stopped at the end of March following the housing industry and its supply chain, but came back strongly as operations opened up again in May. And since then, as with others, we've seen this strong demand continue through the second half. Looking at the year as a whole, it was the contracting side, which suffered most, with revenue down 33%, whilst the higher-margin mixed tenure business was up 3%, with 6% higher unit sales. Together, this business mix allowed for a slight improved margin in the year, up to 3.7%. Now if we just look at the second half in isolation, though, the operating margin was up to 4.7% compared to 4.3% in the prior year. So operationally, the business is starting to deliver. Now I've said before, there's a real market opportunity here. The order book increased by 16% to just short of GBP 1.3 billion, demonstrating the strategic progress being made in the business. So with this and with our ongoing commitment to invest in this area, we expect the average capital employed in the year to increase to around GBP 180 million, which includes around GBP 10 million from -- transferred from the Investments division. But I'll talk a little bit more about this in a moment. With Urban Regeneration, it's been a relatively slow year with development progress generally moving to the right as Construction progress was interrupted by the first lock down, and decision-making amongst its clients has remained cautious throughout the year. That said, these are long-term schemes where we have development agreements with clients for anywhere up to 25 years. So a 3- to 6-month delay in the overall scheme of things is not that material. That period of time delay, however, is very material when you're looking at a 12-month financial reporting period. With the long-term order book up 7% to GBP 2.4 billion, there's also plenty of future opportunity here, and we'll continue to fund schemes on an individual basis, looking at the optimal risk reward funding structures to be used at the appropriate time. For the year ahead, we're looking at average capital of around GBP 120 million, which includes around GBP 20 million transferred in from Investments. And on that note, this is the last time we'll talk about Investments as a separate operating entity. Towards the end of the year, we split the operational responsibility for its activities between Partnership Housing and Urban Regeneration, thereby eliminating the increasing overlap in the marketplace of their proposition and capabilities and to eliminate the creeping duplication of resources. We made a loss of GBP 6.9 million in the year, and this includes the cost of affecting this transfer and associated redundancies. And looking ahead, therefore, we'll now report in 5 reporting segments. And this slide gives you an idea as to how the restatement of the 2020 comparatives will work to reflect the new structure. So as an example, on the left, GBP 0.1 million of the loss will get allocated to Partnership Housing being from the later living extra care business and the JV with Hertfordshire County Council. So its 2020 number will be restated by that amount for comparative purposes and so on. So that in summary, 2020 was significantly impacted by COVID. However, these results really do prove the resilience and quality of the business. We had a good second half, and all our businesses are operational, with COVID restrictions now not having any material impact on our business. The balance sheet has strengthened, cash is really good, and we expect the average daily net cash for this year will again be well in excess of GBP 100 million. All amounts received under government schemes have been repaid. Furlough, VAT and the like, all repaid. We owe nothing, and we continue to focus on improving our payments to the supply chain. And we've declared a final dividend of 40p per share, adding to the interim we paid in December to make a total dividend for the year of 61p. Thanks. And let me pass you over to John.

Thank you. Our group strategy remains exactly the same as it did pre-COVID. We're in the markets we want to be in, and we'll continue to increase our market share of those markets. We are looking for long-term work streams either with long-term contracts or clients that have a lot of repeat business. This is very much an organic growth strategy. And we have plenty to go for without the need of any acquisitions. Our job is to make our businesses better and better and then even better again for all our stakeholders. Our stakeholders include people who work in the group, customers, partners, our supply chain and, of course, the communities we serve. Now anybody can have a strategy, but it is the persistent execution of our strategy day in and day out, which gives us high-quality earnings that we have today. The quality of our earnings is demonstrated by the fact that we have had no exceptional items in the last 5 years. Now this is unusual and fairly unique in our industry. Having no exceptions or significant contract write-downs go a long way to explain our strong balance sheet and cash position. Today, we are reintroducing medium-term targets for each of our divisions, and I will start with Construction. The medium-term target for Construction is to consistently make 2.5% to 3% margin. Margin is much more important here for us than turnover. We will allow the turnover to fall if we can't get the jobs with the right risk profile, as indeed we have done in the recent past. However, we expect some turnover growth as we increase our presence in some geographical areas. Partners, subcontractors, government and commercial clients are all looking more closely at balance sheets, which is completely understandable from a risk management point of view. Clients are also increasingly looking at factors rather than just the lowest price in making their decisions, such as ESG credentials, and there are more barriers to entry as a result. Although I must say, the market is fairly slow at the moment, particularly in converting 2-stage tenders into orders, but we expect to see modest growth in turnover over the medium term. And with our high visibility of work, we'd expect to make progress towards our medium-term targets in 2021. Infrastructure. Now before COVID, our medium-term target was 3% margin, and we are now increasing this to 3.5% margin. Infrastructure is all about very long-term relationships with relatively few numbers of large customers. In order to achieve the 3.5% margin, we're concentrating on consistently improving our operational efficiencies. Traditionally, a lot of large Infrastructure jobs are done in joint ventures between contractors, but we feel this is not always best for the client or indeed the contractors involved, and we'll avoid working in a JV with other contractors, unless it gives us a clear competitive advantage. Our design business that is reported under Infrastructure is seeing a very stable market with life sciences particularly strong. This business represents about 10% of Infrastructure revenue. With our increased long-term order book and a government committed to Infrastructure spending, the medium-term prospects for Infrastructure are strong, and we expect to make progress towards our medium-term targets in 2021. Fit Out. The -- our medium-term target remains the same, a profit of at or around GBP 35 million a year. Now we are, as you know, market leaders in Fit Out, and we have to work really hard to maintain our position, and we must keep innovating and avoiding complacency at all times. The market for Fit Out is stronger than most people would initially think. The Fit Out market is not based on the office property market but on change in client organizations. We are now seeing clients changing their occupational space strategies, and this means more work for us. Our design & build office Fit Out business is looking particularly strong. Design & build has a high overhead base and higher gross margins. So high volume leads to significantly higher profits in that business. We expect Fit Out's medium-term target to be met in 2021. With Property Services, our medium-term target is a profit of at least GBP 10 million per annum, and we expect to get there through both turnover and margin growth. Now we are the disruptors in this market through our use of data and technology to provide extra services to clients, including social value, better cost control and better service to residents. The market is large and our current bidding activity is high. We expect to increase our order book and gain market share this year and make progress towards our medium-term target. Partnership Housing. We Are reconfirming our medium-term target of 6% operating margin and a ROCE in excess of 20%. Now as you know, we see significant growth potential for this business, and we expect to increase our turnover in both our existing markets and in geographical areas where we are currently not operating. We expect this mixed tenure to continue to expand as a percentage of turnover as we win and indeed as we are winning more and more bigger mixed tenure schemes. The current market is strong for both open market sales and the size and number of bidding operations. We expect both revenue and capital employed in this business to be higher in 2021 and higher again in 2022, and that progress towards our medium-term targets will be made in 2021. With Urban Regeneration, profits are always going to be slightly lumpy. And the way that we measure performance is on a rolling 3-year ROCE. And our medium-term ROCE is -- medium-term is a ROCE towards 20%. In order to get there, we need to have more schemes with the same overhead base and use our capital more effectively such as more forward funded schemes. Historically, most of our schemes have been in the South, the Northwest and the Northeast, but we are now seeing strong growth in the Midlands. At present, we're seeing a large number of long-term opportunities across the country. However, the commercial markets with the exception of logistics are not strong at the moment. Schemes that Urban Regeneration has inherited from Investments will be a drag on ROCE in the short term. So we expect only modest progress towards medium-term targets in 2021. Now this last slide acts as a summary of everything I've just said, so I won't go through it in detail. But you can see that our medium-term targets are the same as pre-COVID with the exception of Infrastructure where we have increased our medium-term target to 3.5%. And the group has started 2021 with real strong momentum. I will now hand you back to Steve.

Thanks, John. And now in this section, I want to just spend a few moments talking through where we're at with this whole area of carbon emissions, net zero and the like, and just to try and demystify an area, which I think has become quite confusing amongst the many headline-grubbing pronouncements that are around at the moment. So just as a starter then, in terms of our whole responsible business strategy, as many of you know, in Morgan Sindall, we refer to these as our total commitments. These provide a framework for a common strategy, which is focused on all our stakeholders. There's a framework we've been using since 2008. So none of this is new to us. You can see here on the slide, these commitments fall into 5 headings or categories, if you like, and support the UN's Sustainable Development Goals, which are noted here. But importantly, they also support us becoming a better business. Now each of these total commitments has a range of KPIs used to measure progress and performance over a number of areas. And we formally report against these every year, and details of these are available for all to see in the annual report and on the website. Now improving the environment is just 1 of our 5 commitments. And within this, I want to focus here on specifically climate change and carbon reduction. But firstly, a bit of background and a few of our credentials. This is not a new area for us. Now we've had our data independently audited since 2010 and were recently awarded an A score for leadership on climate change by CDP, the only major U.K.-owned construction company to do so. Now science-based targets, this is important. These are targets, as they are described, based on science and externally verified, calculated to eliminate all emissions to the atmosphere by 2050 and to limit global warming to well below 2 degrees C, preferably 1.5 degrees C above pre-industrial levels in accordance with the Paris Agreement. And again, we were one of the first construction companies this time globally to gain this accreditation, all externally measured and all verified. Now there's a few other things on this slide. But hopefully, what it gives you is the sense that we've taken climate change quite seriously for many years now. And it's also a part of how we do business and how we win business, and this slide just gives you a few examples you can read later, where reducing emissions is already well embedded in many of our activities. So firstly, when we talk about reducing carbon emissions, what precisely are we talking about? Well, for us, to be clear, it's our Scope 1, our Scope 2 and operational Scope 3 emissions defined accordingly, and there's a slide at the back with definitions and terminology. These are recorded and audited every year by the Carbon Reduce scheme, formerly CEMARS. Now I mentioned that science-based targets are calculated to eliminate all emissions to the atmosphere by 2050. And the graph on the right shows a trajectory top-down that we need to follow to achieve these targets. That's the yellow area. If we did nothing more from today, we would simply follow the dotted line shown on here with the arrow. So we need to follow the downward pathway. Now just as an aside, our total emissions recorded in 2019 were around 27,000 tonnes. And this is our starting point. We think this is a better benchmark than 2020, where our emissions were significantly lower but we don't think sufficiently representative due to the COVID travel restrictions in place. So it's about following the pathway. And what we've done then here is to take this top-down pathway and validate it bottom up. Now we've modeled the various scenarios and have populated the route map with specific actions and calibrated their impacts, stretching out to 2030, which will move us down this science-based pathway. And the key actions on this route map is shown here. Now some of these are obvious. However, what's different, I think, is that the impact of each action is all backed up by modeling science and real tangible plans. So we've got a clear and identified set of actions, which will support the science-based carbon reduction pathway out as far as 2030. So where does net zero fit into all this? Well, on the basis, there doesn't appear to any -- appear to be any common definition of this. Any company could claim to be net zero at any one time, if it just simply paid its money and invested in offsetting activities, whatever they might be, shown by the black arrows. Pay your money, you get your offset and you claim that zero, and you get the headlines. The problem with this, though, is that it doesn't achieve the goal of eliminating all emissions nor is offsetting a currently recognized activity in science-based targets, although this is expected to change. But for us to get to net zero per this graph, we will need to offset, not huge amounts but what we want to do is be clear and transparent about any offsetting activities that we do. Now our intention is that our offsetting active investments will be long term and sustainable, multi-generation and importantly based in the U.K. and expected to deliver ancillary benefits of improved biodiversity, natural capital and population well-being. And therefore, by 2030, at the latest, we will have invested in such approved, long-term and sustainable carbon removal projects that we can then claim to be net zero, which is the smaller green arrow or even net gain, which is a larger green arrow. So this is our commitment as an organization on carbon emissions. It has 2 strands to it. Firstly, to continue with the transparent and externally verifiable science-based targets and fulfill the actions required for us to follow the 1.5 degree centigrade pathway to zero emissions in 2050. And then secondly, to invest in such U.K. carbon reduction initiatives, which have a long-term generational impact to the level where with a modest amount of offsetting, we can claim then to be at least net zero, as we've defined it, more probably net gain by 2030 at the latest. This commitment will also be supported by an internal carbon charge, which we've introduced from the first of January this year, designed to encourage group-wide innovation in carbon reduction. However, the ultimate position and our horizon ambition has to be to eliminate all carbon emissions from all our activities, upstream, downstream, the full Scope 3, including from our entire supply chain, the embodied carbon in our construction and emissions from the users of our -- of our buildings and users of our buildings. And we're on with this, too, with the first step being to help the supply chain and support the supply chain measure, report and reduce their own emissions. And this is also now at the center of how we design buildings for the future. A great example of this, you can see the picture here, is in our Urban Regeneration business through its English Cities Fund in Salford Central. Net zero in operation has been the main driver in its design. And in addition to being a fully fossil-fuel-free office, the living external facade here provides a net gain in biodiversity for the local area. Now this sort of thing has to be the way forward. So I hope that gives you a flavor. What we want to do is we want to be clear and transparent in everything we do. Thanks. John?

Our strategy is unchanged, and like for us is all about persistent implementation of a very straightforward strategy, which gives us high quality of earnings and will lead to increased market share. We have reintroduced medium-term targets today, which are exactly the same as they were pre-COVID, with the exception of Infrastructure where we have increased medium-term target margins to 3.5% from 3%. Our strong balance sheet is absolutely fundamental in allowing us to make both the right short and long-term decisions for the business. Now everybody is talking about carbon emissions at the moment, and it isn't always easy to understand exactly what people are saying. I very much hope you found Steve's presentation on our path reducing our carbon emissions, both clear -- clear and transparent. Now look, we're in good shape, and we expect profit in 2021 to be slightly ahead of the record profits we delivered in 2019. So we are emerging from this challenging period stronger with teams even more determined and confident in, their ability to challenge the status quo and drive things forward at pace. Thank you. Now we are now ready to take questions, you may have. [Operator Instructions]

Joe, you're first.

Three questions, if I may. Firstly, Fit Out, really strong outlet there. Could you talk us through the dynamics? Because it's obviously quite a high private sector exposure, quite a high London exposure. But you were talking about changes in consumer behavior. I would love to hear more about that and why you're so positive about the outlook there? And then secondly, maybe one for Steve. Can we talk about the impact of Regeneration on working capital in 2020, but also what the investment is going to look like in working capital for 2021? And then finally, probably again for Steve. Very notable ambitions in reducing your carbon emissions. Could you talk through the potential costs that's may be related to that? And clearly, there's a huge cost of not doing anything, but what are the costs of reducing your carbon emissions?

I can do with Fit Out. I think the idea that people are not going to go back to the offices isn't going to be true. Clearly, we will be not working exactly the same again, but what we think is happening is long-term trends have accelerated. There are also quite a lot of large Fit Outs in the marketplace at the moment, which gives us some confidence, and these would have perhaps been pre-lets that were done pre-COVID. But actually, we're finding it on the smaller jobs that we're particularly busy at the moment, and a lot of those are done through design & build, where people are just thinking, how can we freshen up our office, how can we expect to really attract people into the office when we go back? So we're very optimistic. And as I said, we are pretty confident we're going to hit our medium-term target in 2021 in Fit Out.

John, let's follow-up on that. We just think there might be kind of a one-off benefit as offices are shut and customers use the opportunity to refresh their offices, but that's kind of one-off benefit, but doesn't last beyond '21.

It probably might go on for 2 or 3 years, but then hopefully, there'll be something else. Though, we feel very good about Fit Out.

And just on the Regeneration side, I mentioned the inflow of working capital of just over GBP 102 million. About half of that was inventory, half of that was receivables. The inventory, the bulk of that is Regeneration. And you'll notice from the numbers that the average capital employed for the year in both those businesses were significantly higher than the year-end number. So we did have significant completions in Q4, and that will reverse. So you are going to see from a cash perspective, GBP 333 million year-end cash number is unusually high. So there will be a return to investment in Regeneration in the first half of this year. And then on the carbon, this is quite an interesting one. Quite simply, I don't have a number at the moment that's nicely costed out. What we will say is that we've introduced a carbon charge, which we think, which is internal and we think that the absolute price per tonne of carbon that we're charging internally is not something that we want to necessarily talk about. What it does do, though, it gives a huge incentive to the organization to think innovatively about carbon reduction and provide quite simply a central pot to fund initiatives and fund schemes. That said, the cost of not doing this is not winning business. This now is all part of doing business and winning business. So it's not as if all these initiatives have nice pound no costs against them. The cost is not winning business. It's not staying in business. It's an imperative to do it.

Jonathan, your question.

A few questions from me, please. Firstly, on Infrastructure. Have you seen a noticeable change in the competitive environment in your shows and markets there when bidding in terms of who you're competing with and what the bidding terms are? And is that partly driving the improved margin target? The second question would be whether you're seeing any impact of material cost inflation? And then the third one would be on cladding. Just wondering what you're expecting the impact would be on housing operations from the prospective tax? And whether you've taken any provisions elsewhere on historic projects?

So if I could deal with Infrastructure first. We're not seeing the market or the competitors changing particularly, but we're just getting better at it. And I think it's our own operational improvements, which are helping us to make more profit and win more work. As far as the inflation is concerned on materials, yes, we think there's going to be some, but we think we've got it covered off when we're ordering in the first place. All right. Do you want to talk about the cladding?