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

Good morning, everybody. I'm going to do a brief introduction. Steve will go through the financial and operational review and indeed, the ESG update, and I'll come back and talk about strategy and outlook. So then we're really pleased that we had record results last year, particularly with inflation and other market headwinds. It's quite interesting because none of our staff or very few of our staff have actually had to manage business through inflation or times like this before. And it's because they've done such a great job being patient and tenacious that we're able to have the results that we've got, and I really want to thank them very much indeed. But it's not just our staff. It's also our supply chain and our customers who've had to work with us, and we've had to work with them to find ways to get jobs to work, and I'd like to thank them all as well. Our balance sheet is really important to us. And I know you've heard us bang on about that before, but it is really important for us to win the long-term work that we are winning. Our clients want to see it, our supply chains want to see it, and we are committed to having significant daily cash at all times. We've come into the year with a high-quality order book, but perhaps even more importantly, good prospects and a good pipeline of new potential work across most of our businesses. We've taken the exceptional building safety charge, which we flagged up previously. In these sort of interesting times, our very decentralized empowered organization is able to move at pace to adjust and increase our market shares in all of our businesses. So we're now in a position where we're looking forward with a lot of optimism and expect to deliver result in the full year '23, which is in line with our expectations. So it's now time for me to hand over to Steve, who needs no introduction, but he does like one, Steve.

Thanks, John, and morning, all. So first, then, I'm going to cover the financial and operational review. And then after that, I've got a few slides on our ESG performance. So just taking the income statement first and just to clarify that the numbers shown here are on an adjusted basis, that is there before the impact of the exceptional building safety charge, which I'll cover in a later slide. So as John said, despite the market headwinds and general economic uncertainty, 2022 was a good year for us, strategically, operationally and financially. Revenue was up 12%, operating profit up 6%; profit before tax up 7%, all moving in the right direction. Operating margin, however, was down slightly, probably not surprising, down to 3.9%, and inflation would have played its part in this, although the precise impact is actually quite hard to quantify. EPS was up 5%, and the total dividend for the year was up 10%, so 101p per share, representing a really comfortable dividend cover of just under 2.4x. So just looking at the split of results by the division. We've got the first 2 here, Construction & Infrastructure and Fit Out being the biggest contributor to profit. An excellent performance and again from Fit Out, profit of 18%, and a steady 1 from Construction & Infrastructure with its margin at a healthy 3.3%. Strong operational performance drove Partnership Housing's profit up 13% to GBP 37.4 million, and we had a much improved result from Urban Regeneration, which was up 56% at GBP 18.9 million. And then finally, Property Services, which contributed GBP 4.3 million of profit. And as I said, all against the backdrop of more challenging market conditions, which John will cover in more detail in his section. On to cash. And you can see the operating cash flow for the year, a cash inflow of GBP 48 million. Now on the face of it, it doesn't really seem a great cash conversion performance. But there's a few points just to draw out to explain some of the moving parts here. The main driver is a working capital outflow of GBP 64.5 million, which is shown here in the box. And within this, GBP 56.7 million of it is working capital investments, specifically in the regeneration activities of Partnership Housing and Urban Regeneration. And then in addition to this, included in column C on the chart here, which is the nonregeneration working capital, there's also been a significant increase in Property Services working capital in the year of around GBP 25 million as that business funds its new contract mobilizations and top line growth. But just cutting through all of this, the key overall takeaway here is that there's been no significant change to our underlying profile in debtors and creditor payments. And just on the subject of creditor payments, I've also included a slide at the back of your packs which shows our latest reported payment practices to our supply chain. And as we've said before, this is an area which remains a key strategic competitive advantage for us. So this is our usual slide, it shows our daily bank balance every day of the year. That's the blue line on this chart. Now the average daily net cash for the year was GBP 256 million and as expected, was lower than last year. Now nothing to get too concerned about, just the usual ebb and flow of working capital movements and the investment in our Regeneration businesses in the year, which I've just touched on. Importantly though, the lowest level of cash on any 1 day was GBP 179 million, so plenty of headroom and comfortable. And this allows us to continue making the right long-term decisions for the business to best position ourselves for the future, whatever the macro climate is. The highest day was GBP 368 million, the net cash at the year-end was GBP 355 million. So cash wise, we're in really good shape. And based upon where we are now, we expect the average daily net cash for 2023 will be at a broadly similar level to that which we've just reported for 2022. So around circa the GBP 250 million mark or so. And just to be clear, that's after the expected impact of the building safety outflows and inflows. Now just on building safety. As I'm sure you're all aware, the government issued its final long-form contract for the pledge last month. Now we formally expressed back to government our intention to sign up, and we're now just following the process to execute within the requested time frame. This, for both Partnership Housing and Urban Regeneration. And therefore, as a consequence and as we flagged at the half year results in August, we've therefore now taken an exceptional charge to cover our pledge obligations totaling GBP 48.9 million. And this is within the range which we've previously indicated. And just to note, once again, this is a gross number and does not include the benefit of any remedies which are being pursued. So just briefly on the balance sheet. The building safety charge I've just mentioned is actually split between provisions line at the bottom and the joint venture line third down. I've talked about the cash, we have no pension issues. And so with net tangible assets of around GBP 275 million, our balance sheet provides a really strong and solid platform to support us as we move forward. And looking forward onto workload, at a group level, the total order book was a very healthy GBP 8.5 billion, albeit 2% lower than last year. Now within this, the Construction order book was up 2%, while the regeneration order book was down 6%, both measured against the same time last year. But as always, though, much more important than just the headline number is the quality of the order book in terms of margin and risk. So the key message here is that we've not compromised on quality or compromised on our expected returns. We've maintained the right risk profile for us. And with this high-quality workload, we feel well set up for the future. So those are the group headlines. Good profit growth, strong cash position, strong balance sheet and a high-quality workload. So if you just look a bit closer now at the divisions, I'm going to just focus on the numbers in this bit and leave the markets and outlook to John. So firstly, Construction & Infrastructure, as I mentioned, a steady performance with revenue up 3% and a margin of 3.3%. Now as we've said before, this division is all about consistent delivery, disciplined contract selection and focused risk management. And we've now got a business here where the vast majority of its projects are only delivered either through frameworks, 2-stage processes or are directly negotiated with the clients. Now this slide shows the results a bit deeper, which is split between the 2 activities. On the Construction side, profit was up 3% and the margin of 2.8% was bang in the middle of its target range. And this despite Construction really being at the sharp end of inflationary pressures and strain on the supply chain. Infrastructure's performance was lower than last year, as expected, and was due primarily to project timing and the nature of the workload in the year. Its margin, a very healthy 3.9% at the top end of its target range, demonstrates the benefit of infrastructure also focusing on consistent operational delivery and disciplined job selection and not being sidetracked by chasing big high-profile projects which don't fit our risk criteria or our operational capabilities. Now Construction & Infrastructure both have substantial workloads. And in addition, on top of its order book, Construction also has visibility of over GBP 750 million of work at preferred bidder stage, much higher than at this time last year, giving you evidence, if you needed any, that there's still lots of high-quality construction work out there to be won. And for infrastructure, we've had a few project wins post the year-end, which will be signed up in 2023. So we're still winning work and of the right quality, and therefore, we're not concerned about the 6% year-on-year reduction in what is still a very large overall total. For Fit Out, another excellent result. Profit of GBP 52.2 million, up 18% on last year, with revenue up 22% and margin of 5.4%. This is all about superior operational delivery matched with an obsessive focus on all-around customer experience. Now on the right-hand side of the slide here, you can see the analysis of revenue split by type of work, sector and geography. In short, there's been no significant changes to the overall balance of the business. The London commercial office sector still remains the most important to Fit Out. Now it's worth just a few moments on Fit Out's order book. At GBP 841 million at the year-end, this is a substantial order book, despite it being 6% down on last year. If you remember, last year itself was an all-time record. The key is what is secured for 2023 and what else is in the pipeline. So firstly, you can see here on the slide that as at the year-end, the order book for the next 12 months, i.e., for 2023 was GBP 591 million, and this is actually 12% higher than the corresponding amount at this time last year. Now these are secured orders already in the back. On top of this, we've also got in excess of GBP 100 million worth of work already in preferred bidder. We've got over GBP 300 million of work already bid for and pending a decision and a further GBP 200 million-plus of work at tender stage. So lots of activity in Fit Out, giving us a really high level of confidence in future demand coming into the year. In Property Services, profit was up only slightly to GBP 4.3 million of revenue, which was up 22%. Now this is one division where we've struggled to recover cost increases in the year, so we've effectively had to swallow most of the impact of cost inflation in these results. Hence, the lower margin, despite a significant uplift in revenue. Now the main reason for this nonrecovery is that in many of the division's responsive maintenance contracts, price adjustments for inflation are only operated annually, in April, and are based on a historic index, which is mainly CPI. So we've not yet had the benefit of the uplift, which would cover inflation through most of last year. This should come through in 2023, thereby setting us up for a much better year. Now the division's order book is long term, with contracts tending to be up to 10 years or so in length. And so at GBP 1.2 billion, up 27%, we've got really good long-term visibility of work streams here. So we've got plenty of work which gives us critical mass. We now need to focus on operational delivery. So in Partnership Housing, revenue was up 22% to GBP 696 million, a business now really starting to get some scale. Profit was up 13% to GBP 37.4 million with a margin of 5.4%, slightly diluted by the impact of higher contracting revenue in the year. Return on capital for the year was 19%, which is slightly lower than we targeted but primarily as a result of the investment in the capital employed in the business, with average capital employed increasing by over GBP 40 million in the year as more partnerships and developments come on stream. And this investment is expected to continue as we focus on the long term, with capital employed for 2023 expected to increase further to around GBP 250 million. Now on the mixed-tenure site, which includes some open market house sales, we experienced the same dynamics, industry dynamics in the year as the rest of the house-building industry, and saw the same slowdown in private sales in the fourth quarter. However, strategically, we're making real progress gaining scale, with 58 mixed-tenure sites now on stream, whether in construction or in sales, up from 48 sites this time last year. And with the order book also now just shy of GBP 2 billion, up 32% on this time last year, this gives us confidence that we're moving in the right medium and long-term direction. And then for Urban Regeneration, a much improved performance, with return on capital in the year hitting its 20% target and profit up by 56%. This profit was generated across all sectors and geographies. And although the order book was down 28%, don't read anything into this. These are large schemes which take time to bid and therefore, come less often. But when they do come, they obviously come in big chunks. An example of this, and a really exciting win for us, which is not yet in the order book, is at Arden Cross Solihull, where we're the preferred bidder on a very sizable long-term mixed-use scheme, which is just by the M42. And this will provide activity and profit for potentially the next 20 years or so. So the message here is there's lots going on in regeneration, and we're bidding and winning the right quality of schemes we want for long-term success. Looking more short term, with all the various ins and outs on the schemes planned during this year, our best view at the moment is that the average capital invested for 2023 will be around GBP 100 million or so, broadly, therefore, similar to 2022. So in summary then, I hope I've got the message through. We're in good shape, really good shape. Profit up 7% in the year despite inflation and despite the general market headwinds. Our continued balance sheet strength gives us confidence, and we've got a high quality, visible workload. And not forgetting that based on all of this, we've also increased the total dividend for the year by 10% to 101p per share, a very comfortable dividend cover of 2.4x. Now where are we on ESG then? Well, hopefully, this slide is familiar to many of you. But just to recap, we refer to our responsible business agenda in terms of our total commitments, and these provide a framework for a common strategy focused on all our stakeholders. We've been using this framework since 2008. So this is not new. Now these commitments for us fall into 5 headings or categories, if you like, which is shown here. Each has a range of KPIs used to measure progress and performance over a number of areas, and we formally report against these every year, whether they're good or bad, and you can find details of these there for all to see in the annual report and on our website. We aim to be fully transparent in everything we do. Just standing back, if we take our performance across all of our commitments together, we've again been awarded a AAA rating, ESG rating by MSCI, the second year on the throw we've been given such an award. So firstly, on environmental then, which covers at least 3 of our commitments, which are shown here on the top, how are we getting on? Well, we maintained our, a, CDP leadership score for the third year running, which really is no mean feat. And our 2022 data, independently audited, shows us having reduced our Scope 1, Scope 2 and operational Scope 3 emissions by 4% in the year. And this reduction, despite the increased level of activity in the year and a reduction of 40% versus our 2019 baseline. So this leaves us on track with our accredited science-based target pathway to hit operational net zero by 2030, which is a target I've previously spoken about before. Now as a reminder, this operational net zero target only includes our Scope 1, Scope 2 and operational scope 3 emissions. However, as operational Scope 3 emissions only account for a small proportion of our total indirect emissions, this 2030 target should really only be seen as reaching first base. So what we've done now is we've gone further and extended our target to include total emissions, the whole of our Scope 3. And as you can see on the second bullet point on this slide, what is now included in this is a much, much wider definition of emissions. So what we're saying now is this, that we're targeting 2045 to be net zero in our total emissions, everything, the whole supply chain, the raw materials we use and the future operation of the buildings we build. That's everything. And as we did with our 2030 operational target, we're currently going through a full revalidation process with the science-based targets initiative for this new target, and this will give our plans real substance and validity. But just standing back from all this, although we're making good progress on carbon emissions, I think it's fair to say that the last few years have been the early years, have been the easier years, the easier wins, the really hard yards on this are still ahead of us. But the message is so far so good, and we're well on track. And then just finally on environmental. It's not just about carbon emissions and net zero targets. There's lots more importance stuff going on here. Waste, biodiversity in particular, all important to us as a business and all important to us as a society. And then just on the social side, well, there's sort of 2 aspects to this. There's the internal and there's the external. So looking externally, social value is a prominent factor in our bids, particularly with the public sector, with clients asking more and more what else do you bring to the party? Delivering social values therefore, a work winner for us. It's a business imperative as well as being the right thing for us to do as an organization. And as you'll appreciate, therefore, activities in this area are numerous widespread and well embedded across the group and are being delivered locally down at an individual project level. The internal aspect of social value is about making our own business better, and there's a number of facets to this also. Now I've spoken already about our supply chain, very important to us, not least paying them on time, payment practices, the slide at the back of your packs. Looking after our own people is another facet. And on this, health and safety stats are a very established, clear and tangible set of measures. Now we've done better on this one this year, with our reportable accidents reducing last year after a bad year in 2021. But obviously, this is one area which requires a never-ending continuous focus. And in terms of making our business better, diversity of minds in all its forms and inclusivity in particular, are also business critical. And we don't shy away from what are on the face of it quite poor headline diversity stats, which you can see on the slide in the box. We've still got a long way to go here. What hopefully, this does though is just gives you a snapshot. It's a wide ranging area here. ESG is important to us, and we aim to be open and transparent what we're good at, what we're not so good at. Open and transparent in what we do, how we do it and what we're trying to achieve. And as I just mentioned, you'll be able to see a full suite of our ESG KPIs in the annual report later in March when it's published. So I've covered the past, the numbers, the operations and ESG. Now John will tell you about the market and the future outlook.

Thanks, Steve. I thought I could start by just looking at the market backdrop as a whole. On the whole, the markets that we're operating in are pretty stable. Probably 2 exceptions: one, a strong market for Fit Out; and the housing for sale part of our Affordable Housing business, which is very weak. And clearly, that will have an impact on profits for our Affordable Housing business. Now, early signs and perhaps not so early that inflation has peaked. And certainly since the beginning of this year, each week seems to have got a little bit better where things are stabilizing, particularly with labor and subcontracting prices, and also particularly in the early trades like ground workers. And I think it's helped by the fact that housebuilding activity is slowing down. And we're also finding that we can get a hold of supplies much more easily. As we know, the brickmakers are beginning to have their stocks of bricks again. So we hope that these early signs will continue through the year. The thing that probably keeps me awake most at night is risk of financial failure in the supply chain. I mean clearly, our balance sheet is very important, but it's also important for us to know what the balance sheet of the companies in our supply chain are like and also who else they're working for. So that probably is the big risk in the market for us at the moment. So if I take the businesses one by one. The construction market is pretty good at the moment. And as Steve said, our particular preferred bidder is up 40% on this time last year, although our order book is down 1%. But we do have a situation where quite a lot of smaller contractors or contractors with weaker balance sheets are going out of business, and that is a threat to the supply chain, and we're having to watch that very carefully. So balance sheet strength for construction is probably as important in many of our businesses, both with our clients and our supply chain. Our strategy here is broadly very similar to all of our other businesses, where it's all about organic growth and it's just making our businesses better and better the whole time for all the stakeholders. Again, we're looking to expand construction in those areas where we have lower market share, particularly in the Northeast and other parts of the Southeast. But again, it's all about long-term work streams, how can we either be on more and more frameworks or have work for clients, which is repeatable the whole time because we can't go out into the marketplace all the time looking for new customers and expect to have a good business. So our medium-term target here is unchanged, 2.5% to 3% a year and a revenue target of GBP 1 billion. And as we said before, it is always the margin target that is the most important. But we do expect good growth towards that GBP 1 billion turnover this year. Infrastructure. There's a lot of political support for infrastructure, and it's a very steady market at the moment, and there's a lot of bidding activity happening. But very often, these jobs, because they tend to be bigger and longer term, takes longer from winning a contract to getting on site. But we're in a position where we've got good visibility of what we need this year, but we're sort of looking for work for next year onwards. The sectors that we are concentrating on are unchanged. It's highways, rail, nuclear, energy and water. And it's absolutely fundamental in this business that the work comes through frameworks, and we're about 90% through frameworks. I think 1 area where we're different from our clients are we actually don't want to work in JVs unless there's a very, very, very good reason for it. Very often, the government in particular wants JVs because they've got joints and several guarantees then from the contractors involved. And we're saying, "Right, we've got the balance sheet for you to work with." And we don't think JVs are the best way of operating because who do you talk to? Whereas they're almost like an investment in another company. And also, when our people go into the JVs, it sort of dilutes our culture. So we would much rather not be in JVs but work on our own, plus history tells us we've made less money in JVs, which is another very good reason. So here, again, our medium-term target is a margin of 3.5% to 4%, and we expect to be in that range this year with progress towards the GBP 1 billion turnover. Now the Fit Out market, I'd like to spend a bit of time on because I think a lot of people are saying, "Well, hang on, nobody goes to work anymore. How come you've got Fit Out business that's doing okay?" There's no doubt that there will be less square footages used for offices, but it will be the weaker buildings that will stop becoming offices. And these tend to be the buildings that we don't work in anyway. For the rest, we think people are going to spend more money fitting the buildings out, not less. And that is actually a long-term trend over the last 30 years where the cost of Fit Out has increased as a percentage of the total cost of the building. We now have jobs where the cost of the Fit Out is more than the cost of building the building in the first place. The other thing that's changing is fit outs used to change perhaps every 10 or 12 years, and it's now more like every 7 or 8 years. So we think the market conditions in Fit Out are really good, which may sound really surprising. There's also a very strong demand by lease renewals. A lot of the old sort of 30-year leases are coming up, and that is really then a big refurb required. Obviously, people are changing offices for the new way of working. Offices have now got to be really good to attract people into them rather than people working from home. And when refurbs do happen, they have to be much more energy efficient, which again puts up the cost and therefore, our market size. So as far as strategy, we must not take our market share for granted. Complacency is a real, real problem. We're going to have to continue to work harder and harder and harder to continue our focus on really giving those clients a brilliant experience. We can never compromise on quality of delivery. We have to be much better than everybody else to deserve our market position. So this is a business where we have to work really hard to maintain where we are. This is the only business this time around that we've increased our medium-term target, and that is from GBP 40 million to GBP 45 million, to GBP 45 million to GBP 50 million throughout the cycle. We expect 2023 to be slightly ahead of that range and pretty similar to '22. Property Services. I guess if we had a business that I'm not so happy about this year, it's probably Property Services. The market, though, is very strong. And the local authority clients and the housing associations are really homing in now on the maintenance. We've all read about damp and things like this. It really comes to the top of everybody's agenda, and it's not just price. And this is a very stable market with long-term work streams. And we like the contracts which are 8, 9, 10 years, which are also then renewable for a longer time because it does take time to set a contract up and get it running properly. And also, we've got to continue to offer much more social value because there's a lot more that we can do than just the street building work. So here, we have a medium-term target of profit towards GBP 15 million a year, and we expect to make significant progress. Now one of the things Steve talked about was inflation hitting us this year. Most of our contracts on the 1st -- the beginning of April have a 10.1% uplift, and that will make a big difference to our profit from April onwards. Partnership Housing, there's a strong pipeline of new mixed-tenure schemes. And it's -- we are really excited about those. There's also a very good market for contracting work. A lot of the competitors for the contracting work tend to be smaller contractors. And as the jobs are getting, one, bigger; and two, the housing associations and local authorities are more concerned about balance sheets, we're winning much more of this work at decent margins. Now the downside in Partnership Housing, which is not surprising, is the housing for sale. And October, November, December were very weak. January, February has got a little bit better, but it's still only about half the sales that we were doing this time last year. It's very difficult to predict what is going to happen, but we assume that it's not going to improve, if anything, this year. But our strategy here is to increase not just the number of mixed-tenure schemes we have, but also the size. So we want bigger jobs that last longer, and we're also looking at geographical expansion. So there are a few areas where we're not strong, like the East Midlands and the Northeast. It's fundamental for us to continue to invest in this business even though it looks it's going to have weaker profits this year because this is a fundamental business for us for the medium to long term. And I've said before, we see it being one of the real major, if not the major driver of profits. So the medium-term target is an operating margin of 8%, and ROCE towards 25%, but that is going to be reduced this year. But there is no change to our strategy or our medium-term targets. So Urban Regeneration. Now there's strong government support for mixed-use urban regeneration. There's some really good prospects for us in winning big, long-term work, which should increase the size of our order book quite dramatically over the next year or 2. There's a lot of bidding activity at the moment, and we are well placed for these big mixed-use developments. Now we've got really big track -- really good track record, and the jobs that are coming out are just right for us. Our strategy here is to have bigger jobs and longer jobs and where it's mixed-use, so it's right in our sweet spot. We are going to grow our presence in the Midlands on the back of Arden Cross, which is a very big win for us. And we've got 2 or 3 other schemes there, which we feel we have a pretty good chance of winning. But this is a business where, again, now, we want to have greater selectivity so that we can improve our ROCE. And our medium-term target remains a 3-year average ROCE up towards 20%. On a 1-year basis, we did it last year. And looking forward to '23, we expect a similar performance, a similar ROCE on a similar capital employed. So if that would give us 2 years of 20%, we're actually making progress towards our 3-year rolling ROCE. So this slide, I think, is a very useful slide. I'm not going to go through it in detail, but it actually just has on one slide our medium-term targets, what we actually did in '22 and what the '23 outlook is like. Now I don't want you to think, and I know you don't think, that the medium-term targets are the limit of our ambition. As you know, we've been upgrading them as we go, even though we've only got one that we've upgraded this time, which is Fit Out. Now our strategy is very much building on these businesses and then improving those medium-term targets as we can. So if I summarize, look, the markets we're in are generally favorable, except housing for sale as part of Affordable Housing. Keeping that strong balance sheet and holding significant cash at all times is a fundamental part of our strategy, and we need that to focus on long-term work streams. And you really understand, well, if people want to sign up to us for 20, 30 years, they want to know, one, we've got the cash to still be around; and we've got the cash to invest in their schemes. And everything we do now is investing in the organic growth of our businesses. We're not looking for acquisitions. We're just growing our business, which all have a long way to go. We've increased the medium-term target for Fit Out, and the strong growth potential remains for Partnership Housing. And it all means that 2023, we expect the group profit to be in line with our current expectations. Thank you. Any questions?

It's Anand from HSBC. I've got a couple, please. Just on the supply side of things, is there any significant concentration with a particular supplier? And if cost volatility is reduced, isn't the market becoming more stable for them?

And I think it's a little early to say that the market is stable, but it does appear more stable, and it would appear that it's going to become more stable.

No particular concentration?

No, to answer the first one because we've got these divisions all operating in different markets, predominantly regional businesses, decentralized structure, we don't have any group reliance on top 10 suppliers that causes a concern. It's very much local level, local supply, project by project. So each project is very vigilant, has to be vigilant. But on the sort of a group, it's not a mega risk.

And then just on the ESG point, the move to total emissions. Are you guys the only people doing that? Because presumably as a calling card for public sector customers, that makes you quite different and quite exciting for them.

Well, I don't know. I think what we try to be is very open, very honest and transparent with what it actually means. And to be perfectly frank, 2045 total emissions, how are we going to get there? Well, that's a hell of a challenge. And I don't have all the answers by any stretch of the imagination. But it shows that we're sort of going through the process, we're going through the validation of our plans, et cetera. And we're serious about getting there. But as I mentioned also, the first couple of years, last few years, have been the easy wins. We made some great progress. But let's be frank, it's been sort of the low-hanging fruit. It's going to be really tough. When you look at the sort of what total emissions was incorporated in the whole supply chain, like everything. But it shows an ambition. It shows a desire, and we have to do it, and we want to do it.

And our customers -- a lot of our customers want to do it as well.

Yes.

And then lastly, if I can, on the Partnership Housing. Can you talk about the levers you have in the business to sort of manage it at a slower rate? And then just to be clear, for 2023, you're assuming January, February kind of sales rates and no improvement in the sort of guidance or numbers that you're thinking about?

I think it's more -- not the first week in January, but it's more sort of late January, early February. We're not looking -- we are looking for an improvement, but not back to normal levels by any stretch of the imagination.

And then just the levers, is it just slowing completions to sales rates, trying to move towards more PRS, et cetera?

Interestingly, our footfall is not dissimilar to last year, but we are selling, i.e., people -- number of viewings is about the same, but our sales are well down.

Well, there's all sorts of things we can be doing and looking at because they're mixed-tenure, by definition is mixed-tenure, so there's all different aspects you can do. But fundamentally, you will always have an element of open market sales. I think what we're trying to sort of say is that on one of the sites you've got the contracting piece for housing associations or anything. And we're just cracking on with that. We're cracking on it. And in part, sometimes, you don't have the absolute flexibility to be able to stop work and sometimes, you don't want to because we're sort of medium, long term, and we don't -- what we don't want to do is make short-term knee-jerk reactions, which might actually save your sales a few bucks this year, but it's going to jeopardize the sort of strategic growth plans for next year, et cetera, et cetera. So we're just cracking on. Obviously aware and doing what we can in terms of adjusting build to sales pace, et cetera. But I think one of the important message is that we are medium, long-term-ists in here. This is not just a sort of a short-term 2023, bam, and make those decisions, because it will prejudice the benefit in the long term.

Andrew Nussey, Peel Hunt. A couple of questions as well, please. First of all, in terms of the Fit Out business, can you just give us a little bit of insight what's sitting in preferred bidder? What's being tendered? Whether that's in terms of larger projects, growing value? And then secondly, in terms of taking the supply chain with you, volumes are obviously up 22% last year. How can you make sure you've still got the supply chain with you to make sure that you can deliver the projects as you would expect? And then I've got one on Partnership Housing but do the Fit Out first.

I think the key thing, you must remember that our average Fit Out job is still only about GBP 3 million or GBP 4 million. So -- and I don't think in the preferred bidder that we have anything of any scale. So I think it's mainly maybe a few GBP 10 million or GBP 15 million jobs, but no one is significant. Supply chain is a real issue actually. So we've got to be careful that we deliver these jobs really, really, really well. So we can't stretch our supply chain too much. So we are bringing in some new people bit by bit just to try and expand it a little bit as we are growing.

And just one on Partnership Housing. In terms of the houses that are for sale, first of all, how could you make sure you can control the pricing on those? Is it down to some on-site? Or does it come back to you guys? And secondly, some reassurance around the quality of those assets because in the dim and distant past when you have had previous problems with Partnership Housing, they were the wrong houses in the wrong place. Any comfort or color you can give us?

I think there's a couple things. We have learned. So I don't think we've got any of that at the moment. And the other thing to remember is that all of our -- if anything, we look at the statistics of how many we're selling a week, which is pretty similar to the house builders on the whole. But we've got a big variety. Some sites are selling really, really well and prices are still rising. Other sites, either not selling well and we're having to adjust the price. And there's a whole load in the middle where perhaps we're having to give some more incentives. So this is definitely something -- a decision sort of made not at the site, but in the local regions. There is no one-size-fits-all.

Jonny Coubrough at Numis. Can I ask firstly on Partnership Housing? And it's been part of the strategy to increase the size of sites? And we've seen that happen quite meaningfully? Now 160 open market units per site, it appears to be getting into a kind of sweet spot. How much further do you think that could go? And also, could you give us an idea of the range of site sizes perhaps that feeds in with what you're saying, John, around sales rates?

So we'd expect that to grow over the next 2 years possibly another 100. And then sometimes when we talk about site sizes, we may actually have a series of sites with the same customer or the same partner. So, say, Suffolk for instance, we're talking nearly 3,000 houses. But anything below sort of 60 or 70 houses would be a legacy from the past.

And on infrastructure as well, you said again, you try to avoid JVs where possible. I think you're working in JV on Lower Thames Crossing. Is that because there's a pipeline opportunity there? Could that be something much more meaningful in the future?

I don't know the answer to that one. Sorry.

I think, what, if I sort of worm the way out of that one, it will be it's our preference to avoid JVs to, put it like that.

And then just last one on Fit Out. I mean there have been a few questions, but just keen to hear if there's been any big change in the profile of competitors in the market?

No. We have one big competitor, and that's ISG. And then there's 3 or 4 competitors who would be fighting for third position who would be significantly smaller.

Andrew Blain, Investec. Just that point on infrastructure, I'm not trying to nail you down on it. But in terms of JVs, you're trying to fill the order book for next year. Do you have a view on what sort of level of potential work you're bidding for is in JVs and how that dynamic has changed in the market over the last couple of years and whether you see it continuing in that direction and also sort of the implications on margins for yourselves?

I don't think we're bidding anything in JV at the moment. Doesn't mean we won't, but there has to be a really good reason to do it.

And how much of the market do you think, roughly, you're sort of ruling yourself out by not participating in JV?

Well, I don't think we are because there are certain clients that we had to work in a JV with before that we're now working on our own with.

And I think just to be so clear here, I'm pretty sure John indicated a preference and the sort of the fact, if you look at our sort of history, the facts are that JVs, we've -- our experience is that we've sometimes struggled to get embedded cultures, our own processes involved in JV. So that tells us, therefore, that where -- situations where we can avoid it, we will do. We'll look to do it on our own. Inevitably, there's going to be situations where you're going to have to. So it's -- we're certainly not ruling jobs out to say, "No, no, no, we're not doing that at all." But it's our strong preference where possible, whereas historically we might have. It might be in the default position we always do it in JVs, because that's the way you do it to try and sort of as in the first instance, this is something which we should be doing on our own. But I'm not -- definitely, not striking out of the market at all. No, no.

Alex O'Hanlon, Liberum. Just a couple of questions from me. Firstly, on Construction & Infrastructure. Am I right in thinking that we've met the medium-term target this year, expect to do it next year and exceeded them last year? So what will it take to kind of see those upgraded, noting as well that inflation is peaking now, so kind of the backdrop should be getting easier?

Shall I take that one?

Yes, do it.

You're talking specifically about the margin target here.

Yes, the margin targets.

And what we've said -- so the margin target is, you said, it's a range. And what we don't want to do is keep pushing those margin targets up and up and up because that means if you're pushing the margin, you're taking on more risk. And you might win it 1 year, you might win another year, but you'll drop the ball at some stage. So we're happy operating in that range. It's the right level of risk for us. It's the right level of delivery for us. So now we've got a consistent operating platform where we feel confident we can do that year in, year out. Yes, we might be a bit -- up a bit; one year, down a bit slightly, but we're going to be in that range. So now we're focusing on growing the top line. So hence, we introduced the GBP 1 billion revenue. Again, it's not about chasing revenue here though. The margin target is sacrosanct, that's sort of written in stone. The margin then sort of comes on top. So we really don't want to keep pushing that margin higher and higher and higher because you will take on more risk.

One other question on capital allocation policy. The dividend cover was towards the top end of the range this year, I think, 2.4x, and the policy indicated 2x to 2.5x. Would you consider kind of coming down towards the bottom end of the range? Or is kind of the focus and the thought process to kind of keep investing in the Regeneration businesses as a first priority before distributing additional capital to shareholders?

I think the thought is giving the whole range, it gives the ability to increase the dividend even if profit doesn't go up a great deal.

Stephen Rawlinson. Just a couple from me, if I may. Just the first one is in and around Construction & Infrastructure, where both of which you say you get to about GBP 1 billion revenue this year. We're 6 or 7 weeks in already. I mean you're talking about 25%, 30% increases...

No, I'm not putting it -- not this year. And progress, that's what it is.

That's medium-term target.

Not this year. Positive progress towards gaining revenue next year. Okay. Well, just on this whole issue, I mean, the wording is a bit ambiguous there for me anyway, but at least -- but notwithstanding that, and I get your point, a whole -- to what extent is that volume increase? To what extent is it going to be price increases? And just adding into that, to what extent can the customer tolerate the sort of inflation that's been going through? It's got to come through in water bills. It's got to come through in some form of taxation at some point. So is it an observation you're able to make in and around that on the old conversations that you're having with the water companies in and around the tolerance that consumers may have?

Well, there's no doubt that some of our clients have a certain budget. And it may be rather than building 5 schools, they'd only build 4 schools.

So basically, they'll adjust their volumes is your point? Okay.

But what we are saying is our volumes are looking okay. But not -- neither of them will do GBP 1 billion this year.

Yes. Sorry, it says positive progress in 2023. So I misread. Second question, on Property Services. I mean, continually, you talked about the GBP 15 million. And if we look at the sorts of margins that are being made elsewhere, the implication of that is GBP 250 million, GBP 300 million of revenue. And you, yourself, have said that you're disappointed. And I know it's probably -- it's only 7% or 8% of the total level of activity when you reach these targets. But just set me right on whether this is a realistic level, given what we see in the marketplace generally and observing others in this marketplace. Just set me right on that, why it's still at that level?

Well, we believe we can get there, but we haven't got there. And we also believe that the business can improve operationally. It's a bit like our Fit Out business, it took us nearly 20 years to get a decent margin out of it. I hope it won't take that long. We we're making progress. But as I said, we're not pleased with what it did last year.

And just a final one. If I may ask about the ESG but also your comments about the financial viability of the subcontractor network. It raises, obviously, lots of issues about their ability to afford some of the Scope 3 targets that you put in place. And that obviously comes down to you agreeing with your customers, prices which are adequate for your subcontractor network to pay for the additional costs of, I don't know, a hydrogen-driven tractor digger loader. But that's sort of detail that we shouldn't be going to. But the point was more to do with are your customers willing to pay the subcontractors for these Scope 3 requirements to which you point towards, which obviously will have to come in the next 3 to 5 years?

Stephen, that's the big question. The full Scope 3 in the supply chain. Step 1 is getting full visibility of what we're talking about. This is not just an, "Oh, yes, we've got the route map. We can do that, that easy. We know where we're going." There's a lot of unknowns at the moment. Step 1 in the jigsaw is working out precisely what we're talking about and is getting a grip on this, "We can do our operational Scope 3, we can do our own that easy, get that separately audited." But having full visibility and measurement of what is in the supply chain is step 1. So it's -- I have to say, don't know is the short answer. It's work in progress, and it's something to work on.

But we just feel the whole movement is going towards this, and the whole country is going to feel very differently about it. And we just want to be on the front foot.

So it's early days to be able to say our clients are willing to pay for this. It's too early to tell.

Have you been able to scope out what activities you might go into? They'll probably subcontract it in order to achieve these requirements?

It's work in progress. It'd be wrong of me to sort of say, "Yes, we've got a sort of firm plan. We know precisely the route map." I can't tell you that. It'd be disingenuous, don't know. But it's about sort of starting to get visibility and understand and work through it. But it's a big task. It's a hell of a task.

But I think the bigger, more sophisticated members of our supply chain have really taken this on board themselves. Brilliant. Any other questions? Well, thank you very much, indeed.

Thank you.