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

Well, good morning, everybody. Our presentation today just may take a few minutes longer than normal because Pat has got a lot to say. So I will do a brief introduction because Pat has got a lot to say. So I will do a brief introduction. Steve will, as normal, do the financial and operational review. And Pat will talk about Construction and Property Services. So Pat has spent the last 10 years with his team taking our Construction business, which was a very poor business, to being a very high-performing, consistent business. And he's got a great management team. And we were speaking middle of last year, when things weren't too good in Property Services. And we agreed that Pat had just a little bit of spare capacity. So he volunteered to take Property Services on. And he's going to talk about Property Services, what went wrong and what we're doing to put it right. I will then come back and talk about capital allocation, markets and outlook and then we'll have questions after that. So look, pleased to report another record year despite heavy inflation, supply chain failures and, of course, the loss in Property Services. Our balance sheet has strengthened. Our cash has strengthened. And we see this as being absolutely fundamental going forward. We've got a really good order book. But perhaps even more important, the pipeline of prospects and preferred bidder is also very strong. As you know, we've got a very decentralized and empowered structure. And that really is our differentiator. And we think that is going to become more and more important as the group continues to grow. I will now hand you over to Steve.

Good morning, all. And as usual, I'm going to do the financial and operational review. So if we look first at the income statement, going from the top, revenue was up 14% and operating profit was up 2% with the lower operating margin just a result of the mix of divisional profits in the year of before tax of GBP 144.6 million, up 6%. EPS was up 4%. And then taken all together, we've declared a total dividend of 114p per share, an increase of 13% on last year, so in all, a recompense per share, an increase of 13% on last year. So in all, a record set of results for us. So looking at the high-level split by division, [indiscernible] a relatively resilient one from Partnership Housing and a disappointing one from Property Services, where we struggled. Urban Regeneration did broadly what we had expected, which all then added up to an operating profit of GBP 141.3 million and an operating margin of 3.4%. On to cash, and you can see here the operating cash flow for the period was a significant inflow of GBP 189 million, equating to a conversion rate of operating profit into operating cash of 134%. Now this includes a GBP 59.7 million working capital inflow, which is mainly driven by the increase in revenue in those divisions with negative working capital characteristics, namely Construction, Infrastructure and Fit Out. And other than that, there's nothing else really of any major significance to draw out here. Now I've said before that these point-to-point annual cash flow statements are not really representative of what's actually going on in the business. And of course, this statement still remains true even when the conversion rate looks this good. Because this is the important slide, the usual slide, which we show every time. It shows our daily bank balance for every day of the year. That's the blue line here. Our average daily net cash for the period was GBP 282 million. Whilst the lowest level of cash on any 1 day was GBP 195 million. So plenty of headroom and comfortable, but it just gives you an idea of the size of the cash swings in our business. Importantly, holding this level of cash allows us to continue making the right long-term decisions for the business to best position ourselves for the future. The highest day was GBP 475 million. The net cash at the year-end was GBP 461 million. So cash-wise, we're in really good shape. And based upon where we are now, we expect that the average daily net cash for 2024 should be in excess of GBP 300 million. In terms of workload, future workload at a group level, total secured order book was a very healthy GBP 8.9 billion, up 5% on the previous year-end. In itself, that's good growth, even more so bearing in mind the 14% growth in revenue in the year. However, as always, more important than just the headline number is the quality of the order book in terms of margin and risk. And in growing the order book, we've not compromised on quality or on our expected returns [indiscernible] well set up for the future here. And how we win this work is in part driven by our ESG credentials. ESG is an integral part of most, if not all, our public sector bids. That's how important it is to us and how embedded it needs to be at a local project level across the whole of our business. Now I've put up just a few group headlines here on this slide. We're MSCI AAA-rated again. And for the fourth year running, we've been A rating from CDP for our climate change leadership. This is something we're really proud of and no mean feat at all to achieve. Now as you know, ESG is a huge area. But for the purpose of this presentation, I just want to leave you with the key message that in our line of work, we've got to be on top of our ESG game to win business and to win new projects. It's that important to us. Now if you want more detail, we've obviously got a wide range of stats and metrics, which you'll be able to find in the responsible business section of our annual report, when it's published next month. So those are the group headlines then: good profit growth, really strong cash position and a high-quality and growing workload. So just looking a bit closer at the divisions now. I'm just going to focus on the numbers and leave the markets and outlook for John to cover later. So covering Construction first. Good revenue growth, up 18% with the margin of 2.7%, bang in the range we expect. I'll leave it to Pat to talk through the business in detail and its prospects. But suffice to say, it's a business that really is in very good shape indeed. In Infrastructure, a very strong year, driven by consistent operational delivery and disciplined job selection. And this delivered good revenue growth of 15% at a margin of 4.3%, which is ahead of the top end of its targeted range. But besides from the high-quality delivery, the overperformance in margin was also driven in part by the nature and type of projects which we delivered in the year. Nuclear, energy, defense and rail have all contributed well to this growth with highways being a bit of a laggard for us. And there's still lots to be bid for in Infrastructure in addition to the already sizable order book of GBP 1.7 billion. For Fit Out, well, another really excellent result here, profit of GBP 71.8 million, up 38% on last year, a margin of 6.5% and revenue of GBP 1.1 billion. This is all about consistent and superior project delivery matched with an ongoing relentless focus on all-around customer experience. And on the right-hand side of the slide, you can see here an analysis of the revenue by type of work, sector and geography. In short, there's been no significant changes to the overall balance of the business or any important trends to note. At just shy of GBP 1.1 billion, Fit Out's order book is substantial and up 31% on last year. Of this total, the order book for the next 12 months, i.e., that's for 2024 is GBP 816 million. And this is 38% higher than the corresponding amount at the same time last year. We also got in excess of GBP 150 million of work already in preferred bidder. We've got over GBP 300 million of work already bid for and just pending a decision and a further GBP 250 million of work at the tender stage. So there's lots of activity going on in Fit Out, giving us a really high level of confidence in future demand coming into this year. Not in such a great shape though is Property Services, where we've had a really difficult year, a very difficult year, making a loss of GBP 16.8 million. And again, I'll let Pat talk you through in detail, particularly the reasons behind this performance and the actions we've taken to address. In Partnership Housing, [indiscernible] relative resilience against the softer housing market with demand for the contracting side of the business remaining strong. This was reflected in the revenue growth, which was up 20% to GBP 838 million, driven by the contracting side, which was up 44% and accounted for 56% of the business. That's a strategic and deliberate shift towards contracting when in a more uncertain housing market. Inevitably though, profit was down 18% to GBP 30.5 million. Now I say inevitably, this mainly as a result of lower open market sales in the mixed-tenure business at a lower overall average selling price and margin [indiscernible] partially cushioned the full force of the market downturn. This is a long-term game to us, long-term partnerships. And we've continued to be true to our strategy, take a long-term view and keep investing in the business for the future. As a result, average capital employed was up last year, and we expect it to be up again this year with our current estimates for 2024 being for average capital of around [indiscernible]. And then in Urban Regeneration, much as I expected really, profit of GBP 14.8 million. Now as I mentioned, in August, there's a lot of activity and interest in this space. And we've got a number of preferred bidder awards looking to move into formal contract this year, therefore, supplementing the already sizable and long-term order book. But looking more short term, we had a number of schemes ending in the second half of last year, which will drive a lower average capital for this coming year, which we estimate will be at around the GBP 80 million to GBP 90 million mark. So then in summary, well, we've had a good year with profit before tax up 6%. Our continued balance sheet strength gives us confidence. And we've got a high-quality and growing secured workload. ESG is a must-do for us. And then based upon all of this, the performance and the confidence we've got in the business, we've increased the total dividend for the year by 13%, now up to 114p per share. So thanks. And now let me hand you over to Pat.

As John mentioned earlier, I'm going to talk a little bit about Construction, what we do, how we're set up, where we were when I joined 9 or 10 years ago and where we are to date. And with Property Services, it will be more about the more recent issues and what we're doing about it to fix them. So starting with Construction. It works mainly as a main contractor across selected sectors, delivering close to GBP 1 billion worth of revenue across mainland U.K. 90% of our work is in the design and build sector as it gives us more reliability, more control of the process, better buildability and ensuring that we're more affordable with our customers. The vast majority of what we do is with the public sector, some 85%, both local government and national government. And the majority of this is procured through national frameworks, which usually have a term of some 4 to 7 years. These frameworks provide good visibility, consistent procurement and known competition with pretty strong barriers to entry. We have a place in all the national frameworks we'd like to, with the justice, defense and health frameworks being those that we have a growing presence and provide more opportunity going forward. We are very selective with the private sector, where price is key and risk transfer is greatest, whereas with the public sector, it's much more about value for money, social environmental impacts and longer-term repeat work. Our structure covers most of the U.K. with 14 area units working through 5 very well-established regional businesses, each with its own leadership, its own delivery capability and its own work-winning capability. It's the strength of these regional teams and their leaders that's allowed me to spend more time in Property Services this year. Our regional structure allows us to develop strong customer relationships alongside local suppliers with [indiscernible]. Our largest region is central and west at around GBP 300 million revenue. London and the home counties are similar. The northwest is slightly smaller at GBP 250 million. Then we have Scotland and east, which again are a bit smaller themselves. The structure we have ensures our employees are very well connected to the communities in which they work. They're very engaged. They relish the opportunity to add social value and engage in community activities, all very important to our customer base. We are decentralized, very small central team, which supports the national frameworks and the technical functions. Education remains our largest vector. And there continues to be a long-term investment plan in education facilities across all of the U.K., renewing existing estate, addressing population growth, the shortfall of special needs facilities and the consolidation of schools into larger campuses. Leisure and life sciences remain strong, alongside health, in which we have further opportunity for growth. Our average project size of around GBP 16 million ensures we maintain a diverse portfolio. No great exposure to major projects with their own predictability. It helps to manage resources without large variations in peaks and troughs caused by workload. Although two-stage procurement requires a lot of investment upfront, it does allow us to derisk projects, get well-designed projects, get robust procurement in place before we sign up all key components of our strategy. We included three slides with case studies on, which I'm just going to briefly touch on here because in the packs you've got that you can look at later. But Kenilworth School in the Midlands is an example of the size of the campuses we're now building, 2,200 school children in that school in the Midlands of significant scale. Although this Molecular Sciences Building for the University of Birmingham is an education building, it also kind of represents the growth in life sciences generally with the commercial work that we're doing elsewhere in the business. And this is an example of where we work with news and in a partnership with Wirral Council down at Birkenhead, delivering a commercial development of around GBP 40 million. So good examples of the kind of larger projects we've been doing in the last year. Interestingly, these projects all took about 2 years to build all through some of the most volatile conditions we've seen out there. And they're still delivered successfully. So the teams did a great job. So where we've come from. When I took Construction on some 9 or 10 years ago, it was a very different picture to that, that exists today. And to be fair, for the last 7 years, we've been a pretty profitable business. We weren't that different to many other contractors out there when I joined. We largely built anything for anybody, anywhere, under any procurement route, the dreaded kind of four-way strategy, I called it. We had a high-risk order book, comprising lots of single-stage contracts. And we had lots of delivery issues that led to lots of disputes. So as a result, we had a very poor reputation and found it difficult to retain clients and staff. So what's different now? Well, for many years, we've increased the proportion of our order book into the two-stage procurement. And now almost 100% of what we do is either procured in two-stage environments or through the frameworks we're on. We're represented on all the chosen frameworks in the U.K., as I said earlier. The group's strong balance sheet helps our net cash position and provides comfort to our public sector clients. We're a top-quartile payment company, helping cement strong supply chain relationships, leading to a significantly improved quality and delivery with lots of repeat customers and virtually no disputes or litigation. As a result, our reputation is enhanced. And we have very low staff attrition. I now have teams who largely self-manage their portfolios and that they're fully tuned in to our strategy with the outcome of avoiding dumb deals and the resulting bad jobs that just ruin the performance of construction companies. Financially, in those early days, we were pretty loss-making, particularly in London, many of you might remember that, whilst we worked through some really difficult contracts. But I think it's important to note that our London business now is exactly the same as our other regional businesses, mainly public sector, procured through frameworks that just happens to be in London. And it's actually probably our most -- one of our most successful businesses and has been for many years. As you can see, 4, 5 years ago, 6 years ago, we will always allow volume to slip back if there's a slowdown in the right opportunities in the marketplace. And over the last 5 years, we've had good, steady profit growth, albeit a dip in the COVID year, where we still managed to produce a respectable level of profit. So looking ahead, our order book at the year-end was almost exactly the same as it was last year. I would add though that in January, it's increased by about GBP 50 million to GBP 850 million with a few good conversions. And our preferred bidder level is still at GBP 1.3 billion. Equally important now, there is a 2025 picture, which is in good shape with around GBP 800 million of revenue either secured or in preferred bidder with the rest of this year obviously still to come. We're seeing good demand across the business. Inflation is much more indictable. But budgets for projects are still catching up with that baked-in inflation in the system and clients and consultants still not really wanting to admit that yet. It does put projects in distress during the preconstruction stage and can lead to decision-making being delayed. But all in all, we've got very good prospects for price and margin growth. One of the key risks obviously in the industry, and John spoke about it earlier, is supply chain solvency. But for us, we mitigate that by using mainly local suppliers with whom we have strong relationships and showing we attract the stronger suppliers with our best-in-class payment practices and monitoring the key indicators of cash flow stress before they become terminal. As we mentioned earlier, we are confident education will remain strong for the foreseeable future. We expect growth in our health, defense and justice sector work, which are our newest frameworks, continued investment in life sciences and technology sectors. And we continue to invest in our social and environmental capabilities. We'll always look to provide tailored solutions using the right blend of offsite, design for manufacture, digitization for the process and the facilities we build. We see great demand for in-house developed carbon assessment tool, CarboniCa, which helps reduce embodied and operational carbon and, in effect, creating intelligent solutions that meet the bespoke needs of all of our customers. And of course, we underpin that by a real focus on risk management, margin quality above volume and quality of delivery. So the medium-term target for us is to continue to deliver an operating margin in the 2.5% to 3% range, revenue of around GBP 1 billion. And we do expect that we should achieve both of those targets in this calendar year, financial year. So that's the picture in Construction. I'll now talk about Property Services, which is a little different. Again, what we do. We provide planned and responsive repairs for the social housing stock for local authorities and house associations across England and the main. Our contracts, or more appropriately, partnerships, are a minimum of 5 years and many are much longer and have an opportunity to be extended. Some 75% of our workload is for local authorities, but there are opportunities for growth at both -- across both client bases. Our contracts usually facilitate the opportunity to add additional work streams, such as planned programs. And we've successfully added decarbonation and retrofit works across a number of our partnerships in the last couple of years. Just worth mentioning that L&Q was the most recent contract that launched last year and added to our order book. It's a long-term, planned-only contract with an appropriate risk allocation. But it does have opportunity to expand into other work streams. As you can see, we have four main geographical bases from which our main contracts operate plus our national planned units from which L&Q and other work streams will operate in the future. In the southeast, we have a lot of adjacency, which gives an opportunity to utilize a workforce of some 1,100 and a van fleet of some 700 vehicles. So a big organization that requires a lot of controls and organization. So what does our customers want? Most of our customers have previously offloaded their direct maintenance arms. And what they want from the private sector is efficiently run services with up-to-date skilled operatives, high levels of service, response times, innovation and the use of technology to improve outcomes. Community engagement is really important to ensure that residents, our clients, ourselves maintain strong communication links to avoid complaints and working through partnership. The strength of the balance sheet is also important to ensure that we can mobilize new contracts and invest appropriately. Similarly, we have our three case studies in the pack, which again you can see the detail of later. But just to give you a flavor of what we have in our portfolio, Basildon is now some 7 years into its contract, a very successful one. It's evolved over the years and now includes significant planned work streams beyond that included originally. It's around about GBP 40 million turnover per year. At Westminster again, a long-term contract, we have again added new work streams, including a large volume of decarbonization and retrofit works. And L&Q is in the pack as well, which I mentioned earlier, our newest contract that mobilized earlier last year. So what's gone wrong? I guess, at the macro level, the business secured a lot of new contracts over the last 4 or 5 -- 3, 4, 5 years, during which time, the market itself has changed dramatically. There's been significant increases in the volume of repairs across the sector, which are most contracts, including most of ours as the contractors' risk, alongside an increasing ratio of urgent and emergency repairs that have all led to challenges for us in delivery and in delivering the commercial returns we're after. Combined with big sector inflation above the contract allowances that we're entitled to, the impact of the backlog of COVID and the general condition of housing assets, we've had real challenges in delivering contractual KPIs. Avoiding growth in subcontract spend has been difficult to plug the gap in resources. And it's distracted the business from basically getting the fundamentals right. Our decentralized and empowered culture has proven difficult to embed in this challenging environment. Management in these kind of circumstances, I'm sure we've all seen, has tendency to become more controlling, increasing resources at the center and overpowering the operating units. And that's what I saw when I came into Property Services. So when John asked me to take this on middle of last year, I was asked to understand the issues and develop a remediation plan. So since the middle of last year, made a number of changes in personnel with a combination of new appointments from within the group, which brings confidence around the culture and the need for long-term decision-making, but with some external appointments to boost sector and customer knowledge. We're in dialogue with many customers to review the operational and commercial models with a view to reflecting the current market conditions. And these will reduce losses incurred in recent times. We're working on a program of operational improvements and focusing on management ownership of performance, of quality of delivery and of people retention. In order to stabilize the business, we'll be monitoring the longer-term bidding opportunities rather than bidding for those in the shorter term. The organizational changes are pretty much complete now. And we're now working on the broader improvement programs needed to enhance delivery and productivity levels. And importantly, we haven't had the additional stress of mobilizing new contracts in the last 12 months, which we did have in the previous 12 months before that. Looking ahead, our long-term order book is at GBP 1.5 billion, up around 23% on the last year. And that's predominantly because of the L&Q program coming into play. That will deliver around GBP 100 million works through the year. Opportunities to grow the business are many. The need to improve or at least maintain the quality of an underinvested housing estate is significant. Regulation is demanding higher standards, alongside energy efficiency and the grant funding that's available. And most of our existing contracts have the opportunity to expand as well as secure new contracts as the year moves on. We do expect to see a more appropriate risk allocation in the commercial models going forward in the market as they come to tender. So I'm confident that the changes made to date and the ongoing improvements that we'll implement during the year will support our medium-term plan to return to profitability and deliver around GBP 7.5 million worth of operating profit in the medium term. And of course, we've got greater longer-term ambitions than that. We will respond to the many opportunities for growth as the business gets on a stronger footing as we do have sufficient scale in most of our operating units to add more volume and new work streams. As we work through the remediation plan, we expect full year loss this year equal to roughly half of last year's loss but followed by a return to profitability in 2025. That's me done.

Thank you, Pat. So I think the key thing for us is we think businesses like us need to be bigger, have more sophisticated offerings for clients and have big balance sheets. We think that is the future for a group like ourselves. And the overarching principle for our capital allocation policy is to hold significant cash balances at all times. Our first priority, of course, is to maintain cash and have a strong balance sheet. Then our second priority is to maximize investment in our current regeneration activities though our organic growth. And we've got a lot of projects that we need to invest that money in. Our third priority is ordinary returns to shareholders. Now we see that consistent ordinary returns to shareholders are very important. And that's why we increased the dividend by 13% this year. We're also looking at small bolt-on acquisitions to potentially increase the pace of our organic growth. Now these would be of a relatively minor nature. And they would actually just enhance and fit into the existing structures. After that, at the bottom of our priorities, we have special returns to shareholders, which is something, I guess, we might consider at some stage. But it is certainly at the very, very bottom of our capital allocation strategy. If I look at the market conditions, as you know, we're a very diversified group. And we can have a situation where some markets are doing well, some markets are doing badly. And in this year, we've got record profits with certainly the housing market being very weaker indeed. Construction, Pat sort of talked about, it is a very steady market through the frameworks and the education market, which is probably -- which is our biggest, is particularly strong at the moment. With Infrastructure, there's a lot of work that we're pricing. But Infrastructure jobs tend on the whole to be bigger, last for longer and take a little more longer to get on site. A lot of tenants moving into space, but increasingly for us, we're doing more work now for the landlords, who realize that if they've got space that is not really grade A and needs upgrading, they need to do that rather than wait for a tenant for the space and take it over. So that whole of the Fit Out market is, we think, growing and becoming even more sophisticated. Property Services, the market is strong for housing repairs. The need is very strong because the backlog is great. And we believe it has political support from all parties. Partnership Housing is two bits. There's the housing for sale that has been very weak. Interesting, we've seen a little bit of pickup in the first few months of this year [indiscernible] because it actually takes on average 57 days before the first inquiry to a reservation. So that really is what we're looking at. And that is looking a little bit stronger. And I'm sure you've heard the same from the main housebuilders. The bit in the Construction side is actually very strong. Even though the market hasn't grown, there's been quite a few contractors in this space who've gone out of business. And the local authorities and housing associations are looking for stronger balance sheets. So that's been a growth area for us. Urban Regeneration is again split into two. The ability to win new schemes is very high at the moment. There's a lot of big schemes coming out. And our track record is putting us in really good position to win these long-term partnership agreements. The schemes that we've actually got though are harder to get on site: one, because of build-cost inflation; two, yields going out; and in many cases, lack of tenant demand. And of course, also a lot of what we do is in the housing market. So we actually -- that's a bit of a mixture. But the long term is looking very, very good indeed. So if we look at the outlook by division. Pat has already told you his operating margin of 2.5% to 3% and revenue of GBP 1 billion is his medium-term target. And I think I heard a promise he was going to do it this year. Thank you, Pat. Obviously, with all of our margins where we -- we have a margin and a turnover target, it is the margin target that is most important. So if we have a downturn, it is the margin we will concentrate on. Infrastructure, medium-term target operating margin of 3.5% to 4%, again with a revenue of GBP 1 billion. We expect to make good progress towards the GBP 1 billion but not make it this year. And the margin, we expect to be at the top of the range. So with Fit Out, we have a medium-term target of an annual operating profit within the range of GBP 50 million to GBP 70 million. And as you know, we've upped that quite significantly over the last few years. And we're confident that we will be at the upper end of that range in '24. With Property Services, we reduced the medium-term target to GBP 7.5 million per annum at the half year results. As Pat said, that is not the limit of our ambition as it is not indeed in any of our margins here. But we just think it's realistic to have something which is more medium term than something that is too far out. And we expect this year, as Pat said, to make a loss, which is about half what we made last year, but return to profit in '25. And I think we are saying that with increasing optimism. So Partnership Housing, although the housing market has improved a little bit, we don't expect a dramatic improvement in profits this year and we expect modest profit growth. With Urban Regeneration, we're in the sort of hiatus between jobs finishing and jobs starting. And we expect both the profit and the ROCE to be much lower than it was in '23. So if you look at the big picture, the group is in good shape. We are a bit concerned about the financial stability of our supply chain. We think this will remain an issue for us this year. We're going to continue to keep that strong balance sheet, continue to have significant cash at all times. We think that really is a differentiator for us. And the other thing is we really concentrate on long-term work streams. So we like winning jobs even if they don't start for 2 to 3 years and will cost us money for 2 to 3 years because we're always taking the long-term view. Clearly, we've got to fix Property Services. But we expect 2024 to be in line with our current expectations. Thank you. Questions?

Jonny Coubrough at Numis. First question perhaps for Pat is you said when you took the helm in Construction originally and started the turnaround, a big part of it was changing the contract mix. Are you comfortable in Property Services that the contract mix is broadly right and it's an operational turnaround?

It's a bit of both. I think our focus would be on the planned maintenance contracts in terms of new work going forward. The repairs market, we are seeing a shift in the commercial and risk profiles. Because at the minute, they're not really commensurate with the kind of opportunity that exists. We do see both opportunities, but I do think planned will probably be a greater level of our operations, which is effectively contracting with a lower level of risk. So I guess, that's where we are.

And you mentioned also about potentially having discussions around pricing on some contracts. The guidance that you've given for this year and next, does that include any improvement in pricing under contracts? Or is that based on what you've currently got put in place?

No, this year, we're confident that some of the negotiations that we're embarking on right now will bear fruit. In fact, some are already. So we have made some of those allowances in our forecasts, but modest and sensible reflection of those discussions. Most customers realize that the market is very different to what it was 3 or 4 years ago. They see it in their call centers with the volume of calls that they're getting to deal with. And they know that to get a quality of service, they have to invest more in the services that they're paying for.

And then my next question would be on Partnership Housing. And you've mentioned today the percentage was do bolt-on acquisitions. Could you give us an idea of what kind of size those could be, over what time period they could generate profit? And also, would they be at the 25% ROCE hurdle?

Well, very difficult to answer that question. I think we see Partnership Housing as the real growth area for our business. And therefore, if we are going to do an acquisition, that would be the first area we would look at. And then obviously, we'll take a view on those acquisitions, bearing in mind all those things. But it's very difficult to be precise.

I think you've got to assume that it will pass the normal metrics tests. Yes, we're not going to go off and do something that doesn't meet the standards.

And last one for me is the strategy of the division has been to increase the number of sites and average site size. And that's moved on quite considerably. Based on the current development pipeline, what do you think that could be in the medium term in terms of numbers of sites and site size?

Yes. And as we've said before, right the way through the downturn, we haven't stopped to take on new partnership arrangements. So our sites will be about -- the number of sites will be about 25% up this year on last year. And we'd expect in a couple of years' time to have 70 or 80 sites with more units per site.

Adrian Kearsey, Panmure Gordon. A couple of small questions on -- I'm not quite sure what's happening there. A couple of questions on partnership -- sorry, on Property Services. The GBP 17 million loss for the year just gone, does that -- is that just a pure number? Or is there any provision in there for future years? And if there is a provision, what's sort of the phasing of provisions of the future losses for the existing contracts?

There's a small -- within that number -- I'll take that one, Pat. There's a small provision for a loss-making contract, if that's the question. So it's a relatively small number.

Sort of small single-digit millions or...

It's relatively small.

It's a couple that's only got 18 months maximum to go, in fact, even.

Andrew Nussey from Peel Hunt. A couple of questions as well, please. First of all, in Fit Out, obviously, very strong margin performance, which you say was sort of driven by mix. Is there any reason to believe that the mix is going to be fundamentally different in '24 as it was in '23?

I think 6.5% is a very, very good margin in anyone's books. I think it'd be wrong to say that's the level of Fit Out going forward at all. I would say something -- I'm looking at you, John, really, 5%, north of 5% is something which you should be looking for from Fit Out going forward. But I think within -- that's probably as good as we can give you, I think. But you should definitely not be sort of forecasting north of 6% on a regular basis, I don't think.

Okay. And a number of times through the presentation, you obviously referenced supply chain failures, risk of supply chain failures. To what extent has the group incurred losses as a consequence of supply chain failures this year?

So it's difficult to put a figure on it. If it's not just losses. But when a supply chain fails, you've got to bring somebody else in. And obviously, when you have high inflation, that could cost us more. But it also means the period that the opportunity of finishing the job on time gets tougher. And that costs money as well. Difficult to know exactly how much, but it would have cost us money.

What we'd best describe it as a [indiscernible] rather than anything material to the numbers. It's sort of lost opportunity, lost profit rather than loss, if you see what I mean?

And lastly, to be quite blunt, it sounds like in Property Services, the commercials, which are negotiated when some of these contracts were, one, were just wrong, potentially an issue of control. Has the commercials team been changed within Property Services?

Yes, there's been changes in the commercial and financial teams. I guess though that the market has changed so much, I would put it less down to signing bad deals to the deals just becoming out of date with the market conditions, to be quite honest.

Alex O'Hanlon from Liberum. Just a couple of questions from me. The first one is just on the preferred bidder work. It seems like there's quite a strong level of preferred bidder work there. Could you give us an indication of the conversion rate from preferred bidder work into order book? And the second question is I note the GBP 300 million of work already tendered are for Fit Out. What is the win rate of tendered work on Fit Out? Could you give us a...

So if we take preferred bidder across the group, some people put preferred bidder in the order book, some people don't. We'd be very disappointed if as much as 5% dropped out. And on Fit Out, it's very difficult to know exactly what the -- because a lot of the jobs are negotiated. But where we tender, we would expect to win nearly 1 in 2.

Stephen Rawlinson from Applied Value. I'm going to ask a few questions about Property Services. But first of all, I think you've done a cracking job on cash in Construction, Infrastructure and Fit Out. So let's mention that because there's loads of good stuff going on there. But just on Property Services, I've got a few actually. You mentioned, Pat, I think, when you spoke, you mentioned the word technology with regard to Property Services. But actually, it didn't appear on one of the bullet points on the slide. And that had been one of the features of the last few years that you're going to invest in that and then upgrade your technology in that area. Could you give us an insight into that and the cost related to that, that might be as part of the loss-making? Secondly, you mentioned that the customers have realized they have to invest more in housing stock. In an environment where funding is constrained, how do you expect that -- how is that going to work? Can you just sort of help us out a little bit? Yes, I get it that they can realize that. But where is it going to come from? And the other thing about Property Services, the order book has gone up. Is that increase of 21%, is that increase at acceptable margins? I'm assuming that the GBP 7.5 million is equating to something of a 3% to 4% margin, perhaps on turnover, maybe GBP 250 million, GBP 300 million. Is that the sort of -- have I got the numbers in the sort of ballpark that's in your mind there with GBP 7.5 million? So sorry, a lot of questions there, but I don't want to detract from the -- the other GBP 3.8 million did pretty well actually, so forgive me.

I'll go backwards. The first -- the last question, yes, the margin position that we expect to get to is in that order, 3%, 3.5%. The order book is predominantly driven by the signing-up of L&Q. It's a long-term contract, GBP 25 million, GBP 30 million per year, which has taken the order book from where it was last year to this year, really. That's the change. There hasn't really been any significant changes beyond that. And in fact, a few of the other projects would have their end date coming closer to conclusion. So the order book is driven by L&Q. In terms of the local authorities and housing associations' ability to spend more on their properties, there is a huge, I guess, environmental macro demand. We've got regulators, ombudsman, who are demanding much, much higher responses and resolution of complaints and issues. It is probably the #1 agenda item I see on our councils' and local authorities' agendas. We get constantly asked to deal with this stuff, John and I. And I think they will find the opportunity to prioritize spending on housing and repairs beyond some other services. I can't speak for all obviously. Some of the housing associations out there are pretty strong in terms of their financial strengths and covenants or there's not. And again, it applies in some of our local authorities. We have some quite well-set balance sheets in some of our local authorities and some less so. So it's a real -- it's a mixed balance. But the predominant factor is that the kind of performance of local authorities and their housing contractors, whether in-house or external, just hasn't been good enough over the years and the economics have changed.

And technology, which was a feature?

One is the technology needed to run our operations, that's pretty good. And I've been quite pleased with what I've seen when I've come in. So there's been quite a lot of investment in our management systems, the technology with devices that our guys and girls have on the projects and how they record the work they're doing. That's all pretty good and that's well set. We did invest quite a lot in some other technology, around sensors and this kind of stuff, which have incurred losses last year. We've written some of that off, I have to say, because there are products out there on the market that do this equally well that costs less and we can move with our customers to partner with these organizations to do it. So yes, we've taken a little bit of a step back in terms of some of that with them in terms of looking at supplies and opportunities outside.

And if I may, I'll just add one more on partnerships. Because, John, you said that you see this as a growth area. You're doing about 100 units a year. But over the coming weeks, and certainly in the interims, we saw back end of last year, nearly all the housebuilders are saying, "We're into partnerships. We're really going to grow that area." They're thinking of margins 8% to 10% typically. And obviously, what they're going to be doing for their clients might be a little bit different than what you're doing. But is there a comment to be made in and around the whole area of, well, why is everybody gathering around this area? Is the competition going to get more difficult for you? And what's going to happen in your thought processes to your margins as you move forward? Because quite clearly, your expectations are lower than theirs as things stand.

Yes, I think I'll be careful because the word partnership housing obviously means different things to different people. And to a lot of the housebuilders, partnership housing means a higher percentage of housing, which is Section 106 or whatever. But our Partnership Housing also includes a lot of contracting, where the margin will be lower. And it's a different model.

Just reiterating what Stephen said about the other divisions, fantastic performances all around. But just on Property Services, have you done anything to change the linkage between the sort of pay structure of the contract winnings of sales team to the actual -- is that structure, sorry, now linked to the cash and profit delivery from what they're winning? Have you changed that? Or is that something you should be changing?

Yes, we've done a lot of work in terms of changing the way that our employees are linked to performance. Previously, it was too kind of top-level-driven rather than everybody within the business has an impact on the performance of the business, so quite a change there. To be honest, we haven't really been in bidding mode. And the one thing that I've always resisted is linking incentives and rewards to bidding success. Because I think that is downward spiral. It's up to the business as a whole to bid properly with discipline and that everybody benefits from both the work we win and the work we deliver.

So it's work in progress, basically?

It is a bit. But yes, I wouldn't see us fundamentally having a big sales incentive program though.

Okay, just got an easy question, just on -- for the education sector, obviously, you mentioned it's looking good even now under the current administration. What have you discussed with the opposition in terms of their plans for education spend?

I think it's fair to say, I'm not sure they know. But we haven't had any discussions. And we take the view whatever the market is [indiscernible].

Lewis Roxburgh from Investec. Just a few questions, take it one-by-one. Obviously, a very good average net cash position. I was just wondering, that's very strong, continues to get strong. Is there an upper limit for how strong the balance sheet needs to be and eventually to be -- think about maybe reinvesting some of that back into the business or giving it back to shareholders?

Well, we certainly look to reinvest in the business, potentially do some bolt-on acquisitions. And those are ahead of giving money back to shareholders, except, of course, for a very strong ordinary dividend.

I think we've shied away from being prescriptive about what the minimum or maximum level is on cash because the environment changes. In a difficult environment, the requirement to hold significant cash becomes greater, as we see at the moment, where there is financial stress in the supply chain and in the industry. So it does move around. And that's why we've never been prescriptive about a number.

One thing we've got to be very clear on, at the moment, we are -- we've got high turnover in Fit Out, Construction and Infrastructure, all of which have negative working capital. If we actually think those markets are going to get tighter, we want to be in a situation where we don't have to bid for jobs to keep the cash coming in and the turnover would reduce. But the cash would also reduce quite significantly. So if we think we're going into a downturn, we would be even more cautious on the amount of cash we think we need.

And yes, just on supply chain, just on the outlook for that, do you think supply chain risk will ease moving forward? Do you think we're sort of past sort of peak distress? And how do you, in general, mitigate supply chain risk as a business?

I'll just do that. At the absolute highest level, because we are a decentralized business across a wide range of industries operating at a local level, as a general statement, we don't have a reliance on, as a group, on any sort of five, six, seven, eight suppliers. If one went bust, we're in trouble. These are -- so it's at a project level predominantly where the issues are. So by definition, therefore, it's relatively contained. That's the high level.

Yes, and that's how it works in Construction. The local structure of the business means that we're generally dealing with local subcontractors and suppliers. We have had issues this year, but they've been contained on projects. The guys have got over it. And as Steve said earlier, probably more lost opportunity than really hitting the bottom line. And we stay very close to our suppliers, many of whom, they share their management accounts with us. We're close to their cash positions. And any signs of cash flow stress on our projects, we'll go straight in and talking to the management of these organizations to try and overcome it. So we have to be grownup. And we have to sometimes support these organizations as well.

Yes. And the final question is strong growth margin accretion you've alluded to, that's probably best-case scenario. But does it make sense? Or do you see a significant opportunity still in the geographical locations that you're currently in?

We see the different businesses are stronger in different parts of the U.K. than others. And we see expansion in those rather than overseas expansion.

Rob Chantry from Berenberg. Just three questions actually. Firstly, on Partnership Housing, you mentioned a kind of slight pickup at the start of '24 in private house sales. Could you just talk a little more about that in terms of scale indications of how you see the kind of future in that area? I think secondly, just a follow-up on supply chain, could you just talk about, I guess, a bit more about the kind of change in risk management around the inflation impacting the subcontracting market? Is there anything more structurally you can do about it? Or is it effectively just about diversification and risk management because it's an industry-wide topic? And then thirdly, Property Services, clearly quite a significant turnaround to be enacted here. Could you just talk about the kind of the ultimate role of this division in the broader portfolio in terms of the kind of risk-reward of being good at this versus being good at other areas of your business, which clearly you're very good at?

I think the last question, the Property Services business have similar clients to the regeneration business. And it's quite interesting, we can get to see Chief Executives of councils very easily to talk about Property Services. But if it's regeneration, we seem to be given their regeneration department. And there are times when that's very, very useful. The supply chain issue in housing, I think, is probably as bad as any parts of the supply chain issues. Because the housing -- the subcontractors for the housing market have not have actually experienced less work.

And I guess, the first one was just in terms of housing sales in the first few weeks and reservations in the first few weeks of the year. I think we're no different to everybody else. The U.K. housebuilding industry is well commented on, there's a lot of data out there. And we're sort of no different. First couple of weeks coming into the new year were a bit mixed. Last few weeks, we've seen a pickup both in terms of inquiries, hits on the website, reservations, you name it. So things are better. And I think we are feeling better than we were in December.

I think the other thing is that perhaps there was an expectation that prices would fall more. And if anything, in some locations now, prices are rising a little bit very modestly.

Alastair Stewart from Progressive. A couple of related questions, really following on from the earlier one on risk. Have you actually changed the metrics of your overall risk management strategy in the last, say, 6 months? And specifically, can you give some color on why you increased the selectivity in highways?

Well, on the highways piece, the -- we have not -- dare I say, we -- just trying to think how best to respond to this. Yes, we've increased the selectivity in highways. We are -- it's an area where, historically, it's probably not been our strongest area. And I think the focus is very much on, as I said, the energy, nuclear, the other areas. Defense has been a good area for us. So I think it's rather than -- within our sectors, the chosen sectors that we do, it's one that's not performed as well. But it's certainly not one that we're discounting and leaving to other people, far from it. It's an important sector to us.

Is it anything about the actual...

We've just got to be careful. As with all these things, we've just got to be careful as to what jobs we pick up and what jobs we bid. And so it's just getting that balance. And I think all -- I think the best way of saying is actually just others have done better. I've used the phrase laggard. It has just been a laggard amongst the other competitors in the sector.

But we also see further growth in other sectors, which may be a better place to put our resources.

And the general risk policy, the metrics, it's not changed, I presume, no?

No, no, no.

No. And across all of our businesses, the most important thing is risk because it's all about avoiding the buffers. Any other questions? Look, thank you much indeed for your time. Thank you.

Thank you.