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

Hi. Good morning and I'm going to say a few words. Kelly will then go through the financial and operational review. I'd then like to talk about MUSE, our Mixed Use Partnership business. And then I'll talk about markets and outlooks and then take your exciting questions. So look, overall, we've had a really good year in '24 and we had 2 profit upgrades during the year. So we're pretty pleased with the results. Now clearly, we could not have had those results without the tremendous work done by all the people in our businesses throughout the group and they've really gone for it this year. And I would like to say a big thank you to everybody. The high-quality order book is a big thing that's really improved in the year and a lot of that is because MUSE has had quite a lot of extra work. And that gives a bit of an indication of how the shape of the group is going to change over the next few years. Our balance sheet is a real fundamental thing for us. We feel that a group like ours needs a very strong balance sheet with substantial cash, one, because of our size; two, because of our ambition; and three, because we really do want to grow that partnership business. We also want a balance sheet that's going to give us the opportunity to make all the right long-term decisions in good times and bad. A big differentiator for us is the fact that we're a very decentralized business and holding on to that as we grow is always a challenge, as you can imagine, because there's always things that want to make you centralized. And we really want to release the energy of our great people by having a very decentralized empowered organization. Before I hand over to Kelly, I want to give you a bit of a helicopter view of the group. Fit Out clearly is our most mature business. This is the business we started back in 1977. We are the market leader. Our job here is to maintain that market-leading position, which often is much harder than getting there in the first place. This is a business that generates cash, has negative working capital. Our Construction Services businesses, we see really good strong organic growth potential but we're growing those businesses carefully. It's about managing risk and taking on the right jobs that we can really deliver well. And indeed, in that business -- in our construction businesses, if there's a tough market, margin and quality of earnings matters more than turnover. Our Partnerships business, which we're investing money in, we see as the growth driver -- big growth driver for the group in the medium and long term. Partnership Housing in the medium term and mixed use in the longer term. I think that's a helicopter view of what we're doing. If I could hand over to Kelly.

Thank you, John and good morning, everyone. So as John said, I'm going to take you through the financial and the operational review. And we're going to start with a couple of key highlights from the group income statement. So to start with, our revenues have grown by 10% to GBP 4.5 billion in the year and that's been followed by good growth in our operating profits, rising by 15% to GBP 162.6 million. That's been accompanied by an operating margin at 3.6%, 20 basis points up on this time last year and that's all down to the divisional mix profile, which we'll come on to in a short while. Now once again, we have benefited from higher interest rates on our strong cash balances and that has led to a net interest income in the year of GBP 9.9 million. And in turn, that's led to a profit before tax up 19% to GBP 172.5 million with a margin of 3.8%. That's 30 basis points up on this time last year. Now when it comes to EPS growth, it's slightly down a few points at 13%. But that is all down to the higher statutory tax rate that we've experienced over the course of 2024. And finally, we're really pleased to announce that we are supporting a 15% increase to our full year dividend, which has risen to 131.5p per share. So in summary, a really strong set of good results with double-digit growth across revenue, profit before tax and our full year dividend. So let's take a quick canter through the performance split by division. So once again, Fit Out has delivered a strong contribution to the group's results. Profits are up 38% year-on-year and that's been followed by strong contributions from Construction, Infrastructure and Partnership Housing despite the slower pace of recovery in the housing market. In Property Services, the division has now concluded on its business remediation program, which has resulted in losses for the year of GBP 17.8 million. And in Mixed Use Partnerships, profits were lower in the year as expected due to the phasing of scheme completions. So overall, operating profits finished at GBP 162.6 million, up 15% year-on-year. Now for the first time, we are presenting our secured order book alongside our preferred bidder position. And we'll start with the order book. Now as you can see, we have experienced substantial growth in the year with the order book closing at GBP 11.4 billion. That's 28% up on this time last year. Now a big part of that substantial growth has come from Mixed Use Partnerships where they have been successful in converting a number of large, sizable preferred bidder schemes into signed development agreements. But what remains incredibly important to us when it comes to our order book is we're not compromising on quality, the expected returns or the level of risk we're prepared to take. At the end of the year, our preferred bidder position sat at GBP 4.9 billion. Now that shows a 10% year-on-year reduction. But there's a couple of points to note here. Firstly, it reflects the conversion of our preferred bidder work into our secured order book. But we also expect our preferred bidder work to be replenished as we gain more visibility of work from our existing frameworks and the later phases on some of our multiphase development schemes. So in summary, our total secured order book and preferred bidder work comes to GBP 16.3 billion for this group. That's 14% up on this time last year and provides us with a tremendously strong platform to deliver our future revenues for both the short, medium and the long term. Now when it comes to our cash performance, a very familiar chart here for you all. And this sets out over the course of the year, the group's operating cash inflow of just under GBP 135 million. But in truth, it's not how we see our cash flow through on a daily basis. We'll come on to that chart in a moment. But there are a couple of key factors I want to highlight to you. Firstly, in the year, we experienced a net working capital outflow of GBP 34 million. Now of that, just over GBP 100 million is represented by our investments in Partnership Housing through the development of new sites and new partnerships. But in turn, that's led to a conversion of our profit to cash of 83%. Now it's this chart that really does represent what happens on a day-to-day basis. The blue line sets out the daily points all throughout '24. The gray line does exactly the same for 2023. At the end of the year, our average daily net cash for 2024 was GBP 374 million. That's GBP 92 million up on this time last year. But a few points to note. Our lowest cash point was in October of last year at GBP 293 million. Our highest was GBP 540 million 1 day before the financial year-end close. So what do we draw from this? Firstly, at our lowest point, we still had a good level of headroom together with our unutilized banking facilities. But the other really key important point is, in a really short period of time, you can see how significant some of our cash swing movements can be for a business of our size and scale. At the end of the year, our cash stood at GBP 492 million, underpinning the strength to our balance sheet. So as we look forward into 2025, we expect our average daily net cash to be in excess of GBP 300 million as we continue to invest in our Partnership Housing activities together with Mixed Use Partnerships to drive long-term growth, which leads me on nicely to the capital allocation framework for which our overarching principle remains unchanged, which is to hold substantial levels of cash at all times. Now the hierarchy itself hasn't changed since February 2024 when we last presented this but it is worth reinforcing our commitments in the following order. Firstly, maintaining a strong balance sheet has never been more important to all of our stakeholders. Secondly, maximizing and optimizing investment to drive organic growth expansion in our partnership businesses. Thirdly, maintaining the ordinary returns to our shareholders in accordance with our dividend policy, where we have a cover ratio between 2 to 2.5x. Fourthly, we continue to explore bolt-on investment opportunities where it can accelerate our expansion efforts within our partnership businesses. And finally, given all of these significant capital investment opportunities, today, we do not foresee a route to return capital. And so this leads me on to ESG. Now ESG remains integral for us remaining and being a responsible business. It's also a massively critical factor to our customers, both in the private and the public sector and ultimately, their end customers. In a decentralized business, the actions we take for ESG flow all the way down to a project level because that is where we will make the difference. But the bar is ever increasing in the ESG landscape and we are seeing an expansion, whether it's regulation, legislation, directives. But what I want to do is, share the highlights that we've made over 2024. And if we start with sustainability, for the fourth year running, we have secured the MSCI AAA rating and that's been followed by the A rating score given by the CDP for leadership in climate for the fifth year. Sticking again with sustainability, we are on track with our medium-term targets for Scope 1 and 2 emission reductions. Now a little bit of a reference point here. 2019 is our baseline year. And to date, we have noted a 44% reduction in emissions. When it comes to our supply chain, who are an important stakeholder and a really important delivery partner for us, we pay 98% of their invoices within 60 days. And when it comes to protecting our people and safety, we are industry-leading with 90% of our projects being -- over 90% of our projects being injury-free. And finally, by no means least, we have delivered over GBP 4.6 billion of social value to date. Now whether that's through creating local jobs, supporting regional businesses or helping communities becoming healthier and safer. So I'm going to move on to the operational review by division and I will focus on 2024. And in normal format, John is going to cover the divisional outlooks together with the market conditions prevailing within those markets. So starting with Partnership Housing. Now this division has continued to strengthen its long-term partnerships with the public sector. It's also continued with its short-term strategy to pivot towards contracting to provide an extra layer of resilience during a time when we have continued to see a softening in the housing market. As a result of this, we've seen revenues grow modestly by 3% to GBP 861 million. And within these numbers, contracting has strengthened with its revenues growing by 19%, up to GBP 564 million. Now despite that revenue mix profile, the division has been successful in delivering stronger margins in the year. And that's been through the type of contracting work that they performed but also the mix of schemes they've delivered. As a result, operating profits increased by 18% to GBP 36.1 million, with a margin of 4.2%, up 60 basis points. Now despite the short-term pivot towards contracting, partnerships remains at the very heart and core of our long-term strategy for this division. And you can see that evidenced by the level of investment we have made over the course of 2024 and as we've walked into 2025. So as we look forward into this year, we expect the average capital employed to rise to a range between GBP 380 million to GBP 400 million. With a secured order book of GBP 2.2 billion, together with a further GBP 1.9 billion at preferred bidder stage, the medium and the long-term ambitions for this division have never been stronger. Now trading performance for Mixed Use Partnerships followed an expectedly similar pattern to the first half with profits at GBP 1.5 million, markedly lower than this time last year but as I said, as a function of the phasing of scheme completions. But it's been a strong year this year for this division. It's secured a number of sizable, preferred bidder positions into its order book by way of signing them into development agreements. Its order book has grown by 124% to GBP 4.1 billion and it has a further GBP 800 million of work at preferred bidder stage. So as we look forward into 2025 for this division, we expect its average capital employed to rise slightly to a range between GBP 105 million and GBP 115 million. Now once again, Fit Out has delivered an excellent result for the year. And that's been driven by a couple of factors. Its revenues have grown 18% to GBP 1.3 billion. Its profits have risen 38% to GBP 99 million and it's been supported by an operating margin, which is truly exceptional at 7.6%. Now the outcome of this isn't just volume led, it is also strong operational leverage. The delivery, however, of this superb result by Fit Out relies upon their tenacity and laser focus on quality, project delivery and the customer experience, everything this brand is known for. It closed the year with a secured order book of GBP 1.4 billion, 31% up on this time last year. Now when it comes to Construction, our strategy remains unchanged with real focus on contract selection through to operational delivery. And whilst we remain careful about revenue growth, there's been absolute prioritization when it comes to margin protection. And it's these factors that have allowed the division to deliver good revenue growth of 8%, just over GBP 1 billion but strong profit growth of 19% to GBP 30.9 million with a margin of 3%, which is now at the top end of its 2024 medium-term targets. Now this division continues to manage risk down further with 98% of its work procured either through frameworks, direct negotiated works, all through a 2-stage bidding process. But furthermore, 85% of its work remains in the public sector with education being one of its largest subsectors. It finished the year with a secured order book of GBP 1 billion and a further GBP 1.2 billion at preferred bidder stage. Now Property Services has had a tough couple of years. Now many of you will remember in August that I set one of my short-term key priorities to really support the division in concluding on its remediation program. And I'm really pleased to say the division has wholeheartedly achieved that. And in particular, it specifically addressed some of the key remediation points that we set out in February of last year. But as a result, we have recorded operating losses of GBP 17.8 million and that's been led by the exit costs for a small number of underperforming contracts, which we negotiated an early release from. We've also undertaken a review of all of our contract assets and we have concluded on our operational restructuring efforts across the whole portfolio. Now like in previous years, these operating losses form part of the group's normal trading results. We don't treat this as an exceptional cost. We are, however, pleased to say that the business is now set up to deliver a modest profit in 2025. And finally, Infrastructure. Now Infrastructure follows a very similar strategy to Construction with real focus on contract selection, the right commercial terms through to operational delivery. And it's these factors and disciplines that has driven the strong revenue growth experienced in the year, where it's 18% up to just over GBP 1 billion. However, profits have remained flat at GBP 38.5 million when compared to the prior year but that really is a function of the phasing of scheme completions and new starts. Margins closed at 3.7% for the year, right in the middle of its current 2024 medium-term target range. However, 2024 has been an exciting year for this division. It has been awarded over GBP 2.5 billion of work over the year. Now not all of that is in its secured order book or even in its preferred bidder work. It finished strong at the end of the year with GBP 1.9 billion in its secured order book with a further GBP 700 million at preferred bidder stage. So I'm going to leave John to talk a little bit more about Mixed Use Partnerships.

So MUSE has joined the group from when we acquired AMEC back in 2007 and had been going for about 10 years beforehand. So it's had quite a long time to sort of start to get to know what it's doing and you need a long time in this business because things happen very slowly. It's all about long-term placemaking and multiphase. So each of our projects, we have many, many phases to them, usually over many, many years. It's very much a national business based in London, Manchester, Leeds and we opened up in Birmingham 3 years ago. Every project we do is in partnership but usually with multi-partners. Now how do we make our money? We make our money from our profit on the share of our equity and the development management fees that we charge for managing the entire development. The majority of the projects are forward funded and that's pretty fundamental to get the right ROCE. Now obviously, the development order book has gone up very substantially. And of course that GBP 4.1 billion is our share of the developments, not the gross amount. So these are a list of the current partnerships that we have. As you can see, the majority of people are local authorities and that's -- they tend to be our customers. And as you can imagine, if they want to start and enter into a contract with us for 20 or 30 years, they will spend a lot of time doing their homework, talking to other local authorities to find out what their experience has been. Now that is a huge barrier to entry. And we have, over the years, spent a lot of time even on the toughest ones, not walking away from it but staying there to make certain that, that development happens. And sometimes it's taken a lot longer than we would like to get on site. ECF is a very interesting one. That is a partnership between us, Homes England and Legal & General that's been going now for over 20 years. And in 2019, that fund was increased to GBP 200 million and we've always got 4 or 5 developments on at any one time in that partnership. But as you can see, a lot of partnerships, a lot of them are up north and not so many in Central London. So if we look at the order book and how it sort of moved over the last year. On the left-hand side, there's the 4 jobs that have gone from being preferred bidder to having contracted development agreements. Interestingly, Arden Cross, Wolverhampton and Solihull are all from Midlands region. So obviously, that job so far -- that region so far has lost money and it's going to take another 2 years before it goes into profit. We've got the 4 new preferred bidders. We've also interestingly won 3 this year to date, Hull, Wakefield and a Northeast scheme that we can't quite announce yet. The order book on the right-hand side shows how the business has sort of been pretty transformed by its order book in the last year. What I'd like to -- talk about 3 different schemes just to give a bit of color as to what we do. This is one that we've been working on for 20 years, an ECF one. Many of you would recognize that very famous river, which you see, goes on the outside of Manchester, to the left is Spinningfields. Manchester is a very unusual place where the prime real estate is right on the edge of the city. And our site is the site on the left -- on the right, which effectively was a car park for Manchester City Center. So the scheme over the last 20-odd years is completely mixed use with multistory car parks, 2.2 million square feet of commercial space and about 1,000 homes. The 1,000 homes are the white blocks at the back. Interestingly, the green building is the largest living mall in Europe. And MUSE has a real reputation being very innovative in what it does in order to make real places that change communities, both socially and economically. So this is a very typical thing but you can see a scheme like this that takes 20 years, why it takes a long time to get a track record and experience in a business like this. This is a job we're just starting in St Helens. It's a 20-year multiphase partnership over many sites. The first phase, very typical of what we do, a new bus station, a new market hall, offices and residential in the town center. What I think is interesting and we could have done it either way but the way we cast our order book, we have only got the first phase in our order book, even though we have a 20-year exclusive signed development agreement. So clearly, we would expect to win quite a lot more. If we add up that over a number of jobs, that would add another GBP 1 billion to the order book. A job here of a very different scale, Arden Cross. In the middle of the site is what is now a big field, is a new HS2 station being built. And our development agreement here is for 30 years. We were preferred bidder in 2022. It took us 2 years to get the development agreement signed. It's now going to be 4 years before we get on site and then we'll be on site until about 2054. So it's a very long-term scheme. And when it's completed, the commercial area alone is expected to employ about 27,000 people, which gives you some idea of the scale. And there's a small amount -- well, I shouldn't say small amount, about 3,000 new homes as well. The first phase is likely to be a new campus for Warwick University. So I'd like to sort of summarize MUSE. There's a very strong track record of delivery, which takes a long time to put together. In a lot of ways and it may sound surprising, it's very similar to Fit Out. It's a market leader in a very specialized market and it's a business that's taken decades to get that experience and expertise and to really know what it's doing. They're both businesses where a strong balance sheet is absolutely fundamental. But there are also differences. This business obviously has a very negative -- very positive working capital as opposed to negative in Fit Out. The other thing is because Fit Out jobs are small, we have to win a job every day. In this business, we're getting to the stage where we don't have to win a job every year. So we can be very selective in what we go for. But it's all about long-term profit streams. And we have been investing for growth here. Probably nearly half of our overheads, GBP 8 million to GBP 10 million a year is spent on non-income-producing activities today. That is winning new jobs, working on the jobs where we are preferred bidder and working on those jobs where we have a contract but we're not yet on site and therefore, not earning money. So that's been quite a heavy investment over many years. So I'd now like to move on to markets and outlook. And the first thing I'd like to just talk about our medium-term targets, which we've increased 4 of them today from what we had before. Partnership Housing remains the same, 8% ROCE and up -- sorry, 8% margin and ROCE up towards 25%. With mixed use, we've increased the ROCE up towards 25%. And we're doing that because we are seeing a larger number of jobs coming through, so we can spread the overheads over more jobs. And we're also seeing good margins or good ROCEs on the jobs that we're winning. Now with Fit Out, we are upping it to GBP 60 million to GBP 85 million from GBP 50 million to GBP 70 million. You might argue that, that doesn't sound a lot bearing in mind that our profit was GBP 99 million last year. I think we've got to recognize that, one, we've had a very strong market in Fit Out. Our margin was unbelievably strong. We also had a year where our biggest competitor went out of business, a company called ISG. And clearly, we had some extra work, not because of that [indiscernible] going out of business but with our strong balance sheet, we were picking up work probably for the last 18 months more than our normal fair share. But of course, that market is now going to change. Everybody needs competition. We need competition. The market wants competition. And a lot of people are seeing the sort of profits we're making and think it's quite good. It's a tough gig, Fit Out, I have to tell you, that it's a -- to anybody listening. But there are 3 or 4 firms now who have taken on a lot of the ISG people and they will be a strong player in the market. So we don't quite know how the market is going to pan out but we're determined to keep our market leadership position. So in Construction, we've increased the expected margin or the medium-term margin by 0.5% and the turnover we're now certain going to be in excess of GBP 1 billion rather than GBP 1 billion. And that is purely as the business is just getting better at what it's doing, getting more repeat business and just getting a better business. And it's pretty similar in Infrastructure, where we've upped it by 0.25% from 3.75% to 4.25%. And we left Property Services the same, an operating profit of GBP 7.5 million a year. And clearly, we've got a little way to go to get there. So if we look at the outlook, I think there's one big issue I'd like to talk about and that is obviously the National Insurance increase and the inflationary effect that's going to have. That is definitely a headwind for us. To some extent, we're going to be able to mitigate it. In others, we're going to be able to absorb it in our normal trading. But it certainly is a headwind for the business as indeed it is for lots of businesses. For Partnership Housing, we expect a solid profit growth this year but we expect ROCE to be pretty similar to '24 as we're continuing to invest in that business, continue to invest in that business and winning new partnership schemes. So with mixed use, we're expecting very modest, very modest profits over the next couple of years, reasonable profits in the medium term and significant profits for the group in the long term. Now the Fit Out market, we expect the profit to be towards the top of our revised range. It's still a good market. And as you notice, we have a very good order book. So with Construction, we would expect the revenue to be more than GBP 1 billion and indeed more than '24 with a very similar margin to '24, which would be at the bottom of its new target range. With Infrastructure, we'd expect the margin to be in the middle of its revised range with pretty flat revenue. Although we won a lot of work in '24, a lot of that work isn't going to get on site until '26, '27. Obviously, Infrastructure is a business where we have huge visibility. Construction, we have less visibility and Fit Out, we have less visibility, again, is the way it sort of works between those businesses. And in Property Services, we expect a very modest profit in '25. So if I just summarize, look, we've got a lot of energy in the group and our decentralized organization is throwing up lots of ideas and really going for it. It's all about organic growth. If we do an acquisition, it will be a bolt-on purely to speed up organic growth. But broadly speaking, it's about organic growth and it's about all the people in our businesses looking at those businesses and how can they make them better and better and better again because that's what it's all about and that's how we can actually really grow the business and have a better business. We talked about the strong balance sheet. We're not going to let go of that. That is fundamental to us. And I'm really pleased that we've been able to increase the medium-term targets in 4 of our 6 divisions today. I'd like to just end by saying we're on track to deliver an outcome for '25 in line with our current expectations. Thank you.

James [indiscernible] from HSBC. Can you just talk a little bit about the profile of the order book? How much of that is for delivery in 2025? And how does that position compared to this point last year?

Okay. So look, I think in the RNS, we do set out the phasing slightly more accurately. But I think broadly speaking, Construction and Infrastructure are well set -- Construction is well set up for a good order book secured to deliver revenues for the forthcoming 2025. Infrastructure, as John has highlighted, it's got quite a tail to its order book because these schemes go out for a longer period of time but it's still in a very strong position to deliver its revenues. Fit Out, we have set out some guidance again in the RNS, which talks about just over GBP 1 billion, which will -- out of its GBP 1.4 billion secured order book and that computes pretty much the guidance we've given you for this year. When it comes to the partnership businesses, there's a real sort of tail medium to long term and that's much more prevalent with Mixed Use Partnerships, which really does go out to the medium, long-term cycle of its schemes. And Property Services, clearly runs to the average tenure of its 3- to 5-year schemes. So we're in a good place from a secured perspective.

And also you mentioned in Partnership Housing that you had increased the contracting within the mix. Can you give a sense of where that is? And ultimately, where you expect to take that to hit those medium-term targets?

We would expect in the medium term and long term for contracting to be a smaller percentage of the whole. We took the opportunity to do more contracting when housing for sale was slower. But also we have a situation where quite a few normal housing contractors went bust and quite a lot of housing associations really wanted a contractor with a good balance sheet, which was also an opportunity for us. And that way, we were able to sort of grow the profit even though the housing for sale market was very slow.

And then one final one, if I may. And just on National Insurance. How do you expect that pressure to manifest itself over the year ahead? And how do you expect to kind of manage that through the business?

And it's probably fair to say it varies from business to business. On some jobs which are cost plus, we're able to pass it on to the clients. When we're quoting for new work, we'll be able to pass it on to the clients. And some of it, we won't be able to pass on but we expect to be able to absorb it within our existing budgets.

I would add to that, that we have had good track record, of course, in previous years when we've gone through inflationary cycles. And I think the beauty of particularly when you look at Construction, which typically enters finally into fixed term, fixed lump sum agreements, the length of those projects don't go on for years. So they can average 6 to 9 months. And so therefore, we can cycle out the inflationary pressure quite quickly.

But it's definitely a headwind.

Yes.

I am Aynsley Lammin from Investec. I think I've got 2, actually, maybe 3. Just on the partnerships for housing, obviously, unchanged medium-term targets. Have you become more excited about the potential growth potential, what you could kind of invest in terms of capital in that business on the medium term? And just maybe some color around, obviously, we're hearing the kind of housing associations a bit stretched at the moment, looking for government funding, just some color around the impact of that you might be seeing. Second question, just more general on cost inflation. Obviously, you mentioned the employers mix but just interested what you're seeing elsewhere. And thirdly, just on bolt-on M&A, you mentioned you may be interested, any opportunities there? Is that, looking something that could be imminent this year or just something on the radar?

I think with the bolt-on acquisition, we might not do anything at all. We've only mentioned it, just so it doesn't come as a big surprise if we did something. But also, we don't want a situation where people don't give us the opportunity to look at something. But it's not in our plans. It's not -- we're not relying on it in any shape or form. When we do our medium-term targets, there never be a limit of our ambition and we look at them again when we get there. But we do see Partnership Housing as a business that can grow quite dramatically.

I think just to pick up on the inflation point of cost inflation, I think the large factor there really is wage inflation, which we've talked about.

Jonny Coubrough from Deutsche Numis. Can I ask just a follow-up question on National Insurance. Was there any impact in FY '24? I know it hasn't come in but just from contract accounting and making cost assumptions.

No. I mean large -- I mean, we do experience cost inflation from time to time but it's not prevalent or material.

Okay. And in terms of Fit Out, you mentioned, John, the competitive environment picking up. Do you see the overall market is growing at the moment? And also, you mentioned winning a job a day. Are you able to give us an idea of the range of contract size within the mix at the moment?

The range is from a few hundred thousand to several hundreds of millions. But when I say -- talking about the market, [indiscernible] I'd say the competition is going to change because obviously, we had honestly a very big competition, it's going to be different. And you never quite know what different looks like until you see it. But also, if we look at the market, long term, the office fitting market -- office fitting out market has grown at a much faster pace than GDP. I suspect we've had a really strong market and we might have a quieter market for the next few years.

And then just a question on housing because it was interesting to see the margin improved despite a higher contracting mix, which tends to be lower margin. So some context on what happened there would be helpful.

It really is simple as the type of contracting schemes that we've negotiated. So again, a lot depends on our procurement route, the terms but there's no [indiscernible] there's no one callout area. I think we've been particularly strong this year. But as John has said here, over the medium term, we expect to remove our reliance on that stream of work whilst continuing to be in that space and move much more back into the mixed tenure space.

And last one is whether you've seen any pickup in private sales rates in the housing market?

I think we're no different to the other housebuilders. And obviously, we look at their rates and our rates and they're pretty similar, below where we'd like to be but slightly better than last year.

Andrew Nussey from Peel Hunt. Again, a couple of questions, maybe to each in turn. But first of all, in terms of Property Services, if we adjust for all the subcontracts, which have been brought to an end mutual agreement, what is the underlying revenue run rate at the moment? And is that at a level where you can deliver GBP 7.5 million of profit? Or is there an expectation of growth in that business to get to that level of profit? It's the first one.

John, I'll take that one. So if we adjust those contracts that we've moved out of probably anywhere between about GBP 150 million to GBP 170 million. Yes, what we're expecting is to get to GBP 7.5 million contract renewals, growth within those contracts through further capital planned works or planned maintenance. And yes, we would start with our work winning efforts now, which, as you know, we put a temporary hold on.

Okay. And second question sort of around capital allocation. If I picked up correctly in the presentation, Kelly, bolt-ons would be within partnership as opposed to any other [indiscernible]

Largely speaking. I mean, look, we're not ruling all the other areas out but they would have to be truly accretive, exceptional for us to consider.

Okay. And just sort of in terms of those medium-term targets, what's sort of the implied average capital employed within the regeneration businesses? It feels like perhaps in partnership getting up to GBP 500 million and maybe a couple of hundred million of mixed use.

So what I would say is that whilst we've given guidance for 2025, we don't actually have a limit on particularly Partnership Housing. I could foresee that we'll be much more moderate on Mixed Use Partnerships but unlikely to exceed the numbers you've talked about.

But we certainly would like to have the space to grow those businesses much faster if we can find the right opportunities.

And sort of last question around mixed use. These are obviously very long-term projects. What sort of safety levers do you have in there if returns aren't going the way that you would like?

So most of these agreements, we set it up where we have an agreed margin. And that then gives you, the land value pulls out the bottom. And so -- and every time we start a new phase, the calculations are done. So it's only per building or per phase of those long-term agreements that we're at risk.

I can't say no.

Yes. So I think the key point here is multiphase and each phase is treated as a separate obligation.

Alastair Stewart from Progressive. A couple of questions. First on defense, the Prime Minister made a fairly fundamental statement yesterday. Can you briefly run through the defense work you do? Any early conversations you've been having, obviously, they will be very sensitive. And is there any evidence that budgets are being moved -- cash is being moved out of other budgets, for instance, transport that you're involved in? That's question #1. Second question is ISG. You said there needs to be competition. I believe you said it when they did go bust. But have you actually seen any meaningful new competition coming into the areas that you generally win work?

So if we take Fit Out first. Yes, there are 3 or 4 businesses who were smaller and who have taken on a lot of the ex-staff from ISG and they are very credible competition winning work in the marketplace. As far as defense is concerned, both our Construction business and particularly our Infrastructure business do a lot of work in defense. And -- but it's probably too early to know what the statement he made yesterday will have. But certainly, there's quite a lot of defense work we are talking about at the moment. But you're absolutely right, money is going to have to come from somewhere and we're very mindful that other budgets could well be reduced.

And just thinking further on that, do you see more troops will require more housing? Or is it much more of the high added value end of things, there's some IT and so on?

Well, I forgot to say, Lovell, have built quite a lot of housing for the military as well.

I think also, Alastair, it's probably too early to say. But as an organization, we are set up to support the government on its ambitions, whether it's housing or whether it's defense.

Just a couple of questions from me. So firstly, on Fit Out margins at 7.6%. I think the slide referred to contract mix and type and operating leverage. Can you just give more detail on that? Is it a certain number of big projects? Is it -- what exactly is it about the contract mix and type that makes them higher margin? And how do you see that flowing through into '25? I know you've guided a kind of adjusted EBIT level but in terms of margin dynamic of that.

Should I take that one? Okay. So yes, the 7.6% is exceptional. It is impacted by a number of projects, which we clearly don't talk specifically about, Rob. It is exceptional, as you've heard us say a few times. In terms of guidance, I think you should be looking in a normalized period anywhere between 5.5%, the top end probably 5.75%, perhaps 6% but no more than that. And that would still be using some operational leverage.

Okay. And then on Infrastructure, I guess it's a guidance more than GBP 1 billion revenue business with a good margin. Could you give more detail on the end market breakdown? Because I guess the statement refers to defense, energy, nuclear, there's work winning in water, et cetera. But if we were to kind of put the different types of work into different buckets, can you give an indication of what they are as in the weighting?

We don't disclose the -- I mean, in the RNS, we do provide a little bit of an indication but we don't specifically disclose. There are significant sums. And I guess the important point to note is particularly with water, whilst we are prevalent in water, we're not massively exposed to water. We've been very open about the markets that we are very excited about and can achieve some good sensible returns from being in power, energy, et cetera and defense. So that's probably where most of the weighting lies. And nuclear, sorry.

Understood. I'm sorry, I know I said 2 but one quick follow-up. So in mixed use, I know there's a question earlier from Andrew, I think, on effectively what could at scale capital employed be? Because I guess you've got several slides in the deck, you talk about the kind of great long-term projects and return on capital employed up to 25%. And I think you said it could be GBP 200 million type capital employed at scale. Why is that not GBP 500 million?

It's probably not that much because of -- as John said, much -- even before we get to the capital employed investment stage, we are already investing for our own overheads. So that you've got to look at the 2 almost together that we're expensing a lot of our investment because we put it at risk to get to a signed development agreement. And then, of course, when we are at a development scheme arrangement situation, then, of course, we will still be sinking in our investment, whether it's supporting on the planning or other activities but we recycle it quite quickly. So the composition is constantly changing. So as much as on the surface, it might be growing incrementally, the composition is changing quite significantly.

Stephen Rawlinson from Applied Value. Just on Partnership Housing and another question on Property Services. But on Partnership Housing, can you just remind us of the total build during the course of last year of new dwellings and whether you're starting to see any economies of scale as you might start to grow that? I recognize that mixed tenure was down a bit last year. And allied to that, in terms of government policy, are you seeing the housing minister move towards using contractors rather than necessarily depending upon 106 agreements to get new properties and therefore, that might benefit the way in which you've approached this business as opposed to the sort of the larger giants in housebuilding. So that's on Partnership Housing. So it's about sort of the total -- just remind us of that, the economies of scale and so -- and the second element is on Property Services. I know you've been a great advocate of that over many years, John and the losses over the last 2 years are quite significant. Modest profit next year, target of about -- suggests -- let's just look at the numbers around about a 3% margin. Just in terms of your ability to get economies of scale in there, in terms of your ability to use IT, 2 or 3 years ago, you talked about the IT system, Goldeni, I think it was called. But that seems to have gone off the agenda. Are you able to compete in that effectively given the scale and given the IT developments that others are introducing as well? So just sort of talk us through that to help us understand how we get to a modest profit this year and that GBP 7.5 million that's been a target for, what, 18 months now and is realistic. It seems as an outsider but nonetheless, it's still a long way from where we are.

Yes. Look, I'll answer the difficult one first and leave you the easier one. But clearly Property Services has not been our finest hour. And -- but we're pretty confident that we can get a modest profit this year. Clearly, we have got a lot of work to do, to have a proper plan, to know how we're going to get to substantial profits. And clearly, we -- the 7.5%, which would be our medium-term target, really wouldn't be a big enough profit to justify having it in the group long term. But we're pretty confident that we're going to get there. But we -- actually, the fact that we've made so many mistakes in this division must mean that we've learned something. And if we treat every mistake as a learning opportunity, we should do very well going forward.

I'll take the tricky one now. So in terms of homes we've built and I'll look at the total proportion now. Under contracting, we've probably delivered about 3,300 homes, 1,800-ish under the mixed tenure. So that's what, 5,100 and maybe about 874 of that is open market private sales. Yes. So it is -- the open market sales are notching up but we're not getting massively excited. It's in sync with what we're seeing elsewhere in the market at this point.

The contracting element is going up as well.

It is. It is. Of course, it is.

Are you getting a strong reception from the Minister of Housing with regard to how you might progress in that area because that does just seem to be the trend at the moment and just how those conversations are proceeding.

It's early days in those conversations.

It is. There's engagement.

Toby Thorrington from Equity Development. Two unrelated from me, please. Perhaps the easy one for John first. Have you seen any supply chain churn, stress changes in your own supply chain to comment on?

Yes. I think the supply chain and the solvency of the supply chain is probably one of our biggest risks. Luckily, we mitigate it because each of our businesses have a different supply chain and each of the regions tend to have a different supply chain. So it's a nuisance but it's cumulatively would be a problem rather than on a single basis. But it is a big issue.

But has it, sort of has been churn, you would say, during the year.

Yes. We have had people in supply chain who've gone out of business.

Yes. And the other question, more general, the statement references in a couple of places, challenging planning conditions that doesn't exactly chime with some of the other things that we're saying, seeing and hearing in the sector. Is that sort of division specific? Or is there a general comment you'd like to make on that?

I think most of them say that planning is actually is getting a bit better but it's not perfect.

I think it's also referencing specifically and this is the partnership businesses where the speed in which the planning reforms will be really well understood together with the resources. I think it's really sort of targeting that. But you're right, John. I think we are seeing some minor incremental improvements but not wholesale yet.

Okay. Any other questions?

Just one last question and probably a bit of a [ watching ] at one. GBP 47 million spent by the cash outflow on buying shares for the trust in the balance sheet. Can you just -- sorry, in the cash flows. So a large chunk of change, GBP 11 million in the prior year. Is that GBP 47 million a one-off? And can you give us an indication of the more normalized level that you might be spending on shares for the future, please?

It's just a function of where we are with our various share option schemes, et cetera. So of course, where the share price has been. But it will normalize a little bit in this year, take a midpoint between GBP 11 and GBP 47 million but it won't be as high as GBP 47 million in the forthcoming period.

Any other questions? Okay. Thank you very much for your time today. Thank you.

Thank you.