Costain Group (LSE:COST) — Full Year Results

0:00 Good morning, and welcome to the COSTIN GROUP PLC investor q and a session. Throughout this recorded session, investors will be in listen only mode. Questions are encouraged and can be submitted at any time. Just find the q and a tab situated in the right hand corner of screen. Simply type in your questions and press send. The company may not be in a position to answer every question it receives during the meeting itself. However, the company can view all the questions submitted today and publish responses where it's appropriate to do so. Before we begin, I'd like to submit the following poll. I'd now like to hand you over to Paul Sharma, director of investor relations. Good morning to you, sir. Good morning. Thank you very much indeed, and thank you for the investment people for setting up the school as always. With me, we have Alex Vaughan, CEO Helen Willis, CFO. Before we start, though, I would like to draw your attention to slide two, which is the forward looking statement. This is on the RNS, and it's also on the presentation.

0:50 We did do a full presentation yesterday. It's on our website, so please have a look at that. We won't be going through

0:56 the presentation this morning. We went through it yesterday, so take a good look at that. It's good. And now I'd like to pass over to Alex for some introductory comments. Alex? Yeah. Thank you, Paul, and good morning, everyone. Thanks for taking the time to join us this morning, and we look forward to answering the questions that you might have. Look, were very pleased to be able to announce a good set of results for the company last yesterday. Three things I think I'd draw your attention to. Firstly, it's another strong financial performance for the company, building on that over the past four years, an increase in the adjusted operating profit, and then in growth in the margins, again, in line with the targets that we've set out. Obviously, EPS was up strongly, and the cash and balance sheet position of the business remains very strong. So a really solid set of financial numbers for 2024.

1:56 Looking forwards for the business, we were really delighted that we've had a really good year, and we secured a record increase of about £1,500,000,000 to the high quality forward work position. We've now got forward work position of £5,400,000,000, and that's over four years' worth of revenue. We've had quite a number of wins and extensions in the year. We're getting a lot of growth on the frameworks that we are already operating on. And as we sit here today, we've got very high volumes of tendering activity, and we look forward to announcing further progress through this year. What we've done is given everyone confidence in the growth of the business by indicating that there will be a step change in revenues and operating profits in 2027, building on the position that we've now secured.

2:47 And then the third thing is very clearly our strategy is delivering growth for the business and value upside for investors where we're growing in what are growing markets. We're broadening our customer base, broadening the services that we offer. And as a result of the board's confidence in growth prospects of the business and the strength of our balance sheet, we were able to double the dividend. So that's where I'll go in terms of an introduction, Paul. Perhaps we can get to some of the questions. Great. Thank you. We've got some questions, pre submitted questions, I think, from Max. So I'll just work my way through if that's okay. So the first one is, do you feel COSTTAIN will be able to continue to grow, bearing in mind the effects of the budget from last October weren't, you know, weren't viewed that well by something in the market.

3:37 Yeah. Look. From my point of view, as we've set out in the results statement, we certainly see huge opportunities to grow. If I look at investment across our markets,

3:48 In transport, we've got the HS two contract that's gonna continue for at least another five years together with two major new wins on that contract for the next phases. So that's gonna keep us pretty busy. Water is, you know, just about embarking on a record level of investment and COSTONE. We've secured strong positions for all of the major water companies, and that's gonna proceed over the next five years. And then, actually, if you look at the five year spending plan beyond that, it's gonna grow it's gonna grow again. Energy, we can all see the significant investment that's needed in energy, and COSTEM is really well placed to take advantage of that marketplace. And then defense, look, unfortunately, in the world, there's a little bit more of a challenging space. So investment is being made, and we see that continuing. So and if I look at it, you're actually the majority of investment in infrastructure comes from the private sector, either through regulated or private spend, and we see that coming through, and we've won a lot of positions to take advantage of that. And we see the government having to spend in critical transport infrastructure to unlock growth, which is obviously their number one priority.

5:04 This is one, I think, one was sent for Helen. Could you give an update on the progress regarding the de risking of the pension scheme by buyouts, etcetera? Yeah. Morning. Thank you. So the pension scheme is is is in a much healthier place than it was a number of years ago. You can see on the balance sheet, it's an accounting surplus. But when it comes to our ability to reduce contributions and so on to the scheme, it's the actuarial surplus that that is key. We had a we in our last triennial valuation, we agreed an annual check. We carried that annual check out last March, and that showed we were in actuarial surplus, and we were able to pause our cash

5:44 contributions and also our dividend matching. And that gave us the optionality to do something additional. And we chose to make a share buyback that you saw in the autumn of last year. So we have another annual check this March, the end of this March that we'll hear about in June. And depending on the outcome of that, we may again have optionality to increase dividend, do a special or a buyback. But of course, we have to consider the cash flow in the business at that time and the share price at that time. So I'm hopeful that we will have some choices to make there. The pension fund is in a in an increasingly good shape, and we are working with our trustees to think about possible other structural changes.

6:32 So some options coming up for us. This is also another Helen one. Exceptional items in the second half were 9,600,000. This obviously impacts your earnings, therefore, your PE rating. So what the exceptionals likely to be in 2025? The exceptionals in '24 were around about five for the last year of our transformation program. That was a three year program. There won't be any of those costs going into '25. We are now moving into a period of what we're calling business as usual. So we're continuing to change the business, but we won't be putting any of those costs into exceptionals. You will probably see some modest CapEx coming through in the next few years as we start to invest in systems.

7:20 So I I would anticipate minimal exceptionals going forward.

7:27 This is probably sort of another hell of a one. Sorry about this. Andrew M, or maybe both. How confident are you maintaining a progressive dividend given potential economic headwinds?

7:40 So we we are confident. We've we've been cautiously moving into dividend when we started again in FY 2023, and we you can see that progress in 2024. Our plans show growth as we've been talking about and Alex was bringing to life just now. And that growth in in in operating profit is cash generative. Our our free cash flow will continue to be strong. Our balance sheet is is is ever stronger, and so we we really are confident that we can modestly move to to our dividend policy over time. This is one for Alex from Anthony D. Will the transport division sales in 2025 benefit from delays in '24 on top of any normal expected growth? So, you know, with some projects moving to right, what will '25 revenue look like for for transportation?

8:38 Look. I don't think, you know, you won't see a a recovery straight away in 2025. You know, infrastructure takes a long time for us to design. So we're working on a couple of high new highway schemes at the moment, but we're in the early stages of design. And if we've learned anything in the successful delivery of infrastructure, is to prioritize more time to design the solution, get the planning agreed, and get that before we go to site. So certainly, it'll be sort of 2026, 2027 when we're gonna see the transportation numbers start to move up. This is one for Alex from Chris G. How does the change of green policy away from net zero, alternative energies by BP and Shell, affect COSTED's relationship with them and the profitability of this kind of future future market?

9:30 Yeah. Chris, it's a good question. I think energy is a sort of ever changing space.

9:37 What we know is that we have to decarbonize our energy system and that's certainly what the climate change committee have set out for The UK. It's what the UK government is committed to and driving, and therefore COSTIN is actively involved in a large number of areas. Certainly with BP, we're involved for the carbon capture and hydrogen, and BP are committed to to that project, and that is funded by the UK government because it's really a first of a kind program. So that is being pushed, that's all about decarbonizing industrial clusters. But we're also looking to work with National Grid on the Great Grid upgrade because electrification's gonna become a big part. We announced recently a win for Sizwell C where we're providing project management support, and we all know there's gonna be a huge nuclear investment in Sizwell. So, look,

10:37 it's ever it's ever it's an ever increasing changing space, but we're well placed to take advantage of what's gonna happen in that market. Clearly, some of our customers are subject to global global business strategies, which are different from our current government strategy. This is for both of you. So for Andrew M, how much of the forward work position is contracted versus preferred bidder status? And what risks are there with, you know, contracts moving effectively from the preferred bidder onto the order book. Shall I take the You'll take first part. Yeah. Then you can yeah. So so there is a slide in the presentation that you you could refer to slide 15. But the the forward work position of 5.4 is broken down as 2.9 of order book and 2.5 of preferred bidder.

11:29 And the preferred bidder is really where the framework contracts are. And as we get works orders and those timings and values are firmed up, they will move into the order book. So that you always see a progression from the preferred bidder into the order book. The nature of all of our work in in both of those parts is a much better risk profile than perhaps in in years gone by. There are no fixed price lump sum contracts in there, and the risk profile of it is very much one that we are happy with and feel we can we can manage. Alex, don't you want to Yeah. Look. I think Andrew

12:03 came back to sort of the conversion rates of preferred bidder. That will definitely flow. So our customers, if I take if I give you use an example of a water customer, they will have regulatory outcomes that they have to meet. And if they don't meet those, there'll be penalties and also a clawback on the investment that they've been given. So they will definitely have to spend that money. We've been allocated that works. The reason we've put it in preferred bidder is because we've been given and allocated that, but we've got to develop the solution with them, and we've got to agree the final price with them. And that will definitely come in, and, you know, it'll it'll happen over that five year period for that framework. And we've got a track record of all of that preferred bidder. And, you know, the reason it is preferred bidder is because we've been awarded that contract, and we're just working through the customer on the precise scope and timing of that investment.

12:58 Next one, actually, I think I'm gonna do this one if that's okay. Can the repeated reference to step change in 2027 margins be anyway quantified at the stage? So this is from Chris G. So the adjusted operating profit for '24 was 43.1. Consensus, we're collecting the moment, but looking at the numbers from the analysts, and there's a couple more to come, and we probably should be about 46 adjusted EBIT for '25, probably about 50 adjusted EBIT for '26, and then 60 adjusted EBIT for '27. So, Chris, that's where the big jump comes. And the reason for that is if you look Next one is with George w.

14:03 Are there any notable upcoming contract renewals or new projects in transportation, water defense that could significantly impact your order book? I suppose that's, you know, where where's the new work gonna come from in 2526? Well, George, we certainly see opportunities coming in roads, and we're in discussions on those. So we, you know, we look forward to being able to take those through. I think most of the working water we've now secured that's gonna really affect the business, but there are there are wider opportunities like some of the reservoir opportunities that we're talking to customers about at the moment, but that water really is now unlocking work from those frameworks. It's exactly as the five year program we have with Heathrow Airport, you know, water transport for London, you know, those customers. It's about now unlocking that spend from those frameworks and and getting it on the ground.

15:03 The next question is about the 5% operating margin target. How would it get there? Will that be from new new work or from efficiencies? Take that. So with the targets that we put out into the market in the sort of fairly short term were three and a half percent during FY '24, four and a half percent during FY '25. And the way to think about that wording is that the second half margin would would meet meet those targets. Clearly, did pretty well in FY '24, so we had 4.4% in the second half of twenty four. And and that certainly gives us a good platform and confidence to reach the 4.5% during FY '25.

15:49 We've talked about 5% as an ambition, so that very much is in the medium term. And we continue to drive the business very hard. So there are a number of layers that contribute to this gradual improvement in margin. Really, it's a lot of it is coming from our construction work, which is the largest part of the business. And that's about winning the right kind of work at the right condition right terms and conditions and driving performance really tightly. And and you see that really pushing the the march up already. We've also been controlling our costs. There is a little bit that comes in from service mix as well as we do more consultancy that adds sort of icing on top of the cake. And of course, as we grow, you get operating leverage as well. So it's it's all of those things contributing to that gradual margin progression, but we're we're really confident to reach that next target for FY '25.

16:42 Welcome to John H. Some infrastructure related companies have seen a problem in rail. Have you seen that? And how do you how do you see rail panning out for the next few years? Yeah. Look, you know, you've noticed some of those businesses that have been affected. I think one of the things that we've really made a strength in COSTIN is the ability to move people around the business. So we don't have people who are only rail specialists. We're able to move people around the business, which helps us be ambidextrous in how we how we grow and and resource the business. But, you know, when we embarked when we looked at CP seven, we didn't anticipate a significant investment in the areas that COSTIN has a strength.

17:31 Our capability really being around overhead line electrification enhancements to the rail system system and stations. So we certainly see CP eight as a as a bigger target. So as a result of that, we're not affected by some of the slowdown in rail spend in this five year period, but we certainly see big opportunities for us in the next five year period, which is which is exciting. But, you know, I think our ability to have people that can move around the business, which means as water grows, as energy grows, as, you know, HS two grows and other those contracts, we're able to move people around and and and support the growth of the of those business, which is great. And I think that's all the questions for now. So, Alessandro, I think I can hand back to you if that's okay.

18:22 Perfect. Thank you very much for answering those questions from investors. Of course, the company can review the questions submitted today, we will publish a response out on the investor meet company platform. Just before redirecting investors, which is very important to the company, Alex, could I just ask you for a few closing comments? Yeah. Look. Thanks again for taking the time to join us this morning and and for your questions. And, look, if you ever have any questions, Paul's email is very easy to get ahold of, so don't hesitate to to email email him. Look. We're very positive about the full direction of the business, the progress that we've made. You know, there's a significant investment in UK infrastructure being made to safeguard the The UK's future. It's all about building a more prosperous UK, a more resilient UK, and decarbonized UK. And COSTANG is gonna be forefront in ensuring that we deliver the solutions to unlock our future. So thank you very much. See you soon.

19:20 Alex, Helen, Paul, thank you very much for updating investors today. Can I please ask investors not to close the session as you now be automatically redirected, provide your feedback in order that the management team can better understand your views and expectations? On behalf of the management team of COSTIN GROUP PLC, we'd like to thank you for attending today's presentation, and good morning to you all.