Costain Group (LSE:COST) — H1 Results

0:00 Good morning, ladies and gentlemen, and welcome to the COSTIN GROUP PLC Investor Update. Throughout today's recorded meeting, investors will be in listen only mode. Questions are encouraged and they could be submitted at any time. Using the Q and A tab on the right hand corner of your screen, please simply type in your questions at any time and press send. The company may not be in a position to answer every question it receives during today's call. However, the company can review your questions today and will submit those responses on the Investor Meet company platform. Before we begin, we'd like to submit the following poll, and I'm sure the company will be most grateful for your participation. And I'd like to hand over to Director

0:31 of Investor Relations, Paul Sharma. Good morning. Good morning. Thank you, Mark, and welcome everybody to our H1 call. I'm Paul Schaller, director of Investor Relations. And with me, we have Alex Form, CEO and Helen Willis, the CFO. Before we start, I'd like to just make you aware of slide two, which is our cautionary forward looking statement. You'll see this on on the slides here, also on our presentation and on our r and s. So please please do take a look at that. I also recommend you go to our website and have a look at the presentation we did yesterday. Analyst

1:06 It's it's a useful bit of information, but also you can see the RNS and the full presentation as well. So with that, I'd like to pass over to Alex Walton to make some introductory comments. Yeah. Good morning, everyone, and look. Thanks very much for your support to date and for your time this morning in joining joining us. And look, real opportunity for you to ask any question that you really want to of us today, and we'll do our best to answer all of those. So I just wanted to sort of give you sort of overarching summary from us. Look, we've been embarking upon a very clear strategy for a number of years now and a very purposeful focus for the business, and it has now built real momentum right across the COSTIN GROUP. I think three things I just want to bring to life. Firstly, I'm incredibly proud of all of the COSTIN team and that we're able to report another strong set of results for the first half of the year. This demonstrates the continued strong operating performance of the business, our robust financial position, and how we are capitalizing on the clear strategy that we've got in place.

2:15 And I'll let Helen in a minute talk about sort of key highlights from from the numbers. The second the second thing is we said when we spoke to you six months ago that we were very busy bidding work and that we would secure work, and we've done just that. The team have secured a significant volume of really high quality long term work in the first half of the year. And the forward work position stands at £4,300,000,000, more than three times the annual revenue of the group, which by any industry metric is at the top of the table. We also announced last week an award of a further seven year AMP8 contract for Southern Water valued at over 500,000,000, and we've got the opportunity for a further five year extension after that. So that will bring thirty five years to working continuously with Southern Water, which I think is a great attribute for the good performance of the business.

3:15 We also expect to be making further award announcements in the second half of this year, so continued momentum in that space. And then thirdly, look, our growth in the forward workload, the positive outlook is a result of our very clear strategy focusing on those markets where essential infrastructure is being invested in to meet the critical needs that you hear politicians and and everyone talking about. We are successfully building a stronger, broader tier one customer mix,

3:46 which brings strong resilience and balance to the business. We're also continuing to develop and grow a strong construction and consultancy services business across that broadened customer base. So very pleased with with the progress we're making, but excited about the opportunities that lie ahead for us. So look forward to your questions, but I'll hand over to Helen. Helen? Thanks, Alex. Good morning, everyone. Great to have the opportunity to talk with you today. So just a couple of highlights. You'll note that the operating profit's continuing to grow and, importantly, the margin alongside that. And, of course, we're continuing to generate free cash flow. And and all of that drives our stronger period end cash position and is improving the strength of the balance sheet.

4:33 And what's been very nice to be able to announce, this half year is as a consequence of of of all of that positivity,

4:40 we're able to continue the dividend with the interim dividend of 0.4p, and in addition to be able to announce the £10,000,000 buyback. So a really good indicator of our level of confidence in the business, its resilience, and and its future opportunity. Great. Thank you. So we've got one pre submitted question first, which was please confirm the order book does not contain any fixed price construction contracts. Shall I take that? So thank you for the question. That's a really important point for us. If you look at the r and s, Paul was was pointing out where you'll find that on our website. On page six of that, we make a a very clear statement that our order book doesn't include any single stage design and build fixed price construction contracts.

5:30 Very important for us in in our assessment of risk and our ability to manage our our contracts and delivery ongoing. So that's something that we are very strong maintaining. I think the next one is gonna be a a Helen question. It's from Andrew M. You've announced a 10,000,000 share buyback program. How did the board determine that this was the best use of capital at this time?

5:53 How does this align with your long term growth and investment strategy, particularly considering ongoing projects and potential m and a activities? Thank you for that question. Absolutely. So we've got a stated capital allocation policy where we we have been investing in the business through our transformation program, and and now you're beginning to see some some CapEx investment as we're driving improvement in systems and digitizing the business. All of those are really important for us, we will continue with those. And our plans going forward absolutely accommodate those. But with the strong cash generation that I referenced just just a moment ago, we do believe we can we can start to think about the other parts of that capital allocation policy, and that absolutely is possible mergers and acquisitions, and and then shareholder returns.

6:46 So we are beginning to think about acquisitions. We're now in a position where we can consider that. It's something that we will think long and hard about. But if something does emerge that we believe is value accretive for us as a company, we'll absolutely consider that. But I think alongside that, we're able to to consider that alongside the the returns to shareholders. And so we've we've announced the buyback along alongside the maintenance of the dividend and the £10,000,000 of the buyback plus the 3.3 ish of of dividend

7:23 anticipated for the year feels feels at a sustainable level for us and appropriate level return at the moment for for our shareholders. But something we keep under consideration as we go forward. As an answer to pension question, this is from John H. Given the pension fund is now in surplus, is there any consideration about a buyout?

7:47 Absolutely. We keep that under consideration. We assess that on a regular, but not very frequent basis. And at the moment, our assessment is that that would be very expensive would be, in fact, unaffordable for us as a business given the size of the scheme. It is in surplus, but it's still a sizable scheme. Something we'll keep under consideration. An important point for us is that it remains in surplus and the business is not making cash contributions as as we've announced into that scheme. But, obviously, making sure it's it's suitably funded and and supporting our pension scheme members. I think it's one for Alex. With potential shifts in government spending priorities, how you position the company to adapt to the changes in infrastructure investment?

8:39 Are there any specific policy changes that can materially impact your forward work position or revenue projections?

8:47 Yeah. Look, I think it's a very a really good question at this time. Look, we've had a very clear strategy for a while now that we've chosen to focus on what we believe will be the essential infrastructure that is going to tackle some of the big challenges that we have as a country and as a globe.

9:10 And I think that rings true with what you hear from the current government, the new government. So it's all about driving economic growth. So if you look at road infrastructure, rail infrastructure, it's gonna and transport and wider transportation infrastructure, it's gonna be all about how are we gonna drive economic growth across the regions in the country and unlock economic activity. If we then look at the energy investment, it's going to be all about how do we get towards net zero. So how are we going to transition the energy space because we've got to safeguard the planet, but we've also going to have to adapt to very changing weather conditions that we can all see. That again impacts the transportation networks in terms of flooding and some of the resilience challenges. Then it's all about cleaning up the water system

10:05 and safeguarding the future supply of water. And then sadly, we're in a world that national security is even more threatened, and therefore maintaining a strong defense is pretty key. So I do think that the strategy we've embarked upon is positioned absolutely in the right space. Everything I see from government in terms of their missions and certainly the conversations we've been having with government around their missions, their priorities is totally aligned to the market focus that we've got. I think naturally, the the risk for us at the moment is we just see a very short and near term

10:45 period of time that they are under significant spending constraints, but also we'll be wanting to have a review of what investment is planned and for them to be able to make sure that it's adequately prioritized in the areas that they think it should be. But that will be a very short term thing. As you can see from the work we've won in water,

11:06 it's fantastic that you can see that we're getting on with that with that investment, and that is twice the size of what it's been before. If I look at rail, you can certainly see the investment that Network Rail is embarking upon, £43,000,000,000 worth of investment over the next five years, and we're actively pursuing a good volume of that. And then in highways, we can see that some of the projects that we're talking to the client at and working on are all about how we unlock economic activity in areas. And then energy space very clearly is is aligned to the government's enhanced focus on driving the energy transition. So we're pretty confident that we're absolutely facing into the right markets.

11:52 I think one of the things I would say in closing is that we've had a few questions about the cancellation of the a three zero three and the a 27. I think we should see that as a

12:02 positive. I think we're gonna have a government here that is gonna decide what the priorities are, make the hard decisions, and then give us a ten year plan of what we can get on with, which will give us consistency and continuity, which is great for us as we drive the growth of the business. So thank you. This question, I think, also from Benji. It's a related one we had before. With the resumed dividend payments and current payout ratio, how do you see your dividend policy evolving? Are there any plans to increase the dividends, cash flow improves, or will share buybacks remain a priority? So we're in a an interim period at the moment where we still have the dividend parity arrangements with the pension scheme, which we talked last year about that.

12:53 Whilst the dividend parity clause is in place, any return to shareholders above contributions, which was set at 3,300,000, need to be matched. We carried out the annual check this March, and that showed that we were in surplus, and therefore, we were able to pause for one year the dividend parity clause that goes from this July to next June. And that gave us the opportunity to consider additional returns to shareholders.

13:25 And as we've announced this week, we maintain our choice was to maintain the current level of of dividend, hence the 0.4p that we announced for the interim, same as last year. But to consider additional returns, the choice there was to either change the dividend level or to do a special or to do a buy a share buyback.

13:48 Our our decision was to keep the dividend at a consistent level because we will have to do this check again next year. So keeping a a constant level of dividend, we felt was important to give certainty to shareholders. And then the choice then was was whether we returned extra amounts to shareholders through a special or a buyback. And our choice was buyback as it's more value enhancing.

14:13 Next March, we'll have to do the check again. Beyond that, I would hope that that would would no longer be the case. But whilst dividend parity is in is part of the agreement with the pension fund, those are the sort of questions we need to to consider. Very important to us that we do return to a progressive dividend policy as we've put in our capital allocation policy and we're pushing very hard to return to that and to make this more simple for people as well and to understand what to expect. But for now, a constant level of dividend was our choice taking the opportunity to to return an extra amount in the form of a buyback. Next one is from John H. I think for you for both.

15:01 Is the company targeting revenue growth for 2025? Notwithstanding what the AMPAPE won't flow until 2026. Overall activity on the new government should grow, and the company's current work work looks very positive. So, basically, what's the revenue sort of, you know, looking to look like for the next couple of years? And where do you see it after that with the government spending patterns? Yeah. I think we would look. We would see revenue being fairly flat

15:29 for this year and for next year. And that's really because we're at the early phases of new infrastructure programs. Therefore, we're doing design work, so the volume of activity is slower, and it will be the same as we start to mobilize for AMP8. But we then anticipate that when we get into 2026 and moving onwards, the revenues will be increasing as we start to get into the delivery phases of those contracts. So how we see things moving forward. Yeah. Think, I mean, obviously, the analysts will be writing the numbers as well. So I'll be publishing consensus in the website for 2425, '26, probably in about a week or so, so you can see where the market thinks we're gonna be headed as well for the next couple of years.

16:18 I've got three of the four analyst numbers in. There's one to write the note. So I think it probably middle of next week, maybe maybe late next week, I think we'll have the numbers, new numbers on the website. I see.

16:30 So this is one thing I think for Alex. How do you view your competitive position within the market? Are there any emerging competitors or industry trends that could challenge your market share?

16:41 How are you planning to stay ahead of those competitors? Yeah. Really good really good question. And I think it's it's very variable within within the different markets we're in. I think I think the most important part of our competitive positioning is the strength of relationship that we have with our customers. So if you take the Southern Water award, you know, we've been working with Southern Water consistently now for twenty four years, and they've now awarded us a contract for another twelve years. So you can see that the intimacy of relationship is a pretty important characteristic and it's the same for network rail, it's the same for national highways, etc. So that's an important part. If I look at water, let me start with water because it's sort of flavor of the month.

17:31 We've worked really hard over the last five years in AMP7 to totally change the way we operate in the water sector, to change the commercial terms and conditions with our water customers. So we've had to really shape a lot of their thinking. And I think that's why when you look at our positioning, we're probably one of the leading players in the water sector right across right across the marketplace. So, you know, really good position to have built, but that's been hard won. And a lot of work that we've had to change the way we work. If I look at transportation, I would say we're one of one of the select few who operate across roads, rail, and now aviation.

18:17 And I think that's because we've got a really good reputation and expertise in delivering infrastructure. And if you look at the major programs, you know, alongside a number of others, we're consistently the the individuals that are on that. I think in the energy transition space, we've built a sort of mark first move first to market, first mover advantage in the energy transition. So the depth of relationship that we're building with BP has meant that we've won the carbon capture contract, and we've won we've now won the hydrogen contract. So that's really good. But, that's based on the reputation that we've got with the customers, the fact that they really like us, which means we've now won our third contract with BP up at Teaside.

19:06 It's a very different picture if I look at the North Sea where we've we've historically had a reasonable position, it's it's just too competitive a market, and therefore, we're not you know, it's not an it's not an area that we have a strong positioning, but energy transition, energy networks is certainly somewhere. And then if I look at defense, I think we've got really good again, really strong position in that space, and I would say that we're up there with the top players. And nuclear decommissioning, likewise, you know, we've got a tremendous in house capability, expertise, long term relationships with people like Sellafield, and we're one of their one of their go to partners. So the markets we're in, we're definitely very strongly placed. But as I gave you an example in water, we have to work really hard in helping shape our customers' thinking about how the market should operate and really change our operating models to make sure we are fit for purpose for the direction of travel in those markets. So so absolutely focused on the right areas, tremendous capability, and very strongly positioned from a competitive advantage point of view.

20:25 And this is from Max H. Can you confirm all the areas looking at deliver adjusted EBIT margins in excess of 5%? And it's probably actually worth maybe just going over the 3.5%, 4.5% margin targets anyway because I think we've now seen a lot of investors so far, haven't we? Yeah. Well, if I let Helen come to the targets, I I I can confirm that not every single contract is gonna deliver in excess of of 5%. You know, our our rule of thumb, and we've got pretty good predictability and consistency around it, is that our capital delivery programs should deliver a consistent three and a half percent margin, but we do have the opportunity to outperform that where, you know, where we drive greater productivity and efficiency and better outcomes. So that's sort of where and then we've obviously got the consultancy business that does deliver the higher margins that that, you know, that moves the blended margin up. So and just to sort of start there, and then Helen, do you wanna Yeah.

21:33 Do you wanna talk about the targets? I'll I'll I'll yeah. I'll address the targets specifically. So we we put out some time ago now the margin targets that we stated as three and a half percent during the course of f y twenty four and four and a half percent during the course of f y twenty five. I talked to them first. They that that progression comes from a number of different factors that we're driving very hard through the business. So first and foremost, it's about driving operational performance, and that's what we've been really focused on for the last few years. Winning the right work, understanding the risks within the work that we win, and then driving delivery excellent delivery such that we have predictable results. It's really important that they are predictable and really important that we're maximizing the margin on those on those contracts. So the first sort of big big slug of improvement comes from from that sort of, you know, driving those basics very, very hard. So pretty dull.

22:39 We like to say we're we're predictably boring, but it's about doing the basics extremely well and that really starts to drive that first improvement. And you can see that the second half of last year, our margin was 3.8%. And we we think that that will continue. Just bear in mind, having said that, bear in mind that we have a distinct bias to the second half in a way we recognize our our profit. So h one margin will continue to be less than H2. So important to look at both parts of that and then the full year that comes from that. So the three so first of all, delivery excellence. Secondly, we've been restructuring the business and taking cost out and and using that cost out to invest in skills that we need, and therefore not driving our cost base up.

23:29 And then thirdly, driving the the the mix improvement as we increase the size of the consultancy business. And that's there's a really nice slide in the in the presentation that that draws out the three different types of consultancy that we deliver. And then on top of that, how do we get up towards 5%? Well, as we grow in scale, there might be some operational leverage as we are able to drive the business just that little bit harder. So there's not one not one item that that that drives us through to that improvement. There's three distinct areas, and that's what we're driving very hard. And and we think we are beginning to to see that success coming through as you see the margin progression in the numbers.

24:16 That's great. So I think that's all actually all the questions for now. So Mark, maybe if you could maybe just Yeah. That's that's great, Paul, actually. Thank you very much indeed. Thank you to everybody for engagement. And of course, Paul, Alex, Helen. If any further questions do come through, we can make those available to you post today's call. Alex, Helen, I know that and Paul, I know investor feedback is particularly important to the company. I will shortly redirect those on the call to give you their thoughts, their expectations, their feedback. But before doing so, I wonder if I may, Helen, Alex, if I could come back to you just for a couple of closing comments. And then as I said, I'll redirect investors to give you their feedback. Yeah, look, thanks very much for joining this call.

25:02 It's really important that we understand some of the questions that you've got anything. So please just do continue connecting with us and engaging with us. But in summary, just in concluding, I'm really pleased with the momentum of the business. We've got a lot of opportunity ahead. We're very driven by it. But what you've got is a really solid business performing really well in markets that present significant opportunities. And we look forward to taking advantage of those and continue to update you on our progress. So thank you, Helen. That's great. Alex, Helen, Paul, thank you once again for updating investors. If I could please ask investors not to close this session as we'll now automatically redirect you for the opportunity for you to provide your feedback in order that the company can better understand your views and expectations.

25:52 This will only take a few moments to complete, but I'm sure it'll be greatly valued by the company. On behalf of the management team of COSTIN GROUP PLC, I'd like to thank you for attending today's presentation, and wish you all a good rest of your day.