Costain Group (LSE:COST) — Interim Results Q&A

0:01 Good morning, ladies and gentlemen, and welcome to the COSTIN GROUP PLC Interim Results Q and A Session. Just please simply type in your questions at any time and press send. The company may not be in a position to answer every question received during the meeting itself. However, the company can review all questions post today's meeting, and we'll publish those responses where it's appropriate to do so. Before we begin, we'd like to submit the following poll, and if you give that your kind attention,

0:32 I'm sure the company would be most grateful. And I'd now like to hand over to Director of Investor Relations, Paul Sharma. Good morning. Thank you, Mark. Welcome, everybody, to the COSTIN call. It's our first investor meeting call. So it's it's really nice to have Mark and the team do more work for us. Just to say that our results were published yesterday, if you go to our website, which is www.costain.com/investors, you can see the the statement related to the city yesterday at seven. You can also see the presentation, and there's also a link to the analyst presentation, which is now long. So if you want to watch us and do the full presentation there, you can do that as well.

1:11 Before I I I hand over to our CEO, Alex Vaughan, and CFO, Helen Willis, I'd like to draw your attention to a couple of things. On slide three here, this is the safe harbor statement, so please have a look at this. It's also on page 22 of the statements yesterday and on page 35 of the slides as well. So I'm just hoping to have a look at that. So I'd like now to pass over to Alex Baughan, our CEO, for some introductory comments. Thank you. Thanks very much, Paul, and good morning, everyone. Thanks for taking the time to join us this morning. I'm just gonna give you a very brief sort of set of of key highlights from the results announcement we made yesterday just so that we can maximize the time for your questions.

1:59 But we were very pleased as a company to be able to report a strong set of results, which demonstrates the strength and resilience of the business that we have, and we're definitely on the road to where we want to be. We're all about delivering those strong results. So we delivered growth in the adjusted profit, up 7%, which is exactly in line with expectations. And the net cash has increased to GBP 132,100,000. And positively also, the operating margin increased 2.3%. And we're on track to deliver against every one of our milestones for the full year in terms of profit, cash and margins. I think one of the important factors that's happened since the full year results last year is we've taken some strong actions to continue to strengthen the business, especially around cash within the business with significantly reduced contributions to the legacy defined benefit scheme and securing strong surety and banking facilities for a further three years. So all of that just continues to strengthen the business.

3:13 Performance across the business has been good. So, you know, transportation has been resilient and stable. You know, we are dealing with some short term headwinds with Department of Transport spending, which has been very public, but we're managing those and delivering our contracts across roads, rail, and integrated transport,

3:38 trip delivering those well. And then in natural resources, performance has been good, and we've got real growth tailwinds behind us in that area as we see strong investment in water, energy, defense, and nuclear. So in summary, we've got a very positive outlook across all of our our markets whilst recognizing the short term constraints of some of the government funding over the next eighteen months. We've got a really good quality, low risk secured volume of work, about £2,500,000,000 of secured work, and a further £1,500,000,000 of preferred bidder work. So that 4,000,000,000 worth of work really gives good visibility for the business together with a number of frameworks that we've got that we value at zero.

4:28 And at the moment, the highest level of bidding that we've seen for a very long time gives us with really strong confidence moving forward. So I think my closing message would be that, you know, the more diversified customer mix that we've got, the broader service offering that we're giving, the market outlook and and the strength of our balance sheet is giving us real confidence. And, you know, the board is currently reviewing, putting in place an interim dividend payment, and we'll update the market shortly on that. So with that, I'll hand over to you, Helen, just for a few highlights. Thanks, Alex. Good morning, everybody. It's great to have this opportunity to to connect more directly with with with our investors. So

5:13 just to build on a couple of things that Alex has said, strong cash generation is a real feature for for the business now. You'll see that we've generated 26,000,000 in the first half of this year, and that comes off the back of really strong cash generation in 2022 as well. So real focus for us on that, making sure we are managing the the working capital very, tightly and building that cash balance. Just a little bit more color on the refinancing that that we did, and Alex has just mentioned. So we worked with our banking group and our shorties to refinance with an a new arrangement taking us through for the through the next three years. We were able to bring in a new bank into a banking group. So NatWest joined us. So really nice to have a a strong high street, UK bank coming into the, into the group, and I think that's another marker of of confidence. So really pleased with the outcome there. You'll see that the facility level has come down.

6:16 That, again, that's a a sign of confidence. We didn't use our RCF, our revolving credit facility last year or the first half of this year. It's there to essentially give us a buffer. But the reduction in that level is is a positive thing for us and reduces our financing expenses. So, again, really positive out outcomes there. And lastly, just to build a little bit on the pension valuation. So this is a three yearly process, to value the defined benefit scheme, that the company still, is obliged to maintain. And we work with our trustees on the on the board of of the pension fund to, strike a new three year agreement, and we were pleased that the, the deficit has reduced to such a small level that we were able to agree reduced cash contributions into that scheme.

7:13 So that was £12,000,000 coming down to £3,000,000 annually. So another good outcome for for both the the the trustees being comfortable with that and for the company as well to reduce that cash. So I think really building on the strength of the balance sheet, really focusing in on cash generation and and some good outcomes there on the refi and on the pension revaluation process. So with that, I'll hand back to Paul. Thank you much indeed. So I'll go to the q and a. I can do this really chronological order coming in. So first one is given your level of cash outside cash joint operations, can we expect a dividend this year? So we've we've signaled in the statement that the board is considering receiving dividend. We recognize that that's really important for investors.

8:07 We've also signaled that there is currently dividend matching with part of the pension agreement, and that is to the extent of £3,000,000. So the consideration underway at the moment is to resume a dividend that would be equivalent to the pension contributions at around £3,000,000 a year. We're going through a process at the moment to have the right agreements through the company and and with our our new banking group, and we'd hope to be able to make a statement very shortly on that. The next one is, do you expect revenue to be stable in 2023, and what do you expect for '24 and '25?

8:55 So for 2023, yes, I'd expect the second half to be similar to the first half as we move into 2024. Little bit early to say, but, across the business, natural resources continuing to grow, in transportation, a diff different view for for each of the sectors. A lot of a lot of commentary in the in the press about highways or road sector. There may be a bit of a slowdown there, but we have really good visibility with rail, with the work that we do with HS two. So a steady issue goes, I think, would be the answer for 2024. Your pence pencil expanding operating margins for '24 and '25.

9:41 Do you have any expectation of the margins for 2023? Yeah. Look. I think we've got expectations out there in the marketplace for full year margins for '23. So I think we're we're guiding the market to about 2.9% for the full year, which will be up on the half year. And, obviously, we've set out the milestones for getting to three and a half percent margin by the end of twenty twenty four and getting up to four and a half percent by the end of twenty twenty five, and we're on track to deliver against those milestones. Our next one is given your level of net cash and EBIT, the shares seem to be cheap. Have you been approached by a buyer? I agree that the shares do feel cheap, and there is room for improvement in the valuation of our business. And, obviously, we're working hard on supporting that, and there's, you know, there's been no approach.

10:41 In terms of the share price, basically, they are asking you what would it take to move the share price up? And secondly, will the board stroke management be buying any more shares in the company? So, look, I think we're clear on the measures we've got to do as a business in our hands to get the share price to move up. So, you know, one is continued confidence. So we delivered really strong set of results in the full year last year. We've delivered in line with expectations of the half year this year. So we're building back the confidence that this is a business that does what it says it's gonna do, which is good. I think continuing to make the progress against the margin milestones that we've outlined is great. And I think demonstrating to everyone the confidence in the outlook and the market by securing work will be another measure. So those are things that we're very focused on and delivering against. I think there are some market issues that are outside our control.

11:38 We're obviously heading into a general election next year. And I think, you know, once we get through that, that's also gonna give people long term confidence about, you know, the direction and the underpin. I think what I would say about market outlook and the election is that what we're hearing from conversations we're having with both the major parties is that there is an alignment in terms of policy prioritization and investment levels for the markets that we are in. I think the labor would like to invest more in getting greener quicker, but I think they recognize that funding will be constrained, and therefore, they're probably gonna continue at the speed that the current government is going were they to get in. So, yeah, lots of actions on our behalf, but I think the results we've issued yesterday for the demonstration of a track record as a business that does what it said it's gonna do is an important step in moving the share price up. And in terms of coming to your second question, look, we, you know, we both own shares.

12:44 A large part of our remuneration is paid in shares, so we are directly linked to our shareholders', you know, expectations. You know? Personally, I'm a significant shareholder in COSTIN, and I have bought a significant number of shares during my career. I've been here thirty two thirty two years, so I'm heavily invested in this business from a shareholding point of view. My next question is how this is Tim. How is management pay linked to the share price performance? Yeah. So, Tim, you know, we are so a significant amount. So we obviously get paid a salary, and then we get an annual bonus. And about a third of the annual bonus is converted into shares.

13:34 And, obviously, therefore, we're directly linked to holding those shares for a long period of time and those shares increasing in value as the share price goes up. So that's a key point. And then another significant part of our remuneration is a long term incentive plan, which has targets linked to earnings per share and relative share shareholder share value growth in the market as well as cash. And so and we and both of us, again, are expected to hold those shares for a significant period of time. And all of the details are obviously in the annual report. So we are heavily aligned and incentive incentivized to have the share price continue to grow and the future of the business become very strong.

14:27 Next. So two questions are are quite related. They're really valuation wise. So how does COSTIN compare to its peers in terms of valuation? Well, I think, generally, COSTIN is sort of valued on a multiple basis, slightly lower than some of some of our peers. And I think that's an element, as I said earlier, about, you know, this continuing confidence in the business. You know? You know, we did disappoint the market, and we recognized that sort of 2019, 2020, and that that then sort of had a hangover into '21. So we really only had a full set of clean results in '22, which was great. And, again, another half of good results for the first half. So look, I think, you know, as we build back the confidence, I think our relative balance sheet strength is good as compared with anyone else in the market, and our order book is at a good level. And I think the markets that we operate in and the fund financial performance is good. So, you know, we're on the road to recovery to being valued where we should be should be valued, and I think that should give everyone confidence.

15:39 This is from Michael asking strategic investments in technology. Are you looking at doing any m and a in the the technology space? So, look, Michael, at at the moment, we've got significant opportunities in this business. I'm never gonna say never, but we've got significant opportunities in the business at the moment to drive organic growth, and that's where our big focus is. I think you'll have seen that we made an announcement that we're actually pivoting our digital digital activities. We're really focusing on the services element of digital of our digital activities because that's an area that we're certainly seeing consistent demand from our customers, and they're buying buying

16:22 us, and we're getting a reasonable margin, well, a good margin on that. And we're discontinuing the manufacturing and production activities in digital just because demand is inconsistent. It it it needs a fixed cost base, and it just gives us less less flexibility and more risk. So we've decided to discontinue that and focus on the areas where we can drive real growth and and margins.

16:50 Next one is from Martin H asking about the expression in line with board expectations. Saying that's really not transparent. Give give more detail. And probably this is pretty well for me, actually, if that's okay. So, Martin, the I'll explain some legal points of all this is it's we have to quite careful the phraseology we use. The line of board expectations is not a formal profit forecast, which actually the the the market and the FCA don't like. So in terms of transparency,

17:22 I can give you the numbers, really. And if if we were outside what the analyst set that we're expecting, of course, we'd have to let the market know. So in effect, what the market is saying for this year is they expect the the adjusted EBIT to be around 39,000,000, expecting the adjusted EBIT in f y twenty four to be about 42, 43, and for the year after to be about $4,747,000,000. So so those are the numbers in the market. And if we were, you know, tracking up well outside that, then we'd also have to let the market know, but that's where the market expectations are at the moment, and and the board is comfortable with those market expectations. Next one is from Daniel d. What do you think is the things the investors understand, appreciate least about COSTIN?

18:14 I think probably the thing people don't understand as much is the strength of demand perhaps in the markets that we've got. I think if you go and we took it through in the presentation yesterday, just the impact of climate change, the impacts of population growth, the impact of resilience of natural resources,

18:37 and the need for economic growth, you know, the big drivers that are are pushing demand our way. I think, you know, I hope people can understand it, but it's what driving. I mean, I think everyone can see the investment that's gonna have to be made in the water sector just because it's been so public, you know, about the polluting of coastal waters and rivers, and that is something that COSTIN plays an important role in preventing. I think also probably people don't understand the sort of competitive advantage we're building in the market from our strategy. We are a business that's very different to anyone else in the market in that we are working to meet our customers' whole needs as opposed to just being there to build new assets or just being there to design new assets.

19:27 You know, we are there to help them shape their strategic thinking. We help them help we absolutely do help them deliver the infrastructure that they need, but we also help them optimize the use and performance of the existing infrastructure that they've got. And that is creating a real positive dynamic between us and our customers in terms of being seen as a partner who can help them with whatever challenge they've got as a part as opposed to only if I want to have something built. And and I think that's that's a real strong opportunity for the business. So I hope that answers the question. Next one's from Nick B. Are you thinking about going outside The UK, or is UK gonna be your sole focus?

20:13 Well, look. At the moment, The UK is our sole focus, and that's really because for us, the consistency of being able to deliver good business is directly linked to the strength of your customer relationship and the type of customer that you work with. And, you know, we invest heavily in building strong relationships with our customers and work with those big blue chip customers who demonstrate the behaviors that we would want as a partner, and that is our single-minded focus at the moment. And that is what is gonna drive growth in the business moving forward. And this one's from. Why are you doing dividends rather than buyback?

20:58 Shouldn't you be buying back shares at this this level? I think our our our hope is to, resume a progressive dividend. We've got a stated policy. We've also been clear on our capital allocation priorities, so you'll see that reiterated in our half year statement. There is a flexibility to to to think about other returns other than other than dividends, but at the moment, we are considering a fairly modest return to to dividend. Next one. Actually, there's a few from Daniel d. So considering that consultancy is such an important part of your business, why don't you just disclose more details in the in the results and and break it out a bit more detail, basically?

21:49 Yeah. Daniel, thanks. We get asked the we we get asked that question quite a lot. Look. The consultancy business is going. I mean, we report the business in the way we run the business, and we don't run a separate standalone consultancy business. And the people in COSTIN sometimes work as a consultant and sometimes work as a contractor or delivery partner. So, you know, we just feel that we should report the business in the way that we run and operate the business to keep it simple, and that's what we do. And that's why we expect margin targets for the overall group because that's what's really important is that we drive the overall group margin up. And that's how, you know, that's how how we're running the business and how we're growing the business. And, yeah, positively, the volume the amount of consultancy work and the quality of the consultancy work is is increasing. And we are, you know, we are making sure that people can understand it better.

22:45 So in the results presentation, you can certainly see the type of consultant work that we do and for the type of customers that we do it for. Yeah. Suppose I it also mean really this Daniel just links it to the margin targets we have. So the 3.5% for FY '24 and FY '25, 4.5%. And, really, this is driven by the the business mix moving towards consultancy as well. It's also for Daniel d. Considering the headwinds in in road and the lack of margin in some schemes, what's the future for that business? How are gonna position yourself in in highways stroke road? Yeah. Look. Let me let me cover that in a couple of things. Let me firstly deal with the sort of margin headwinds in road. That is a particular factor of the hyperinflation impact and just how that plays out. So that is that is a sort of one off particular issue as opposed to a normal long ongoing trend with roads. Generally, we can make good money and good margins delivering roads. I think, look, one of the factors that you'll see within our presentation is that, you know, we recognize that we we have been working hard to build a much more resilient business by having a broader customer base and larger positions with other with other customers. And, you know, you'll have seen the progress there with Heathrow Airport, Manchester Airport Group, Transport for London, where we're growing our position with with those

24:15 sort of customers. So, you know, strategically, you know, this business is moving in a direction to make sure that it has a good set of large, broad range customers that it is working for so that if any customer goes through a strategic change or budget change or, you know, changes its strategy, then the resilience of the the businesses that we can keep going, and and it won't affect us. So, know, that is a factor of of what our focus is at the moment. And pleasingly, you know, we're making progress on that. And this is the last question at the moment. Is it again, from Daniel. COST A appears to have a significant amount of women in senior positions versus peers. Why is that? And does that help you? Well, why is it? It's because we want the best team, and the people that we've got within the business are the best people around in the business, and and that's great. And what I can tell you is the quality of the conversations that we have and the quality of our decision making is so much better because we're getting it's not just the diversity from a gender point of view, but it's also the diversity of background in previous experience that that we're that we're accessing, and it's just adding real quality conversation and quality decision making in where we're taking the business. So that's my view. Helen, I don't know whether you have a view.

25:44 Great question. I think we yes. We do. We have you know, our PLC board clearly has a high proportion female as does our exec board, and we're working really, really hard to get that gender diversity throughout the business. That's really important. But, know, we're we're really focused on other areas of diversity as as well. And I think I absolutely agree with Alex. I think the for me, the diversity of thinking makes us a better business, and us creating the culture to embrace that diversity of thinking is is is a great great direction for us to be going in. So can only translate, I think, into into ultimately into a stronger business with better results. So it's one of the reasons that I came to COSTIN.

26:35 It's not just a tagline and not just stats. It really is a very inclusive culture, where where people come come first in in pretty much all of our conversations. So I think it's it's a a very, very important part of of what IN is, and and it will be a very important part of how we move forward. And for Daniel, this is about staff and staff costs. So, basically, staff present this represents a different percentage of your costs. Obviously, salary is going up. So is this factored into your into your margin targets and, basically, your forecast for 2425? So our wage increase is basically fully factored into your numbers. Yeah. Look. I mean, if you look at this, staff is a is a, you know, it's a terrible term, but they are the biggest asset that this business business has because they are accept we have an exceptional team who I'm incredibly proud of.

27:25 And, you know, we in the April review this year, we gave staff a rise commensurate with what's going on in the market, and we'll be reminded to just make sure that we're paying people fairly moving forwards as well. And one of the benefits of the transformation program that Helen has been leading is that it's delivering benefits that are helping us being able to manage that, and therefore, that we can retain our targets for margins and growth in the business. That's great. Think we're pretty much actually smack on the half hour. So maybe, Alex, I could ask you just to round up. Yeah. Look. And look, thanks very much for your time and for joining this call, and thanks for your support in supporting COSTIN as an investor.

28:12 Look, we're very focused on continuing to deliver strong financial performance as we have done in the in the half year. We will continue to take the strong actions that will strengthen the business, and we're gonna take advantage of the positive market outlook that we've got ahead. And you will see continued momentum in this business as we build it back and deliver in line with the expectations and deliver on the ambition that we've got. So thank you again for your time, and have a good rest of the day. That's great. Alex, Helen, Paul, thank you once again for updating investors this morning. Could I please ask investors not to close this session? As we now automatically redirect for the opportunity to provide your feedback in order the management team can really better understand your views and expectations. This will only take a few moments to complete, but I'm sure it will be greatly valued by the company. On behalf of the management team of COSTEN Group PLC, we'd like to thank you for attending today's presentation, and I wish you all a very good morning.