Kier Group plc

Good morning everyone and thank you for joining our half year results presentations both here in person and I'd also like to extend a welcome to those joining us by webcast and audio. I'm Andrew Davies, Chief Executive of Care Group and I'm joined today by Simon Kesterden, our Chief Financial Officer. So this morning I will talk you through the highlights of the last six months to 31st of December 2022 and then hand you over to Simon who will talk you through the group's financial performance. This will be followed by an operational review, an update on ESG, and we will finish off with our outlook. And then there'll be an opportunity for questions and answers at the end. So if we move on through the disclaimer and we look at the FY, sorry, the half year 23 highlights. on slide four so we delivered a strong set of results in the first six months we had a positive momentum in the business infrastructure services revenue grew by five percent and construction grew by four percent we do however continue to see inflationary pressures in the business and certain projects are having to be reappraised and therefore delayed due to cost pressures in particular in our construction business We did, however, achieve an adjusted operating profit of £57 million, a period-over-period increase of 6%. We delivered an industry-leading adjusted operating margin of 3.7%, continuing to outperform our medium-term target of circa 3.5%. I'm very proud of my entire Keir team in delivering another set of strong results, and Simon will talk through the financial performance in more detail later. Our focus continues to be firmly on delivering the medium-term plan through growth in our core markets, supported by UK government spending commitments. Therefore, to deliver a 3.7% adjusted operating profit margin in the first 18 months of our three- to five-year plan increases my confidence in the business to continue delivering for our shareholders. The Group's net debt position at 31st December was £131 million. The net debt position reflects our usual seasonal working capital cycle as well as the full repayment of our KEPs facility. Therefore, £131 million was a great achievement against this context. Average month-end net debt for the year was £243 million compared to £191 million in the prior year. And we're seeing the underlying positive cash flow come through, which has allowed us to reduce our debt and our debt-like items. Our order book sets us up well for the medium-term plan and demonstrates that we continue to benefit from UK government spending. The order book has increased by 26% year-on-year from £8 billion to £10.1 billion, reflecting contract wins across our business and providing multi-year revenue visibility. The underlying momentum in the business is strong. We've secured 96% of FY23 revenue, which provides a high degree of certainty against a backdrop of wide economic and political market uncertainty. Significant effort has been made to improve the quality of our order book. As a reminder, over the last three years, we've exited low and loss-making contracts. We've spent a lot of time de-risking our portfolio, and we're focused on winning work within UK government and regulated authorities with negotiated terms and appropriate risk profiles. Our order book is supported by long-term framework positions, and frameworks are our route to market. We've maintained and grown our central and local framework positions. However, we exclude long-term framework positions from our order book, and therefore these represent additional pipeline of opportunity. We're committed to our sustainability framework and ESG targets, which we'll talk about later in this presentation. Our existing order book and strong at £10.1 billion has continued to grow in the period, which provides us with confidence and healthy visibility for the full year FY23 and into FY24. And with that, I'm pleased to be able to hand over to Simon.

Thank you, Andrew. Morning, everyone. Turning to slide six, this sets out a high-level income statement. Revenue in the first half, as Andrew mentioned, is expected, is similar to the prior year and reflects volume growth in both infrastructure services and construction, which offset the anticipated reduction in property transactions. I'll walk through this on the next slide. We delivered adjusted operating profit of £57 million in the first half of the year, despite inflationary pressure. The Group is 20 basis points ahead of its medium term planned margin target of 3.5%. The business made a statutory profit before tax of £25 million. This is post adjusting items and amortisation. Statutory profit has doubled compared to half year 2022. This demonstrates period over period improvement and how the business continues to progress towards its medium term value creation plan. We achieved adjusted earnings per share of 8.5 pence. This represents a 9% growth when compared to the 7.8 pence in the first half of last year. Net debt, consistent with last year, was £131 million and reflects the usual seasonal working capital outflow. We achieved the £131 million despite the repayment of our supply chain finance facility, KEPs, in July 2022. Average month then net debt was £243 million. This was adverse to the prior period but in line with our expectations given the repayment of our KEPs facility and other debt-like items. Turning to slide 7, starting on the left-hand side, we start with revenue of £1.5 billion. Infrastructure services revenue increased by 5% primarily due to the ramp-up of capital works on High Speed 2. Construction revenue increased by 4% as our order book starts converting to revenue. Our new prison in East Yorkshire, Her Majesty's Prison, Fort Sutton, continues to ramp up production. It's worth mentioning we've achieved this growth despite having seen customer budget approvals being delayed, project reappraisals and value engineering to bring projects back in line to budgets with public sector spending having been impacted by cost inflation. Property revenue fell by £66 million as we saw the expected reduction in property transactions reflecting current market conditions. We took advantage of favourable market conditions at the end of our last financial year knowing it would subdue property transactions for the next couple of years. Moving now to the adjusted operating profit bridge. We start with the previous year's first half adjusted operating profit of £54 million. Volume mix and price changes have resulted in an increase of £4 million. The reduction in property transactions resulted in property profits being £6 million lower than the previous period. Cost inflation over the period amounted to just under £5 million. We continue to see inflationary pressure given the macroeconomic environment, but also continue to mitigate the majority of this. Over 60% of our order book is made up of target cost or cost reimbursable contracts, and if we do choose to give price certainty to our customers, it will be done after key risks and opportunities are understood. Also, our average order size in construction is only £14 million, resulting in a regular repricing of contracts. Lastly, we have management actions of £9 million. Management actions primarily related to ongoing cost saving initiatives in the first six months of the year. The result is an increase in adjusted operating profit to £57 million. Adjusting items amounted to £20 million in the period and are much lower than the £30 million incurred in the first half of last year. We've seen restructuring costs materially reduce as expected. As a reminder, half of these items are non-cash, being amortisation related to historical acquisitions of £9.8 million. Next, restructuring costs. These, as I've said, have reduced significantly from nearly £12 million to less than £4 million. The costs in the period relate to the downsizing of the international business in line with its market opportunities. The comparative costs largely relate to the regional restructuring and cost reduction in our construction business completed in FY22. Some of these costs were paid during the first six months of this financial year. Other items of £5.5 million include £4 million of fire cladding costs. Given the nature of the construction projects we typically engage in and following regulation change, we estimate our exposure to this could be at worst case between £10 to £20 million. Moving on to free cash flow. Operating cash flow conversion was in line with expectations given the seasonality in the business. Adjusted EBITDA in the period grew from £77 million to £91 million. We then have £79 million of working capital investment, a significant reduction when compared to the half year 2022 outflow of £133 million. Working capital is seasonal in the business, with summer being a higher period of activity compared to the winter months. Working capital improved compared to the prior year, predominantly due to the volume growth in the business. The prior year comparative was also impacted by VAT payments on account of £10 million. Accordingly, during the second half of the year, the Group is anticipating a reversal of the H1 working capital outflow and a return to net cash. As previously mentioned, we repaid the final £50 million of caps in July 2022, meaning our total operating cash generation, together with proceeds from the equity raise and the sale of Keir Living, has allowed us to reduce caps by £201 million since 31 December 2018 and £79 million since the equity raise, which demonstrates the underlying cash being generated. CapEx in the first six months amounted to £27 million, however £22 million of that relates to payments made under leases now capitalised under IFRS 16. The majority of the increase relates to additional plant and equipment to support the ramp-up of HS2. Net interest and tax increased by £8 million in the first half due to interest payments of £5 million with a mark-to-market benefit of £2 million from the hedge we took out in February 2022, tax of £3 million and leases of £2 million. We maintain supplier payments of 34 days on average consistent with the prior period. If we step back and look at our free cash flow in the first half, excluding the impact of KEPs at £38 million, this outflow was a significant improvement on what would have been an outflow of £100 million in the last year. We can therefore see the underlying cash generation with our adjusted EBITDA converting to free cash flow. Turning over to page 11, we have the net debt bridge. We start on the left-hand side with closing cash of £3 million at the end of June 2022. We then see free cash outflow of £88 million that I've just talked about. We had adjusting items of £23 million. This includes the payment of items accrued for in FY 2022 and pension payments of £7 million. We then have the purchase of Kier Group shares. This is in respect of the Group's Employee Benefit Trust, which acquires Kier shares from the market for use in settling the long-term incentive plan share schemes when they vest. The net cost of this was £12 million. The other £4 million predominantly relates to net joint venture investments. This results in a net debt position of £131 million, the same as the prior year. Moving to financing and liquidity, on the right-hand side we show the current debt structure of the business following the refinancing in 2021. As a reminder, the majority of our facilities were extended as part of last year's refinancing and are due to mature in January 2025. During the first six months of the year, in addition to KEPs, we repaid $54 million in total on our revolving credit facility and US private placement notes, both of which matured in December 2022. We repaid these from our operating cash flow and we continue to maintain considerable headroom on our facilities. Slide 13 sets out our order book position. Our order book is high quality and has significantly increased by 26% to £10.1 billion compared to 31st December 2021. We've secured 96% of our FY23 revenue, as Andrew mentioned, and we continue to win work in our chosen markets. Significant effort has been made to improve the quality of the order book. We're focused on winning work with UK government and regulated authorities. We continue to focus on managing risk and reward when bidding, negotiating and delivering work. As mentioned earlier, 60% of our order book is under target cost or cost reimbursable contracts. Our infrastructure business has nearly 100% of its contracts agreed as target cost or cost reimbursable and it's important to balancing our risk and reward profile. Within our construction business, we utilise stage lump sum contracts to fix out risk with our clients where appropriate and provide certainty. We also use two stage contracts to negotiate favourable terms and manage risk. Our average order size is only £14 million. Having that relatively small average order size results in us regularly repricing contracts. The order book continues to be underpinned by significant long-term framework agreements. Our long-term framework positions are excluded from the order book. These represent further opportunities for the group. Moving to capital allocation, we're focused on optimising shareholder returns. Accordingly, as we generate cash from operations, we expect to deploy that in a number of ways. CapEx is expected to be minimal, but we plan to invest further in our property business in order to generate consistent returns over time. We'll continue to do this in a disciplined and controlled manner. Further deleveraging. As you're aware, we're targeting a sustainable net cash position in the medium term. We're targeting a dividend cover of around three times earnings through the cycle. Once we have sight of our medium term sustainable net cash position, we appreciate that restating the dividend will be key to ensuring our shareholders share in the benefits of the group's growth. With regard to mergers and acquisitions, the group will continue to consider value accretive acquisitions in core markets where there is a potential to accelerate the medium term plan. And now I'll hand back to Andrew for the operational review.

So many thanks, Simon. Now turning to slide 16, I'll give some colour on the operational updates over the last six months, starting with our infrastructure services business. As a reminder, this includes our highways, our infrastructure projects and our utilities businesses. So we've seen revenue growth with an increase of 5%, and this is largely driven by the ramp-up, as Simon said, of HS2 Capital Works and our infrastructure projects business. So we're part of the AFARGE, Kier Ferrovial BAM or EKFB joint venture. And Kier is delivering the longest section of earthworks, 80 kilometres from the Chilterns to just south of Warwick. And we have the lead on that project management within HS2, EKFB HS2. And we're the project integrator within the joint venture. So within the business, our adjusting operating profit increased 3% to £34 million. Our adjusted operating margin remains strong for infrastructure services at 4%. We've seen some of the volume benefits from HS2 being partially offset, however, by increased contract mobilisation costs in our utilities business. Our utilities business has seen higher activity in the telecom sector with the UK government's commitment to rolling out 5G connectivity across the country. We're heavily involved in the installation and maintenance activity on this with our telecoms team as part of the broadband rollout. As the telecoms business has ramped up, there have been an adverse impact on margins in the first half of the year. As a result, we're currently reviewing our costs in that business. But the performance in our utilities business continues to improve. We've had positive momentum in the order book with an increase of almost 30%, to 5.8 billion, as Simon said. Our utilities business, which delivers long-term contracts providing construction and maintenance services to water, energy and the telecom sector, as I said, was reappointed on a three-year extension to the Network Services Alliance framework by both Southwest Water and Bournemouth Water, which we estimate will be worth £55 million per annum to us. This framework work follows an existing contract which was agreed in April 2000 under the AMP7 cycle. with 97% of our revenue secured for FY23. And with our recent RINs, this underpins our revenue in the infrastructure services business for FY23 and beyond. We move to our construction business. Our construction business comprises the regional build business, where we construct schools, hospitals, prisons and defence projects for the UK government. It also includes our strategic projects business and care places, our housing maintenance and facilities management businesses. Construction volumes grew 4% to £709 million, which reflects the ramp-up of work in East Yorkshire to construct a new prison, HMP Full Sutton, for the Ministry of Justice, the UK's first net zero-carbon prison. This category C low security prison is expected to house 1,500 prisoners and will run on electricity only. It's been designed to include solar panels, heat pumps and efficient lighting. The prison has been constructed using modern methods of construction, providing both cost and programme efficiency benefits. Social value is also a key element of the project, with Kier committing to 50 sustainable employment opportunities for prison leavers, 50 apprenticeships and upskilling 1,000 workers within its supply chain. Kier Places also saw volume growth across facilities management and housing maintenance. The facilities management work is predominantly for the Ministry of Justice and Home Office, demonstrating the synergies of these two businesses. The adjusted operating profit grew 25% to £33 million, with margins increasing 70 basis points to 4.6%, as the benefit from volume growth and previously realigned cost base start to drop through to the operating profit line. Simon said the order book momentum has continued in our construction business, with an order book increasing 23% to £4.3 billion. We were recently appointed to the £10 billion off-site construction solutions framework. So Kier, with our joint venture partners, McEvoy and METEC, were appointed to all six lots, and it replaces the existing modular building framework and will run for the next four years. Kier has also been reappointed to the Northwest Construction Hub high-value construction framework. The new version of the framework will continue to support local authorities procuring for the construction and maintenance of public sector buildings in the area. And we secured places on both lots 1 for projects valued at circa £8 million to £25 million and lot 2 covering projects £25 million and above. Kira's worked within the framework since its inception in 2009, collaborating with many of the Northwest region's public sector organisations through two-stage arrangements, meaning early contractor involvement to deliver projects including schools, colleges, leisure and sporting facilities and theatres. The Keir Places team has been awarded preferred bidder status by RHP Group on a £75 million 10-year contract to deliver repairs, voids and planned works across its housing portfolio of around 10,000 affordable homes in the boroughs of Richmond, Hounslow, Kingston and Hillingdon. As part of RHP Group's large-scale improvement plan, Kier Place's skilled teams will aim to carry out works to upgrade homes, including installing new kitchens and bathrooms, as well as making properties more energy efficient. Our construction business has 95% of its revenue secured for FY23. And I'm very proud to say that the construction team has won new, high-quality and profitable work in our markets, reflecting the bidding discipline and risk management embedded in the business. As these orders convert to spades in the ground, we expect the associated revenue generation and working capital flow opportunities to follow on. And finally, to our property business. Our property business invests and develops primarily mixed-use commercial and residential schemes and sites across the UK. The business is well established in the urban regeneration and property development sector, and we largely operate through joint ventures to manage risk and opportunities. As expected, operating profit fell due to reductions in property transactions driven by current market conditions. As we anticipated a slowdown in market conditions, we were able to increase our completions and transactions at the back end of FY22 to maximise the returns for our shareholders. We'll continue to take advantage of market opportunities where possible in terms of land acquisition, timing of build and selling, and doing so within our disciplined approach to the use of capital. Simon said the capital employed in our property business reflects Keir's equity, debt investment, capital appreciation and reinvestment of profits. The capital employed increased to £158 million from £122 million invested at June 30th, 2022. A return on capital employed for the first half of the year was 7%. As a reminder, we're targeting to increase our capital employed, as I said, to 170 million over the medium term. And we believe this to be consistent rate of capital investment at a level expected to help smooth the returns profile of the business. We believe it takes some time to selectively invest in sites, season the capital and then transact. So over the medium term, we expect to deliver a more consistent performance from our property business. And similar to the rest of Kier, the property business has performed well in work winning. And the highlights include our Andover development in partnership with Test Valley Borough Council, which is fully let. And our Solum joint venture with Network Rail sold its final residential block at its Twickenham Gateway development. Moving on to ESG and sustainability. This is the slide which I hope is familiar to most of you, but we thought it would remind you of the key focus areas for KIA. So our purpose is to sustainably deliver infrastructure, which is vital to the UK. And as a strategic supplier to the government, ESG is fundamental to our ability to win work and secure positions on those long-term frameworks. So, for example, UK government contracts above £5 million require net zero carbon and social value commitments. Previously, we launched our new sustainability framework, Building for Sustainable Work, which covers sustainability from both an environmental and a social perspective. And we genuinely believe that to be a responsible business and to play a leading role in our industry, we must address both the impact of climate change and leave a lasting legacy in the communities in which we operate. So we turn to environmental on slide 21. This slide details one of the initiatives to reduce our carbon footprint. So following engagement with our supply chain partner, we've introduced the use of battery storage units alongside generators on our sites. As our sites can often be in areas without access to mains power supply, and given the significant carbon emissions generated by fossil fuels, we believe the use of battery storage units will represent both a reduction in our carbon emissions, but also a great cost-saving opportunity. And so far, we've introduced the storage units on just under 20 of our 400 live sites. Moving to social side, Kier is and always has been committed to investing in training programmes to upskill our employees with a view to addressing the current industry skills shortage. Kier is a people-based business and our performance depends upon the ability to attract and retain a dedicated workforce. And during the period we had over 500 apprentices participating in programmes representing 6% of our workforce. We have a total of 7.5% of our workforce currently in formal training programs. I'm proud to say that in January this year, we committed to creating 10 internships for talented black students as part of the 10,000 black intern scheme. We're committed to making Kier a diverse and inclusive workplace, and we're targeting to increase the number of internships as we go forward. So if I move on to the summary and the outlook. The performance of the group over the last six months reflects our significantly enhanced resilience and strengthened financial position. We continue to outperform our medium term targets. Our order book has increased significantly against prior year to £10.1 billion, reflecting a large number of contract wins across our businesses. And this provides us with good multi-year revenue visibility. These awards reflect the bidding discipline and risk management now embedded across the business. Current trading remains in line with the Board's expectation, despite inflationary pressures and the political and economic uncertainties. Looking ahead, we expect to generate positive operating cash flow for the full year and deliver a net cash position at year end. Our FY23 outlook remains unchanged. The group is well positioned to continue benefiting from UK government infrastructure spending commitments and focused on delivery of a sustainable net cash position and a sustainable dividend in line with our medium-term value creation plan. So with that, ladies and gentlemen, I'd like to open up the meeting for any questions. Andrew.

Good morning. Andrew Nussie from Peel Hunt. A couple of questions, please. First of all, in terms of inflation impact, there's obviously some comment in the market that inflation pressures are beginning to ease. Are you still facing some delays within construction arising from inflation, or is it beginning to get a little bit better? And secondly, in terms of the management actions, the benefit of 9.1 million, how much was sort of an annualized impact from past actions as opposed to what was undertaken in the period and what might be led moving forward?

So shall I take the first and Simon, you want to take the management? So on the construction delays, yes, we are still seeing construction delays. I think they're easing. And I think you see the order, well, the order book growth is good, but the revenue is increasing in construction, as we said, 4%, 5%, et cetera. And I think that reflects now the easing of it. It also reflects the latency working through from prior delays last year in construction. Those contracts are now having been reappraised, coming to fruition. to get spades in the ground, so to speak. So we are seeing an easing of it, but it does still exist, and inflation does remain still an issue in the business, but I think it would be fair to say it is easing, and the evidence for that, I'd say, is the construction revenue growth.

Do you want to take the management actions? Yeah, the management actions. Roll forward was about five, incremental one, and then three was actually mitigating inflation. So not the cost saving itself, it was mitigating those inflations.

you johnny thanks johnny kubra at numis um could i ask firstly on the construction margin um and you pulled out that it was helped by the impact of management actions and higher volumes it would be helpful to also understand the the margin dynamics within the different businesses within construction and what the difference is between um care places and regional build and what the impact of that was

Yeah, it's a good question. So place is a slightly higher margin, our construction business lower margin. And at the moment, the mix is swung towards our places business as to where we'd expect it to grow because the construction business is still recovering. So as the construction business grows, I'd expect that margin to become slightly diluted.

And in terms of the debt maturities in 2025, what's your expectations at the moment for how you refinance that?

Yeah, I mean, obviously, at the moment, the markets aren't great for refinancing debt. So, you know, at the moment, we've got plenty of time. So we'll just keep an eye on them. And when a window opens up, we'll try and take advantage of it.

Just going back to the construction point, you'll see we did say we took management action last year in construction. We sort of trailed that. We were going to do it because we anticipated slightly lower volumes last year because inflationary pressures delaying things. And you sort of see the benefits of that coming through. So it is a volume-sensitive business, but that's why we're very acutely aware that you do have to make sure your cost base is right for your volumes. And the comment I made in utilities is the same sort of comment. We do proactively take management action to make sure we have the right cost base for the right business volume.

Thanks. And just one more from me. You mentioned delivering a good performance despite political uncertainties. What are your expectations at this stage for the impact on the red markets if there is a Labour government coming into place next year?

So we, I mean, obviously, like everybody else, we have to a degree been impacted by the changes in government, various ministers change, et cetera, et cetera. And that naturally puts a slight pause in processes. And that's possibly a contributor to the delays. But I do think inflation has been the main sort of issue there. Our view of the current government is that they've stated they want to stick by the original manifesto, which they got elected in 2018-19, and that was a commitment to recapitalising infrastructure in the UK. So all the signs are we are seeing that commitment being continued. So I think for the present government remains very strongly committed and I think the Chancellor recently in response to an article committed that HS2 would continue to go to Euston. So very strong support and commitment is what we see from the existing government which is great. I think for a future government, I think all parties, there's a bipartisan approach to investment in housing, investment in schools and education, investment in transportation and hospitals and healthcare. So, you know, naturally we need to see what their policies are when they roll them out as part of any election campaign. But I think, you know, there seems to be a very strong bipartisan approach that they do need to recapitalise infrastructure in the UK.

Morning. Two from me. Given the macro outlook on property, what kind of property transactions and investments are you likely to direct the capital towards? Perhaps if we deal with that one, then I'll ask the second question after.

Don't we take that? So we'll continue to look at the opportunities we have looked. The one thing we do look to with properties, we look to those areas of strong synergies with our operating businesses. So I mentioned... The success of the Twickenham scheme, Twickenham Gateway, which is a residential scheme built in conjunction with Solom, our network rail partner, above Twickenham Station, allowed them to redevelop the station they wanted to do and then finance it through the skill set which we brought to allow them to develop the residential. So we continue to look at those opportunities within existing JV agreements. We'll continue to look at logistics. But as we said, we did sell a fair few of those last year. We took advantage of the market conditions and opportunities. So that was the right thing to do, to transact a little earlier, to take advantage of that. But it's a broad spectrum. It's a good portfolio we'll look at. But we do look at areas where we've got strong synergies with either customers in the operating businesses, like Network Rail or like the various councils we operate with. So it's across the usual spectrum.

And one for Simon. Could you give us some sort of colour in terms of what the sort of non-underlying items are going to be for the second half and perhaps for next year as well?

Yeah, I mean, in terms of I mentioned the firing cladding. I mean, I think that that's the one that could potentially drop through. And we see there 10 to 20 million pounds potentially with four in the first half. So those are the items more likely going forward. Andrew mentioned a sort of cost based review on utilities. There could be a little bit from that, but I don't see that material. And then from a cash point of view, of course, we still cash flowing that Chester West and Cheshire amount, which cash flows out until 2025.

morning both alexa hanlon from liberum um just one question from me if i may um on the construction order book you mentioned that you use two-stage bidding as a process to manage the risk of cost inflation could you give us an idea of what proportion of work is bid on that basis

A percentage. I mean, we do target two-stage and most of the frameworks, you know, by the very definition are two-stage negotiations. You will get into them. So, look, you know, certainly, you know, that's our preferred route to market is working with the customer, get early engagement, work with the customer, work through the inflationary pressures. You may have to value engineer it. That's, of course, the slight delays, as we've always consistently said. But you always get to an end result with a proper and correct allocation of risk between the client and the contractor if you do two-stage negotiation. I'm not saying we do always a two-stage negotiation. If we're building something with a client off a framework with a known cost base, with certain elements de-risk, maybe land risk excluded or asbestos risk excluded, we will do a lump sum D&B contract. But then you know the risk in that type of – but if it's an unknown unknown or a new client or a new type of – we will almost certainly go through a two-stage negotiation as our preferred route to market, but not exclusively. At the end of that, when you get into contract, as Simon said, once you get cost certainty and risk certainty around the projects, very often to give the client budget certainty, you will then fix it out at a point in time in the contract. And that suits both parties, and that allows then margin to grow potentially within the contract.

Perfect. Thank you.

Any more questions? Okay, with that, I will wind up the proceedings. So thank you very much, everyone, and have a good day. Thanks.