Kier Group plc

Right. Good morning, everyone. Thank you for joining us for our half year results presentation. For those of you here in person, I'd like also to extend a warm welcome to those joining us by the webcast and audio as well. So I'm Andrew Davies. I'm chief executive of Keir Group and I'm joined today by Simon Kesterton, our chief financial officer. So this morning I will talk you through the highlights of the last six months to 31st of December 2023, and then I'll hand you over to Simon to talk through the group's financial performance. And this will be followed by an operational review, an update on ESG, and we'll finish off with our outlook. Then there'll be an opportunity for questions and answers at the end, and we'll start, if that's okay, with questions in the room, and then we'll go to see if there's any questions online as well. So if we move through the disclaimer and the results summary highlight and we talk to on slide four now the half year 24 highlights. So the first half of the year seen the group delivering a strong set of results with increased orders, revenue and profit. We delivered revenue growth at 23% with strong performance across the business. We achieved an adjusted operating profit of £65 million, an increase of 13%. We continue to deliver an industry-leading adjusted operating margin of 3.4% despite the continuing inflationary pressures. As our performance tends to be second-half weighted, we expect full-year margin to be in line with our medium-term target. Group's net cash position at 31st of December was £17 million, and that's materially better than the £131 million net debt position we had at the half-year 2023, and that's due to our free cash flow generation, which itself has been driven by increased volumes, particularly in our construction business. This strong cash generation has allowed the group to materially deleverage. The group's average month-end net debt for the period improved by £106 million to £137 million average net debt. The future prospects of the Group also remain strong, with the Group's order book increasing by 6% to £10.7 billion, reflecting contract wins across our business and providing multi-year revenue visibility. So 97% of our FY24 revenue is now secured, and we therefore continue to have a high degree of certainty against a backdrop of wider economic and political uncertainty. Significant effort has been made to improve the quality of our order book and as a reminder since 2019 we've exited low and loss making contracts. We spent a lot of time de-risking the portfolio. We focused on winning work within the 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 the order book number I've just mentioned, and therefore these represent an additional pipeline of opportunities to us. In September we completed the acquisition of substantially all of the rail assets of the Buckingham Group and their HS2 contract supplying Kier's HS2 joint venture EKFB for a consideration of £9.4 million. The acquisition was an excellent cultural fit and was an opportunity for us to accelerate our rail strategy. The acquisition I'm pleased to say has been successfully integrated into the business. In February we successfully completed a refinancing of our facilities. We issued £250 million of senior notes and extended our revolving credit facility. These revised long-term debt facilities completed the last stage of the Group's recapitalisation and provide us with both flexibility and optionality going forward whilst we continue to deleverage. At our FY23 full year results we committed to recommence dividend payments once we had a clear line of sight of a sustainable net cash position alongside an appropriate longer term debt structure. I'm therefore absolutely delighted to be able to declare an interim dividend of 1.67 pence per share with Kier rejoining the dividend list. And lastly, the group was notified last week of our admission back into the FTSE 250 after five years. This is a great achievement and a testament to the hard work and commitment of our people who have enhanced our resilience and strengthened our financial position in line with the objectives set out in our medium-term value creation plan. And I'd like to thank the entire Kier team for their dedication and contribution to the group's performance. And with that, I'm delighted to hand over to Simon who will take us through the detailed financial results.

Thank you, Andrew. Morning, everyone. Turning to slide six, this slide sets out high level income statement. Reviewing the period, as Andrew mentioned, is higher than half year 23 and reflects volume growth in both infrastructure services and construction. which I'll cover in more detail on the next slide. We delivered an adjusted operating profit of £65 million in the period, despite continued, albeit lower, inflationary pressure. The group achieved an adjusted operating margin of 3.4%, which when considering our usual second-half weighting of earnings, is in line with our medium-term value creation plan. Statutory profit before tax is 6% higher than the comparative period, as increased rates were partially offset by material reductions in debt. We achieved adjusted earnings per share of 8.7 pence. This represents a 2% growth when compared to the 8.5% pence achieved in half year 23, despite corporation tax rates rising to 25% from April 2023. Net cash is significantly better than prior period at £17 million compared to £131 million worth of debt for half year 2023 as operating cash flows from volume growth translates into working capital inflows, reductions in adjusting items and pension scheme payments. As expected, the group materially delevered. This has resulted in average net debt reducing by £106 million to £136.5 million. Turning to slide 7, starting on the left hand side, we start with half year 2023 revenue of £1.5 billion. Infrastructure services revenue increased by 16% primarily due to the continued ramp up of capital works on HS2 and the successful Buckingham acquisition. Construction revenue increased by 29% as the strong order book we entered the year with converted to revenue. We also saw small growth in the property revenue and these all resulted in the growth of the group's revenue of 22.5% in the period to £1.9 billion. Moving now to the adjusted operating profit bridge, we start with the previous half year's adjusted operating profit of £57 million. Volume mix and price changes resulted in an increase of £6.1 million. We have achieved management actions of 5.4 million during the year. We continue to see inflationary pressure given the macroeconomic environment, but also continue to manage and mitigate this. Over 60% of our order book is made up of target costs or costs for impossible contracts. And if we do choose to give price certainty to our customers, it will be done after key risks and opportunities are understood. The result is an increase in adjusted operating profit to 65 million pounds. Adjusting items excluding non-cash amortisation and interest amounted to £9.5 million in the period and are broadly in line with the £9.1 million costs in the comparative period. The main item remains related to firing cladding costs which are £3 million higher than the comparative period. Given the nature of the construction projects we typically engage in, and following regulation change, we estimate our net exposure to this could be between 10 to 20 million pounds. As a reminder, the amortization of 11 million relates to acquisitions, and has increased as a result of the Buckingham acquisition. The additional amortization is provisional, as acquisition accounting is for 12 months, and we estimate will be circa four million pounds per annum for the next 1.7 years. Of the smaller legacy items, legal legacy claims in the year relate to the disposal of Keir Living in May 2021. The other costs include some Buckingham costs in connection with the acquisition. The interest relates to IFRS 16 where leased office space has been exited. As previously guided, we haven't incurred any restructuring or related costs. Moving on to free cash flow, the results of all the hard work done over the past two and a half years with the group achieving significant operational and financial progress can be seen very clearly here with a material improvement in operating cash flow despite the usual seasonal working capital outflow. Looking at the detail, we can see that adjusted EBITDA in the period grew to £92 million. We then have £46 million of working capital outflow, a significant improvement when compared to HY23 outflow of £79 million, as expected due to the growth in construction which started at the end of the last year. This includes an improvement in our supplier payment days by one day to 33 days. CAPEX in the period amounted to £26 million, however 19 of this relates to payments made under leases now capitalised under IFRS 16. Net interest and tax increased by £2 million in the period, due primarily to corporation tax payments restarting on the group's return to profitability. This results in the group materially improving its cash conversion from minus 122% to plus 19% as we generated a small cash flow of £12 million in operating cash, significantly better than the usual H1 outflow, further demonstrating the plan is delivering a meaningful improvement in the cash position of the group. Turning over the page, we have the net cash bridge. We start on the left hand side with closing cash of £64 million at the end of June 2023. We then see a small free cash outflow that I've just talked through of £8 million. We had adjusting items of £16 million, which includes the payment of items accrued for in FY23. Pension payments of £5 million. As previously mentioned, we paid £9 million to acquire certain contracts of the Buckingham Group, which are performing well. 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 long-term incentive plan share schemes when they vest. The net cost of this was £4 million. The other £5 million relates to deploying capital to the property segment. This will help drive future returns as the current market is affording some great opportunities. This results in a net cash position of £17 million. Moving to slide 12, this slide is now a pleasure to talk to as we move through 2024, as it really demonstrates the significant progress made by the group in reducing our net debt. If we look at the last 18 months, we've reduced our average month-end net debt and debt-like items by £149 million, with £80 million of this being reported net debt. For HY24, we've seen the operating cash generation lead to material deleveraging. The 136 million achieved across the period is 106 million lower than the comparative, now that free cash flow generation is almost entirely devoted to paying down reported average month end net debt. A key part of the medium term plan was to generate cash and strengthen the balance sheet. The previous slide demonstrates the material improvement in the cash generation and reduced debt. This success provided the opportunity to put in place a long-term capital structure to support our strategy of de-gearing business whilst retaining flexibility and optionality to deliver future growth. In February 2024, after the period end, we secured long-term financing of the Group through the issuing of a £250 million five-year bond and extending the revolving credit facility to 2027, both strengthening our debt maturity profile and diversifying our funding sources, an important step in the delivery of our medium-term plan. This slide shows the details of the debt structure and the changes we will see over the next few years. As of 31 December, we had committed debt facilities of £548 million, comprising of a £475 million revolving credit facility and 73 million of US private placement notes. Previously, these were due to mature in January 2025. Following the completion of our 250 million bond issuance, our 548 million of facilities now comprise of 250 million of bonds, 261 million of revolving credit facility and 37 million of US private placement notes. The next key date is January 2025 when all of the US private placement notes and 111 million of the RCF mature and this will leave our facilities comprising of a 250 million pound bond and 150 million revolving credit facility which mature in 2029 and 2027 respectively. The maturity profiles reflected in the chart on the right hand side of the page. Slide 14 sets out our order book position. As you've heard from Andrew, our order book is high quality and has further increased by 6% to 10.7 billion compared to June 2023. We've secured 97% of our 2024 full year revenue as we continue to win work in our chosen markets. Significant effort has been made to continue 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. 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, the majority of our contracts are fixed, but circa 95% of these are fixed following a two-stage process to identify and mitigate the risks involved. Our average order size in the construction business is only circa £20 million. This relatively average small 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 optimizing shareholder returns. Accordingly, as we generate cash from operations, we expect to deploy that in a number of ways. CapEx is expected to continue to be minimal. Further deleveraging as you're aware we're targeting a sustainable net cash position. We plan to invest further in our property business in order to generate consistent returns over time. We will continue to do this in a disciplined and controlled manner. We have previously targeted a range of £140 million to £170 million of capital employed in the property division. The range has recently been under review and has increased to a range of between £160 million to £225 million given the growth of the group. We're targeting a dividend cover around three times earnings through the cycle. With regard to mergers and acquisitions, the group continue to consider value accretive acquisitions in core markets, where there's potential to accelerate the medium term plan. We've always recognized the importance of dividends to our shareholders and reinstatement of one is an important facet of the medium term value creation plan, which we launched June 2021. We said that we could deliver a dividend covered circa three times by adjusted earnings over the cycle. We expected that we would pay the dividends as approximately one third as an interim dividend and approximately two thirds final dividend. The results presented today show strong operating and financial performance and we have seen a material deleveraging in the period. A significant improvement with the strength of the order book and future prospects of the group allow us to declare an interim dividend of 1.67 pence per share. This represents a dividend cover of approximately four times as we progressively move to the medium term target of three times. It's very pleasing that the results of everyone's hard work at the company are now being shared with our shareholders who have been extremely supportive over recent years. And as Andrew said earlier, I'd like to thank the whole KIA team for being able to deliver these results. And now I'll hand back to Andrew for the operating review.

So many thanks, Simon. And if we now turn to slide 18, and we'll look at our infrastructure services operational review first. So infrastructure services segment saw significant growth of 16%, largely driven by additional high-speed to capital works activity. And just as a reminder, as part of the Eiffage, Kier, Ferroville and BAM or EKFB joint venture, Kier is delivering the longest section of civil works, 80 kilometres from the Chilterns to just south of Warwick. We have the lead on project management and programme integration in the project venture. And the contracts also acquired through the Buckingham acquisition have contributed to this revenue growth on HS2. Our adjusted operating profit increased 30% to £44 million and adjusted operating margin remained strong for the infrastructure services sector at 4.7% as the volume growth translated to profit. We also had positive momentum in the order book with a 16% increase to £6.7 billion compared to the prior period. In terms of significant awards, our Natural Resources, Nuclear and Networks Division was appointed to the £3 billion SCAPE Utilities Framework, aimed at delivering utilities, civils and infrastructure and transportation services work. And we're one of two contractors that were awarded a place on that framework. And with 96% of our revenue secured for FY24, with our recent wins, we can see an underpin to our future revenue in infrastructure services. The business is well positioned to benefit from anticipated increased opportunities afforded by the new water spending cycle AMP8, as well as opportunities in the rail, energy and environmental sectors. And if we just turn to the next slide, the rail asset acquisition, just an update on that. On 4th of September, 23, during the period we acquired substantially all of the rail assets of Buckingham Group, as well as their HS2 contracts, supplying, as I said, Kiers HS2 joint venture, EKFB. And we did it for a consideration of £9.4 million. The acquisition provided Kier with new rail clients and increased our capability across the UK. It also bought 180 employees with expertise in the rail sector, further enhancing Kier's talent pool. And as part of the acquisition, Kier achieved positions on various frameworks and projects, including the Control Period 6, or CP6, Northwestern Central Framework for Network Rail, Transport for Greater Manchester Framework, Transport for Wales Framework, West Midlands Combined Authority, the Willinghall and Darleston Project, an East Midlands Railway Etches Park Project, and Nexus Whitley Bay Project. And the acquisition accelerated Kier's multi-year rail strategy. And just as a note, the historical contractual liabilities prior to the completion date were not acquired as the rail assets were purchased out of administration. The acquisition has been successfully integrated into the group's transportation business and is performing ahead of expectation compared to the time of the transaction. Turn to construction. Our construction business comprises regional build, 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 business. Construction volumes increased 29% to £915 million, which reflects the volume growth in our regional build business. Adjusting operating profit increased in absolute terms by 1% to £33 million. The business delivered an adjusted operating margin of 3.6%. The period-over-period reduction in margin was in line with expectations and driven by a change in mix as well as the increased overheads to support the additional site starts as a result of the growth. Despite the reduction in the first half of the year, the 3.6% margin remains industry leading. Within construction, our care places business saw volume growth across facilities management and housing maintenance. Again, as a reminder, the facilities management work is predominantly for the Ministry of Justice and the Home Office. The housing maintenance business delivers repairs and maintenance services for local authorities. We continue to grow our capabilities and customers in this area with a focus on decarbonising social housing through retrofit opportunities. The order book in this sector remains strong at £4 billion and we continue to win work in our chosen markets. The order book now is more normalised level following the initial increase previously. In the first six months of the financial year we've been awarded five education projects worth circa £182 million, four healthcare projects worth approximately £81 million as well as a new category A prison for the Ministry of Justice at HMP Elmley worth over £100 million. Examples of the type of projects we are winning include our appointment by the Department of Education or DfE to redevelop Bournemouth and Poole College's Bournemouth campus aimed at a range of students from school leavers to adult learners. Within healthcare we've been appointed by the Sussex Partnership NHS Foundation Trust to deliver a £60 million inpatient mental health hospital in Bexhill with 54 beds as part of its redesigning inpatient services in East Sussex programme. Our construction business has 99% revenue secured for FY24. We move to our property business. So our property business invests and develops primarily mixed-use commercial and residential schemes and sites right across the UK. The business is well established in the urban regeneration property development sector. We largely operate through joint ventures, both to manage risk and opportunities. As expected, operating profit slightly fell due to reductions in property transactions due to the difficult market conditions, which have continued from the prior year. We will continue to take advantage of market opportunities where possible in terms of land acquisition, timing of build and selling, and we do so within our disciplined approach to capital, as Simon mentioned. At the end of the year, Keir's capital employed in the property segment was £163 million, excluding third-party debt and fair value gains. This reflects Keir's cash investment in the property segment. Given the group's increased operating cash flows, the benefit of building out certain projects such as 19 Caldwell Street in Birmingham, and market conditions showing tentative signs of recovery, we can see a number of attractive buying opportunities. We've previously targeted a range of 140 to 170 million capital employed in the property division. The range, as Simon has mentioned, has recently been under review and has increased to 160 on the lower end to 225 million on the upper end. Again, as a reminder, the property division targets a return on capital employed of 15%. We also recycle the capital from our property transactions and therefore these provide a source of future capital to us. We believe that this will generate a return for our shareholders over the next few years, especially given the timing of the deployment within the cycle of the expected market recovery. As we mentioned before, the property division does have synergies with our wider business model, with the cash generated from our construction division being redeployed to generate higher returns for our property division, thereby smoothing the returns profile for the overall group. We believe it takes time to selectively invest in sites, season that capital, and then transact. And over the longer term, we expect to deliver a more consistent performance from the property group. And similar to the rest of Kier, the property segment has performed well in terms of activity, and highlights include our joint venture with the Housing Growth Partnership, acquiring a development site in Royal Tunbridge Wells, and selling a logistics scheme in Whiteley in Hampshire. If we move to sustainability now and our sustainability framework. So last year, following our success of our first sustainability framework, we introduced, we reinforced our commitment by issuing a refreshed framework. New framework better aligns our activity to our major customer, the UK government. And this evolved framework focuses on three pillars, people, places, and the planet. As a reminder, our purpose is to sustainably deliver infrastructure that is vital to the UK. As a key supplier to the UK government, ESG is fundamental, therefore, to our ability to win work and secure positions on long-term frameworks. In UK governments, contracts above £5 million require net zero carbon and social value commitments. In order to help achieve these goals, we're targeting our work firstly to build a workforce which has the relevant skills and capabilities to deliver these goals, ensuring where possible everyone receives equitable treatment and that our people reflect the communities in which we serve. Secondly, we want to leave a legacy, a positive legacy in the communities through the projects we deliver and the people we employ within them. Alongside this, we aim to further tackle inequality. And finally, as the stewardship of the planet is vital to all of us, we plan to reduce our carbon usage and support our customers with their infrastructure requirements as they manage climate change related events. And at sites we're aiming to protect and preserve biodiversity as well as the efficient use of resources on our projects. If we move to environmental progress, we see carbon reduction both as an obligation and an opportunity. So we aim to ensure that we do the right thing and operate as a responsible business. And from an obligation perspective, Kier's had its carbon reduction plan recognised by the science-based targets initiative, including our target to achieve net zero carbon across scope one, two and three by 2024. In addition, our infrastructure services and construction segments are now PAS2080 certified, the leading standard for carbon management solutions in buildings and infrastructure. And this demonstrates our commitment to designing and managing out carbon from the lifecycle of UK infrastructure projects that we deliver for our clients. And from an opportunity perspective, in February, Kier was awarded the London Stock Exchange Green Economy Mark. This is awarded to companies who can demonstrate that more than 50% of their revenues are generated by procuring green products and services. And in FY23, 64% of Kier's revenue was generated from green activities. Climate change has led to increased opportunities in Kier's and Kier's end markets and for example the demand for green buildings, green bridges, green tunnels, nuclear rail and water infrastructure as well. The combined achievements really are a key milestone in Kier's ESG strategy and it's great to see that this work is being recognised now externally. On the social side, Kier is and has always been committed to investing in training programmes to upskill our employees with a view to addressing the requirements of the industry for key skills. Kier is a people-based organisation and our performance depends on our ability to attract and retain a dedicated workforce And during this past period, we had over 720 apprentices participating in programmes, and that represents circa 7% of our workforce. In addition, circa 9% of the workforce are on a formal learning programme. As part of our drive to recruit diverse talent, Kier has placed 23 prison leavers and eight released on temporary licence, or ROTL, candidates in employment, either within our business or within our supply chain partners in the first half of the year. He also remains committed to offering employment opportunity to those who have served in our armed forces and has hired 24 veterans in the same period. Finally, if we move to the summary and the outlook. Our order book has remained strong at £10.7 billion and provides us with good multi-year revenue visibility. Contracts within our order book reflect the bidding discipline and risk management now embedded within the business. I am particularly pleased to report that the Group significantly improved upon its year-end net cash position and significantly lower average month-end net debt and has confidence in sustaining this momentum going forward. The second half of the financial year has started well and we are trading in line with expectations. Group is well positioned to continue benefiting from the UK government infrastructure spending commitments, and we're confident in sustaining the strong cash generation achieved over the last 18 months, allowing us to continue to de-lever the Group. And we remain committed to delivering our medium-term value creation plan, which will benefit, we believe, all of our stakeholders. And with that, I would like to open up the meeting to any questions. And we'll take the ones in the room first, and then maybe go onto line if there is any there later. Johnny.