Balfour Beatty Plc

We're not just imagining the future, we're building it now, together. We're delivering the infrastructure that matters most and driving progress across our growth markets. UK Energy, Transport and Defence and US Buildings.

We're shaping Britain's transition to clean energy and making it a reality every day at Hinkley Point C. Laying the groundwork for future nuclear power stations like Sizewell C. We are planning projects that will power future generations and on site we are putting those plans into action.

As the UK's largest power transmission and distribution workforce we're delivering vital grid reinforcement on Isle of Skye and powering up Net Zero Teesside, set to be the world's first gas-fired power station with carbon capture and storage.

That's pretty amazing, isn't it?

We're tackling congestion and helping to keep the UK moving from operating and maintaining the M25, Europe's busiest motorway.

to working with local authorities to maintain the roads at the heart of our communities and paving the way for the lower Thames crossing, part of the biggest transport investment in a generation. Can we just take a second to acknowledge how massive that is?

In defence, we're drawing on decades of experience in complex, high security environments to help protect Britain. Across the country, we're delivering secure, reliable solutions for some of the UK's most critical defence projects.

Which projects?

I can't tell you that, for national security reasons.

Beyond the UK, we are shopping global infrastructure too. Delivering the expansion of Hong Kong International Airport.

And here in the U.S., we're designing and building spaces that connect people and enhance communities, from North Carolina to Texas. From Washington, D.C., all the way to California, we're building schools, offices, homes, government facilities, and transport infrastructure, and driving real change where it matters most.

But this is just the start. With end-to-end capabilities spanning the entire infrastructure lifecycle, we're leading the change that's shaping a better future.

Real people, real impact, real growth.

So welcome to our half-year results. It's incredible looking at the video, which I think is our best one yet, the sort of extraordinary things that we actually do and deliver on a day-to-day basis. Quite astonishing. And normally at the end of the presentation, you sort of thank everybody, but what I would say is that for our 27,000 employees who do this day in, day out, it's an incredible achievement and we'll always remain... I'm grateful. Right. Right. So. Is that a tear? Sore throat. So I'm Leo Quinn, Balfamey's Group Chief Executive. um and uh i'd like to talk about our first half results and the most important thing is look we're on track to achieve our full year earnings and expectations um i want to make three points here and i think they're really really important is first and foremost is the strength of our underlying earnings business and the fact that we've actually achieved our three percent margin in uk construction proving phil wrong is an accomplishment in itself. And of course, the astonishing growth that we got within support services. I'd also like to point out our record order book. And this is on the back of a rising infrastructure tide. And as you know, Balfour Beatty is the market leader in infrastructure. What's quite unique about the company is our ability to turn earnings and actually order book into cash. And that underpins our dividend increase and also our share buyback. And if you want to ask me later, how does orders underpin cash, I'll explain that to you as well. So fundamentally, a really, really good start to the year. But this is only half the story. And this next slide is very, very important because what it actually does is it underlines effectively the quality of the backlog and the pipeline that we've got. And most importantly, it allows us to be selective. And that selectivity allows us to improve margins, not only at the pricing level, but at the delivery level. So let's just start with the fact that we've got 19.5 billion of order book, which is a record order book. But more importantly, that's underpinned by a pipeline, much of which is actually secured of another 20 billion. The biggest challenge we face in the market today is that demand in infrastructure far out exceeds supply. And for over the last two years, we've been actually looking at that and looking to capitalize on it in terms of our pricing strategy and margin strategy, but also in the de-risking. And the de-risking is really important because what it means is that the booked margin actually gets delivered as the delivered margin, as opposed to when you deliver the booked margin, it's actually below the actual, when you deliver the booked margin, when you deliver the margin, it's below the booked margin. So let's have a look at some of this in detail. If I look at the 20 billion, we've got five growth engines within the business. The number one and the most important at this moment in time is the power transmission business. And that's really been driven by the fact of net zero, but more importantly, AI. Some of the demands for data centers and power connections is just phenomenal. We're engaged in early contractor involvement, which you might be more familiar in terms of as a feed study. That feed study is actually paid for by the client. So historically in that market, we would actually be hard bidding work whereby we'd put three bids in, we'd win one. uh in three and then we do we deliver it with all of the risk now what happens is that we go in early we'll actually survey the site for planning conditions for soil conditions early design in some cases early procurement and what that allows us to do is significantly de-risk the the business here the amount of business that's going to derive from our early contractor involvement at this moment in time is six to eight billion which is about a third of the 20 billion market that sits out there in power generation within power generation in the last six months we've seen what effectively was an acceleration of orders into the first half of the year with net zero t side but also with sizewell Sizewell has now passed FID, which is the government's financial investment case, and work is proceeding on site as if it's to be built in full. And further, Sizewell is, we've signed and we engaged in a three-way alliance agreement with ourselves, Langer, Rourke, Bouygues, to deliver 14.5 billion of civil construction work. And that is actually a signed commitment. I'll explain more in the second half. In the area of defence, we're engaged in three or four defence sites, which over the next 12 months will actually have to appoint a partner to deliver the fissile. The fissile work across these sites is worth between two and five billion. And we're actually on site delivering today and in a very good position to secure some of that. In the case of Lower Thames Crossing, we see that Lower Thames Crossing, where the contract has been awarded to us, will probably start about 2028. But it's all part of our growth pipeline. And then within our buildings business, what we're looking at is a run rate business for another three billion, which has already been secured but not awarded at this moment in time. So this strong backlog of enhanced margin and de-risk coupled with a 20 billion pipeline leaves me very confident that we'll be exceeding what effectively is the average cash going forward in the future. That then underpins what effectively is an accretive dividend and an increasing share buyback. So I'm very confident with the momentum in the business on the rising tide of infrastructure that we'll be actually delivering significant shareholder returns into the future. So on that note, I'm going to hand to Phil in order to explain the reality. Thanks, Leo.

Good morning, everyone. In the first half, we made really good progress in our growth markets and remain on track to achieve our full year expectations. That includes our ongoing expectation of increased profits from the earnings-based businesses with very strong contributions from UK construction and support services, more than offsetting a forecast reduction in profit from US construction where we've had a frustrating write down in US civils in the year to date, for which we are confident we will ultimately get cost recoveries. Looking into the first half in more detail, revenue grew by 10% to 5.2 billion pounds, which was a 12% increase when excluding foreign exchange movements, largely due to growth in US buildings and support services. Profit from the earnings-based businesses increased by 7%, with strong profit growth in UK construction and support services, largely offset by a loss in US civils. And when including higher costs in the investments business, group profit from operations was flat at £77 million. Profit for the period decreased by 10% to £73 million, which included lower net finance income as last year's first half benefited from an impairment right back. Earnings per share decreased by 6% to 14.4 pence, And our order book at 19.5 billion pounds has increased by 6% in the period. And the director's valuation of the infrastructure portfolio reduced by 8% to 1.2 billion pounds. Period end cash increased to 1.2 billion pounds, driven by a large working capital inflow, which also resulted in average net cash increasing to 1.1 billion pounds. As I said, we remain on track to meet full year expectations, albeit with a change in profit mix, and this gives the board confidence in significant ongoing shareholder returns. Allying to this, the interim dividend has been increased by 11% to 4.2 pence per share. Moving on to the business units, let me start with construction services. UK construction had an excellent first half, excluding insurance recoveries. Profits grew by 35% and we achieved our long-standing 3% PFO margin target a year earlier than forecast, with the improvement driven by better operational performance and the lower risk nature of the contracts being undertaken. We also benefited from an insurance recovery of 10 million pounds relating to an ongoing project. Looking to full year, we expect the business to achieve a 3% margin prior to including the insurance recovery. US construction made a loss in the first half with good performance from the buildings business offset by cost overruns and scheduled delays at a civil highways project in Texas. The project which we're delivering in joint venture is due to end in the middle of 2026. And as you would expect, the group will seek to recover these costs overruns from subcontractors. Prior to this year, highways activities in the southeast and Texas had been profitable for the group, and we expect this to be the case again following the conclusion of this project. Allying to this view, in the first half, we signed a further highways contract with the same clients, which we will deliver independently over the next six years. For the full year, we now expect U.S. construction to deliver a profit of around 20 million pounds. At Gammon, the first half largely outturned as expected. Revenue was 23% lower, driven by reduced activity at Hong Kong Airport, where our two major projects progressed towards completion. PFO increased by 13% to £17 million, and the PFO margin percentage increased to 3.1%, driven by the mix of work delivered. I'll also touch on none underlying items here. And you'll remember that at year end, we provided £52 million in respect of a jury verdict given against the group and its JV partner regarding a US highways project completed in 2012. We're pleased to say that in the first half, a settlement was reached with all parties, including our subcontractors, and the group share of the settlement was fully funded by its insurers. As such, the group has released this provision in full after taking into account legal costs incurred. Moving on to support services. which comprises our power transmission, road and rail maintenance businesses, all of which performed well in the first half. As you know, the large-scale investment in the UK's power transmission network is beginning to ramp up, and this can be seen in the first half numbers, with a 19% increase in support services revenue being driven by higher volumes in the power business. As a result, profit for the period increased 35% to £46 million. For the full year, we expect PFO margin to be towards the top of the targeted 6% to 8% range, with further profitable revenue growth from the power business and consistent performance from road and rail maintenance. Let's now look at the group's order book. which is now at £19.5 billion, with an increase in each of the four divisions. UK construction increased slightly to £6.3 billion, and 82% of orders are now either on target cost or cost-plus contractual terms. In the US, in dollar terms, the buildings business grew their order book by 6% in the first half, and Civil's added the new road project I spoke to earlier. Gammon has had a good period for order intake, particularly in the building sector, and their order book grew 12% in local currency, and support services grew by 16%, largely due to new rail orders, including a long-term fleet supply contract with Network Rail, a place on Network Rail's CP7 Western reactive framework, and further track renewal work with the Central Rail Systems Alliance. The power order book within support services grew modestly in the first half compared to revenue as many of the large schemes which the business are working on are being contracted in phases. We are currently underway on early contractor activities and the contracts for the later phases where the majority of the value sits will be added to the order book in the coming years. Moving on to infrastructure investments, which made a loss in the period. The key driver of the division's losses continues to be the costs in US military housing relating to the monitor's work. This month, we have agreed in principle to extend the monitorship to the 6th of June, 2026, which we believe gives the military housing business sufficient time to remediate the outstanding work. In the first half, the group also recognised costs relating to three UK PFI assets, which required remedial works ahead of handback in 2026. A small gain on disposal was recorded in the first half, with £2 million of contingent consideration received in relation to a 2024 disposal. Looking ahead, we expect to make a small loss in the second half prior to disposals, resulting in a full year operating loss marginally larger than the £12 million reported today. It is important to say that investments remains profitable when excluding the ongoing cost of the monitor's work. Finally, we expect gain on disposals for the full year in the range of £30 to £40 million with a number of transactions ongoing. Moving to the director's valuation. The valuation of the investment portfolio decreased by 8% in the first half of the year to £1.2 billion, largely due to two main changes. Firstly, we have increased discount rates in both the UK and US portfolios to reflect changes in long-term interest rates and to align to the secondary market. This has resulted in a reduction in value of £61 million. Secondly, with over half of the portfolio being US-based, the strengthening of sterling versus the US dollar during the first half also had a large impact, reducing the valuation by £65 million. We continue to invest in and recycle capital from the portfolio with two new multifamily housing assets acquired in the US during the first half and disposals planned in the balance of the year. Looking at cash now, which has been particularly strong for us in the first half. Operating cash flows improved and we're up 26% compared to the first half last year. But the major driver of the larger cash balance was a £290 million working capital inflow. This was driven by advance receipts on several new projects in US construction and by working capital timing in UK construction. The remaining items on the bridge were largely as expected, including around half of this year's share buyback being completed. The one other item I'll mention is our other category, which is normally a much smaller number, but included £26 million of foreign exchange movements in the first half, given the weakening of the US dollar. I'll finish with a summary of our full year guidance for 2025. We continue to expect an increase in PFO from the earnings-based businesses. In this, we now see UK construction operating at a 3% PFO margin as it continues its upward trajectory and further progress in support services, which is maintaining margins while growing revenue. We expect US construction to have a much better second half and finish the year with PFO of around £20 million. We expect the gain on investment disposals for the year to be in the range of £30 to £40 million as we continue to realise value from the portfolio. Net finance income is expected to be around £30 million and the effective tax rate will be close to statutory rates again. Looking at cash, we expect average net cash to be in the range of £1.1 to £1.2 billion now and for capital expenditure to be in the range of £40 to £50 million. In summary, we remain on track for the full year and continue to be well positioned to capitalise on improving operational performance and the momentum in our growth markets in 2026 and beyond. This will continue to underpin our long-term commitment to grow shareholder returns. I'll now hand you back to Leah.

Right. Thank you, Phil. I'd start off by saying that we've been talking now for at least 18 months, two years, really about the growth engines behind the business. And in summary, these represent about 70% or cover about 70% of our revenue. But I have to say, where we sit today, I've never known the business be in such a good position for the future. So as I leave the business, the strength of our order book and our pipeline is truly quite phenomenal. I always think in any business, if you've got a portfolio and you've got one or two sort of growth engines, that leads to a good overall outcome because the growth engines cover all of the misdemeanors elsewhere. If you've got three growth engines, it's a little bit like three bell fruits on a one-armed bandit. You know, it's a jackpot. We at this moment in time have got five. And our biggest challenge is really how do you cope with that level of demand with a limited supply? There's only 27,000 of us to actually deliver. So it demands that we become selective and we become more and more selective. So I'll take you through each one of these for a few seconds. And the thing I'll point out to you here is if you look at this graph, which is sort of our backlog going forward and our revenue, projections for between 24 and 26 the power transmission business is actually doubling. Well if that isn't interesting enough between 26 and 28 it has the potential to double again. There aren't enough people and resources to deliver all of that so our number one message is actually really around selectivity. And just a little bit of history. We've been in this business for about 114 years. It's where Balfour Beatty actually started. National Grid, which is one of our major customers, we've been doing business with them for 100 years. So we're well ingrained in this industry. We have about 20% to 30% market share. We have about 2,300 blue collar workers in this market. couple of other things it's not only national grid and ssc but it's also now scottish power as well we're very focused in what we do we do 400 kv and 132 which is rather specialist and again there's not a lot of competition in that market i said earlier that demand is actually being driven by by consumption it's about net zero and how do we connect wind farms into the grid how do we de-risk the grid but also the demand for AI and data centers is now booming and getting connections onto the grid. So all of this caters to that. We not only do the 400 KV and 132, we do substations and we're now doing converter stations. Converter stations, I was up in Scotland recently and visited one. They're 300 metres square. If you can just imagine a field where we're going to actually plant a 300 metres by 300 metre converter station to take wind power off into the grid. So truly phenomenal stuff. We're actually... not growth in the future we're delivering this now this business will probably nigh on double this year if i look at it but we're delivering on the likes of btno eagle and we've got the rio frameworks we're delivering against and we're working on ecis into uh ferrasti which is these sses power plan the other thing about selectivity which i've said before which is really important and that is that we've chosen the schemes we want to deliver There's a whole portfolio out there and some of them are extraordinarily difficult in very remote places. All of our picks are actually where we've got good urban conurbations and we can actually get people and talent. I think one of the things that's remarkable in the last 18 months we've recruited 850 people into this business to cope with the growth. That in itself is a challenge. I'm very, very confident that our future is extraordinarily bright in this area. If I look at power generation, interestingly enough, Sizewell B, which preceded Sizewell C on here, we actually did the diaphragm wall and the foundations for that 40 years ago. So it's very interesting how these things come back time and time again. Hinckley Marine will be tailing off over the next eight to 10 years as we do all the mechanical work. The civil's work for us is largely finished. We'll be then morphing into a size we'll see. And as I said earlier, a size we'll see has come along like a bullet train. In the last six months, we've signed the the alliance agreement between ourselves. We can and Langer walk to deliver the civils. The government has given approval to the financial investment case at a minimum level. we will end up sharing $14.5 billion of civil delivery in that program over the next eight to 10 years. So really, really, really encouraging. The other order that's come in in the last six months is Net Zero's Teesside, published, I think it's 880 million. This is a situation whereby this is a negotiated contract, as Sizewell was a negotiated contract. And what's really key about how these projects are de-risked, in the past, we would invariably have some sort of penalty associated with retentions or liquidated damages. In the case of all these contracts, we are bonused and incentivized on actually performing. So it's only upside and our downside risk is actually minimized in terms of there's a minimum level of margin that we can earn come hell or high water. Also, as I look forward to the future, you've got SMRs, you've got more carbon capture. We're working on fusion and the like. So not only is this very visible in the short term, but in the long term, we've got even more growth coming through. And I think you saw things on Rolls-Royce this morning about the value of their SMRs for power supply to data centers for AI use. So fundamentally, our generation business is growing as well. Again, I'll point out that between 24 and 26 is doubling, and then there's also the potential for that to double again. If I look at defence, defence is really one of our smaller businesses. But again, the challenge we're going to have here is, again, circa 250 million here or 200 million but again between 26 is doubling and as you look out it has the potential to double again in the case of defense we're working with three primary customers all our work is around submarines and nuclear the one part of the defense budget was protected that was protected was actually the nuclear element of it we work with um the likes of babcock on devonport which is for the astute class submarine where we're we're building out the dock We're working with the atomic weapons establishment in Aldermaston, where we're in there building the hub, and they've yet to appoint their fissile partner. We're working with Rolls-Royce in Derby, where we're building out the AUKUS facilities. And again, they've yet to appoint their fissile partner. We feel fairly confident, given our background, knowledge and experience, and the fact that we're actually on these sites, that we're in a favoured position to actually secure an awful lot of that work. And that will be worth between something between two and six billion pounds in total. Obviously, we work with the Dio who have in the light of defense spending a growing backlog. And also a lot of the projects we're doing are with in the area of cybersecurity. And those secure projects will actually roll one into the other. Again, they're not actually tendered. They're sort of negotiated because of the nature of them. So if I look back at power, our power business has been de-risked by something called early contractor involvement or feasibility studies. These orders have actually been negotiated with the client directly and there's only upside for performance and the downside risk is capped. If I look at our transportation business, this is a mix of a number of businesses. Firstly, in rail, we've been very fortunate in the first half of the year to secure a number of rail maintenance contracts, but also in the area of plant hire and plant equipment. So we've won the Tampa contract, which is a 10 year contract. commitment to Tampa hire. And then we've also within that one, another contract, which is also the plant hire for rail for the next 10 years as well. So with HS2 absorbing a lot of the transport budget at this moment in time, The rest of the budgets are getting rather tight in terms of highways, local roads and rail. So the fact that we've got a secure pipeline for rail is very good, underpinned by our ongoing maintenance that we do. So we see rail as flat for us over the next four to five years. When I get to roads, roads breaks into two parts. It breaks into local authority roads, which is our living places business and is in our service business. And we've got highways, which is our national highways, motorways and the likes of that. In terms of living places and local authority roads, we've got a very solid business going forward. Every 12 months, one to two major councils will come out with major tenders. We're working on a couple at the moment which are in the hundreds of millions, and they're invariably one on all. You either win them or you lose them. We're very encouraged by... the outlook in this market, but at the moment we're not forecasting any growth to come out of this. If I go to highways, our two major projects at the moment is obviously finishing off the M25A3 at Wisley. Just for the people in the room and on the call, the M25 will open at the end of September, so those who've sat in traffic for a long time will be pleased at that relief. The A3 will take a little bit longer. We've recently won the M3 Junction 9, which is a hundred odd million highways job. We're working on such things as the A66 and the A57. None of those we're forecasting as growth, but the growth that we do see is in the Lower Thames crossing, which has already been secured, which will kick in about 2028. And that will give us a nice fill up. This is a very, very solid business, has produced good profits and good cash flow for the last 20 years. So it's really one of the foundations. We see a lot of prosperity in the likes of the growth at Heathrow. We're more interested in the T2C terminal and probably coming up in the next two to three years. I think the runway will be out past 2032 and the likes of that. Aviation is very big for us, and given this business is an expert in material and haulage, we cluster reservoirs in here. There's going to be a lot of building of new big reservoirs around the UK, and on the right terms and conditions, we'll engage in that sort of work. So again, there's a lot of opportunity in front of us in this business, built on a very solid rail, local roads and highways business. If I look at the US, about 2023, we embarked on what effectively was a growth initiative in the US. And that was actually to expand our territories beyond the main branches. So the role of the US for us is it diversifies our risk away from the UK and gives us a second string to our bow. Within the US, we're very well diversified all the way from Seattle to California, across to Texas, Florida, and back up to Washington, D.C. What we did is so geographically, we look to expand the business. And you can see that the benefits of that is we've gone from an order book of 5.7 to 7.1 billion. The model for us is a much lower risk type of model. It's a low return in terms of its fee, but the risk is passed down to the subcontractor chain. The initiatives that are working for us very, very well is apart from the new branches that we've opened in places like San Diego, sorry, not San Diego, Sacramento, is that we've been able to cross-fertilise customers across the US. So, for example, Disney, where we have a very big presence in Florida, we've now started doing work with them in California. Universal, similar, we're now starting to do work in Texas. We've seen a huge demand for data centers, and we're one of the largest suppliers to one of the tech companies in Portland, Oregon. That actually is now spread to Washington, D.C., where we've just secured a 200 million data center order, and we're also looking at similar in Phoenix. So for us, the U.S. geographically is actually going very, very well. It's growing. And actually, the specializations that we have, whether it be hospitals, education, the likes of that, is putting us in very good stead to actually expand that beyond where our concentrated centers are today. So look, finally, really summing up, it's very interesting to have, I think, a really strong order book with rising margins and a de-risked order book. That's just one part of it. But the other part is, what have we got in place to give us confidence that that can be delivered in the future? And 10 years ago, we launched our build to last programme around lean, expert, trusted and safe. But where do we stand today? First and foremost today, we've got strong governance and controls across the business. We've got a dedicated and committed workforce across the country. across the globe. In terms of trusted, we are by far and away the market leader in infrastructure, and we're trusted to do what we say we will do. So if someone's thinking about an infrastructure project, you cannot work without having Balfour Beatty on the list. We have what I think is some of the best in class safety practices where we're leading the industry in digital and the application of AI. And we have a group of employees who actually care about the environment and are committed to their local communities. So that's the foundation on which the future of the company will be built. What has Trust Built to Last actually delivered for us? Well, a 47% increase in earnings, but more importantly, that's underpinned by a level of cash generation with the likes of which I've never actually seen before. We've returned just under a billion to shareholders via buyback and dividends, and we've actually bought back 28% of the company at an average price of about £3.30, which, judging by today's price, was a good deal. We've got a highly de-risked 19.5 billion backlog, strong margins, and as I say, highly de-risked. And we've got a 20 billion pipeline of additional work, which actually will be delivered over the next 10 years. Our backlog will be delivered over the next two to three, but our pipeline will be over the next 10. So if you're thinking about confidence in the ability to continue over the long term to return cash to shareholders, I'm personally very, very confident that all the right things are in place. So finally, in summary, you know, I think we started out built to last. I think Balfour Beatty is already built to last. And on that note, I'm going to hand over the questions.

Hi, Rob Chantry at Berenberg. Thanks very much for the presentation, guys. So yeah, three questions from me. Firstly, I guess on the US order backlog, another strong increase. Could you just talk a bit more about the level of confidence you have on the US margin and EBIT generation in that backlog over the coming years? I know historically you've maybe Talked about a normalised level of EBIT, 40, 50 million level, but obviously a bit of a step back in the first half. So to talk about the confidence you have in the margin net backlog. Secondly, I guess on US civils as well, can you talk about what exactly went wrong? I know you've announced this year several more contracts in Texas on the roadside. Is it the same risk profile or the challenges? I know you commented on lower return and lower risk, but some more clarity on that given the amount of exposure you have to Texas. And then thirdly, just some comments around the infrastructure investment piece on the US monitorship. I know there's kind of news in the first half that's been extended, I think, to the 6th of June next year. Just some thoughts on how that impacts your attitude to that asset, some of the background to it, and your thoughts around that ongoing process. Thank you.

Over to you, Phil. I thought you could do all those, given it's your last go, see if you can get them right. Do you want me to do numbers?

You usually do numbers. I'll do the buildings. First and foremost, the growth of buildings is underpinned by what effectively is quite diversified across the US continent, so that's quite strong. On the building side, we continue we had an excellent first half uh with buildings we see that being the same in the in the second half the first half result was set back by the the civil's project which is delivered in joint venture in texas in the first half I'd have to say we've really had an outstanding first half for buildings and we have a lot of confidence in that business. The thing I would say more importantly is that the risk in that business does go down to the supply chain. So when something goes wrong, it doesn't necessarily go to our account. But that actually is reflected in the fact that we only make like a 2% margin return on the fee. So it's a low risk and a low return. So I'm very comfortable in that particular business and business model growing for us. The downside risk obviously happens is that if a subcontractor does go bankrupt and that delays the overall schedule, then it will go to liquidated damages to our account. But in the event, the scope of work and the cost of completing any subcontractor default goes back to either bonding or the insurance. In the case of Texas, and Phil should fill this in as well, the contract that we have in place is in joint venture. And going forward for the last 18 months, we have not done any joint ventures in Texas with the particular partner in question, primarily around the fact that we don't see the value add in that relationship for us going forward. The contracts, in this particular case, the issue that's arisen is that it relates to subcontractors, it relates to design, and as a result of it, work has had to actually be redone. When things are designed and in the wrong place, invariably there's a liability that falls back to the likes of the designer. and we're going to look to recover that in full back from the company. The problem with our business model always is when you recognise the fact the job is going to run longer, therefore prices are going to rise and you have the potential of liquidated damages, you have to recognise it in the period. But you might not actually get the money back for two years or whatever and it's usually a long negotiating process. So that's the ifs and buts of that. Anything you'd like to add?

No, only that we are pursuing the third parties. We're confident that we'll get a good outcome from it.

The one thing I would build on, Phil said it very well, was on 161 where we had the insurance case recently, we took a £50 million reserve against that liability at the end of the year. That actually got resolved and settled and we've written back the full amount bar the legal costs. That is extraordinarily unusual to settle something in that timeframe. But it is interesting when I analyze it. We took a 50 million reserve and it's been written back. We've now taken another reserve. So net-net, there's no impact on cash. It doesn't matter whether it's middle column or underlying. The cash of the two net each other out. So it has no impact on our ability to continue our share buyback and return a capital to shareholders. And I think the thing I would say is that we've got such a resilient balance sheet that you can take those bumps in the road in your stride. By the way, you don't want to be taking any bumps in the road. You don't want any potholes. But the fact of the matter is the strength of our balance sheet, the cash on it, just means that it's bloody annoying when these things happen. But, you know, it's part of the reality.

On US monitorship, we will be through the bulk of our work by year end and then the monitor will do their work. I think in our discussions with the Department of Justice we set it to be a date that everybody was comfortable we can bring this thing to a conclusion.

Next question.

Thanks very much. Graham Hunt from Jefferies. I've got three, if that's all right. Just going back to US buildings market, you called out a number of areas of strength. Just wondered if there are any pockets of weakness that are worth calling out just generally. how you're seeing the different sub-segments there. Second, on the UK construction business, you've now hit your 3% margin target ahead of schedule. When you talk about those big or the major projects that fill your pipeline going forward, are you confident you can maintain that 3% or even maybe go a little bit above and then third question just a bit of a bigger picture one on the the two administrations that we have in the uk in the us from the government side do you have any reflections on what they've been doing in terms of accelerating infrastructure build out where that's been most impactful on your portfolio and what gives you confidence um in terms of the policy they're putting through thanks yeah um

I better do these because, I mean, they're going to be fact-based, aren't they? I can't wait to hear your answers. You asked for a moment of weakness. We're a low profile as a company. We don't really like to sort of put out there in terms of a lot of the things we're working on for various reasons, some good and bad and publicity. But you say, I think you asked the question as to maybe lowlights and whatever, but recently Trump's visit to the Federal Reserve, which we're building... was was not necessarily the publicity you garner however saying that the project again very low risk phenomenal what we're doing basically jacking up the entire building and putting a new building inside it so you know the things we do are quite extraordinary the business continues to do very very well and as I said The first half has been really one of the best first halves we've had in the business. And I'm very encouraged about the pipeline that we see. You know, our market leading position for schools in California is just going from strength to strength. There's one here on my shoulder. If you look at sometimes they spend over $200 million on a school, you know, you don't hear of that in the UK. So I don't know if Phil wants to add. In terms of the 3% margin, look, I have always said that our UK construction businesses operate at five, always said it. And if it wasn't for the cock ups that we've had in the past, we would sort of be moving in that direction. Phil likes to keep me firmly grounded and sort of get me to understand that, you know, three is a virtual reality but but i do think you know when i start to look at what's happening around you know what we're bidding the growth rates the fact that we have specialized services which deliver within our framework so effectively we will deliver our ground engineering as best in class and then you know whether we deliver or someone else we would get a fee on that as well so there is absolutely a pathway to exceeding the 3%. So I don't think how long it's going to last. I think where does it go from here is the question you need to be asking. And I can't remember the third one now, but... Make a picture on US and UK governments. Look, UK government is in a bind. It's trying to create growth and if it can't get growth in sort of like the property market and things like that through natural macroeconomics and the likes, it's doing it via fiscal expansion. So it's pumping money into infrastructure, money it doesn't really have in reality. But once these projects start, they don't stop. But I have to say the projects that we're doing, when they deliver the benefits like Crossrail, or the elizabeth line now are just truly phenomenal so i i think they're very very different in the us we're not that exposed to fiscal expansion or whatever we've got a few road projects they're well funded um they're interesting but we don't have a big footprint in the uk we really do dominate the industry in a very positive way um I don't know if you want to sort of add to that, Phil? No. How about 5%?

Well, I think the great news is that we have hit 3%. We've hit it a year earlier than we thought. I think that does come down to the kind of operational discipline that we've had in the business. So there has been less cock-ups. I think if we continue that trajectory, then, you know, we can probably dream of five. But, you know, more sensibly, how do we go from three to three and a half? And how do we go from three and a half to four? That's how we need to approach it. But I think we've got the opportunity to do better than three.

Obviously, he's been taking the blue pill, hasn't he? You know, from the Matrix, yes.

Thanks. Johnny Huber from Deutsche Numis. Could I ask firstly on power? You've previously spoken about it being a 10-12% operating margin business. Is that still the right level? Also, you previously spoke about getting to 800 million of revenues there next year. Leo, you mentioned the potential is still a lot more, but you're constrained by resource. So what do you think realistically that revenue line can be? And then another question would just be on transportation. You set out the pipeline out to 2030, excluding HS2. What would that chart look like with HS2 included and if that continues 2030? Thanks.

Let me do the HS2 one quickly. I think we're at the virtually record level of revenue this year and last year. We'll see the revenue next year for HS2 fall off slightly. I do know that the funding has been set aside to get all the civils completed and then to get the track systems up and ready. They're looking to complete all of the civils by the end of 2029 and then with a clean sheet handed over for the track systems and the power to be delivered. So I would say revenue next year in HS2 will be off between... 20%, something like that, I'd estimate. Which, by the way, is fine because from us, the people working on that will then move to the likes of Sizewell and some of the power jobs. So the resource is the critical part. So there's no reduction in revenue overall for the group. We'll still get growth overall because of the growth in the likes of Sizewell and power. In terms of the 10 to 12% for power systems, we're still targeting them on double digits. I wouldn't want to limit them in any way at all. We're actually bidding at higher margins because we have to be more selective and we're looking at severely de-risked. So our ability to deliver the book margin is severely enhanced. And then on the 800 million target, I wouldn't pin that in for next year. I'd actually look probably over the next 18 to 24 months to get to that level because you do have to build to it. This year we'll just be short of doubling the business, but the year after we'll continue to grow. But we don't want to force growth because then you start making mistakes. So I'd rather have a reliable, smaller business that guarantees my return on my cash than a big business that goes wrong on you. So keeping it under control is really, really important. I've worked in a lot of markets, I've seen a lot of growth, but the growth in power at this moment in time is astonishing. And the fact that we've got the ability to de-risk it and we're being paid to de-risk it means that what historically was selling cost is now revenue for us.

Great, thanks. And maybe just while I've got the mic, Leo, given it's your last outing, last set of results, can I congratulate you on your 10 years? I think numbers speak for themselves under Build to Last. I think the share price is £1.50 when you came in, now you've got £5.50. So we wish you all the best for the future.

I'd say thank you for that. And of course, you know, no man's an island. It can't be done without 27,000 employees and a very painful finance director. So it would be wholly inappropriate if I was to take all the credit. I don't mind taking most of the credit, but I have to give some to my wingman who has done a fantastic job in sort of keeping the ship stable and has been a great partner and a friend throughout the entire period. So all credit to you.

I am actually surprised that you ended the power thing by not actually saying 20% margins. I thought you were constrained by, you know, 10 to 12.

So any more questions?

Yeah, let's just, I think we've got any questions on the phone. We do have some people listening in. So let's just give it 10 seconds and maybe some guys on the phones put their hand up if they do want to ask anything, but nothing registered right now.

Well, just while you're just waiting, I think it's worth saying, look, the underlying strength of the business and the balance sheet is phenomenal, absolutely phenomenal. And it's strong enough to take shocks and still deliver those shareholder returns year in, year out. You know, I did a bit of a calculation the other day over the last five years. We've gone from, I don't know, £2 to £5 or whatever. If you just continue the strategy mathematically returning the same amount of money year on year for the next five years with no change in multiple, you get to a £10 share price just mathematically. So if we actually don't change the strategy, do what we're doing today, you've got a chance to double the share price again. Record order book, record pipeline, highly de-risked, probably some of the highest margins we've seen in the backlog. I've never known the business to be in such good shape. And I would like to recognize and give my best wishes to Phil Hall, who takes over for me on the 8th of September. First of all, he's a fabulous guy. He's a really nice guy. He's been in the industry 30 odd years, extremely competent, knows more about the bloody industry than I do. And I'd have to say, I think the board have done a fantastic job in choosing him. So I'll be staying around to the end of the year to help out where I can. But I think, you know, it's a great business. And we've got a question.

We have. Yeah, I think we've got two on the line. So I'll hand over to the operator to introduce.

Thank you. We'll now take our first question on the conference line from Joe Brent from Panmure Liberum. Your line is now open. Please go ahead.

Morning, Leah. Just when you thought you'd got away, can I just ask three quick questions, please? Firstly, on the monitorship on US military housing, my point in thinking that we did hope that that would have been sorted by the end of this year and there's only sort of financial impact of that being sorted by the middle of next year. Secondly, just interested in your views on the secondary market for PPPs, given the rising discount rates you talk about. And thirdly, interested in your view on the sustainable level of negative working capital as a percentage of sales for the group.

As you say, Joe, we thought we got away with it all. Yes. Phil, do you want to do the monitorship? And I'll touch on... You could do all three, actually. I don't know what was on the two. The second one was about PPP. What's the outlook for it in light of lowering interest rates?

Yeah, so the monitorship was officially due to end on the first week of September this year. I think our view was that... we will be through the bulk of our work, as I said, by the end of the year. And then it's just a matter of the monitorship and the monitor process going forward to the final period in June. I think we anticipate that we should be able to deal with it within the kind of current cost budgets that we've got there. So that's the first one. I didn't quite understand the PPP one, so I'd have to go to say it again.

It's in the secondary market valuations, given that discount rates have gone up.

Yeah, so when we did our analysis for valuation for the half year, clearly we look at interest rates and then we look at what kind of we can see in market values and other people's secondary activities. And what we concluded was that we needed to increase our discount rates in the UK by about 0.6%. and in the US by 0.5. So that's, I think, just the normal ebb and sway of the market at this point and where we are in the cycle. So I don't, again, we'll keep our discipline about we have certain values that we want for our assets. If we don't achieve or we can't see us achieving those, then we won't necessarily sell them because we think we know the return that we want on those assets. So that's number two. And then number three, well, I'm always proven wrong. So I said that we'd be about 15% of working capital revenue. We've just posted, I think, 18%. We do think we're going to come off that. We do think there's a bit of an unwind in the second half. So I think our sustainable level is still 15. I still think that's a very good point to be at, 15%. We will try very hard, though, to maintain the 18. So if we've got it, we're reluctant to give it away. So we will try very hard to keep that. But long-term sustainable, we probably think it's around the 15%.

Yeah, and on that, our working capital is actually helped by growth. As you start to increase your pipeline, your forward order book, you're actually getting mobilisation payments and the like of that, and that's probably why we're at such a high level, or one of the reasons why we're at such a high level today. Joe, there's one thing that you said, which I thought you asked a different question, which would have been a brilliant question. And that was the outlook for PPP in the UK. You know, there's no doubt the government doesn't have the money to do everything it wants to, or more importantly, needs to do. So I do think there's going to be some sort of change or resurgence in getting private money into infrastructure. As you're hearing around Sizewell, they brought in equity in and then also around the lower terms crossing. Remember, our investment portfolio was founded around PPP. We were one of the leaders in that area. We still have that expertise. So it may well be that there's a bit of a renaissance in that area for the right type of capital structures, especially around highways and things like that, where we actually financed part of the M25 15, 16 years ago.

Yeah. Brilliant answer to the question that I didn't ask, but thank you.

You're welcome. Anything else?

Our next question comes from Nicholas Mora from Morgan Stanley. Your line is now open. Please proceed.

Yes, good morning. I just have three quick follow-ups. The first one on the cash generation, which was very impressive. Even if we put aside all the cash needed to run construction, you may end up the year with an extra 500, 600 million pounds sitting there. You did not want to boost the share buyback pace in the second half, considering where you're at right now. That's the first question. Second, on U.S. civils, if we put aside the Dallas contract going wrong, where do you think that business can go? We see peers anywhere between 2%, 3% PFO margin to low teens now. Where do you think your business can get within basically a reasonable timeframe? Last one on support services. You've highlighted you're still confident in low-teens margin for the business. Considering the mix, you are not confident enough to raise the guidance for the margin above and beyond the 8%.

Yeah. So let me answer that because I was the one who said it. First of all, power in its own right is different to support services. It's a part of the portfolio, about a third. So the question I answered was double digits in power, not in support services. That's combined with a lower return in our living places, which is local authority roads. But the blended margin is about 8%. And I think that's where we've guided to the upper end of expectations there. You asked a question on cash, and I'll do this one and Phil can do the civil's one. But on the 500 million that you referred to, it doesn't matter where it came from, that money goes into our account. It's really, really important that we continue to maximise cash for two reasons. One is we get income on it by virtue of interest, but it also allows us to invest in our investment portfolio where we look to get a superior return. So that's the benefit of the cash. You can't really return working capital via share buyback or dividends because it's not sustainable and it's actually arguably not our money. But we do get the benefit of having it on the balance sheet and it's a material benefit. And then on civils, I'll say tongue in cheek is that if we could just turn in two years of consistent profit, Whether it be 1%, I'd be happy, let alone two or three. But you're right. If you look at Tutti Perini and some of these others, they have turned in double-digit profits on their civil businesses. But it is a lumpy business because these projects run five years plus. And, you know, it's really when you get very close to the end that you realise that you can actually recognise the full profit that you've made. I don't know if you want to comment, Phil.

US civils, I think we continue to de-risk. We've never liked the nature of the contracts. So again, we're focused on Texas highways where we have had a long, long history of being profitable with that client and in the Carolinas. And I think if we do that, we can match the peers. It's just a matter of we've got to work through, if you like, the old backlog to get into the new backlog. But, yeah, I don't see a reason why we can't get up there and match with Piers. Jim?

Okay, we've got one more question from Andrew Nussi at Peel Hunt, which I'll read. Looking at the power growth engine, resource is a key theme. As projects move into delivery phases, how reliant will you become on local supply chains versus in-house capability? And how concerned are you regarding the abilities to secure resources in order to bank incentive components of margin?

Look, let's face it. At this moment in time, infrastructure is booming, not only for us, but for everybody else. So it is a battle to recruit, retain the best and the brightest. As I've said, we believe that we've de-risked the downside. So in the past, we would hard bid something with the power businesses. We'd be then liable for ground conditions. We'd be liable for retentions. We'd be liable for liquidated damages for late delivery. Those don't exist today in the contracts that we're bidding. So the downside risk is capped. The upside incentives becomes predicated on performance. And that does rely on local supply chains as well as our in-house capability. The fact that we pre-selected all of these jobs to ensure we're in urban conurbation gives us the best chance. I wouldn't want to be delivering something up at Thurso and Spittle and John O'Grokes because having sort of driven around there recently, there's nobody there except sheep. So how you actually get anything delivered is a nightmare. One thing I didn't say about power, which I should actually say, we're actually the market leader in delivering pylons. And the pylon growth is eye-watering over the next three to five years, and actually over the next 10 years. And we have a factory which is re-equipped. It's got all brand new CNC machines in, and we'll be looking to double and treble the volume over the next five years. We've moved from single shift to double shift. So we have another arrow in our quiver around power, and that will allow us to enhance the returns in that area. If that answers the question. Look, just in summary, as I said, I've never seen the business in such good shape. Balance sheet is very, very strong. The backlog and the pipeline are materially de-risked and the returns are higher. I'm personally very confident about another five years or a decade of infrastructure growth underpinned by another five years of shareholder returns, both in increasing dividend and buyback. What more could you ask for? Thank you. Appreciate it. Bye bye.