Costain Group PLC (COST) Earnings Call Transcript

Good morning, ladies and gentlemen, and welcome to the Costain Group PLC Half Year Results Investor Q&A session. [Operator Instructions] The company made [indiscernible] once every [indiscernible] the company can review all questions submitted today, and we will publish the responses [indiscernible] To do so on the Investor Meet Company platform. Before we begin, we would like to submit the following poll. And if you could give that your kind attention, I'm sure the company would be most grateful. And I would now like to hand you over to the team from Costain Group PLC, Matt, -- good morning, sir.

Good morning. Thank you very much, and good morning, everyone. Thank you for joining us this morning. I'm joined today by Alex Vaughan, CEO; and Helen Willis, CFO. Alex is going to make a few introductory comments and then we're going to get straight into the questions and answers. I know there's some that have already been submitted. So thank you for those. And as was just said, if you have more as we go through the session, please add them in, we'd be delighted to answer them. So with that, I will hand over to Alex.

Thank you, Matt, and good morning, everyone, and thank you for taking the time to join our half year results investor meet call, and we welcome any questions you'd like to ask us. So I'm [indiscernible] . I've been Chief Executive of Costain now for 6 years, and I'm just going to give you a very brief overview of our results and our reflections. And then Helen and I will both -- Helen, our Chief Financial Officer, and I will take the questions. If you haven't had a chance to watch yesterday's results presentation that we both gave, you can view a recording of that presentation via a link on our website. So I'd encourage you to look at that if you're interested. When I look at the highlights of the results presentation and the results that we announced yesterday, look, I'm incredibly proud of all of the hard work and dedication of the Costain team and what they're putting into executing our ambitious strategy. This has resulted in an increase in operating profit margin and operating profit again and the forward work in the first half of the year. All of that underpins both our confidence in delivering expectations for the full year this year and then growth in a step-up -- a significant step-up in growth in revenues and operating profits in full year 2027. So it has been another positive financial performance in the first half of the year. Revenue was $525 million, and that reflected the continued growth in natural resources, which was also offset by a reduction in transport. That was due to the expected completion of a number of road contracts ahead of the new contracts that we've already been awarded starting next year and a rephase schedule for HS2 in the short term, moving that work back a couple of years. I think what's really important is the quality of the contract portfolio that we have and our strong contract execution because you can see that coming around that despite that revenue small decrease, we've got a 3% increase in adjusted operating profit, which is great news and an increase in that we've got an operating margin of 3.2% in the first half of the year, which is a big step-up from last year's 2.5%. So you can see the profitability of the business growing. And we remain on track to deliver our targeted 4.5% margin run rate during the second half of this year as we build to grow that adjusted operating profit margin in line with the targets that we've set out before. Our net cash position remains very strong. And at the end of the first half, the net cash was GBP 144.9 million, which reflected the timing of some of the payments that we were going to get in, but we've reconfirmed that we remain on track for our year-end net cash to be around about GBP 170 million, which is in line with the previous expectations that we set out. Now as a result of our focus on critical growing markets, we've continued to win a lot of new work and add a number of new customers. And we've expanded our forward work position to GBP 5.6 billion, up from GBP 5.4 billion at the year-end, which was a significant increase on the previous half year. That GBP 5.6 billion is now much more than 4x our full year revenues for last year. And what's -- and if you take that and you step back, the bidding activity levels remain incredibly high, and we expect to be making a number of further new contract announcements in the second half of the year. So the forward growth of the business is becoming secure. And if I look at the marketplace, infrastructure investment is increasing significantly, and we see real momentum in the work progressing as is evidenced by the further awards that we've made this year and the high level of bidding activity. We were obviously encouraged by the commitments made by the new government in its 10-year infrastructure strategy to increase investment in Transport, Defence and Nuclear Energy and Energy, along with the significant increase in committed regulatory investment in water, which is at a record high, energy, again, at a record high and the aviation sectors. All of this underpins our clarity and confidence in the significant growth ahead, and you could not wish to be in better markets. Now through the growth in operating profits and margins, continued strengthening of our balance sheet and the progression in our dividend alongside our share buyback program, we are creating substantial value for our shareholders and investors. And given the very positive market outlook and our business resilience, we're increasingly confident of delivering on expectations for further progress this year, next year and that step change in 2027 and beyond. Now the step change in growth in 2027 revenues and operating profits and margins and net cash are driven by 3 things. Firstly, and it underpins the margins we've made this year. The quality of the contracts that we are now writing up to -- signing up to and being awarded and the strength of our contract execution is just giving a real confidence in how we can deliver solid margins and solid contract profit. The second thing is obviously the increased volume of forward work. And you can see that coming through in the increase that's been made and the confidence that we have that there will be further announcements coming in the second half. And then it's also the confidence in further work being secured because we are bidding -- there's a high level of bidding. There's a lot of committed investment by our customers. So we see that. So those are the 3 things that really underpin the confidence in the growth that we're talking about for '27. So finally, look, when I step back and I reflected on our results, for me, the business is in the strongest position it's been for years. And that's because, firstly, we've again successfully delivered growth in both operating profits and margins as well as further strengthening the balance sheet, and we're on track to meet expectations for this year. We also continue to win that further good quality work and have a growing forward work position of GBP 5.6 billion. And as I've said, that's over 4x last year's revenue, which by any comparator is at the high end. And that positions us for the step change, as I said, in revenue and profit growth in '27. And our market outlook is extremely positive with significant growth across all of our markets, and that work is now flowing through. So as I said, for me, the business is in the strongest position it's been for years. So thank you. Thanks, Matt.

Thank you very much, Alex. So we will now turn to the question-and-answer session. We'll begin with the pre-submitted questions, but I can see we've had some additional ones come in this morning as Alex has been speaking. So thank you for those, and we will answer those. But starting with the first question that was pre-submitted for you, Alex, is on topic of Thames Water that is obviously in the news a lot at the moment and really wanting to get your views around given the issues that Thames Water is confronting, how are we feeling about working with them and the future with them.

Yes. Look, great question. And you can't turn the TV on or read the newspaper now with there being a commentary about the state of the U.K.'s water industry at the moment. And what needs to happen. And as a result of that, we've got record investment going into water in this next 5 year, GBP 104 billion worth of investment in the next 5 years. And we know that in the 5 years after that, there's going to be even more investment. So huge investment being made to fix the challenging situation we've got at the moment. And positively, Costain holds strong positions with 7 of the largest water companies, and we've got contracts with them, some for the next 10 years and some for the next 5. And that gives the company significant growth opportunity. And Thames Water is a customer we've worked with for a long time. And we don't do a lot at the moment, but they're talking to us. There are strong opportunities whoever is the owner of Thames Water to turn around and deliver the critical infrastructure that is needed both for London and the Thames Valley. As a business, we've got a really strong pipeline of water opportunity on top of the other. And what I would say there was another thing in there about Costain Group had some of the past issues we had with councils and planning authorities. The good thing is that government is helping to address the whole consents and planning issues that the country has, which is fantastic news. And all of the new contracts that we sign up to ensure that we address those issues before we commit to a price and a program. So I would see Thames Water as a big opportunity because whoever the owner, significant investment has to be made. And I'll see that the type of contracts that we're signing up to really protect us from those challenges.

Great. Thank you, Alex. Next question is also for yourself, I think. It's a great question actually about what the culture is like at Costain.

Yes. Look, great question. And I suppose I'm a little bit biased because I've been with Costain for 35 years. So clearly, I love the company and the people that work for the company. But let me just talk about the values. I was going to talk about the values and core behaviors and some of the underpins. So talking about culture, the values of people who work for Costain. Our values are integrity. So we will always do the right thing, and we will act with absolute integrity at all times. Safety and well-being, we won't do anything that isn't safe for our team to do it, and we really care about the well-being of those people that work for us. We are a business that's environmentally and socially responsible. We want to have a positive impact on society and the environment, and we are incredibly customer-focused. And that is a real priority for us and makes us a valued partner for our customers. So those are the values, integrity, safety and well-being, environmentally and socially responsible and customer focused. Going alongside those, there are 4 core behaviors that we ask people at Costain to work to. They are curiosity, collaboration, courageous and caring. And those are, for me, about driving that growth mindset as a business, that curiosity of how we go about doing things, collaboration. Our business is all about teamwork. Courageous is being brave to come up with that new idea, challenge the ideas, look at doing things differently, make sure that we're open and honest about the financial performance and where we are and what goes on. And that caring is caring for the environment, caring for our customer, caring for each other. It's just making sure. So I hope that brings to life the sort of culture, a place where we embrace teamwork, we have a growth mindset, and we solve some of the biggest challenges together. Now that's from someone who's been here for ages. Helen, would you like to give your impression?

Thank you. Yes. So I wholly endorse all of that. But I'd say as someone who's been here nearly 5 years and coming into the industry fresh coming into Costain, I think what's really struck me is the culture we've created here is truly inclusive in all ways. And as a female coming into what has been a male-dominated industry, that's a really important factor. But it's not just about that gender diversity. It's truly diversity in all respects. And I have felt it to be a very respectful culture, and we've worked very, very hard at -- you picked up the point, Alex, creating a transparent environment where people feel safe to share ideas, safe to bring problems or opportunities, and we're definitely stronger for it. So I think it's a very special culture at Costain.

Thank you very much, both of you. Sticking with you now, Helen, I think for the next question. We have a question about AI and how we're using it to drive efficiencies and what sort of benefits, I guess, we might expect to see from AI.

Great. A hot topic. So we are driving a digital transformation in Costain. We've been implementing new systems over the last year or so and have a program of change that we're very excited about and think it is going to differentiate us in the market. And AI, of course, is coming up very regularly, as you might expect. There's obviously an incredibly fast pace of change in terms of what AI technology is out there and what it promises to do. I think we are taking a cautious approach to it. The primary consideration for us as a company is making sure that we maintain our cybersecurity. So making sure we use tools that are cybersecure, that are keeping our data secure and our customers' data secure as well. So that is sort of a consideration number one. But we are very alive to the fact that it can do new and different things for us. It can help us to understand our business better. And so we are -- certainly, any new systems that go in, we're making sure they have AI functionality. And we are thinking about how we use that, how we release that into the business and therefore, how we start to extract value from it. So I think a really exciting area. But for us, we're on a digital journey that will be about new systems, including AI capability. So exciting times.

Thank you, Helen. So the next question is returning to, I guess, a more topical story again. So the Lower Thames crossing is obviously now got the go ahead, and there's a question about whether we have any agreed or proposed involvement in that large project. Alex?

Yes. Look, let me -- so we're not directly involved in the Lower Thames crossing contract. But however, we are involved in many other programs across the industry and across our sectors. So [indiscernible] you'll have seen us as one of the players in the Thames Tideway scheme over the last 6 to 7 years and that is transforming the health of the River Thames in London and supporting the growth of London. So we've been involved with that, and we're involved in a huge number. Actually, on the front page of our results presentation, you'll see the Bewl Reservoir, which is a fundamental piece of infrastructure that is going to safeguard clean water supply to the Southeast of England working with Southern water. So water, critical infrastructure we're involved with. If I look at Rail, clearly, HS2, major strategic program that we've been involved with. Road, we're involved with quite a number of schemes in London to safeguard the integrity of transport coming into and around and inside London, as well as the M60 up in Manchester, critical piece of road infrastructure. Energy, we're involved in the BP Net Zero landmark project, the first major carbon capture and storage scheme that will unlock a green energy future for the U.K. Wow, who wouldn't want to be involved in that. Defence programs like the 20-year plan to redevelop Devonport, really important program. And then we announced earlier this year the award of a contract for Urenco, where Costain is going to be leading a program that is all about creating the fuel that will unlock that nuclear energy future. So no, unfortunately, not involved in Lower Thames Crossing, but we are involved in a lot of other very exciting landmark schemes.

Great. Thank you very much, Alex. Yes, it certainly sounds like lots of opportunities. And the next question follows on from that in some respects. It's around the potential for capacity constraints that we may face given this large volume of forward work and opportunity out there. Do you see any capacity issues from either a personnel point of view or a financial point of view?

Yes. Look, absolutely. If you look at the growth and investment and the fact that a lot of our workforce will be retiring over the next 10 years, there's a really big focus on driving the skills and expertise and capacity to be able to deliver this infrastructure. So as a business, we're recruiting a record number of graduates, apprentices and running development programs in our business to upskill our people, which is fantastic and continuing to recruit people and grow, which is great. I think one of the real things -- when we look at how are we going to get the capacity, how are we going to attract the capacity and develop the capacity, I'll come back to something I talked about in our presentation yesterday. Costain benefits from 3 Cs. And those 3 Cs are -- the first one is consistency, and it's all about the consistency of relationships and approach. So with our customers, we have long-term relationships and our long-term approach. We really get to know each other, and we do the same with our supply chain. So that just makes people feel confident in working with each other, very open, very clear, very transparent. And that's a fundamental attraction for people wanting to work with Costain and wanting to work for Costain. And then there's continuity of work volume. So because of the type of work we win, which is 5-year programs of work, we are able to give people confidence that they can pay their mortgage and continue to buy things for their family for the next 5 years. That attracts people that want to work for us as well as the exciting projects that we deliver, but the fact that you've got that continuity attracts those people. And then for our supply chain and for us with our clients, the fact that we have collaborative contracts. So these are not adversarial. They are about sitting down, co-developing the solution, codeveloping, managing the risks and then getting on to execution. That is something that we can attract people for and we can attract our supply chain. So where we are placed and the type of contracts that we win and secure and deliver really gives us the opportunity to reach in and address that capacity challenge that we have.

Fantastic. Thank you, Alex. So the next question I will turn over to Helen. We've had quite a long question on dividends, essentially asking you to set out your views for dividend policy at the company over the next few years. What should investors expect from Costain and dividend?

Thanks, Matt. So I think the sort of wider topic of capital allocation, and we do set that out in the RNS. The place that we have prioritized over the last few years is investing in the company. We truly believe in the growth opportunities of the company. And we've been investing in our transformation. We've been investing in bringing the right skills in to really drive those opportunities and drive that growth, and you can really see that coming through in the forward work book, as Alex was describing earlier. And we've been investing a capital expenditure in our digital transformation, as I was just referencing earlier, bringing in new systems. So that continues to be a focus for us. We believe there's a lot more that we can do. We are driving the margin up. That means we might need other skills to come in to continue to drive that upwards. And we think we're ambitious for more growth. So we will continue to prioritize those investments. That said, our balance sheet is really strong. We do have more than enough cash. And so we have resumed payments of dividends, which we resumed in 2023. And you will have seen those increasing steadily into '24 and in the interim that we've just announced at half year. We do have a 3x policy stated, and we anticipate moving towards that. And of course, we have then done share buybacks for what we consider to be extra cash returning to shareholders. So I suppose that's the sort of order of priority. There is just one thing to remind on that I spoke about last time. We do have the dividend parity clause with the defined pension scheme, which says that contributions into the scheme should match payments to shareholders. And that is in place in the overall agreement with the pension trustees. But we have introduced the annual check that we carried out last March and this March, and that gave us annual pauses to cash contributions and dividend parity. So that is something that is sort of in the background and gives us cause to be slightly cautious on the steps we take and guidance that we give in this area. So we are making progress on that, and we'd hope to be a bit more clear on that when we get to the full year.

Great. Very clear. Thank you, Helen. So the final pre-submitted question, I'll hand to Alex shortly. And then I can see we've had a number of questions come in during the call on the first half results release from yesterday, which is fantastic. Thank you. So we'll turn to those shortly. Keep them coming. Whilst you do that, I'll ask Alex the final of the pre-submitted questions, which is around whether we're looking at any options to bid for work outside of the U.K. market over the next 5 years or so.

Yes. Look, so good question. We certainly look at the potential, and it's something we're very open to. However, what I would say is I come back to my 3 Cs that I've just talked about. I think what is a critical factors for success is where you can have that consistency of customer relationship. I'm not a fan of and I will not support one-off relationships with customers because I don't believe either party strives to or can have the best outcome. So that continuity -- sorry, the consistency of relationship is something that we would look for if we were going to embark upon an opportunity overseas. We'd also want to be able to see continuity of a work program. So this would want to be something that isn't just one contract, could be a number of contracts or a program of contracts and would have some longevity around it. And then we'd also want it to be a collaborative form of contract. So we certainly, as a business, we've been very clear, we will not sign up to any single-stage fixed price lump sum contracts. That is not something we would tolerate. We want to work under collaborative contracts. So that would be the rule book. And again, I would say we are not short of opportunity in the U.K. There is huge opportunity for us right across. There is record investment in Road, Rail, Aviation, Water, Energy, Defence and Nuclear Energy, huge investment. And we know that there's other things like ports that once the offshore wind market really gets going is also going to be increasing in investment. So we are in a target-rich environment, and we're very focused on those 3 Cs and how that unlocks really valuable opportunities for us. So thank you, Matt.