Keller Group plc (KLR) Earnings Call Transcript

Good morning, everybody, and welcome to Keller's Interim Results Presentation for 2022. Firstly, to safety. There are no tests in terms of fire alarms today. So if the alarm does go off, it is for real and we'll be following James out of the building using normal routes. Could I ask that everybody switch their mobile phones to silent as we go through the presentation. I stand before you today, a happy CEO, indeed, a very happy CEO. Since we put together our plans for 2022 back in the autumn of 2021, the world has changed a lot. It's changed a massive amount indeed. Inflation is rampant. Russia has invaded Ukraine. You've got a situation where supply chains are becoming more problematic whilst labor seems to have eased a little bit. There's certainly a first spread of material shortages around the areas where we operate. Confidence, both in our clients and indeed the markets seems to ebb and flow reasonably quickly. And all of this is something which our operations face every single day. Nonetheless, despite all of that, today, we announced a record set of results for the first half of 2022. And we're confident as we look forward to the second half that we'll further our expectations for the full year. Today, we'll follow our normal agenda. I will give you a brief summary. David will then take you through the detail in terms of the financial results. And then I will follow up with an insight into business update generally, a summary and outlook. And then finally, we'll move on to questions and answers. So to the summary. As I stated, it's a record performance despite the environment we find ourselves in. In the first half, revenue is up 31%. And roughly, roughly there's 3 components to that. First one is acquisitions. Second one is the pass-through of inflation, which I'd remind you it's been something which all of our businesses have had to deal with. And then finally, just raw organic growth across -- pretty much spread across all of our divisions. In terms of profit, profit is up 19% and has had exactly the same 3 drivers as revenue. And in addition, it's had the headwinds of the residual effects of inflation, which we managed to pass on all of that. The adverse impact operationally of disrupted supply chains, and I'll come on to that a little bit later and there are some other operational challenges. Debt at GBP 194 million, I'll leave that to David to talk about because there's some moving parts in there. But nonetheless, a good story, slightly down on what we thought a month ago. And safety, safety is a little bit disappointing in terms of performance, but in terms of activities -- and I will cover this in a bit more detail a little bit later on. In terms of activities, I'm very pleased with what we've achieved in the period and I'm pretty confident we'll make continuous progress over time. Strategically, we continue our quiet progress in terms of execution. And excitingly, [ we'll feature that ] is NEOM, which again, I'll cover a little bit more detail later on. But this has clearly got all the characteristics of what could be a huge project. Our record order book fuels our confidence that as we move into the second half and carry the momentum forward that we'll be well positioned for delivering our expectations in 2022. And that's really evidenced by the Board's confidence in increasing the dividend for the interim. And with that, I'm going to hand you over to David, who will talk about the financial details.

Thank you, Mike. Just to add my own welcome this morning to those in the room and those joining via the webcast. The format for the financial slides today are similar to what you have seen in the past. I'll first provide some comment on the income statement for the half year, look at both underlying and non-underlying items. Then provide a waterfall analysis that identifies the key bridging items between underlying operating profit of half year '21 to half year 2022. I'll then talk through the cash flow, some balance sheet highlights, including net debt and then highlight some look-ahead modeling considerations for the second half. So let's start with the income statement. This slide shows the summary income statement for the half year 2022 with the 2021 comparative to the right. This is taken from the income statement that was included in the announcement this morning. So let's turn to underlying profit first. Revenue between the half year has increased by GBP 353.3 million or 36%, which is the equivalent of 31% on a constant currency basis. This does include the impact of the RECON acquisition, which is about GBP 112 million. So on an organic constant currency basis, the increase was 20%. Volume was up in all divisions as we saw increased activity with markets further emerging from the impact of the pandemic. On a constant currency basis, North America increased by 39%, 22%, excluding the impact of the RECON acquisition, Europe by 26% and EMEA by 7%. The volume growth was accompanied by good profit growth with a 26% increase to GBP 49.6 million, a 19% increase on a constant currency basis. As Mike mentioned, these are record profits for us and the fact that they have been delivered against a backdrop of significant macro socio and economic challenges, highlights as our resilience as a business and makes it all the more pleasing for the teams across the globe. Our margins have been reduced by 30 basis points to 3.7%. The key reason for this is that our ability to pass on inflationary cost doesn't always result in a markup, thereby diluting margins. We did have some operational challenges in the North America foundations business, which impacted profitability and the margin rate as well. More on that later when I go to the operating profit bridge slide. Other highlights include the reduction in the tax rate to 25%. This is driven by the mix of profits across the jurisdictions. So EPS is up 31%, driven by the improved profitability and the reduction in the tax rate. As previously notified, the interim dividend has increased by 5% to 13.2p, which gets us back on a growth trajectory. We'll now move on to the operating bridge slide. This shows the major items driving the profit movement half year on half year. This should be a format you're familiar with from previous presentations. Moving from left to right, starting with 2021 half year profit of GBP 39.5 million. We highlight the FX impact, which was GBP 2.1 million. Coming to the North America division, which is down GBP 11.1 million on a constant currency basis. The first item relates to the one-off claim that landed in the first half of 2021. That doesn't repeat this year. The second bar represents a net reduction in the division's business profitability caused by a variety of factors. The contribution of RECON is included in this bar, but has been netted out by the lower profitability of our foundation's business as a result of some challenging operational issues experienced in the half. These include labor and material availability that has impacted productivity, cost increases. So whilst we do pass on inflationary cost increases, there is a lag, which has a bottom line impact. And finally, project execution issues that resulted in us taking some losses. There was one sizable contract issue in the first half where significant remediation and rework was required. As is usual in these circumstances, we have prudently taken the full cost of the rework prior to submitting a claim to the client, which remains ongoing. The next bar brings out the increased profitability of Suncoast driven by single-family home volumes remaining high throughout the half, offset by the impact of increased steel prices for the high-rise business following the outbreak of war in Ukraine. Now turning to Europe, which was up GBP 8.2 million. Right across all the business units in Europe, there was healthy volume growth. Nothing major to call out, just good execution after the logistical challenges from COVID in early 2021. And all the business is coping really well with any impacts from the Ukraine war. HS2, this large project continues to be executed in accordance with plan. The acquisition included there relates to the North pile business in Finland that was acquired in H2 last year. The EMEA division is having a fantastic year, up GBP 11.1 million. This is predominantly driven by turnaround rather than volume growth. Taking the bars in turn, suspend the contracts in 2021 related predominantly to Mozambique. In H1 2021, we had costs with no revenue and the settlement agreement was signed in H2 2021. Middle East and Africa were still heavily impacted by COVID in early 2021, so the recovery shown is driven by the emergence from these challenges, along with the benefit of restructuring that was undertaken in 2021. The turnaround in Australia is driven by the emergence from COVID-related challenges that impacted 2021. Minor increase in central costs gets you to GBP 49.6 million operating profit for the first half. Moving to the next slide, I will cover off non-underlying items. Again, the income statement, but this time focusing on the middle column. Non-underlying operating costs were GBP 6.1 million for the first half. The analysis of these costs is shown in the top right-hand box. GBP 3.5 million relates to an exceptional contractual dispute, GBP 1.2 million relates to the costs associated with the ERP rollout. As this is a cloud-based software as a service solution, we are unable to capitalize and will therefore show it as an exceptional item in the coming years. The restructuring costs related to the exit from 2 small noncore geographies during the half. Another highlight is the amortization of acquired intangibles on RECON, which has come in to this table for the first time. The sum of all items across underlying and non-underlying performance gives a post-tax statutory profit of GBP 24.4 million for the half year. I'll now move on to the cash flow. This page shows the summary of cash flow from operating profit down to net debt. We had a GBP 41.6 million free cash outflow before interest and tax in the half, predominantly driven by the working capital needs to satisfy the growth in the business. I draw your attention to the working capital box on the right that has the analysis. As we have said many times in the past, we are a positive working capital business, so we should expect an outflow trend as the business grows. What is interesting with the analysis here is the differential between the growth in receivables and the growth in payables compared to the first half last year. Given material and labor availability and the pressures this has exerted on the supply chain during the half, suppliers have opportunistically saw tighter payment terms, including payment on delivery in some cases. We expect this trend to continue in the short term with a return to normality next year. The other highlights are the acquisition spend of GBP 15.6 million, GBP 8.6 million related to the contingent consideration on RECON, GBP 3.4 million on GKM. The acquisition in May 2022 and the final payout on Bencor of GBP 3.8 million following the contract settlement in North America last year. Worthy of note also is the foreign exchange movement. Whilst we have a tailwind on revenue and profit, we do have a headwind on debt given that it is mostly denominated in U.S. dollars. In the bottom box, we -- on the right, we highlight the net debt on an IAS 17 covenant basis of GBP 194 million. Leverage on a lender covenant basis at the half year was 1.1x, well within our target range of 0.5x to 1.5x. We'll talk more on net debt later. Next, look at the summary balance sheet showing the half years along with the position at the end of 2021. The analysis of the movement from the end of '21 are set out in the tables. No real highlights to touch upon other than to point out the significant FX movements given the strengthening U.S. dollar and our volume of activity in that region. The next slide provides some more detail on the net debt profile during the year. Looking at the trend in the graph, you can see the increase in net debt driven by the ramp-up of activity levels and acquisition outflows in the first half of the year. Net debt did increase by $80.6 million with average levels increasing by 76%. As mentioned, that is driven predominantly by the working capital requirements. We have operated well within our covenants throughout the year with leverage at 1.1x at period end against a limit of 3x and interest cover at 27.5x against a minimum of 4x. And at the half year, we have GBP 215.7 million of undrawn borrowing facilities along with GBP 85.8 million of cash and cash equivalents. The next slide shows some look-ahead modeling considerations. This slide is intended to provide some insight into how some of the drivers of actual reported financial performance should be thought about as we step through the second half of 2022. Suncoast's profit, we expect residential volume to taper off, driven by the macro environment of increased interest rates, but we don't expect any further increases in steel prices for high-rise contracts. Large projects similar to H1 portfolio. We'll continue to focus on bolt-on acquisitions. Operating profit percentage. We do expect that to improve versus H1. And in terms of profit phasing, we do still expect a moderate H2 bias. Interest in H2, we expect to increase given higher interest rates. The tax rate we declare here at the half is 25%, which will be what we consider it for the full year. And on cash and working capital we are targeting around the 1x leverage well within the 0.5x to 1.5x target range. That's it for me. Thank you for your attention. And I'll now pass you back to Mike, who will take you through the business performance update.

Thank you, David. Right, onto the business update, starting with safety. In terms of performance, safety, rather disappointingly, we slightly moved back on both AFR and TRIR. And that really, I think, is a good wake-up call but we cannot afford to be complacent. We've built up a bit of momentum here. We need to keep it up. I would point out, and I'll point out to this audience, but I certainly wouldn't point it out to the team that those rates are significantly better than any of the industry comparatives in terms of averages wherever we are present. As I say, we set our own targets really. And it's important we continuously improve on those. If nothing else, just from the cultural viewpoint, I think that momentum is important. In terms of actions, I'm very pleased with the way that the safety leadership team and indeed at a divisional level, the teams at that level and BUs are actually working together. They've worked together this year and actually worked on an updated induction program, which is being rolled out at the moment, which actually sets a higher level of expectations in terms of people joining the company. This is particularly important when we go back into a growth mode and we're taking people back on. It's very important from the outset that people have given us a high set of standards and then safety is built in from the get-go. We have continued our focus on the [ MS reporting ] and try to get ahead of incidents and also demonstrated leadership by making sure people are out there visually being seen doing safety leadership tools. Some practical things. Blind spot cameras on rigs. This is not commonplace. It's commonplace in Europe but hasn't been common elsewhere. And that for us is part of that, if you look at leveling up program, if you will, of making sure that all of our kits and all of our new rigs actually have the blind spot cameras fitted to them and where possible, enhancements beyond that. Virgin Pulse, I think that's a good example of one of many well-being initiatives that we've got across the company. David was out this morning, trying to get his step in because he's on one of -- his particular team has been particularly competitive, the Legal Eagles, but it's good because it gets everybody engaged, gets everybody talking and most importantly, gets everybody out there being a bit active. And then finally, continued support for UNICEF. There's more details of that in the brief, but I think it is -- whilst we do sponsor lots of initiatives locally. And indeed, we've got a trust in Europe, in Poland for our Ukrainian employees to support them. Things like that, I think it's also important from a corporate level that we recognize our broader stakeholders. In terms of climate change, this slide's got a lot of information on it. It's a very rich, rich slide from that prospect. And indeed, I think the original version of this was in 4 fonts there was so much in it. And there's a lot of keen activity here. A few things to draw out. We've specifically said that we're working on all 3 of these areas. Scope 3 for us is, by far, the biggest, but it's also the most difficult to get at. And we're rolling out the education of the carbon calculator. We're getting embedded in our bidding processes. And as far as practically possible, trying to influence clients in that regard and to take solutions, which have a lower carbon footprint. But frankly, different clients in different places have different responses to that. So we will do our bit but it's certainly not a golden bullet. On a more practical basis, the area which we can directly influence at the moment is Scope 2. And we're making good inroads into that from a standing start. I think -- and you'll notice the blue box at the bottom there, at the moment, at the half year, our Scope 2 emissions have reduced from our 2019 pre-COVID baseline of more than 20%, which is twice what we set as a target, and that's pleasing to see. And I expect that momentum to continue. And I would sincerely hope that we are well on track for hitting our target of 2020 -- sorry, 2030 in terms of net zero emissions for Scope 2. In terms of the order book, order book has hit a record high. Clearly, there's some inflation in there. There's a bit of FX as well. But it also pleasingly, it's across the whole board. It's across pretty much all of the business. There's 1 or 2 business units which have stepped back year-on-year. But by and large, everyone has got at least 6 months' worth of coverage and it's decent quality coverage. And more particular from my point of view, a lot of the business units have, by fair means and all responded to the directive of -- look for more secure revenue in the short term. So within here, for instance, there's GBP 25 million on an oil and gas facility in ASEAN and India. That's going to continue going and indeed is in plan at the moment. There are 3 significant infrastructure projects in Australia. There's Tangenvika bridge project in Scandinavia and another couple of Polish infrastructure projects. All of these things for us are important because unlike some of the private and commercial work, we can set reliance that these things are going to be completed in medium term against what is an uncertain economic outlook. Moving on to the divisions. First of all, North America, North America, the revenue was up almost 40% there, benefiting from RECON, benefiting from the increase to the pass-through revenue and inflation and also some growth across the board. Operating profit, unfortunately, it was backwards 27%, driven by everything to do with the revenue drivers just discussed. The non-repeating GBP 7 million claim that we benefited from in the prior period, which David mentioned earlier on. And the residual effect of unrecovered inflation and the efficiencies caused by material shortages. I think North America, more than anywhere else, has actually been adversely impacted by the availability locally of cement. And that has caused us significant operational challenges. And frankly, we probably underestimated that earlier in the year, but -- and it's something which historically, our sites have always had to deal with, all contractors do. But it's something which in the last 6 months in particular, I think, has become particularly problematic. And unfortunately, the inefficiencies you incur, you can't recover because if people are standing there waiting for materials to turn up. That is for [indiscernible], it's not something you can recover from the supplier or indeed from the client. In terms of the other businesses, Suncoast, Moretrench, RECON, all of those businesses performed very well, very pleasingly during the period, which I think is -- for us, is very good to see. Moving on to Europe. Yes, steady as she goes, really Europe. They've had a good rebound from the previous period in terms of 2021, the early part that was quite severely hit by COVID. This year, they've recovered from that. They've got some wind in their sales in that regard. And they've had some good wins, some good progress across the park. Northeast Europe, principally around Poland, I think, has been very -- it's been most significantly impacted by the Ukraine war. Several projects there early on in the year were either delayed or canceled if they had -- if they're close to the border or there was uncertainty about funding. So that was a little bit of a headwind. That having been said, there's some very good work and good momentum elsewhere across the region, which is pleasing to see. The one blip there, we call it out as the safety performance. There's no pattern to that increase. We've looked at that very carefully, but it is something which culturally and the team are keen to address and make sure that they turn around. In terms of EMEA, I think this one is particularly pleasing. The rebound here has significant movement forward in terms of revenue, but an even greater one in terms of operating profit. Clearly, compared to the previous year, -- we've got -- last year, we had a GBP 4.8 million write-off on the suspended contracts, which David brought out in the bridge slide earlier on. There's also a couple of million with respect to branches in Africa which, frankly, were marginal and loss-making and is part of our portfolio rationalization, we closed those last year. So that incrementally year-on-year added to it. And then you've actually had forward momentum principally in Australia, but elsewhere as well, which -- all of which has got to the half 1 performance in '22. And I'd say in terms of margins, 6% in this area is more or less what I'd expect going forward. Also pleasingly, across the whole of the region we've actually got a pretty decent spread of order coverage. Australia has attracted some very good infrastructure projects, which -- they're just on the verge of starting. Austral has got a good bank of prospects, which actually replaced the Cape Lambert project, which we now completed. ASEAN is a little bit thin, to tell you the truth. Malaysia and Indonesia I think, are still recovering from the travails of COVID. Whereas India, India just goes from strength to strength. They are very selective as to what they do. They pick quality targets with quality clients and they seem to be increasingly successful in doing so. And then finally, Middle East, we've got some prospects there, which we need to work through in terms of localities. But the big one there is clearly NEOM. Talking of which, this slide is probably my most used slide. And when you talk about NEOM, it really fits into our strategy and fits in very, very well indeed. We've used this slide with the client to exemplify why they're interested and ours are very closely aligned. It is, if you look at the top section there, it is a very attractive project. It's got some very good technical challenges. It's got some good engineering, some good architecture in there and suits what we do. From our point of view, it is something which we can leverage our group's scale and expertise. And given the size of the project, that is important to the client that we can actually mobilize. We can actually supply the resources they need. And in terms of giving them solutions, we can give them the full suite of engineering solutions and deliver them to site. You've seen by previous big projects we've undertaken, getting resources, getting logistics in place is something which we are good at and we are well placed for. In terms of the project itself, clearly, it is something that's evolving. I'm sure all of you would have seen some of the press announcements in the last 2 weeks. It is very early days, and I hesitate to put numbers on this internally, let alone externally. But suffice to say that we are rapidly mobilizing for the first work order. And indeed, if it's not already there in the next week or so, the first piece of new equipment will be arriving in the country relating to the first work order. And over the next 2 months, the remaining kit will be arriving. But it is a very big project, whichever way you look at it. The project is very ambitious. It's a very important client to us and we've got the skills and resources to meet their needs. So it is something which is rapidly gaining momentum. And as we know more, we're more confident about timing and what have you, then clearly, we will share that with you. That was positive news. To bring you down to earth, I thought I'd share this slide with you. Some of you, I know, have seen this already. But I thought it's important to bring this out in terms of the uncertain world in which we live because Keller has gone through someone uncertain times before in terms of COVID, in terms of financial crisis, both local and global. And it's just weathered well. And there's a list there of some of the characteristics, which make the company more resilient than most. We're not recession-proof. We're resilient to recession, I'd suggest. We can move between different sectors. We can move from private and commercial into public and infrastructure. We have a good geographic spread. Whatever Mr. Putin does in gas supplies in Europe, probably won't affect our North American business that much. So we do have these natural buffers and counters to it. And all of this is evidenced by the graph on the right-hand side. By the fact that we've generated cash, and we've been paying dividends for effectively 28 years and growing during that period. And that I think in these times of uncertainty, I'd just put out there as something which people should know. Finally, summary and outlook. In summary, we have had a record half 1 performance despite the environment which we have. And we've not only delivered that, but we've also continued the execution of our strategy. We haven't talked much about new M&A in this particular presentation. That doesn't mean to say we haven't been looking, but we have been very disciplined about it. What we're also doing is continuing the restructuring and just making sure the portfolio is in the right shape. We are mobilizing on NEOM and we have got a significant momentum in the business at the moment, which is supported by a very strong order book. And clearly, that's all the confidence in that is evidenced by the increase in the dividend. I don't expect the world to get much better in the second half, to tell you the truth. It's going to be perhaps a leveling out in the level of uncertainty. But I don't think from our point of view, it's going to get that much easier in the second half. I think towards the end of the year, my hope is that it will begin to ease. But I think we've got enough in the tank to actually certainly deliver H2 and give us a good momentum into 2023. And as we get towards the end of the year, clearly, the Board will be looking at the final dividend as well. Last but not least, I'll just reiterate the fact that the Board anticipates that we will be in line with the full year expectations. And we say that with increasing confidence. So from that point of view, it's a good place to finish the presentation. Over to questions and answers.

Three questions, if I may. It's Joe Brent at Liberum. Firstly, on LNG and NEOM, could you give us an indication of what news flow we can expect and what to look out for? Secondly, could you give us a schedule of the expected cash exceptionals, what the timing of cash exceptionals going forward? And thirdly, there's a GBP 3.5 million contract disputes in exceptionals. Could you just give us a little bit more detail on that and whether it's normal for you to [ bring ] contract disputes into exceptionals?

Sure. I'll deal with the first one of those. I'll ask David to deal with the second. You can do -- happy to do the third as well. In terms of LNG and NEOM. LNG, I think, is really -- aside from the normal background LNG type of projects, we are now hunting for all the prospects which are out there, not just in LNG, but other energy infrastructure programs as well. And Germany is talking about doubling the number of wind farms out there. So we don't do all depending on where they put them. Some of that will also be prospects that we will follow. LNG itself, clearly, the Gulf Coast of North America in terms of export facilities, primarily and Northern Europe are areas which we will be looking at. There are 3 different facilities in Northern Germany, which the German government is looking to actually build upon. Short term, they're going for temporary facilities, but they are building out permanent ones. And there will be others around the world in terms of export facilities where there are FEED studies and what have been completed when people are looking to accelerate. And we will be looking at each and every opportunity on its merits to see what we can do. Some will be more attractive than others depending upon who the GC is and whether they have got a history of alliances or indeed self-performing. So we won't chase everything, but we will do it on a selective basis. In terms of NEOM. NEOM, it all depends on the client. We -- I anticipate, as we go through quarter 3 and quarter 4, we will really be beginning to build momentum on the first work order. And I expect that by Christmas, we will be at run rate in terms of delivering the volume on that. And I also expect -- and this is pure guess, but it's working through the pattern of our interactions with the client to date. But my expectation is that late Q3, early Q4, is when they'll start gearing up for the second round of works orders, which will be -- by that time, I think will be materially bigger than the first work order.

Yes. So just on the underlying, I think the focus on the cash side of the non-underlying is the GBP 6.1 million of operating costs and just looking at those individual items to restructuring, it's spent already. The ERP costs probably about GBP 0.2 million of that has spent and there's some of that to go. And then the exceptional contract dispute is a future outflow. And in relation to that, that's a very old project that predates probably Mike, myself, and it's just something that has come up this past 6 months, and it is commercially sensitive, which is why we are not opening up too much about it.

Clyde Lewis at Peel Hunt. I think I'll go with 3 as well. Just around, I suppose, the materials availability now. I mean, you've obviously flagged cement, particularly in the U.S. But you maybe update us as to where things are and how you sort of expect that to sort of flow through and whether there have been any issues around steel, which is obviously another key input. The second I had was around margins in the order book. It'd be useful to get a little bit of a view from you guys as to what's in there. And again, the sort of momentum upwards or downwards on that side of things. And the last one was really around the portfolio restructuring. You've obviously sort of flagged a couple of little ones that you've done in the first half. What's left, if anything now, I suppose, on that front.

Okay. I'll deal with these and you chip in as you see. In terms of materials availability, it's quite interesting. Our 3 biggest consumables are cement, steel and diesel going into the rigs. And if you think about those 3 characters, they have different financial and logistical characteristics, fuel pretty much as the oil price went up, we got hit across the whole of our operations within a month, more or less. But everybody understood that and you could actually get recovery on most of it. So that affected everybody, but the availability was there. Steel, depending on whether it's rebar or strand and depending on whether it's tied or welded, there's different availabilities across the world. Europe got hit by steel shortages in quarter 1, but they very quickly recovered and Suncoast with Strand. Availability more specifically, pricing was a bit of a problem than it has been. And frankly, it's very volatile even now. But it's leveling out. And if anything, it's becoming more certain in terms of the orders which we are placing. The thing which is more difficult in some respects. And frankly, I haven't quite got my head around this initially is the cement because cement delivery is incumbent, the [indiscernible] is built up from that, it's very much a local thing. It gets delivered locally the suppliers, whilst they may have been international names, they actually deliver and operate locally. And therefore, you see different characteristics and different availability and they do different pricing -- significantly different pricing across the world. U.K., you pay roughly twice and always have done for cement than you would in France. And that has gone on forever. And you get the same sort of thing cross borders between Austria and some of the states to the east. The peculiarity to it. Something which exaggerates in North America is that typically, we're on smaller projects there. And therefore, we will be reliant on the supplier rather than a local batching plant or a GC batching plant, which if you're in a big civil project in Europe, for instance, or in Australia, the client will be supplying the cement even if you're paying for it, they will have a facility to make sure it's there. In North America, typically, with the exception of Hampton Roads, that's not the case. And therefore, you're far more reliant on external suppliers. And whilst it is getting better, we're still not yet out of the woods. There's still certain parts in North America, whereas it is still even now a problem, much less so than it was in the beginning of quarter 2, but there's still a bit of a problem. I expect it to get better through the year because things will ease. In terms of margins in the order book, I think they're generally improving, and that's partly as a response to the fact that we have the early part of the year as we realized that people were beginning to get up to capacity, not just us, but the market per se and deliberately beginning to push it a little bit. And it'll be a little while before that all feeds its way through. And as David mentioned earlier on, there will be a bit of a catch-up in terms of material pricing. And I think 2023, 2024, we might actually get some margin uptick, margin recognition on the material pass-through as well. But all of these things are a bit like a hysteresis effect. It takes a little bit of time to work its way through. I don't know if you've got anything to say on that?

No, I think that's -- well, right, I think the scarce resource is a big impact in terms of the bidding we're doing now and the availability -- it's just we are saying to the guys that they should put more margin into their bids.

And in terms of the portfolio restructuring, I don't want to say too much on this in terms of specifics. But what I will do is talk to you about philosophy. Our strategy statement is very much that we want to be in positions that give us higher market share because when we have higher market share, we have less risk, and we have higher margins borne out of higher utilization of assets, people and fixed costs. And that's what we are pursuing in this post COVID, it's clear to us that there's certain parts of our portfolio, which are at the lower end of that spectrum, and you can't see a way to actually getting them to the higher end. And therefore, naturally, we are looking to see if there is somebody else who's a better business on there. And that's what we're working through.

Jonny Coubrough at Numis. Could I ask on the replacement ratio, which reduced year-over-year in H1. Just interested to hear why you're able to be more disciplined on CapEx in the period? And thinking in terms of NEOM if the orders come through better off the magnitude that's been suggested, what would be your expectations there in terms of CapEx? And you mentioned you've got new kit arriving on site. Will that require a lot of investment in kits?

You can talk about the replacement ratio, and I'll talk about NEOM.

Yes. So I think with the replacement ratio, has come under pressure from a working capital perspective, I think we look at the CapEx more circumspect, particularly in the U.S. and we've just let that play itself through in terms of whether we decide to buy or to lease. And in terms of NEOM, we -- with the utilization of equipment that we do expect in -- on that job, where we'll be working 24/6. We do expect that we will actually purchase that CapEx.

It's quite interesting with NEOM because if you compare it versus say a European city, European cities, you can work 5 days a week if you're lucky, and there'll be a curfew -- quite a strict curfew in terms of times of operations. And within that, you want to be able to start the rigs. So in terms of even doing things like maintenance, you are actually curtailed. Compare that to NEOM, as David said, they'll be working 24 hours a day at least 6 days a week and if they have to, they can work the seventh. And what we are planning to do is to basically standardize the rigs. And we will always -- as we build up the fleet there, we will always have one in maintenance. And so the crew will be working at a much, much higher intensity. And indeed, we'll be shortening the lives of the -- in terms of depreciation of all of those assets to recognize that. It's quite a challenging time, though, because the way in which you work, you have to pull and do the piling in terms of the pouring element of it at night simply because of the temperatures. And therefore, you have to work in a basically a daily cycle of production. And that will build over time.

[indiscernible] Just in terms of the operating margin in North America, it sounds like there's a number of factors in the first half that were onetime in nature. And then there's obviously the questions over the availability and the supply issues. So I was just wondering if you could just spell out slightly more second half margin should improve naturally from these onetime facts has fallen away. And then what do you see as sort of the medium-term operating margins, it's been as high as 9% historically. Presumably, we don't see going back there in the short term, but what's the sort of medium-term target?

Sure. I think in terms of our expectations for margin progression, as you say, the first half did have some transient events in it. My expectation is that as we go through the second half, that we'll migrate towards 6-ish in the second half, maybe a bit more, maybe a bit less, depending upon what happens with the cement supply. As we move forward and you get recovery in that, you get recognition of margin in the pass-through materials or indeed, a decrease in pricing in some materials. We will get, over time, an increase in those margins. So I think 6% to 7% is where unexpected to go up. I wouldn't expect it to be 9%. If we have a super project sometime, it might get up there. But I think the business is big enough now that there's enough run rate in there that's sustained at 9% is probably a little bit too ambitious even for me.