Costain Group H1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 20, 2025

Key Takeaways

  • Positive Sentiment: Costain delivered a strong first half, with £525 million revenue, a 3% increase in adjusted operating profit to £16.8 million, margins up to 3.2% and a net cash position of £145 million, on track for £170 million year-end.
  • Positive Sentiment: The company’s forward work position expanded to £5.6 billion—over four times annual revenue—built on high-quality, target-cost contracts across transport, water, energy, defence and nuclear markets.
  • Positive Sentiment: Natural Resources posted a 7.7% operating margin (up 340 bps) in H1, driven by successful AMP7 close-outs and mobilisation for AMP8, with strong visibility through to 2030.
  • Neutral Sentiment: Transportation revenue fell in H1 as expected due to road contract completions and HS2 schedule rephasing, but new works on M60, Transport for London schemes and HS2 tunnels are poised to boost H2 performance.
  • Positive Sentiment: Costain remains confident in meeting full-year FY 2025 consensus operating profit of £46 million and expects a step-change in revenues, profits and margins by FY 2027, supported by the UK’s growing infrastructure investment pipeline.
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Earnings Conference Call
Costain Group H1 2025
00:00 / 00:00

There are 9 speakers on the call.

Operator

Firstly, a big thank you for taking the time out to come and join us for Costain's twenty twenty five Half Year Results Presentation. We've included a number of images in our slide deck this year. This one is the Buell Reservoir contract that we are now doing for Southern Water and this contract is a fairly new contract, that's a recent picture, it's been in the news recently, absolutely critical to safeguarding the future supply of water to the South East Of England. And this is part of a twelve year programme of work that we are going to be doing with Southern Water through AMP8 and into AMP9. So I am Alex Vaughan, Chief Executive of Costain and I am going to take you through the operational review shortly.

Operator

And then Helen Willis, our Group CFO, is going to take you through the financial performance and results of the business before I come back and give you a bit of an update on the strategy and the outlook that we've got for the business ahead and then we'll take a number of your questions. Again, this slide shows the work that we're doing up at Sellafield. Have been working with Sellafield for a number of decades now and we are helping them with their decommissioning programme and this is all a critical part of enabling The UK's new nuclear future by being able to decommission and deal with the waste from the past and you will hear as I go through the presentation the growing position that Costain has built in that new energy market. I am incredibly proud of the hard work and effort and drive and dedication that the Costain team has put into executing the ambitious strategy that we have set out. This has resulted in an increase in operating profits and increasing margins in line with the targets that we have set out and further growth in the forward work position of the business.

Operator

All of that underpins our confidence for meeting expectations for this year and the step change in growth for the business in terms of revenues, operating profits and margins in 2027. It's been another positive performance in the first half. Revenue is at £525,000,000 and we've had continued growth in natural resources. This has been offset in transportation due to the expected ending of a number of road contracts that we knew was coming to an end and that's ahead of the new contracts starting and we'll see new contracts starting next year. We've got the new M60 contract and a number of highway schemes for transport for London.

Operator

And we've also experienced the rephasing of the schedule on HS2. This is a short term move in rephasing it and we'll be completing that work shortly in the future. I call it ebbs and flows of a business, but in the whole, a great performance. The quality of the contract portfolio that we've been building and that we've now got and the strong execution capability of the business has enabled us to deliver a 3% increase in adjusted operating profit and to deliver margins of 3.2% in the first half of the year. And we remain on track to deliver 4.5% margins at a run rate in the second half of this year.

Operator

And our net cash position remains strong and we remain on track to deliver GBP 170,000,000 worth of net cash at the end of the year, in line with the previous expectations. With our very clear focus on growing markets, we continue to win a lot of new work and to add new customers to our portfolio as we continue to provide that essential infrastructure that The UK needs. We have expanded our forward work position to GBP 5,600,000,000.0, up from GBP 5,400,000,000.0 at the year end, more than four times our revenues of last year, pretty industry leading by any measure. And bad bidding activities in our business remain incredibly high and we are very confident that we are making further announcements in the second half of the year of additional work that we will have won. What's really positive is infrastructure investment is significantly increasing and its prominence in the political world of The UK is growing and we see real momentum in that work progressing.

Operator

We've been very encouraged by the government's commitments in its ten year infrastructure strategy and setting out its pipeline and the recent spending review. That bodes really well and you'll see that every one of our markets transport for government spend, defense, nuclear energy and its contribution to energy, all of those markets the investment is increasing, which is great. That together with regulated increasing investment in water, energy and aviation, underpins the clarity and confidence that we have in the growth of the business moving forwards. Through the growth in operating profits and margins, continued strengthening of the balance sheet and the progression of our dividend alongside the share buyback programme, we're creating substantial value for our shareholders and investors and given the very positive market outlook and the business resilience that we have clearly built, we are increasingly confident of delivering strong performance through 2025 and 2026 and for that step change in operating profit and revenues in 2027 and beyond. These are really exciting times for us as a business.

Operator

Now if I move on to the operational performance and let me start with transportation. The photos on here show the work we are doing at Heathrow in putting in place a new baggage handling system for Terminal 2, a critical starter for TEN for Heathrow's expansion and redevelopment plans. And the A30 highway scheme that is transforming lives in Cornwall, especially in the summer when it seems to be the most popular place to go and the West Ricelip section of our HS2 programme that very soon will transform transportation connectivity in The UK. In line with the business priorities, the Transportation division is delivering operational contracts extremely well and continues to broaden its customer mix, both of those being a critical business driver for us, predictable best in class delivery and growth of our customer resilience. Looking forwards, confidence in the growth is underpinned, as I said, by the Government's ten year infrastructure strategy, by its pipeline and by the spending review and we can see those increasing investments starting to come through notably clarity in the road schemes that are going to go ahead and also the local and devolved transport spend that is significantly increasing, together with those bigger business plans for our aviation customers Manchester Airports Group, Gatwick Airport and Heathrow.

Operator

In Road, we continued to deliver programmes of work that we have got as strategic partner for National Highway, so the A30 contract in Cornwall, the A1 up near Newcastle. We've also completed the M6 smart motorway programme and 41 emergency areas on the M1. We've got a growing portfolio of work for Transport for London, whether that be the Gallows Corner project, the Brent Cross project or the A40 Westway, that is growing. And looking forwards, our M60 contract has now received confirmation of funding from the spending review and will be starting next year. We have also secured a place with National Highways on their SPAT3 framework, having successfully delivered a lot of work for them on their SPAT2 framework.

Operator

That's where we provide technical and engineering consultancy services to help them in their strategic planning on the road network. And we've got really clear visibility of the future opportunities in that sector moving forwards. In Rail, on HS2, during the period, the last three TBMs have completed their drives and we have now completed the connection from West Ryse Slip all the way through to Old Oak Common. All four tunnels have now been completed and we were delighted that we completed those on budget and on time. And in Integrated Transport, we've seen increasing growth as investment increases in the airports and we see this as a real growth market for us moving forward.

Operator

So overall, a really strong performance and I'm very grateful for the hard work of the transportation team. Natural Resources is clearly benefiting from strong delivery performance again and significant investment in water, energy, defence and nuclear energy, with revenue, profits and margins have all grown as a result of the strong operating performance and the improving quality of the contracts that we have won and we deliver. The photos show the Horsham wastewater project that we are working on and completing for Southern Water again. The environment that we operate in, in upgrading the whole of the Cadent gas network in the East Of England, a huge area and a big upgrade. And then the new contract we've won for Yerenco, which is going to unlock the nation's nuclear energy future.

Operator

In Water, we've had an incredibly positive close to AMP7. We achieved 100% of the regulatory date commitments that we made to our customers and that our customers have made to the regulators, that's for over 100 projects. Our focus now is very clearly on successfully mobilizing Amp8 and we have good visibility of the contract pipeline from 2025 through to 2030 and we continue to expect that doubling of investment in AMP8 compared to AMP7 and we are expecting high investment levels, even higher investment levels in AMP9 and positively a number of our contracts for United Utilities, Northumbrian Water and Southern Water extend into AMP9. Now you'll have seen that water resilience is an absolute critical area of focus, whether it be reservoirs, etc, And we were really pleased that in June we announced a five year extension to our Anglian water programme for the strategic pipeline. This project will bring resilience to the East Of England.

Operator

It gets less rain than Israel, quite staggering. And we are building a pipeline that will transfer water from areas where there is plenty of water resilience to areas where there is very little water resilience. And then also during the first half of this year, really pleased that we've now turned on Tideway. So we've commissioned it, it's now operational and that is going to transform the health of the River Thames and safeguard London's growth for the future, a really important milestone. In Energy, our performance on the Cadence framework continues to be fantastic and we commenced the delivery of BP's landmark carbon capture and storage project at Teeside.

Operator

And then building on our extensive gas process expertise, we were awarded two design contracts for a new customer, Storage Energy, to build well, to develop the design for pioneering underground hydrogen storage projects in Cheshire. We see future growth in supporting the decarbonisation of The UK's energy system as a great opportunity for us, both through gas distribution where we have huge capability, but also through electrical transmission and distribution where we are working and building a strong capability at the moment. Defence and nuclear energy continues to grow well and with our activities associated with the Continuous at Sea defence programme in defence. And this is continuing to expand and we're working around the nuclear decommissioning and nuclear asset life extensions as well. As I said before, we're really pleased to, in the period, have added Yerenco to our customer list, securing a programme delivery partner contract with them for its Cheshire site, critical to providing the fuels that will support our new nuclear future all part of the Great British Nuclear Drive for Change to deliver cheaper, cleaner and more secure energy.

Operator

And we have also won consultancy contracts to support the delivery of Sizwell C and with Desnes and bidding levels in this marketplace are really busy. So overall, we're really pleased that we've delivered another positive operational performance in the first half of this year. Growth in operating profits, growth in margins and securing significant volumes of high quality long term work. We expect further progress in the second half of the year on the back of a very busy volume of bidding and we are confident in delivering expectations for this year and for next year and for delivering that step change in growth into 2027. Helen?

Speaker 1

Good morning. First of all, just to show that even as a bean counter on the team, I know what we're doing. Picture is HS2. It's the Victoria crossover box. This is where we have launched the TBMs from the tunnel boring machines.

Speaker 1

And if you haven't seen one, I've been lucky enough to be on one. They're over 100 meters long. It's like a huge manufacturing line. It is quite something to see. And I just think it brings to light the scale and the complexity of what we do.

Speaker 1

So I'm really pleased to be here here we are again, delivering another strong set of results, as Alex has been saying. We really are building momentum. We're increasing our operating profit. The margin is continuing to increase. The forward work position growing and the right quality, the right risk profile, all underpinning our confidence and expectations, a strong platform for growth.

Speaker 1

So I'll take you through the detailed slides. So as Alex has been saying, revenue of GBP $525,000,000 for the half, down from last year with significant growth in Natural Resources, but offset by that expected reduction in Transportation as has already been covered. Adjusted operating profit, up 3.1% to 16,800,000.0 in line with expectations and reported operating profit, up as well, 18% to GBP 16,400,000.0. We saw continued margin improvement with an adjusted operating margin increase of 70 basis points to 3.2% compared to 2.5% last year. We remain on track to deliver an adjusted operating margin run rate of 4.5% during the course of FY 2025, and that's in line with our ambition to deliver margins in excess of 5%.

Speaker 1

Adjusted basic earnings per share for the half was down very slightly at 5.5p against 5.6p in H1 twenty twenty four, and that's driven by a lower level of net finance income. We've enhanced shareholder returns with a significant increase, albeit a fairly modest interim dividend of 1p. We continue to maintain a strong balance sheet with net cash of GBP 144,900,000.0 at the end of the half and year end net cash expected to be around GBP 170,000,000, in line with expectations after accounting for the share buyback. And we delivered a further increase in high quality forward workbook, which stands at GBP 5,600,000,000.0 at the end of the half. So turning to revenue.

Speaker 1

This walk takes you through the movements in the two divisions, and you can see the two red bars there, the revenue reductions in Road as expected, driven by reduction in National Highway schemes on certain projects where we are completing or nearing completion, partially offset by the growth in TFL. In Rail, there were revenue reductions principally because of the previously mentioned rephasing by the client to some of our HS2 program. There continues to be growth in integrated transport revenue, mainly reflecting the growing volumes at Heathrow, where we support both our H7 terminal asset renewal partner and major project partner frameworks. In natural resources, a stable revenue in water as the water industry transition from AMP7 to AMP8 regulatory cycle, and our work nears completion on Tideway, as Alex was mentioning. Typically, between AMP cycles, we've seen a period of reduced volume.

Speaker 1

However, the stable volume profile really demonstrates that we've had a positive close to AMP7, and water companies are beginning to scale up for AMP8. We also saw increased revenues in energy. We provide our customers in this sector with a range of services, including engineering design, managed services and program management, solving our customers' complex needs. And we delivered an increase in defense and nuclear energy revenues as well in the half, driven by growth in our current delivery partnership roles. Moving on to the operating profit walk, I'll take you from left to right.

Speaker 1

The reported operating profit increased 18% from GBP 13,900,000.0 in the first half last year, and that's shown on the far left of the chart, to GBP 16,400,000.0 in H1 twenty twenty five, shown on the far right. Adjusted operating profit, shown in the light blue bars, grew by 3.1% to GBP 16,800,000.0 in the first half from GBP 16,300,000.0 last year. And adjusted operating margin increased, as I said, from 3.2% sorry, to 3.2 from 2.5% last year. Adjusting items, only GBP 400,000.0, lower than the GBP 2,400,000.0 in the same period last year. Costs in H1 this year were comprised of 200,000.0 with residual costs of the transformation program that we completed last year and GBP 200,000.0 of restructuring costs.

Speaker 1

And then coming into the middle of the chart, divisional operating margin for transportation decreased by 0.8 points to 2.3% due to the previously mentioned lower volumes in Road and Rail. And that's together with increased investment to support targeted growth opportunities. Natural Resources operating profit increased to GBP 16,100,000.0 from GBP 8,400,000.0 in the first half, and divisional operating margin increased by 3.4 points to 7.7%, benefiting from higher volumes, improved contract performance and successful contract finalizations as we transition from AMP7 to AMP8. Central costs increased by GBP 700,000.0 in the prior period, and that's driven principally by increased share based payment costs. Net finance income in H1 twenty twenty five decreased by GBP 1,800,000.0 as compared to GBP 3,100,000.0 last year.

Speaker 1

This was driven by GBP 2,600,000.0 of interest income from bank deposits, lower than H1 twenty twenty four of GBP 3,500,000.0, reflecting lower bank deposits and interest rates. We also incurred 1,100,000 of interest payable on bank facility fees, which is higher than 700,000.0 in the previous period, and that's reflecting the accelerated amortization of charges relating to our prior refinancing. The interest income on net assets or the pension scheme was slightly higher than H1 24 at £1,500,000 due to a higher pension scheme asset position over the year. Interest expense on lease liabilities was £1,200,000 under IFRS 16, higher than H1 24 due to the higher charges on new property leases entered into during the prior year. And the balance sheet continues to strengthen with net assets increasing from GBP 235,700,000.0 at December 24 to GBP 243,500,000.0 at June 2025.

Speaker 1

Noncurrent assets decreased on the prior period end position, driven by a small increase in the retirement benefit asset, which is more than offset by other noncurrent assets, which are lower than FY 2024, largely reflecting depreciation on our fixed assets. Trade receivables and other current assets increased on FY 2024 position, driven by higher contract asset positions. Trade payables and other liabilities decreased on FY 2024, largely due to reduction in subcontractor accruals. So the cash book. Again, I'll lead you through this left to right.

Speaker 1

So you'll see on the left net cash of GBP 158,500,000.0 at the beginning of the period. Moving to the far right, GBP 144,900,000.0, closing net cash at the end of the half. The first bar represents cash flow and adjusting items of GBP 400,000.0, as I just mentioned. Adjusted free cash flow of £3,000,000 outflow is shown in the next area, the boxed area. This cash flow reflects the timing driven working capital flows around the period end.

Speaker 1

We also incurred a nominal GBP 100,000.0 on CapEx. Next bar represents net asset receipts in the year of GBP 500,000.0, lower than our net financing from on payment of accelerated arrangement fees on the prior refinancing, as I just mentioned. It's worth noting that the operating lease expenditure is shown separately from cash and operations and was GBP 4,800,000.0 for the half. Our dividend payments totaled GBP 4,900,000.0, and following the increased final dividend declared FY 2024. And lastly, we also acquired GBP 1,000,000 of treasury shares during the half.

Speaker 1

We expect our FY 2025 year end net cash position to be around GBP 170,000,000, in line with our prior expectations after taking account of GBP 10,000,000 share buyback program and higher dividend payments. In line with the agreed reduced deficit contribution plan with the trustee of the group's defined benefit pension scheme, we made no contributions to the scheme during the half. An assessment of the scheme funding position was carried out in March 25, and as the funding level was more than 101%, contributions remain paused from July 25 to June 26. These contributions would have amounted to GBP 3,400,000.0 for the period should the scheme funding level have been less than 101%. And finally, I'm happy to announce that we've been reconfirmed as one of the top fastest paying lead contractors in construction paying 97 of invoices within sixty days.

Speaker 1

And that's a critical factor in supporting our quality supply chain. Moving on to cash and banking facilities and just to pull out the elements of it. The net cash position at the end of H1 twenty twenty five comprised cost and cash balances of GBP 85,000,000, cash held by joint ventures of GBP 59,900,000.0 and borrowings of nil. During half, the group's average month end net cash balance was GBP 149,400,000.0, which is shown on the left on the chart, and the average weekend net cash balance was GBP 152,900,000.0. You can see a real consistency in the way we manage our cash.

Speaker 1

During the half, on the 05/28/2025, the group announced that it had successfully concluded negotiations with its bank and surety facility providers to refinance a new full year agreement of its bank and bonding facilities to September 29, with an option to extend by a further year. The group's new facilities agreement replaces a previous three year facilities agreement to twenty six million and comprises a GBP 100,000,000 revolving credit facility, which was previously GBP 85,000,000, and surety and bank bonding facilities of GBP $295,000,000, previously GBP $270,000,000. The existing banking group remained, and we were really pleased to be able to add another bank to the group. There was a further increase, as we've mentioned, to our forward work position, which stood at 5,600,000,000.0 at the end of the half, representing more than 4x our annual revenue from last year. We've been busy building, and the forward work has continued to grow GBP 4,300,000,000.0 at H1 twenty twenty four, 5,400,000,000.0 at full year 2024 and now GBP 5,600,000,000.0 for the end of the 2025.

Speaker 1

And we continue to bid and continue to see opportunities to further increase this position. The forward work position is built on long term programs. It enables us to deliver high consistency, continuity and quality of work for our customers. As at the end of H1 twenty twenty five, really importantly, it included no single stage lump sum contracts and was predominated by target cost contracts, where the scope of the work, design and cost are developed and agreed with the client. That's to say the forward work consists of the right risk profile to ensure predictable delivery of results.

Speaker 1

Our order book stood at GBP 3,400,000,000.0 at the period end, up from GBP 2,500,000,000.0 at the end of FY 2024. The preferred bidder book stood at GBP 2,200,000,000.0 at the end of the half, down from GBP 2,900,000,000.0 at the end of FY twenty twenty four as Work one shifts into our order book. It comprises contracts for which we've been selected on frameworks where a further works order is required prior to the work's commencing. It's important to also note that some of our framework and consulting revenue isn't included in the order book or the preferred bidder and therefore, is incremental. So this, together with existing frameworks, gives us increasing visibility and confidence in delivering progress in FY 2025 and 2026 with a step change in performance in both revenue and profit from FY 2027 and beyond.

Speaker 1

So as I mentioned before, we've transformed our business. We've transformed it in terms of assured delivery, lower risk contracts in our forward work, improved operational effectiveness, cost control and a broader business mix. This has driven the quality of the forward work, the right risk profile, the right contractual terms and hence, the right conditions for predictable delivery of results. We continue to invest in the business to bring in the skills needed to drive improved performance across the entire business and across the contract duration. Some examples of what we've been up to this first half.

Speaker 1

We've continued to improve the quality of the finance team, reaching deeper into the projects, bringing new challenge into contract delivery. We've invested in and are implementing a risk system that takes a view of risks from projects all the way through to corporate risk, hence, digitalizing our risk practices. And we further enhanced our operational controls, particularly in the area of integrated project controls. This focus drives the path to higher margins as demonstrated by our continued margin progression, and you can see us increasing from the prior period. We've delivered a further year of margin improvements, up 40 basis points to 3.4% in the half year, and we remain on track to deliver adjusted operating profit margin of 4.5% during FY 2025.

Speaker 1

Continues to perform, as hopefully you have heard from our presentation today, against its strategic targets and expects to deliver long term sustainable value for its stakeholders. Costain is investing for growth. Our cost base continues to prioritize investment in capabilities and expertise to support growth, and we'll continue investment in key systems as we digitalize the business, further accelerating our business transformation. And we expect to invest around GBP 10,000,000 in CapEx across FY 2025 and 2026 in these areas. The Board recognizes the importance of dividends for shareholders and has been increasing the dividend payout since its resumption in 2023.

Speaker 1

Dividend payments take into account the cash flow generated in the period and the impact of the current dividend parity arrangement relating to the defined benefit pension scheme. The Board has a target dividend cover of 3x adjusted earnings, which provides headroom for further dividend growth to achieve the target cover level as and when the current dividend parity arrangement is no longer in place. In line with the Board's dividend policy and the previously stated intention to normalize H1, H2 dividend split to a 33%, 67% ratio. An interim dividend of $0 per share has been declared for the six months ended thirtieth June twenty twenty five, a significant increase compared to the prior period interim dividend of 0.4p per share. I mentioned in an earlier slide that pension contributions have stopped for the year as the funding level of the scheme at March 25 was more than 101.

Speaker 1

This also means that dividend parity with the pension scheme was suspended for a further year from July 25 to June 26. A further annual valuation will be carried out as of March 26, which will enable the Board to review future capital allocations. And we continue to review options for restructuring the defined pension scheme with a new sole trustee. After ensuring a strong balance sheet and cash position, identified surplus capital will be returned to shareholders through share buybacks and special dividends. On the 06/16/2025, the group launched a GBP 10,000,000 share buyback program, which completed on the 08/15/2025, and that followed a 10,000,000 share buyback programme that was announced and completed in H2 twenty twenty four.

Speaker 1

So as you can see, there's real momentum, momentum in our chosen markets of transport, water, energy and defense and nuclear energy. High quality and volume of our forward work, together with growth on existing frameworks, gives us good visibility on future revenue and profit. We've already approximately 90% of our forecast revenue for FY 2025, secured at the end of H1 twenty twenty five, and our bidding levels remain high. We remain on track to deliver an adjusted operating margin run rate of 4.5% during the course of FY 2025, in line with our ambition to deliver targets margin targets in excess of 5%. Our balance sheet continues to strengthen.

Speaker 1

Our net cash of GBP 144,900,000.0 and our year end net cash expectations of GBP 170,000,000 and the increasing level of our interim dividend and the completion of our share buyback program. All this makes us confident in delivering our progress in FY 2025 and FY 2026 and that step change in revenue and profit for FY 2027. With that, I'll hand you over to Alex.

Operator

Thank you, Helen. Right, I'm now going to give you an update on the strategy and sort of business outlook. This photograph shows the contract I was talking about earlier. This is Gallows Corner for Transport for London, where we are going to be removing or we have removed already. If you live locally, you'll be feeling it.

Operator

We've removed the flyover and we're replacing it with a much stronger, sturdier flyover and we're reconfiguring the whole gyratory system there, all part of Transport for London's plans about improving connectivity into London. We are delivering against a very clear strategy for the growth and development of Costain, which, with our customers and our partners, will create a sustainable future for The UK a more prosperous UK, a more resilient UK and a decarbonised UK. And we are focused on markets where strategic long term investment is being made to meet these needs. That's across transportation, water, energy, defence and nuclear energy. Investment to meet these critical national needs, as I have said earlier, is increasing and in every one of our chosen markets we see significant opportunities for us to grow, in line with that increasing investment, but also up for us to increase our market share.

Operator

We purposefully only work with Tier one customers who choose to work with their partners in long term strategic partnerships, where Costain can build a real depth of relationship and maximise the value that we add to them. We deliver both capital programmes as a contractor and provide valued consultancy services through our broad expertise. This strategy will deliver growth in revenues, operating profits and margins in line with the stated targets we have got, it will strengthen the balance sheet as we focus on growing in those critical markets, working in strategic long term partnerships with our customers and providing that broader service offering to meet our customers' changing needs. Now our chosen customers in our markets predominantly operate through underwritten and committed five year business plans and they choose to work with us in five year programmes, sometimes like in the water industry this year, ten year programmes. And for us, this is a really positive market dynamic.

Operator

What's making Costain successful and will drive our growth is three Cs. The first C is continuity. This is continuity of the relationships we have and where we work and how we work with our customer, critically important for long term growth. The second C is consistency. What's positive is that we've got an increasing forward work view.

Operator

We are able to see five years work ahead and we have the continuity and consistency to be able to deliver that. The third C is collaboration. Every one of the contract forms that we work with our customers is a collaborative form of contract where we jointly work together to develop the solution, work together to mitigate the risks and then agree what we are then going to go deliver and execute. That is a critical enabler for us to drive margin growth and revenue growth and operating profit growth in this business. These markets and our customers' committed investment programmes are increasing significantly and is enabling us to broaden our offer.

Operator

I have talked before about the Government's ten year infrastructure strategy an increase in road investment, increase in rail investment, increase in energy investment and an increase in nuclear energy investment as they establish the Great British Energy. We also see increase in defence spending, which has been well publicised and we are seeing that across our programmes. Ofgem has approved the first £24,000,000,000 of their RIIO3 programme, with another £80,000,000,000 to go. There is huge investment in the energy space. Heathrow, Manchester Airport and Gatwick Airport, all of them are talking about significant airport growth, aside from their design plans awaiting government approval to add a few runways here and there.

Operator

But clearly massive investment going ahead in the airport sector and of course the water industry is now well into the biggest capital investment ever made in water and with over GBP100 billion worth of investment and we know that AMP9 will be even bigger than that. So we continue to develop a track record, as you can see, for securing positions with our customers on these long term frameworks and for attracting new customers to fall in love with Costain through these cycles and this is helping us build that growth for the business. We bring together a unique mix of experts. Are a very different organisation who have a broad range of delivery expertise where depending on our customers' approach, we act as both construction and consultancy partners. Today, we are a business that works with our customers to shape and create their solutions and we do that for people like Network Rail, the Department of Transport, National Highways, Transport for London, Water customers, Clean Energy customers and others, where we implement design solutions and we are also able to bring in our project controls and programme management services to help them shape their programmes.

Operator

We also expertly support the delivery of new infrastructure, primarily as a leading contractor, but also increasingly as a leading delivery partner or programme manager for our customers' organisations. We also help our customers operate, optimise and repurpose their existing infrastructure. And for example, we have been helping a number of water customers to really optimise the performance of their clean water assets to help deal with the beautiful climate that we have had recently. We are uniquely focused, as a business, on our customers' whole ecosystem. Our conversation isn't just about what's your capital delivery requirements, our conversation is around what are your broader business needs and challenges that we can help you with.

Operator

And that is helping us grow as a business and help us transform our customers' business performance. As I've said, we support many of our customers in the delivery of their capital programmes and as a contractor, we're helping customers across Thames Tideway, road contracts, nuclear energy contracts, moving into the HS2, the AMP8 programmes, aviation and for our devolved customers, a huge amount of work as a leading contractor. And we're a growing consultancy business, which is now generates around 16% of our revenue and has three very different capabilities. Firstly, we're growing our position as a delivery partner and you'll have seen that we announced the award of the contract for Eurenco, which joins the work we're doing for AWE, for Cadent, for BP, for Babcock, all of which we're running their capital programmes for them. Secondly, we're growing our design and engineering capability where we design solutions for our customers.

Operator

And then thirdly, how we support our customers, as I've said, to help them optimize their overall business performance. As a result of our focus on those critical markets and broadening our customer base, we have expanded our strong forward work position, which this slide shows you, to GBP 5,600,000,000.0, over four times the annual revenues of this business. As I said before, we remain incredibly busy bidding further programmes of work. We have strong positions with a growing number of Tier one customers across all of our sectors with an increasingly broader service line. The quality of our forward work position is a result of a rigorous approach, as Helen said, to contract selection and the expertise that we have in our key markets and the broader business service that we provide.

Operator

So in final summary. The improved quality of our contract portfolio, broader customer and service mix and enhanced business resilience is driving our confidence in delivery of our results for full year 2025 and our medium term expectations for growth. As I've said, and I hope you've got I've got across, there is real momentum in this growing investment in infrastructure in all of our target markets. There is greater clarity of it. We've got the details, the government is behind it, the regulators are behind it, it's happening and we're very excited.

Operator

Set against this improving market outlook, we've been able to increase further the high quality forward work position to GBP 5,600,000,000.0 and I'm very encouraged that there will be further announcements in the second half of the year. We retained a very strong balance sheet with GBP145 million worth of net cash, which is enabling us to continue to invest in this business for growth and to be able to increase returns to our shareholders. Bringing this all together, we remain confident in the further progress of the business, how we will deliver this year, next year and step change the growth in operating profits, revenues and margins for 2027 and beyond. Thank you very much and we'll take your questions.

Speaker 2

Ainsley Lamy from Investec. I think I've got three actually, Just first one, the working capital, just maybe a bit more color there. And I assume given you're maintaining your full year expectation for net cash, is that all timing? Is there no change to kind of cash conversion or anything underlying that? And second question, just on the natural resources margin in H1.

Speaker 2

Obviously, good margin. Maybe it's a bit more explanation around that finalization of AMP7, what boosted the margin? Do you expect that to also occur in the second half? And then last question, just on the step change in FY twenty twenty seven. If you could just remind us the main drivers there.

Speaker 2

Is that mainly the margin, improved management? Is it the water? What's kind of given you the visibility and confidence there?

Operator

Do you want to do the first two?

Speaker 1

I'll do the first two. Yes, so working capital, very much timing over the half year. So confident in that GBP 170,000,000 by the end of the year, which is in line with expectations we talked about full year, so it's 180,000,000 less the impact of the share buyback and increased dividend. The real increase is at the half year is contract assets, so they will unwind in the second half. And then you'll see that the there's an H2 bias to profit and therefore cash in the second half.

Speaker 1

So no concerns on the balance sheet items at the half, very much timing differences through the half, which will unwind in the second. Natural Resources margin, so yes, very high in the first half. I'd expect the second half to be similar. The major driver in there is in the water sector. So we've talked a lot about our cautiousness in revenue and profit recognition.

Speaker 1

And as that plays through, you'd expect at the end of contracts there to be upside rather than downside, and you really are seeing that in the water sector now. As we close out AMP7 into AMP8, you've got a real concentration of those contract closings that are giving us upside. So I'd expect second half to be similar to first half. And then as we get into next year, I would expect it to come back to a more normalized level as we're into sort of the midst of delivery, particularly in Water.

Operator

Yes. And if I look at 2027, what's going to drive that? A big underpin is the quality of the contracts that the business now has in its portfolio and the assured way that we deliver contracts. That's a really important underpin, which is why we're consistently now delivering the margins that we're delivering. And then the second thing is just the growth in the forward work.

Operator

So we've grown a significant volume. We have the clear visibility of that work, which is great for us to be able to plan on. And also, you've seen that we've grown the consultancy business as well. So that really helps us from a margin point of view to deliver that growth. So that's the second thing.

Operator

And then the third thing is just the visibility we've got on the other work that we would expect to secure as well, very clear visibility of that and actually some of it we're making pretty good progress on. So those would be my three things.

Speaker 3

You. Joe Brent from Panmire Liberum. I've got three questions as well. So I think following on nicely from that, you've referenced several times potential work winning in the second half. Could you give an indication of what sort of areas we might expect to see that work winning?

Speaker 3

Secondly, I think consensus assumes some EBIT growth in the second half over the first half, but also over last year. Could you give us an indication of where that second half improvement comes from? And thirdly, you talked about options for the pension fund. Could you elaborate what those might be?

Operator

Goodness, you're getting the lion's share. I'll take the first one and you can do the other two. So yes, look, this is going to sound a bit you would say this, wouldn't you? But the bidding activity is across every single one of our markets incredibly, even further work in water, even after having won a huge amount of work already. So all of our sectors are incredibly busy and we would expect to make announcements.

Operator

We're certainly seeing very high volumes in the nuclear energy space at the moment and also across transportation. There's quite a lot going on. There's a lot going on in aviation, a lot going on in roads. And then water, we continue to explore for new opportunities to unlock greater value there. So those would be the areas.

Operator

And it's a great market to be in where we're well placed.

Speaker 1

So profit expectations, so consensus operating profit for the full year is circa GBP 46,000,000, and we are confident in delivering that. So it is, as I said before, very much H2 weighted. There's some volume impact into the second half, and there's also some of those contract closeouts that I was referring to giving us a real uplift to profit and cash in the first half. And I think some people have said to us, isn't that just one offs? And the answer is, in our view, no.

Speaker 1

This is really the consequence of the caution that we've applied in our revenue and profit recognition over the years. And as contracts come to their completion, you get the upsides coming through. So our plans are detailed. We're very confident in them and therefore confident that we'll reach that consensus number. Pension fund, we talked at full year about we've obviously been giving you the details of the annual checks, which has given us some optionality.

Speaker 1

And we are now knee deep in the triennial valuation, hoping to complete that before next March, the full year results there. We're looking at all options, as you might expect, including buy in, buy out, but those have become more expensive over the last few months. But we are working well and collaboratively with our sole trustee to get the best possible outcomes for the company. So more to say on that come the full year results, hopefully.

Speaker 4

Morning. Andrew Nassi from Peel Hunt. A couple of questions, please. First of all, in terms of HS2, I think you used the phrase they're still being rephased. What visibility do you have on that process and the likely movement there?

Speaker 4

And associated with that, are there any issues around the supply chain given that lower level of volumes versus what you still are committed to deliver near term? And for Helen, just obviously, in terms of those AMP7 completions profit back ended, should we expect the same sort of contract structures for AMP8 in terms of the profit recognition, please?

Operator

Thanks, Andy. So so on HS2, clearly, there's been it's been well publicized. They've been doing a new integrated program to complete the railway. And as a result, for the section of work that we're working on, they've looked to exploit the opportunity to rephase some of that and focus on some of the other areas. That is a short term rephasing, and we'll be then delivering that work in a couple of years' time.

Operator

So that isn't causing us any issues with the supply chain. We're able to manage our way through those changes.

Speaker 1

So contract construction, so we've been working very hard, as we've been explaining over the last few years, on understanding the risks that we take on in a much deeper way and working on how we transfer the risk between contractor and client and working on our Ts and Cs. So as we moved into Ampate, where we were extremely successful with our wins and gaining some market share, We were able to use the demand from those water companies to tighten up those Ts and Cs, I would say. So the construction is, by and large, the same, but the terms and conditions and the risks that we have taken on are better for us, we believe it's more balanced and therefore we should expect to see better delivery coming out of the unpaid contracts.

Speaker 5

Hi, morning. It's Ed Press from Berenberg. Firstly, on margin. You've suggested that you're on track for the 5% plus target beyond 2025. Is it reasonable to think that that could become a full year target rather than a run rate as you go beyond that?

Speaker 5

And then secondly, quickly on mix, sixty-forty in H1, is that reasonable going forward? Or do you expect transport to revert to higher levels? And then contract size, I know HS2 and Tideway have been very large. Are you able to give us a sense of what sort of average contract size in your order book is?

Speaker 1

Shall I do the first one? Yes.

Operator

Why don't you do the first two?

Speaker 1

The first two, okay.

Operator

So

Speaker 1

margins. So we set the margin milestones, I think, 2.5 getting on for three years ago, the 3.5% in FY 2024, 4.5% during FY 2025. So thinking about those as second half margins. You can see from where we've got to with 3.4 in the first half. If you look at consensus, that suggests full year, therefore, we'll be beginning with a 4%.

Speaker 1

And we're reasonably confident of that industry leading on its own at 4%. So we will continue to push. So we'll continue to push for us to be more efficient. We'll continue to push for the better risk transfer. And as we grow, as the volume comes through, there is operating leverage that will help as well.

Speaker 1

So could we get to 5% for the full year? That's certainly a possibility, but I wouldn't say it's coming straight after FY 2025. But all of our plans show us progressing as we have been over the last three

Operator

The mix,

Speaker 1

I think, will be similar for the second half, but we do think that there'll be growth coming back into FY 2026 and definitely into FY 2027. Natural resources will be fairly steady H1 on H2. But there's more coming through in transportation, as Alex, you were describing, so really kicking into things like the M60 HS2 volumes will come through in FY 2026. And integrated transport is where there's real growth opportunity with the aviation contracts. So I think overall, there should be more positive news coming through there.

Operator

And then coming to the sort of contract size bit, I think we don't quote that because I think as you know HS2 would be very distorting. So HS2 is a very big one off program, which we've been involved with. The current contract that we well, if you look at the contracts, we've sort of won seven contracts on the HS2 program, and we continue to deliver that. If you look at water, you range anything from 6,000,000 project up to £100,000,000 project in those programs. And we deliver those for all the water companies.

Operator

If I look at what we do in the nuclear energy space from a decommissioning point of view, it is lots of sort of GBP 2,000,000 to GBP 14,000,000 contracts. Defence and nuclear energy where we're the delivery partner, Our contracts are reasonable in size, so but they are program management. And if you look at what we're running, we're running GBP multibillion programs for the client, but our contract would be sort of in the GBP 60,000,000 to £70,000,000 worth of work. So yes, that gives you a bit of a flavor. So we don't really quote because I think it would we'd have to give a bit more detail by sector for people to understand it.

Speaker 6

Thanks. Johnny Kubra from Deutsche Numis. Just to clarify, you've guided to a step up in revenue growth, margins and EBIT in FY 2027. Does that mean that you expect all of those to improve in FY 2026 and then they I

Operator

thought there'd be three.

Speaker 1

I thought there'd be three as well. I

Speaker 6

can ask them all

Speaker 7

at the

Operator

same time. No, great question.

Speaker 1

So 27,000,000 is definitely revenue and profit growth, and there should be margin improvements through 25,000,000 26,000,000 27,000,000 as I was just describing. FY '26, definitely operating profit growth coming through, and I'd anticipate some modest revenue improvement as well.

Speaker 6

Thanks. Just on that point, on the margins, what do you view as sustainable margins across each of the divisions? I mean you mentioned kind of contract gains this year.

Speaker 1

Think if you look at I think if you look at the margins achieved for FY 2024, 3.5% in transportation and sort of circa 6% natural resources, that feels like a steady state. But as I say, there'll be operating leverage coming through as we grow in 2027 and beyond, so that will help to further increase.

Speaker 6

Thanks. And the third one, last one, which is to be a follow-up on working capital. You said in the statement there was a bit of a working capital unwind on lower volumes. And what do you think the sustainable level of negative working capital relative to revenue should be going forward? And also, is it more weighted towards transportation in

Speaker 5

terms of

Speaker 6

that working capital effect?

Speaker 1

The working capital effect is across both divisions. And for example, in Natural Resources, as we close out those contracts, some of that profit is pushed into H2 and therefore cash. In Transportation, there are a number of contract closeouts as well, and those will kick into H2. So I think it really is a function of the number of contracts that we are in that sort of closeout process and hence how it straddles the half year, but confident that it will unwind and support that 170,000,000 at the end of the year.

Speaker 8

Max Hayes from Cavanis. Just a couple of questions from me. So a notable increase in the consultancy revenue mix. Just wondering what levels do you expect this to settle at as revenue from construction contracts grow and the potential impacts on margins if that lowers the share? And then just the £10,000,000 of CapEx that you discussed for over FY 'twenty five and FY 'twenty six, is that just primarily focused on digitizing the risk management and the benefits to be gained from digitizing that?

Speaker 8

So is that securing margins? Is that potential for expanding them? Just some more color there.

Operator

Okay. Well, if I take the first one and then So you take the second I mean, we give we now give the consultancy sort of share of the revenue that will that allows you to work out what the size of that consultancy business is. Will it remain that percentage? Or will it increase? Or will it decline?

Operator

That will depend on the sort of mix of the business as to certainly as we get into AMPY, we'd see construction work going up. And as we get into the systems contracts on HS2, again, that will be construction volumes going up. But we will be also increasing the consultancy. So in real terms, as a unit, it will be increasing in volume. And the really big value is those delivery partner contracts where we have big teams there for a long time supporting and basically acting as the clients' organization.

Operator

But we're making really good progress under Jonathan's leadership, who is here, to turn around and grow that design and engineering that really is moving forward to a great pace. And we're doing a lot more designing engineering for ourselves, where we can actually charge a fee into the client for doing that. But also where more and more clients are buying that direct from us as a consultancy business, and we've got big ambitions in that area.

Speaker 1

So digital transformation or digitalizing ourselves, which I've been taught is the correct term. It's absolutely not. This is, I think, a really exciting area for us. The £10,000,000 is an estimate for $2,526,000,000. We've brought in a transformation lead who has done this in other places.

Speaker 1

And we think there's a really exciting opportunity for us to properly digitalize how we deliver the work that we do. I think it will differentiate us in the market. The GBP 10,000,000 is not just a risk system. It's across a number of things. If I just remind you, we invested in the HR system last year, which took six systems down to one and has given us efficiencies, but also given us much more visibility on our people and their skills and where we move them.

Speaker 1

Risk, as I said, is giving that transparency to our risk practices. And what we're moving into now is really the heart of how we deliver. I could bang on about this for a long time, but I think this is not about peripheral systems, we will get on to those, but this is about how we really digitalize the activities when we're on the ground delivering the work that we do. That will give us better data, more visibility, should drive better delivery certainty and outcomes. So I think for us is if we do this right, and I believe we're gathering the right people around us to do this, it could be a real differentiator for us, a very exciting space.

Speaker 8

Great, thank you very much.

Speaker 7

Thank you. We've had a number of questions from the webcast. First question is, given the very strong net cash position, what are the considerations of increasing the buyback program?

Speaker 1

So similar to how we described at the full year, I think it is great. The balance sheet is stronger. The net cash position is strong. There are a few factors to consider in whether we carry out further buybacks or choose to do a special, for example. First off, we have a three times dividend policy, so we are mindful that, that needs to be moved towards.

Speaker 1

We also have I think it's important to recognize the liquidity of our cash. So as I pulled out, there's the what we call cost in cash, which is fully liquid for us at the 85,000,000, but then cash held in joint ventures. It's our cash, but it's not fully liquid. So when I'm thinking about how much cash do I need, it's the cost in cash of GBP 85,000,000 that's important. And then lastly, the dividend parity with the pension scheme, that is still in place.

Speaker 1

We put the annual check-in place that gave us optionality year on year. But until we have been able to remove that from the agreements with the trustees, that is we're mindful of that, and we need to be cautious of what we commit to until such times as we've removed that parity clause. But we're making good progress. We've returned to dividend. We've done the share buyback this year and last year, and the shareholder returns are much, much increased.

Speaker 1

We're working on the triennial, as I said, hopefully, with some conclusions by the time we come back at the full year. So we should be able to be a bit more fulsome on that at the full year.

Speaker 7

That's great. Thank you for that, Helm. Regarding next question is from Dan Hong from East River Holdings. Regarding the cash held by joint ventures, does it get released at some point? How does it work?

Speaker 1

Yes, it does get It's with a small number of substantial joint ventures. It's held as we earn profit through the joint venture, we receive the cash from the customer, and then there are rules in all of the joint venture agreements as to how that cash is then distributed out to us as joint venture partners. So the cash is always cycling. And you'll see it's come down a little bit as we've concluded some some or beginning to conclude the child wave program, for example, you'll start to see the balances come down.

Speaker 7

Next question is from Steven Rawlinson. It says, the tech states, this forward work position is built on long term programs that enable us to deliver high consistency, continuity and quality of work for our customers. This constant revenue is not present today. What might we expect in the future in each key area, especially as revenue in transport is expected to be lower in H2?

Operator

Right. Think in answering Stephen's question, so yes, so clearly the forward work position that we've got is what we've already secured and have visible and that is supporting the growth. There is a lot of further work that we are working on and actively bidding at the moment, as I said earlier, in all of our sectors. If I look at roads, we can see a big pipeline of opportunities that we want to go at. Aviation, we've talked about there's a number of opportunities we're pursuing that we would be hopeful on, further water work, nuclear energy, very, very active, very busy bidding at the moment opportunities in energy.

Operator

So there is a large pipeline, billions and billions of pipeline that we are bidding at the moment that we would hope to add to that. But I think if you look at the volume of forward work we've secured, that is pretty significant by any measure for a business of our size that will enable us to grow.

Speaker 7

Another question from Dan Hong. What is the full year 2025 revenue, profit and margin guidance?

Speaker 1

I'll give you the profit and margin guidance. Profit I mentioned earlier is GBP 46,000,000 operating profit. And if you look at consensus, that means that the margin will begin with a four, it will be 4.12, I think, one or two. And the revenue will be relatively equal half one on half two.

Speaker 7

Okay. Thanks very much. We have no further questions at the moment. So Alex, I'll hand back to yourself for any closing remarks.

Operator

Okay. Well, look, thanks very much for all of you taking your time. As you can see, we're very excited with the progress that we're making, but we've got a lot of opportunity ahead that we've got to go and grab and capture. And we look forward to updating you again in six months' time. So massive thank you.

Operator

Have a good rest of your day. And as above all, keep safe. Thank you.

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