COSTAIN GROUP PLC (COST) Q2 2026 Earnings Call Transcript

Right, good morning everyone and thanks very much for joining Costain's 2026 half-year results presentation. I'm going to start with sharing my reflections on the first half for the year and then Helen Willis, our Chief Financial Officer, is going to come in and sort of take you through the financial results and the financial performance of the business before I return to sort of give you a bit of a strategic overview, an update, operational insight and an outlook for the business as we move forward. Look, we're really pleased to have reported another strong set of results for the business in the first half. It really reflects the quality, the resilience and the balance of the portfolio of business that we've got and also how our teams expertly deliver our services. We've returned to revenue growth in the first half. We've also grown operating profits and increased shareholder returns. again thanks to the strong balance of cash and the strong cash generation in the business. I think as we said in our results statement the revenue growth in the first half marks that beginning of a sustained period of growth for the business built on the successful positioning of us in what are significant growing markets. I'm going to use a phrase a lot but this is a really exciting time for UK infrastructure and in our markets we've continued to secure a good number of high quality new contracts and extensions that underpins the fact that we've maintained our record forward work position of seven billion pounds for a business of our size that is six times our annual revenue which really underpins that confidence in the growth and the fact that the forward work visibility of 91% not just for this year but for next year gives us that confidence in how we're going to grow and move the business forwards. Our forward work also benefits from having added new customers so we've now added Dover Ports, Gatwick Airport, a national grid in the first half of the year and we've also accessed new market segments so we've broken into the Great Grid upgrade, and we've got a real presence already on the Reservoir programme. All of that really improves the strength of the group. We remain on track to deliver 2026 in line with expectations and to deliver that step change in growth for 2027. And I just wanted to sort of reflect that our first half year results mark a continuation of the progress that we've been making as a business, that momentum in the business. And based on 2026 consensus, we're going to be delivering a full year 26. We're on track to make it six years' worth of growth and industry-leading margins as a business. And as a result of the quality of the contracts that we take on and their nature and the fact that they're cash-generative, this has continued to strengthen our balance sheet. and this consistent cash position is which is a feature of the type of business that we do while strengthening the balance sheets also allowed us to increase increased returns to our shareholders over the past three years we've returned 31 and a half million in terms of shareholder returns and that trajectory is going to increase and today we've announced a doubling of the interim dividend that we've got which combined with the 20 million pound share buyback means in 2026 alone we'll be giving 36 million 34 million pounds worth of shareholder returns this continued momentum this continued momentum is now set to accelerate in the second half of this year as we've talked about with a step change in 2027 for the second half of the year we've pulled together this graph that shows that in water we've spent last year and the beginning of this year, just finalising design solutions for a lot of the water infrastructure. In the second half, we're now getting into the delivery of that infrastructure, which is why you get the step up. And you'll see that really moving forwards into next year as well, where we'll be at full operational level delivering that water infrastructure. Heathrow, we continue to expand the amount of work that we're doing to support their investment plans. And then from a road point of view, we've got the M60. We've spent four years in the design and consenting phase for the m60 we've now mobilized we're on site we started construction activities and obviously the second half you're going to get that and then next year we're going to get a full full year we've also got the ramping up of the nuclear energy work we talked about last year together with that great grid upgrade and we've also got some of the road local road contracts coming through so a clear path for that increased growth coming for you the step change in 27 really builds on our momentum momentum that clear visibility of that seven billion pounds worth of forward work um our business is in great shape and we're really excited and i'll hand over to

helen morning everyone um i'm just relieved to have navigated the step there so uh all good so far um so thanks alex and we've talked about momentum a lot and and it really does feel like that's coming through now as Alex said we're on track to deliver the sixth consecutive year of profit growth and and with an industry-leading margin which we intend to maintain the balance sheet position continues to strengthen we significantly increase shareholder returns having resumed in 2023 and we're winning the right work we maintain that seven billion forward work book and of course we entered the FTSE 250 earlier this year. It really is exciting to be part of this, even as a CFO I can say that. So let me take you briefly through the headline financial results. Revenue up to just over half a billion, up 3.4% on prior year. Adjusted operating profit up 3%, up to 17.3 million with no adjusting items, so that falls through to 17.3 on reported as well. Adjusted operating margin consistent with the first half of last year at 3.2%. Adjusted basic earnings per share increased by 3.6% to 5.7 pence and that's primarily reflecting the increase in adjusted operating profit and a reduced share count following the share buyback programmes. The groups adopted a new target dividend cover as Alex mentioned to two and a half times adjusted earnings and previously that was three point that was three times earnings and that would be paid one third h1 and two thirds h2 as we have in the past. We continue to maintain a strong balance sheet as I mentioned and net cash was 164.4 million at the end of the half and that's 20 million higher than half year last year and that's after the increased shareholder returns. So revenue, as I mentioned, is up 3.4% on the half, and that was following the expected small reduction on transportation, but more than offset by growth across all sectors in natural resources. Crucially, this marks a key inflection point, and we're confident of the step change in revenue growth in H2 this year, followed by sustained period of growth thereafter. in transportation revenues and roses are said reduced in line with expectations as several of our RDP framework projects completed and we expect to return to growth in the second half as Alex was mentioning as we go into construction phase on the M60 and on the M5 thereafter integrated transport increased almost 40% as we really are hitting our stride with the work at Heathrow there was strong growth in natural resources across all sectors in water we see the transition from design into construction phase as we are into amp eight regulatory cycle and we're scaling up to deliver a strong pipeline of work in the second half 26 and and thereafter energy revenue increased by 25.7 percent and that's driven by a range of services we provide including design and delivery of the carbon capture programme at BP and the management of gas mains replacement for Cadent. And revenue increased on defence and nuclear by 3.6%, driven by our current delivery partnership roles. Adjusted operating profit, as I mentioned, grew 3% in the first half to 17.3% and that was really reflecting the increased revenue but maintaining the adjusted operating margin so stable at 3.2 percent we've seen the lower volumes as i mentioned in the rdp frameworks offset by by natural resources uh revenue it should be remembered that last year last year we had a normal course of business contract closure benefits um in natural resources and so the level this year is is a more normalized level i would say we've spoken about our targeted areas of investment in recent periods and it's important to note that we've seen another period of increased operating profit despite continued investment across the business, ensuring that we're really well positioned for growth. And I'll take you through the cash walk. I'm moving from left to right, opening net cash of 189.3 million and closing net cash of 164.4 million. The first boxed area represents adjusted free cash flow and an outflow of 1.4 million and this outflow reflects strong operating profit offset by the timing of working capital around the period ends as well as a modest capex and tax outflow of three million pounds. Interest receipts were 0.3 million. Lease expenditure is shown separately from cash from operations and was 5.7 million for the first half and we've seen an increase in lease expenditure in the period as we invest on contracts ahead of planned growth. There was significant increase in shareholder returns which total 15.4 million in the period 7.2 was spent as part of the FY 26 share buyback program and dividend payments of 8.2 million almost a doubling against half year 25 or 4.9 million other financing costs 2.7 million reflect the purchase of treasury shares to fund our employee share schemes an increase in the first half driven by both increased share price as well as volume of options and awards. We expect to see this continue in the second half as the first of our SAYE schemes for a number of years, best at the end of the year. We expect that adjusted free cash flow will increase in H2, reflecting the typical second half weighting of adjusted operating profit. And we expect our FY26 year-end net cash position to be around £170 million after the step-up in purchase of treasury shares I just mentioned, as well as enhanced shareholder returns in the form of the £20 million share buyback programme and significantly higher dividend payment. The net cash position at the end of half one comprised of cost-end cash balances of £94.8 million, cash held by joint operations of £69.6 million and borrowings of nil. The chart illustrates the maintenance of a significantly stronger balance through H1 when compared to FY25 and H125. The group's average weekend net cash balance in the period was £177.3 million, a £25 million increase on H1 in the prior year, and £28 million on the full year of 25. In the first half of the year, we paid 97% of invoices within 60 days, as we have done in previous periods. You remember at the full-year presentation, I confirmed that in 2025, the group successfully concluded negotiations with its bank and surety facility providers to refinance a new four-year agreement of those facilities to September 29, comprising a revolving credit facility of £100 million and surety and bank bonding facilities totaling £295 million. Further to this, in May 26, Costone exercised a one-year optional exclusion, excuse me, extension clause, and this agreement was extended by a further year to September 2030, and the RCF facility remains undrawn. So our continuing strong financial performance, robust balance sheet and cash position, and the agreement reached with the trustee of the defined benefits pension scheme to remove the constraint of the dividend parity arrangement has enabled us to significantly increase returns to shareholders. The graph shows the year-on-year increase in shareholder returns, having resumed returns in 2023. The Board undertook a review of its options regarding dividend and on 10 March 26 confirmed its intention to pay a final dividend for FY25 in line with its target dividend cover of three times adjusted earnings. The board regularly reviews its capital allocation policy and following its latest review, the group has adopted a new target dividend cover of two and a half times adjusted earnings to be paid approximately one third H1 and two thirds H2. Based on the new target dividend cover of 2.5 times and the completion of our 20 million share buyback programme this year, which will be our third share buyback programme, we anticipate doubling shareholder returns in FY26 to circa 34 million compared to 17 last year. As at the 12th of August 26, the group had purchased a total of 6.1 million shares for an aggregate consideration of £12.1 million under the FY26 share buyback programme. We shared this slide before at half-year and full-year results presentations, but I think it bears repeating, the effective management of risk in our portfolio continues to be central to how we manage our business. Over recent years we've invested in strengthening our processes, controls and assurance activities. We've invested in our systems and we've invested in key capabilities across the business. This approach has applied to the opportunities we bid and win all the way through to delivery on site and through to completion of our works and this approach has driven improvement in the quality of the forward work, the right risk profile, the right contractual terms and hence the right conditions for predictable delivery results. It's this focus that's driven the path to higher margins as demonstrated by a continued margin progression over the last few years. Costane continues to secure further significant strategic programme rewards and extensions to existing contracts and enjoys good visibility on future work we've maintained our record forward work position of seven billion pounds in the first half of the year our forward work position is greater than six times our FY25 revenues and we've seen a year-on-year increase of 25% and an increase of 67% over the last six years this forward work position is built on long-term programs that enable us to deliver a high consistency continuity and quality of work for our customers as at the end of h126 forward work comprises order book of three and a half billion and preferred bid a book of three and a half billion it includes no single stage lump sum contracts and is predominantly target cost contracts where the scope design and cost developed with and agreed with the customer this disciplined approach to contract selection ensures that our forward work consists of the right risk profile, underpinning our predictable delivery results. We also continue to transform the balance of our contract portfolio. Reliance on central government spend, shown in the light blue, is reduced significantly, with a proportion of forward work falling from 64% to 29%. This is mirrored by increases in private and regulated forward work from 30% to 48% and devolved government from 6% to 23%, all proportions of course of a much larger figure. The diversity of our forward work position continues to build, with additions in H126 coming from target growth segments, such as electricity transmission with national grid, reservoir programme management work, Thames water and anglian water devolved authority rail with tfl and port infrastructure with port of dover we continue to experience higher win rates than we have historically achieved which combined with a strong pipeline of bidding opportunities across all sectors gives us confidence that our high quality contract portfolio will remain balanced and resilient going forward this slide importantly illustrates the increase of visibility for FY26 and FY27 revenues. The forward work position is comprised of £1.9 billion of revenue across the second half of 26 and FY27, £1.7 billion over 28 and 29 and a further 3.4 beyond that. The result is 91% of consensus revenues are already secured for both 2026 and 27. Circa 50% of the forward work will convert and be delivered over the next four years. This visibility allows us to plan resources and supply chain to support the anticipated growth. The bar chart also shows a broadly equal split across the two divisions over the next four years supporting growth over all of our sectors. So we're on track for another six for a sixth year of profit growth high quality and volume of our forward work together with growth on existing frameworks gives us a good visibility for the future and profit visibility of circa 90% of our consensus for 26 and 27 we're delivering industry leading margins and have an ambition to deliver margins in excess of five percent our balance sheet continues to strengthen with net cash of 164.4 million and we expect the FY26 year-end cash to be approximately 170 after those enhanced shareholder returns. I'll hand you over to Alex.

Right so thanks thanks very much Helen I'm now going to provide you sort of a brief update on the strategy and then cover sort of the operational performance and business outlook. Look our growth in revenues operating profits, industry-leading margins, cash generation are derived from how we're expertly delivering the clear strategy we've got for the growth and value creation of Costain. We're focused on those markets where strategic long-term essential investment needs to be made. So that's around transport in creating greater prosperity and growth for the business, road, rail, aviation, ports, water, energy and defense. And we explicitly choose to only work for customers who want to work with their partners in strategic long-term partnerships where Costain has the chance to maximize the value that we can add to those customers. And we enhance the value that we bring to customers by ensuring that we provide services that basically engineer pretty amazing solutions for them and expertly deliver them, whether that be as a construction partner or as a consultancy partner. This strategy, with our strategic focus on growth in strong markets, predictable best-in-class delivery, building that resilient customer mix, building a meaningful consultancy service, and being admired in everything that we do, is what is delivering a step change in our growth in revenues operating profits industry leading margins and will further enhance returns to our shareholders i've talked about it being a really exciting place infrastructure the market focus our market focus is built on the very clear visibility that we have on the investment that's going to be made in infrastructure building on the government's infrastructure a strategy that they launched last year to turn around and spend £725 billion over the next 10 years on infrastructure. Our chosen markets represent the UK's critical economic infrastructure, those essential national needs where the largest amount of non-discretionary investment is being made. And our chosen customers in our markets, as I've said, predominantly operate through five-year business plan regulated periods really strong clear visibility of what infrastructure and many of them select to work with us on those five years or longer periods and we do have contracts where we have 15 years worth of work visibility ahead as out as Helen has outlined we continue to demonstrate a proven track record of winning more than our fair share of the work in these in these positions and this drives the growth in the business. Having outlined the sort of strategy that we've got and talked about the scale of investment that's been made in infrastructure in the full year results for 2025 I set out a case study that brought our strategy to life around the energy our nuclear energy market and I'm now going to share with you our water market as an example just to talk you through how we have uniquely differentiated ourselves in the market in how we access that water market firstly the market investment in water is incredibly is significant in scale as you can see and it's increased significantly to 104 billion for this regulated period and today the regulators announced another 3.4 billion pounds £3.2 billion for our customers to support the growth in data centres, etc., to support economic growth. So, huge investment in this market. And what is driving that investment is the urgent need to maintain and optimise what is a very old-aged asset base. For us to meet even tighter regulatory standards by reducing water abstraction from rivers, but also to improve the water quality in the natural habitat. For them to respond to the challenges of climate change, perfectly timed for today. It's pretty hot out there. So we've either got high levels of rainfall that we can't deal with or we've now got two years' worth of extreme drought and a shortage of water with higher temperatures. It's also to support the growth in demand. That $3.4 billion is to support data centres, housing, etc. that is driving that growth. It's also to ensure that we meet the 25-year plans to have a sustainable long-term supply of clean water for the UK. So it's a pretty important sector. Now, operating in the water sector requires you to have a differentiated expertise. You need to have an intimate understanding of the water industry, the water process and the expertise. It really benefits to have really mature relationships with the customers who operate in this place. And positively, that's why the customers choose to work with their partners in those long-term partnerships, 5 to 10 years. Through our unique strategy, we've successfully positioned ourselves in all three of the critical market elements. We're involved in maintaining the existing infrastructure, optimising its performance and repurposing it to meet the changing needs of the customer. And trust me, today, the phone calls we get, they've got very changing needs of how they can produce as much water as they can. The contract we've got with United Utilities, we are delivering a wide range of replacement, refurbishment, asset upgrade services across their whole estate in the northwest of England. We secured the contract originally in 2019. We've since had two further extensions that's now taken it through to 2029. That's going to be a 10-year partnership, and we're obviously working to expand this across the other water companies. But at the moment, United Utilities are the only people buying this type of service. Moving to the regulatory capital delivery programmes, we're working with the five major water companies across England. Northumbrian Water, Seven Trent Water, Southern Water, Thames Water and United Utilities. Interestingly, £3.3 billion of this £3.4 billion worth of investment. So this is where the significant investment is being made. and we work in designing and coming up with pretty incredible solutions to meet their needs and then expertly delivering large programs of capital programs for them. We're also the technical assurance partner for Yorkshire Water. Now, as a result of our expertise and reputations, we've worked with all of these companies on multiple regulatory cycles and the current contracts we've got for United Utilities, Southern Water and Northumbrian Water go into the next decade, so they're pretty long in nature. And some of the relationships we've got span more than 30 years of a proven, trusted partnership. Now, we're also, coming to the third one, we're also a key partner building the UK's future strategic water assets. As you know, we've just completed the Thames Tideway Project, a pretty major strategic infrastructure asset that's going to allow the UK's capital to grow and expand and flourish in a sustainable way. And we're already a partner to Anglian Water, delivering their strategic pipeline alliance, which is to take water from some of the wet areas on the east coast to some of those areas where there is not a lot of water. And we've been doing that we won the original contract began in 2020 and it's now been extended to last until 2030 as we drive further capital investment and the market as you'll have seen is now preparing for a long awaited period of significant investment in reservoirs 15 years too late but we're getting on with it and we've already secured an important role in this not in this market we are already the Enabling Works partner for Angling Water and Thames Water on their Reservue Scheme, supporting the development of what is going to be a £50 billion market investment. Our focus on this critical investment, our markets, our customers and service, has resulted in Costain building the strongest ever breadth and scale of water service that exists. This case study again shows how we position ourselves under our strategy in our markets and is typical of all the markets that we operate in and I believe underpins the strength of our strategy. I'm now going to talk about each of the divisions. Transportation has been an incredible successful journey over the last couple of years. We've now built a very broad transportation business we're exposed in the roads market on the strategic highway and the local and devolved highway networks we're involved in rail right across from the strategic infrastructure on HS2 to supporting Transport for London upgrade their rail infrastructure we've broken into the aviation market where we now work for all three of the major airport operators Heathrow Airport, Gatwick Airport and Manchester Airports Group. And we're also now, we've broken into the ports market that we're beginning to see expand as it supports trade with the rest of the world, but also to support the offshore wind market. So huge success. And in roads, we've completed a number of contracts, but we're now mobilising those two strategic highways on the M5 and the M60, as well as some of the devolved work that we've got and on rail the HS2 contracts just to remind you we've got three contracts for HS2 we're in the middle of delivering the major civils program at the moment with two tunnelling machines making their way to Euston as we speak at great pace and we've also got the two systems contracts one for the HV power upgrade that's going to power the whole of HS2 and the second one the tunnel fits out from an M&E point of view But we've also had a breakthrough contract with Transport for London, which has been great because we've been working with them on roads and they told me that we were doing an all right job, actually said that we were doing a good job. And now we've broken through into their rail and we've won a leading position on upgrading their stations and the step-free access programme that they've got running there. And also in local roads, we're making good headway. And then from an integrated transport, I've talked about the aviation. and I've talked about the Port of Dover already. It's really pleasing to see us making this progress. And if I look at the pipeline in transportation, it's incredibly strong. The future opportunities right across this broader business that we've built are very strong and we see a very positive outlook for transportation. Natural Resources is clearly benefiting from strong delivery performance and significant investment right across water, energy, defence and nuclear energy. In energy, we're focused on future-proofing the existing gas network, supporting gas capacity resilience and now growth of the UK's electricity network. Our performance for Cadent Gas has continued to be excellent and we're progressing the delivery of BP's landmark great carbon capture and storage project in Teesside. Importantly, we've also broken into the electricity transmission distribution market in the first half, targeting those substation upgrade programmes. And in Defence, which again, on the back of the strategic investment plan for Defence, where the CASD programme investment has been ring-fenced, we're now actively continuing to deliver the AWE program and Devonport upgrade and there's a strong pipeline of opportunities that have come straight at us on the back of that which present huge opportunities for us in defence where we have a great position and in nuclear energy we've won the work last year huge amount of work working for Sellafield, Urenco and NRS who are part of the decommissioning and how we're driving growth in in that market as well. Again, there's an outstanding pipeline of future opportunities across all of our market segments in natural resources and we see a positive outlook for this division as well. So in final summary, and to close, the quality and balance of our contract portfolio and broader customer and service mix is delivering growth in revenue, operating profit and strong cash generation. Our strong balance sheet is increasing the net cash position, is allowing us to increase returns to shareholders via dividends and share buybacks. We will continue to benefit from the committed growing investment in target markets that we've chosen to operate in and have demonstrated our ability to enter new growth market segments and expand our serving offering with existing and new customers. As I've said before, our record forward work position of £7 billion, over six times our annual revenue, gives us excellent visibility of the future revenue and underpins our future growth that we've been talking about. Bringing this all together, as Helen have said, we're now at that key inflection point as a business, with growth coming in the second half of this year, a step change in 2027, followed by a period of continued growth thereafter. The business is in great shape. It has a team who pride themselves on solving the most complex challenges and delivering them to best-in-class standards predictably. We have a growing momentum and we continue to take advantage of the significant opportunities ahead. This is a very exciting time for the UK and it's a very exciting time for UK infrastructure. So thank you very much. finally as I hope you're aware we'll be hosting a capital markets event on the 19th of November here in London where we're going to discuss more some of these growth drivers and bring that to life in more detail and I hope to see as many of you as you can attend that event thank you very much we'll take your questions but first we're just going to move and sit over here Charlie you're I'm going to hand the mic out. Thanks.

Hi, it's Ed Press from Berenberg. I seem to have sat in the best seat. I seem to have sat in the best seat. Three from me, please. Firstly, you note that Costain continues to achieve higher win rates than it has historically. From your perspective, what's driving this? Is this down to a broader change in market dynamics, or is it a change in the perception of Costain from customers. Secondly, consultancy. You note in the statement that at 18.2%, that's an increase on where it was last year. Do you have an optimum level for consultancy revenue in mind? Is there still further increase to go, or do you expect some normalisation to come? And thirdly, energy transmission. You have to talk about the competitive dynamics here.

How difficult will the incumbents be to compete against or does the the massive growth in the sector represent an opportunity that you're able to capitalize on yeah so look what do I think is behind the higher win run win rate I think a massive part of that is the insight that we have in the customers because we've worked for a lot of these customers for a long time and we really you know we get to understand their business um i think we work really hard on really getting underneath what is it that they want what's their ambition from the investment what do they need and then i do think we're really good at coming up with solutions we talk about ourselves as an infrastructure solutions business you know we've got amazing people that come up with faster more efficient better solutions than and we work really hard on that and therefore the value we add and we put a lot of hard work into it I was asked on a media call earlier do you ever turn work down there is a lot of work we turn down every single month we're very selective on what meets our risk appetite but also where do we think we can win if we don't think we've got a reason to beat someone else why should we bid it so we're pretty rigorous on that so I hope that answers your first question second one optimum volume of consultancy i think we're going to say more about that at the capital markets day definitely look if we look at the decision making tree it isn't just about growing consultancy it comes down to where where can we have the best position with the customer where can we maximize the value and therefore the return that we can get out of it and how best should costain position ourselves and and that's how and that's how we drive it so we're certainly growing our engineering and design that is grew 60 percent last year and that's going to grow because we actually think we're a better designer than the traditional designers and that's something that we're investing in to grow but in terms of the delivery partner and some of the other services there's that decision to make whether we go for a capital program or whether we go for consultancy and that's based on where do we think is the best position to go there. So I wouldn't give you a fixed percentage at this stage. But as I say, we'll say more at the Capital Markets Day on that. Energy transmission, look, every market is competitive. I would love it if they weren't, but they're not. They're competitive. And I think we've got a great offer. We've got a great proposition.

And we've certainly been successful so far on a couple of opportunities, which we'll certainly say more again at the Capital Markets day but yeah look competition is is is strong and healthy as always cool thank you thanks very much Ainsley Lamming from Investiture two for me please when we look at the visibility and secured work for next year you've got 90 percent one just kind of how unusual is that what's driving that visibility and also if we think about the margin if there's a bit of cost inflation how well protects your in terms of contract terms to pass on and deliver the margins you expect and then the second question just on kind of share capital returns

obviously reduce the dividend cover to two and a half cents a bit more or any thinking there is it you know share price had a good run does that mean there's less kind of chance of share buybacks it's going to be more dividends could that go down further just any color or insight there thanks the first one you take the second one yeah so look in terms of visibility I think what what's what's greater under visibility is we've won the frameworks we've now spent 18 months coming you know doing a lot of design work preparation work and we're now into starting the delivery and then so we've had long-term visibility of this work and it's one of the points that Helen makes you know we get asked the question about do you have the capacity to be able to deliver all this infrastructure well because we've been able to see it coming for three years and sometimes longer we're able to plan because we've done that work one of the great things is that we co-develop the solutions with the customer so you know we can identify risk we can eliminate risk make sure we're not carrying that risk so effectively the design is complete we're then able to deliver it so we're in that phase now we're now going to site and delivering a lot of that work we've spent the last 18 months and that's what gives you that that that visibility and that confidence just coming back to your cost inflation point look I mean the big drivers on cost inflation are the same thing that affects everyone at the moment it's energy prices and energy intensive industries we have as do our clients actually we have protection from inflation and our clients do as well in their budgets so we're seeing that come through look but we don't just sit back and accept that happening we work really hard with the clients determine and go okay well what are we going to do because the end of the day they've got to try and manage their cash flow and their budget as well but we have got we have got protection and at the moment it is limited to energy energy prices yes share capital allocation a capital

allocation rather in the divi versus share buyback I mean obviously this has been the first year that we've been able to be unconstrained in in how we've returned and we plan to return to to shareholders we have the the dividend parity removed in January that we announced so this has been the first year where we've been able to to set those levels without constraint obviously 20 million buyback program this year 10 previous year 10 before that I think three times policy was set way back when when we did the capital raise and before before I joined even even before me and you know looking at looking at the market looking at the level of returns we want to make we felt two and a half times was was a sensible progression I guess you could say it's a sign of our increasing confidence obviously we've got the we've got the cash balance to back it up and and the growth is coming so it's it's you should really view it's a sign of that confidence how are we seeing uh that capital allocation going forward i guess you know capital markets day we'll talk a bit more a bit more about that that's not easy to say um but i think um you know we have got the still the same policy we're still investing in the business that's really important uh but we do recognize the importance of those returns um we

have talked a bit about m&a in the past and we're actively looking at that we won't rush into anything but you know we're well set to to consider all of those elements of our policy hi there max hayes from cavendish uh just two questions so you've spoken about amp eight contracts moving from design to delivery during the second half just looking at the wider portfolio how should we think about sort of the timing of other projects in other verticals similarly moving from design to delivery over the next few years and then as they move into those larger delivery phases uh just how you continue to build margin thank you yeah look thanks max um so look

ampate i've talked about as you said um so the m60 is another classic example we've spent four years working on the design consenting it's a it's a project that's going to be delivered in a lot of people's back garden or right next to people's back garden so it's taken a lot of planning um so we've completed that and it's the same with a number of the nuclear energy projects a lot of work has been in the sort of design phase so we have this and this is what we've got to look at you have this period within the regulatory period that you get you get allocated the work you then start designing and develop solutions and then you spend and that's why you always see that curve is sort of like a wave which actually the customers are now going to help flatten out that we get that and it's the same for Gatwick we've just been we've won the contract we're spending the time at the moment but next year we'll go into the delivery phase of those contracts so it's a pretty similar message right across right across the book if that helps just how do we the really important thing about how do we drive margins is really getting value out of that stage one the fact that we spend so much time to spend four years on the m60 really working through the design what's the best way to deliver it how do we assure it how do we make it predictable means that when you get to the delivery phase you've eliminated the uncertainty you've you haven't got design challenges you haven't got ground conditions so you haven't got procurement challenges you've done all of that work which sort of means that you just go and execute it and we call it assembly now you just go and assemble the solution so that's really what is going to drive the margins you know Helen has a great phrase just just one build on that I think it's the quality of the portfolio gradually coming through so you've got three elements so the portfolio delivering exactly as alex has described but we've talked about still the tail end with you know i mentioned

in in the presentation about the rdp frameworks which was signed back in 2016 so as everything comes on in the right risk profile and right terms as we've been working very hard on you see that quality of the portfolio increase in the the predictable delivery making sure we're reaching all the milestones and gain shares that that gradually pushes that margin up but the biggest piece is as we grow in scale, we will get, I think, a reasonably significant operating leverage uplift as well. So, various factors contributing.

Good morning. It's all happening on the right of the room today. Three questions, if I may. Firstly, a very helpful case study on water, but can we just revisit the nuclear one at the full year and remind us how that is progressing and what show of the order book is nuclear? Secondly, your FY27 visibility of 91% is pretty standout. Can you give us an indication of what the same number would have been a year ago, roughly? And thirdly, no talk about the pension, which is good news. But do you have any plans for the pension?

Okay, well, let me talk about the first one, and I'll let you do the difficult ones. so yeah look I mean what we're trying to do with these case studies is sort of bring this bring the strategy to life I think what it shows is a really strategic focus on what is the investment what is it trying to solve and therefore where can Costain add best value and not just sitting there saying right what do they want to build it's it's the wider challenges and I hope that came across in that and for and for nuclear we're making we're making great progress so if I look at for your ENCO we're now moving into the delivery phase having spent time with them on a lot of the uranium enrichment and it's a it's not one big project it's a sort of series of about 30 individual projects on a program of work with them so we're doing that we've got in North Wales we're doing some decommissioning work of our existing old power stations for NRS doing that and then clearly with Sellafield we've got this 15 year program and we've been helping to mobilize so the first half of this year has been all about mobilizing it get the clients team ready get our team ready we've now got the pipeline of opportunities that we're starting to to develop and design to be able to deliver that and then we've got a pipeline of some pretty exciting stuff which you know hopefully will be to talk about soon you know the UK government has made a very clear state that it wants to have a sovereign capability around that nuclear capability so they don't want to become reliant on other nations for the supply of anything within a nuclear area so what you're going to see is quite significant investment supporting the fact that we've got size well C but we've got SMRs and that's a market that we are targeting to build a position in but also some of the wider you've seen the uranium enrichment with URENCO is a clear thing that the government's saying right we're going to produce that ourselves but there's a lot of other nuclear energy capability they want to build ourselves that we're actively engaged on so So, yeah, pretty an exciting place to be.

So visibility. So it's fairly usual for us to be at around about the 90% for current year, but the 91% for next year is much higher. We haven't given a number before, Joe, so I'm not going to do that now. But it is significantly better, and I think it comes from where we are in the growth trajectory, where we are in terms of design going into construction. as Alex was describing, on water and, for example, roads. We've landed those call-off contracts within the frameworks. We've landed the design. We're actively going into construction. So that gives you really solid visibility into next year and, indeed, the further year. So, yes, it's bigger. It's nice to have that visibility, but really, really crucially, planning the resources around it so we need to know we've got the right people in place, the right supply chain. and that's one of the reasons that we pay so well as well you know there's there's a lot of work out there which is great but obviously we've got some competitors who want the best as well so we do everything we can to make sure we've got the best of both of those pension plans so it's great not to be able to talk not to have to talk about it too much we're so no cash contributions ongoing with the triennial we landed in january we are looking at so what do we do with it buy in buy out versus run on and we're actively doing some analysis at the moment um so no concrete plans

but we are obviously looking at it and keeping it under consideration as you'd expect good morning andrew nussi from peel hunt um a couple of questions um of three actually um if we start off with um customer diversification activity diversification which has been a sort of key part of the the strategy can you reassure us that on this of the day one risk adjusted margin is acceptable and it's not been work secured in the hope of future workloads coming from that customer. Second question on road, if we look beyond the M60 and the M5, do you still see that as a growth market for Costain, particularly given the news flow around focus on asset renewal and replacement rather than miles of new tarmac?

And then the third question, 70 million of cash tied up in joint operations if that could be restructured in a way with your partners would that then lead to review of the capital allocation strategy so just in terms of customer diversification and we very purposely turn around a couple of years ago and decided that this business needed to diversify it was and if you look back at Helen's slide, you know, almost 70% of the business was the Department of Transport, you know, very big in rail, very big in road. And to grow the business, we felt we needed to break into other markets, which we've successfully done, as you can see. And we've grown. And again, if we look at the quality of the customers that we're buying, we're being very selective about, you know, who wants to work with their partners in strategic long-term relationships not one-off contracts and every opportunity that we look at in winning those frameworks has the same risk appetite applied to it as we do on any of any of our other work so we're very clear about we really always want a stage one that we basically get to jointly create the solution together before we commit to what the price and the budget is That's a common way of working with customers, even the new customers, and then we can get into executing and delivering it. So there's no discount or adjustment made for a future growth opportunity. We look at every opportunity on its merits against our criteria and generally everything. So if you look at this TFL rail contract, it's a program of work that's going to be delivered over the next five years worth of work to go and deliver it. and it will be in that same style, as will Dover, as will National Grid. So, yeah, pretty. So we certainly don't sacrifice returns just to get in with a customer. The road market, look, definitely the type of work. So new, great new build, apart from the M5, which is going to be a great new build, but it's being funded by a data centre who needs the access. The M60 is exactly what you've just talked about. It's an existing junction that requires a total redesign and a rephasing because it is, you know, if you listen to a travel programme, it is every single day Simister Island will be on the news talking about how it's gridlocking Manchester because it's where three motorways come and converge and that needs to be reconfigured. That is exactly the type of work that national highways are going to be doing on their strategic network is about are there assets under distress that need doing or are there congestion pinch points that need so that type of project will continue but we're seeing a lot more money being given also to the local roads so the contract we've won for Norfolk County Council is to allow access for 4,000 new homes so we're seeing a lot of that going around the country about what unlocks either data centers homes or other economic drivers in the UK so and also we do maintenance so we maintain all of the

highway infrastructure in the northeast of the country so we grit the roads we maintain them we cut the grass so there's a whole load of work that we do there that will continue as well so we're pretty confident that that market is going to continue to be an attractive place for us as well as the other exciting things that we've added to make us a much broader transportation business so 70 million of cash title and joint operations so um yes we always talk about our our cash as as what's liquid um cash does flow through from joint operations into ours but obviously it's not not fully liquid it's it's a chunk of cash um it's it's from a couple of joint operations um one of which you won't be surprised to hear is HS2 with our JV arrangements with SCS in SCS. So clearly it would fundamentally change our liquid cash balance and therefore would lead us to consider it. But we do have to negotiate that. We do have to think about what's appropriate for ourselves and our joint venture partners in those operations. So it's absolutely something we're looking at, but not something we have any certainty on yet.

Johnny Cooper from Deutsche Numus. I'm just looking at your market pipeline slide 20, and the reservoir program isn't on there. So is that beyond 2032? I think you mentioned, Alex, 50 billion program. Is that right? So could this replace your HS2 workload on a run rate basis as we go into the 2030s? And probably a follow-up question from Andrew. Would this be JV'd, and what would the cash dynamics be? And sorry, last one.

More broadly, generally you haven't seen big working capital swings in your business, but we're seeing some infrastructure markets like power become more cash cash generative are you seeing that in any of yours and and could that be the case in water for example yeah so so look the reservoirs isn't on there because the regulator hasn't necessarily provided the capital for there so what we've put on there is what the regulators have basically signed off even though everyone knows you know i was in meetings with defra um last week um talking to them about the reservoir program so it is a critical you know those 23 reservoirs do need to be be built um and and where costing positions itself is quite key so there'll be some reservoirs that we won't go for so for example white horse for thames water because they're looking for a dbfo partner the terms and conditions could are likely to be fixed price lump sum that's the type of contract that we wouldn't we wouldn't go for whereas there are others that are being funded by the water companies and they want to work in a similar way to the way we deliver the water infrastructure at the moment but again you know where we've positioned ourselves with white horse at the moment is we are the clients enabling works partner so we've been doing all of the trials to proof prove the design of of the reservoir and also we're doing all the are overseeing all the archaeological surveys and service diversions and all of that at the moment so again getting in there so where exactly we choose to position ourselves will depend on risk profile and also where we think we can add the most value so yeah that's sort of still up in the air and in terms of it replacing hs2 our hs2 contracts are going to continue until late in the 2030s and the growth in the balanced portfolio of the business is what fulfills any decline in hs2 that so this isn't about one major project being replaced by another major project if i look at the growth at gatwick i look at the growth that you know in energy and right across when we look at our business we can see an even more balanced portfolio of business um in the future that even without hs2 in it although at the moment we've still got hs2 in it for a long long time the frameworks that we've we've won i think it's important to recognize that there are call-off contracts within the framework so even though they're very large framework values there's a much steadier stream of work that comes through from there and they're all two stage where we're designing and then going into construction so that diversity of customer sector

procurement cycles and so on just all helps to smooth the overall shape for for costing so we don't have any any cliff edges uh at all um and reservoirs i guess we view that as an additional opportunity so uh absolutely we'll look at it but it's all about the risk profile as alex said working capital swings we wouldn't take anything on that is that is is going to put us under stress so everything that we're looking at at the moment is very similar in in cash shape it tends to be that we we pay out our suppliers and then we receive in on a monthly basis so as i've said before the real key in this sector is managing the design managing the scope managing how you

deliver on the ground such you don't have issues with the customer you don't have balances tied up in work in progress and then the cash does does flow in a fairly steady fashion we don't rather than me standing there if you don't mind I'll just conclude now look thanks very much for thanks very much for taking the time to join us I hope it's a bit cooler out there for you when you do get out there look it's a really exciting time for Costain we've made tremendous progress in building a much broader business strength in the performance is coming through and we've got a really exciting future so thank you very much see you soon