Good morning, everybody. Welcome to our full year results for 2022. I'm Leo Quinn, Balfour Beatty's Chief Executive, and I'm joined by Phil Harrison today, Chief Financial Officer. I think it's fair to say this is a strong set of results, and I think is a real testament to the transformation of Balfour Beatty to a well-balanced, lower risk group. There's a lot in these results to be pleased about. I think if you're a shareholder, and if I bring your eyes to the right-hand side of the slide, over the last three years, we've committed to return GBP 570 million of cash to shareholders. GBP 450 million of that commitment is via share buyback, and the balance is actually in dividend.
That in itself is pretty good, but if you look at that against the backcloth of where our average net cash finished, the average net cash finished GBP 130 million higher than it was last year. We've done all of that and generated more cash within the company. Of course, that does bode well for the possibility of future cash returns. If I take you to the other side of the slide where we're looking at expectations, you know, we clearly exceeded expectations across all of the businesses and all of the earnings-based businesses operated within the industry standard margins, with the exception of our services business, which actually beat the 8%-10% range that we set. I think it came in about 8.4%.
Also beating our expectations was the valuation of our investment portfolio at GBP 1.3 million. The thing that excites me about that, and I'll touch on it later, is the fact that, you know, the assets themselves are strongly correlated with inflation, which does bode well. Some of my best lines and statistics will actually be stolen by Phil in his presentation. You'll have to hear them all twice. In terms of positioning for growth, this perhaps is the most important one for me because the idea of this GBP 17.4 million backlog for us gives us really good visibility in terms of future workload.
In an industry where we're always competing for capability and resources, the fact that we've got a good line of sight on the next exciting project and the fact that we can see where employees will be deployed, this allows us to keep, retain, and attract the best talent that we can. When we talk about capability, I often show these slides in their own right, stand alone, these are about the most sexy photographs you could ever get. Really what underlies them is the incredible capability that Balfour Beatty has, and it's something that we've built up over a long period of time. Up on the top left is the LAX Airport, which is the people mover that we're building, which is taking people from the car parking area through to the terminus.
The capability to pull this off is that clearly, I mean, this is a heavily trafficked area. In terms of putting the foundations in for this, we've had to actually move utilities and actually get piling into the ground. We're working at height. We're connecting this structure to the live terminals. I mean, the things and problems and challenges that we overcome are just phenomenal. Building that capability is something we wanna keep and reuse because every time we reuse it, we actually get more productivity and more benefit. If I look at the next slide, which I've shown you before, this is the heads that were sort of dropped into the Bristol Channel and where the tunnels terminate for the cooling of the nuclear power station. These barges are the size of football pitches.
In this area, we're working in a marine environment. We've got heavy lifting. You know, you can't imagine the challenges of doing all this in a nuclear type of environment where this is gonna last for 60 years, and it's very, very heavily regulated. You know, some real skills in that. I suppose the highlight of this year's achievement is the bottom left, which is actually the Marston Box. This is where a case of offsite manufacturing, where effectively, we built two carriageways to the side of the M42 motorway. The top of the structure will actually take the HS2 rail train over the M42. This was slid into position over Christmas in a 10-day blockade.
Had you done this via traditional methodology, you'd have actually disrupted the M42 for two years in terms of lane closures and the like. A phenomenal achievement. This last one here is, you know, we, as an employer, have to be a great place to work because as you all know, people have choices. What we want those people to do is we want them to come back to Balfour Beatty, and we want them to stay here their whole life. As you know, we do a phenomenal job in terms of bringing in apprentices and graduates, and we have 600-700 at this moment in time that we're training. We're doing a great job in keeping all us old people because we canceled retirement five years ago.
We're doing a great job in terms of employee engagement and satisfaction. For the first time, we scored 80% across the global business. Five years ago, we were in the low sixties. You can see all the things that we're doing to try and encourage people to stay and work for Balfour Beatty, provided you can perform. Sustaining capability is our single most competitive advantage at this moment in time, and we get rewarded for it with the results that you've just seen. On that note, I'm gonna hand over to Phil, and you can take them through the facts.
Thanks, Leo.
Thanks, Leo. Good morning, everyone. Let's start with the headline numbers. We're pleased to say that each of these has improved in 2022. Revenue grew 8% in the year to GBP 8.9 billion, which was a 2% increase when excluding foreign exchange movements. Profit from underlying operations increased by 42% with a strong improvement in U.K. construction and an increase in profits on the disposal of assets from the investments business. When including the net interest credit and negligible tax charge, which we flagged in the December trading update, profit for the period increased by 49%. Earnings per share of 47. 5p were up 60%. Which takes into account a reduction in shares following the 2022 share buyback program.
Our total order book at GBP 17.4 billion has grown by 8% or 2% in constant currency, while the directors' valuation increased to GBP 1.3 billion up from GBP 1.1 billion, largely due to the portfolio's strong correlation with inflation and the strengthening of the U.S. dollar versus the pound. During the second half of 2022, we made the decision to have a third-party valuation expert review the portfolio at year-end, and our valuation is consistent with theirs. Average net cash at GBP 804 million and year-end net cash at GBP 815 million continues to underpin the group's competitive advantage and supports our long-term capital allocation framework.
As a result of this strong performance, the board today is announcing a final dividend per share of 7 p, giving a total dividend for the year of 10.5 p. Moving on to the business units. Let's start with Construction Services. The business delivered underlying profit of GBP 149 million, which is an 89% improvement on 2021. This reflects the strong recovery in U.K. construction, which is now within the 2%-3% industry standard margin range. Profit at U.S. construction increased with a small improvement in the PFO margin achieved. At Gammon, there was also a small increase in profit, although revenue grew by 32%. The margin percentage returned to a more normalized level.
In the current year, we expect Gammon to deliver a similar performance into 2022, and we expect incremental margin improvement in the U.K. and U.S. businesses. Moving on to the order book, which grew 10% to GBP 15 billion for Construction Services. In the U.S., we grew by 11%, which is unchanged at constant currency. In Hong Kong, our 50% share of the Gammon order book increased by 12%, which was a reduction of 3% at constant currency. Let me cover U.K. on the next slide. Our expectations for further improvement in U.K. construction are underpinned by the order book, which has grown by 9% in the year, and we have continued to de-risk.
The shift away from fixed-price projects means that 90% of the U.K. order book is now represented by lower-risk target cost and cost-plus work. This is a huge ship from a huge shift from only four years ago and highlights the improvement in the group's resilience. Moving on to Support Services. In 2022 was the first full year since the group decided to exit the gas and water sector and reposition the business to focus on power, road, and rail maintenance. As expected, this has resulted in lower revenue, and we look to grow the business from this new baseline. The performance during the year was particularly strong, and this resulted in profit from operations of GBP 83 million and the business outperforming the 6%-8% target margin.
I should mention that 2021 benefited from the exit from gas and water and end of contract gains. We did see a smaller repeat on contract gains this year. Support Services is underpinned by long-term contracts, which we added to successfully in 2022. Key wins included road maintenance awards for Buckinghamshire Council for the next eight years and East Sussex County Council for the next seven years. Looking forward to 2023, we expect Support Services to deliver towards the top end of its 6%-8% industry standard margin target range. Turning to our infrastructure investments business. Where we chose to sell five assets during the year, resulting in GBP 70 million of gain on disposals.
As a result of the disposals and having fewer assets in the portfolio, operating profit excluding gains on disposal reduced by GBP 3 million. The net interest income on subordinated project debt increased by GBP 12 million in the year, largely due to prior year impairments not repeating. The business continues its disciplined approach to target a two-time return on its invested capital as we continue to see good market opportunities. During the period, the group invested GBP 30 million in new or existing projects, including a multifamily housing project in San Antonio. Moving to the valuation of the investment portfolio, which has increased by 17% to GBP 1.3 billion, driven largely by operational performance and the strengthening of the U.S. dollar in the year.
The GBP 139 million operational performance increase includes, amongst other things, GBP 47 million of gains on disposed assets and around GBP 80 million from inflation and rental growth. Inflation growth in the U.K. portfolio in 2022 averaged 12.5%, and U.S. military housing rents, set annually by the military, will see a 12% increase this year. Considering the strong correlation with inflation and rental growth, we have included a sensitivity assumption in the table on the right, and you can see that a 1% change has a more significant impact on the U.S. portfolio, with an average of 33 years left on military housing projects. That's one of the big drivers.
At year-end, as part of our normal six-monthly review, we made some assumption and methodology changes to the directors' valuation model, which has resulted in a net increase of GBP 28 million, or about 2%. Having considered the risk and maturity of the projects, secondary market transaction experience, and the impact of recent rises in long-term interest rates, the discounts raised for the U.K. assets and the U.S. military housing assets have been reduced, which has increased the valuation by GBP 54 million. For the U.S. military housing portfolio, there were specific changes made to rental growth rates, overheads, and tax. In total, these changes reduced the valuation by GBP 26 million, with benefits from the growth rate and tax changes more than offset by the change to overheads.
We also engaged, as I said, a third-party valuation expert to independently review the portfolio at year-end, and I'm pleased to say that the directors' valuation is consistent with their conclusions. If we move to the directors' waterfall, I've mentioned many of the changes here, but let me quickly show you the directors' bridge, which takes us to the year-end valuation of GBP 1.3 billion. We've invested GBP 30 million in new and existing projects and received GBP 93 million of proceeds from the five assets we chose to dispose. The distribution received from our investments of GBP 89 million were largely offset in the year by the discount unwind. We then have the operational performance and foreign exchange, followed by the assumption and methodology changes, which we've isolated at the end.
All of which were covered in the previous slide, which all combine to take us to the GBP 1.3 billion. Let me move back to the overall group, starting with cash flow, which has been well managed again in the year. Average month-end net cash of GBP 804 million was GBP 133 million higher than 2021, and the closing balance of GBP 850 million was GBP 25 million higher than the start of the year. As previously forecast, we've seen a GBP 50 million working capital outflow in the period, while all other items are largely in line with expectations.
Looking to the future, having recently concluded the triennial pension negotiations with the trustees of the Balfour Beatty Pension Fund, we now expect pension deficit payments this year to be GBP 11 million lower than 2022, with the Balfour Beatty Pension Fund element reducing from GBP 35 million to GBP 24 million per annum. The company and the trustees have reconfirmed their commitment to a journey plan approach which targets self-sufficiency by 2027. Despite lower deficit contributions, I do expect cash to reduce in 2023. We're forecasting a working capital outflow of between GBP 75 million-GBP 125 million in the year as we move towards our long-term target of 11%-13% of revenue. Turning to our multi-year capital allocation framework, which we've been following since 2021.
We continue to see a range of opportunities to invest in or, in organic growth, and Leo will touch on this in his section. We delivered five examples in the year of us realizing value from the investments portfolio and will continue to do this with a higher director's valuation demonstrating the opportunities available. The balance sheet remains strong, and we've raised new U.S. private placement debt, which has extended the debt maturity profile of the group. These factors give us the confidence to grow the dividends with 10.5p Per share recommended for the full-year dividend, up 17% on 2021. We are reconfirming today that this year's share buyback program, which commenced at the start of January, is for GBP 150 million for the third consecutive year.
We continue to expect this framework to be in place for a number of years to come and to give our shareholders confidence in the returns available. This is underpinned by our confidence for 2023, which I'll recap on now. We expect PFO from the earnings-based business to be broadly flat with 2022. This includes incremental PFO improvement in construction services driven by the U.K. and U.S. businesses, and support services profit from being towards the top of its targeted range. In investments, profit on disposal for the full year is expected to be in the range of GBP 15 million-GBP 30 million as we continue to realize value from the portfolio. Moving below PFO, we expect a small increase in net finance income.
Finally, we expect the effective tax rate to be close to statutory rates, which for 2023 are 23.5% in the U.K. and 26% in the U.S. With that, I'll hand you back to Leo.
Well done. Great. Thanks, Phil. What's actually quite interesting, just for a second departing from the numbers, we look at the headline numbers all the time and how the business perform. I think what you've heard from Phil is underlying this, you know, strengthening the balance sheet, the independent valuation of the portfolio, what's gone on with the pension, the management of debt. I mean, it's not about just managing the revenue and the backlog and the profit. There's a whole balance sheet here which is very effectively and efficiently managed. I think, you know, we should recognize that because that goes straight to value in the company. Let's sort of level set everybody 'cause I sometimes forget just the overall size of the group.
You know, we're just under GBP 9 billion. We operate in three geographies. The U.K. between support services and construction is about half. You know, the U.S. construction is about 34%, and then Hong Kong is about 17%. It is a diversified and a very large group. I'm quite grateful it's no more complicated than that because I couldn't imagine having the Middle East, Australia, and all these sort of things that hang off the portfolio in the past and actually having adequate control. In a world where auditing is getting more and more difficult, you know, clarity and transparency is just so important to us.
The other side of the portfolio is, you know, we've got this extraordinarily valuable asset in terms of the investment portfolio, which, I'll touch on in my first slide in terms of it's U.S. and the U.K. The benefits it brings to the group are truly remarkable. This sums it up very, very nicely. First and foremost, you know, we've got a diversification of assets across geographies which is, which is important because you never know what the next surprise is going to be. We talked about ad nauseam, the GBP 1.3 billion, the strong correlation with inflation is really important. Phil pointed out in his presentation that the military housing asset, which is our largest asset, increased by some 12% in terms of the rental income this year.
This is a business where, believe it or not, inflation is our friend. There aren't many of those these days. The other thing I'd bring you to your attention is this chart on the bottom left-hand corner. There's an interesting story here. If you can go back to 2015, John Laing made an offer of GBP 1 billion for the investment portfolio. That was at the same time when Carillion were actually bidding to take us over as well. We rejected both. It is interesting that the portfolio in 2016 was worth GBP 1.2 billion. It's still worth GBP 1.2 billion, GBP 1.3 billion. In the meantime, we've realized just under GBP 1 billion worth of value out of that portfolio.
What an incredibly good decision to hang on and manage it ourselves and actually, you know, eke out the assets when they're at maximum value. A real success story. If I look at sort of the future, I look at investments, it's a store of value, but it's also part of our growth engine. The growth has to be carefully managed. You know, we had this outstanding success with the Purdue University, which really describes our business model. You know, just under 1,000 rooms student accommodation. Balfour Beatty designed, financed, and actually operated the asset. It was built by Walsh Construction because it was in an area that we don't have a presence. We gave it to a partner to do.
We ran it for three years. We had 100% occupancy with also a big waiting list post-COVID. Again, we disposed of it at 3x book value and a GBP 40 million profit. You know, that's a phenomenal achievement. Of course, it took five years to do it. It wasn't quick, you know, because by the time you've, you get the financing, by the time you build it, and then you actually run it to optimal occupancy, you know, there's a long gestation period. When you look at those returns, it's certainly worth it. Based on that business model, we've got assets in exactly the same format, both in the U.K. and the U.S. At this moment in time, we're at a bit of a low.
We only have three, but we're obviously continuing out there looking to cultivate and grow new business. The other business that's quite interesting that we really don't spend a lot of time on is we have a portfolio of about nine U.S. multifamily housing assets. This is a business where we'll buy up a residential block, usually in the Sun Belt or the Southern Smile, 400 or 500 apartments. Our model is very simple. We go through hundreds of opportunities, and we might find one from that. What we're looking to do is increase the occupancy level from about 92%-93%-94%. Then what we look to do is upgrade the apartments in terms of bathrooms and kitchens and the like, and get a higher rent.
When you put those two multiples together, we get a very good yield. We've invested over the last eight years, about GBP 80 million in this business. We've actually sold assets to the tune of GBP 120 million. We have nine assets in the portfolio today, and they're actually valued at GBP 70 million. You can see it's a nice little business, although small in the scale of things. If we look at US P3, this is where we see the growth in the future. It isn't growth in 12 months. This is a 10-year trajectory. We, of course, at the moment, financing, building and will operate the LAX people mover, which takes people from the car rental area over to the terminus.
We're invested in that very heavily. That will be completed about the end of 2024. We're looking at a couple of other assets in this area, and we've been shortlisted in Prince George's County Schools in Washington, D.C., which will be quite a large one if it comes to fruition and we're successful. Again, a very disciplined approach to the market. We wanna make sure that we're actually investing in things that we're pretty confident we can get a return on. Nice business and very nice returns.
If I move to really what I think is the heart of Balfour Beatty and that capability I talked to you about at the beginning, you know, this is the portfolio that that capability really manages, the ability to manage a billion-pound plus contract. When we look at infrastructure, what we're looking at is this, the total of infrastructure. It's not only things like HS2, it's the nuclear power, it's the net zero carbon, it's the track slab, it's the highways. Fundamentally, this is a large portfolio for us. The important thing here is there's actually a base load of businesses, whether it be our rail, our highways businesses, our power, which effectively are a recurring base load for us. All of this stuff here is really on top.
At a time when you're hearing that the government is looking at reducing budgets and restricting spending, the first point is they're still spending, and they're spending an awful lot of money in this area. Energy security is a real priority. Transportation remains a priority. Although you may see a reduction, what we'll probably see is a growth year-over-year in terms of this particular portfolio. I point out, Warren, one very important fact is nothing's being canceled. What we've heard is things are actually being delayed and pushed out. Fundamentally, it'll just be the same amount of money over a longer period of time, which actually is in some ways quite good because it does underpin continuous earnings.
If I look at energy security, after food security, I think it's the number one government priority. You can see we're well-placed in all of these areas. Here's sort of a little diagram of how we sort of depict this market. We think the available market to us is about GBP 50 billion. You've got to remember, this is gonna play out over the next 10 to 25 years. We're operating and we're effectively in all of these areas in different ways. Just recently, we signed a memorandum of understanding with Aker and one with Holtec. Aker make concrete bases for floating and gravity pylons for wind farms. Holtec are actually an SMR, which is small modular reactors for nuclear.
We're the largest supplier of transmission and switching stations for the likes of National Grid and SSE. That's actually pulling the wires and the cables, not building the transformers and the like. We're very big in terms of Hinkley and Sizewell and working on both of these projects at this time. We're actually doing FEED studies in terms of carbon capture with the likes of Technip Energies and BP and the others. Fundamentally, we're playing in all of these spaces. In terms of our infrastructure portfolio, whether it be roads, whether it be high-speed rail, whether it be energy and energy security, we're very well placed, and we see this as a, as a future in aggregate growth area for us.
If I move to the United States, I mean, this is a strong, well-performing business over the last three or four years. Although in the last 12 months, we've seen some pretty dramatic changes in the marketplace. If we start from the Northwest and move over to the Mid-Atlantic, up in the Northwest, you're seeing two real trends coming into play at the moment. The first is the tech companies are struggling with their revenues. Of course, you're constantly hearing about downsizing and restructuring. Interestingly enough, that's not the biggest challenge that we face. The biggest challenge we face is people not going back to work. Where people are building out campuses in order to house their employees, they're finding that people aren't coming back to the office, and therefore they don't need the campus they're building.
Things are being deferred and delayed, and they're looking to see what happens over the next 12, 24 months. The Northwest is proving to be slightly challenging. In terms of California, complete contrast. It's one of the biggest bond raises that we've seen around schools, over $20 billion. We're one of the leading providers of schools in Southern California, and that business for us is actually booming. When I moved to Texas has always been a really, really strong business for us, but this is actually influenced by interest rates. What we've seen in our order book is we've got the largest up 60% awarded, but not contracted order book that we've seen, but we've got the lowest contracted business.
Effectively, we've got this pipeline which is all sitting there waiting to be passed over to go into construction. Because of high interest rates, the developers are not sure that it's gonna be successful, they're not pressing the button. We're in a real pause here. Again, because we've got some great capability, we're looking to deploy these into markets where we see growth. In terms of the South, Southeast, again, this is actually booming for us. It's booming around leisure, hotel, hospitality. Florida is on the up. A lot of work from SeaWorld, Disney, Universal, and places like that. We're seeing growth in airports, across the piece by the way, but we've been successful in both Raleigh, Durham and Jacksonville. Again, good growth happening in this area.
When we go up to the Northwest, the federal market is really the, I won't say tsunami, it's the wrong word. Is the real growth that we're seeing. Last year we won a couple of large projects, both with the military and the Fed. This year we're seeing a pipeline of more business coming along. The economic stimulation that you're seeing from Biden and some of these things we're seeing mostly in the Washington D.C. area. Again, a good business. In aggregate, what does that all mean? You know, I would say flat next year to slightly improving. Again, good business and we've got great capability.
We do benefit from this southern smile in that you've got the population migration where people are coming down to the south. If I look at Hong Kong, I suppose the interesting statistic to me is I haven't been to Hong Kong in two years and one quarter because it's effectively been locked down. The business has continued to perform well. It's a 50/50 joint venture with Jardine Matheson. It's consistently delivered a GBP 30 million dividend for the last five years and is a strong performer. Has about 11% market share. The airports and the colony has actually opened up recently. We're seeing strong growth in terms of airport traffic, hotels, leisure, and the likes of that. This economy is actually on the up.
If you look at Macau, all of the gaming licenses have been renewed, they've had to put 15 billion HKD on the table to invest in leisure and improvements for the future. Macau is going to be good. The Development Bureau have announced 100 billion HKD expenditure each year going into the future, that was confirmed I think as of Tuesday. Fundamentally, this is a buoyant market. I think we're going to see a lot of growth here. The Development Bureau is investing in data centers, community housing, MTR in terms of infrastructure.
MTR are actually one of our largest traditional customers. We see ourselves doing a lot in the areas of rail and the airport, and things like that. Hong Kong, I think, you know, consistent steady performance with growth in the medium term. Moving on to the next slide. We're all very interested in sustainability. You know, how we can do more with less. We're totally committed to our sustainability targets at 2040 and 2030. We're doing some exciting things in terms of communities and investing in people. Our big thrust is how do we get young people into the workplace? Of course, you know, we started The 5% Club, and that's something we push across all industries.
The most exciting revelation we've had recently is over the last few months or so, we've actually launched what was effectively a zero carbon construction site. This was at the Royal Botanic Garden Edinburgh. Apart from the usual thing of like zero concrete and materials and this, where we've really tested the water is around can you truly run an electric-powered construction site? It's quite clear today, working with JCB and Sunbelt, that we've got all the assets that are electric, but we don't quite have the infrastructure to make them work. If we're gonna have big tracked construction equipment, it's gonna have to go to hydrogen. We're working with the likes of Siemens and other in that area. Really excited about what we're seeing, what we're learning.
This is actually to be shared not only in Balfour Beatty, but across the whole industry because, you know, it's a little bit like safety. You know, zero carbon and sustainability is something that we all need to join resources in order to optimize the output for the benefit of all. Very heavily focused on this, and this is really exciting. The other area which is getting great traction is we all know that construction infrastructure has been criticized for productivity. Over the last couple of years, we've been working really hard internally, but also with partners and some clever geeks in terms of how we actually bring real innovation into the construction industry, innovation that drives productivity. We think overall there's about a 15% productivity improvement to be had if we can get this right.
We've made investments in terms of digital permitting. I don't know if any of you realize, in order to dig a hole in the ground today, you actually have to have a paper permit signed off, which is usually about four pages. When we sign them off, this gets stored in a cardboard box, then it gets sent to Iron Mountain and stays there for 20 years, we then pay for it. We've totally digitized the permitting system so that it's all done on tablets or iPhones. It gives us effectively full traceability. It drives up productivity 'cause we don't have queues of people trying to get a permit in order to start work. More importantly, it actually improves safety.
Over the last six months where we've actually been running this, what we've seen on HS2 is actually world-class safety performance, which is effectively zero LTIRs based on the fact that because it's digitized, we can fully track every operation, and we can actually see where everybody is on the construction site and whether they're actually carrying out the work they're supposed to be in the right place. The fact that people know you've got that transparency has changed behavior. As a result of that, we've seen four months of zero LTIR, which is just, you know, is world-class by any standard. Think about rolling that out across the whole of the U.K. construction industry and globally. Massive improvement. In terms of our control rooms, we've taken 19 different feeds and consolidated them into one control room, so we've got one version of the truth.
We're seeing the productivity gains in our Living Places business come through almost immediately on the back of that. We give our customers true transparency to the actual work site that we're on. In construction management, last year, we rolled out our AIMS. AIMS is primarily around scheduling and tracking. What we're doing, with great efficiency, is just-in-time delivery, whether it be concrete or aggregates, which minimizes the idle time and ensures effectively that we're in the right place at the right time. Of course, there's this huge sustainability benefit to that. Net, net, you know, with the inspiring things we're doing around digitization coupled with sustainability, we really do think we're at the forefront of our industry. We want to stay there.
Really, in summary, if I think about how we've performed and what we see in the future, these are of what we've delivered. If you look, we've got an order book or a backlog which we've grown over the last five years. Size of it isn't important. What's important is the risk in it, and the risk has been materially reduced. If you look at earnings, strongly recovered. We're now beyond post or pre-COVID performance. Again, we don't see it stopping there. If I look at our average monthly net cash, I mean, it's quite a story, isn't it? I remember September 2014, our cash flow was minus $1 billion outflow.
Here we are today with this average cash of nearly GBP 1 billion coming into the company. What does that do? That gives me confidence that the graph you see here at the bottom in terms of shareholder returns, in terms of buyback and dividends, are underpinned by cash, and therefore, I'm confident in continued future shareholder returns. Great results, exciting business. Hand over to you for questions.
Thank you very much, Phil and Leo, for this presentation. Arnaud Lehmann from Bank of America. I have three questions, if I may. Firstly, could you comment on the cost inflation? Obviously, materials, I'm assuming, are starting to fade. On the other hand, you were operating in countries where general inflation is high, so I assume wage inflation is gonna become more of a topic. Are you confident that you can pass that on to your customers into selling prices? My second question is on the comment you made on 2023 construction. You sounds like you're quite optimistic about profit improvement there. Is it volume driven, more work, or is it margin improvement?
Lastly, looking at your director's valuation of the investment portfolio, there is a GBP 139 million increase coming from what you call operational performance, which you say is split between inflation, rental increase, and gains on disposals. What can you reproduce, I guess, on an ongoing basis? What is the split between these various components, and are you confident you can maintain the valuation around the GBP 1.3? You're getting nice dividends out. You're selling a few assets. Can you, can you offset that with more operational performance? Thank you.
Okay. I'll do one and two, and you do the third one.
Okay.
All right. The cost inflation, look, it's something that has to be managed on a regular basis. I think we do a good job through our procurement to minimize inflation in the first place. If you look at our, the construct of our portfolio, in most cases, we've now included inflation-type clauses, if they're not already in the contract. Most of the inflation is actually absorbed by the customer. It would actually be unthinkable and inappropriate for us to absorb those inflation on billion-pound contracts. We're very keen to make sure that that is understood by the client, that that's their risk and not our risk.
We do have some fixed price contracts which are still in the portfolio, which we're working through, where we have to absorb that, and in some cases, it results in losses on the contract. That's now in the minority. If you go back to Phil's slide, our exposure in terms of backlog is about 10% of the overall backlog. It is something that we manage, even if it's the client's risk, because they don't wanna be paying more for it either. I would say there is some abatement. You know, obviously rebar's going down. Unfortunately, concrete's not responded in the same way, but hopefully it will go down.
Wage inflation, we operate in a range of about 5%-6% in terms of the total benefits we give to our employees, which we think is actually probably the right sort of level to be competitive in the industry. In terms of profits of 2023, Phil and team have put out guidance out there. You know, they sometimes accuse me of being a little bit hallucinogenic. I'd have to say that, you know, we're in a good position. We've got a good backlog with lower risk. You know, we're confident that we've got a good future ahead of us, and we can generate cash and continue the returns. Phil?
On the portfolio, it will depend in the short term on inflation. We've seen some substantial inflationary effects near term, which is driving the operational performance. To get 12% increases in U.K. and the U.S., that's. If that moderates, the operational performance line will be smaller. For us, we continue to invest in that business, which should create more value for us. Two times return is what we're asking for. We'll still dispose. I think net-net, the portfolio will ebb and sway. It could increase. I doubt it'll actually come down that much, 'cause we continue to invest in that business. Thank you very much.
Thanks very much. Jonny Cooper at Numis. Could I ask firstly on overheads, are the net operating expenses in the P&L? I think if we were sitting here a year ago, we were expecting those to go up as a combination of inflation and a return of business travel. They've held pretty steady despite the revenue growth. What's the outlook there? Do you expect those to be maintained, as growth comes through? Secondly, on the outcome with the BPPF triennial review, could I ask firstly if there's any mechanism there for accelerating payments, if you accelerate shareholder returns? Secondly, given the net cash position you have and given the funding position's improved, is there any argument to buy out the pension scheme?
I'll get you to ride on those two. That's both your territory. You're doing the first one, are you? There's three there. Oh, is there? I only got two. Well, you do the first two, and I'll do the last one. Go on. You're doing the last one. No, no, do it the other way around. You do the last two, and I'll do the first one. Yeah. I'll do all of them. There you go. That's easier. Yeah. Operating expense. The businesses have done very well in keeping, you know, their cost base, very, very tight. I think we will see some increase. Clearly, there's wage inflation that will come through.
As Leo Quinn said, we're, you know, with the contract structures we have, that will predominantly pass on to the customer. We'll see some of that in OpEx. I think we always are looking at how we can be more efficient in that base. It'll come up, but I don't think it'll be significant for us. That's the first one. Acceleration of, or is there a mechanism in the pension scheme for, in terms of share buyback to accelerate deficits? The answer to that is no. There is not an acceleration mechanism in the latest agreement with the pension scheme. I can't remember the third one. It was pension something.
Is there an argument to buy out the pension scheme given the position?
We keep it under review. I think it's not quite there yet, but it's certainly in our minds at some point. Remember, we're running this to self-sufficiency, so, you know, that's the key thing, and we're on track to do that by 2027. Then clearly, cash contributions from the company falls away.
Andrew Nussey from Peel Hunt. Again, a couple of questions. First of all, when we look at the U.K. construction margins of low 2% against the 2%-3% industry standard, can you give us some help around the mix between major projects and regional projects in terms of the returns being earned there? Secondly, on the support services side, the 6%-8% margin target, can you again just give us a little bit of a feel between what the return should be between utilities and transportation now that those two areas are beginning to normalize?
Looks like you're gonna be busy. I thought you'd do the first one. Look, at the end of the day, if I look at our U.K. construction, the major projects is a slightly higher return than the run-of-the-mill regional construction, but that's largely because the nature of the contract is such that, you know, it's cost plus an incentivized fee, whether it be HS2, Hinkley and whatever. There's very little risk. You always do run the risk that you could have disallowed cost, i.e. you've incurred costs that you're not authorized to do so. That can actually be deducted. You will always carry a reserve in light of something like that. Fundamentally, you know, major projects is really the better performer in the portfolio. Phil.
When we talk about support services and all of this thing, we run this as a portfolio. We're not about to start the aggregating and talking about individual, you know, elements of utilities and transport. We're really not gonna do that. I think one thing we can say, we have recently, over the last 18 months, renegotiated a lot of the frameworks 'cause they've come to an end. It is a different era now. You know, if you go back six or seven years ago, when a lot of these frameworks were entered into, some of the terms and conditions and the risks that were passed to the contractor were quite scary. What we've done is we've moderated a lot of those.
What it means is you might not be getting more margin, but you've got more certainty in terms of delivering the profit that's in the job in the first place. Risk mitigation in terms and conditions is even more important than actual margin presents.
Okay. Thank you.
Thanks very much. Graham Hunt from Jefferies. Three questions from me. First one on the U.S. I think you made some leadership changes there recently. Just wondered if you could update us on your sort of longer term strategic objectives there and provide some color on those changes. Secondly, on balance sheet, I think this will be the first year, i.e., 2023, where balance sheet cash has come down. Does that mean that you're broadly happy with where the balance sheet is at the moment? Then just quickly on London projects, I think you still have a couple of buildings contracts in London. Could you just give us an update on those? Thanks.
Okay. Well, if I do the balance sheet, you could do the operation as well. U.S. leadership, you're right. We've recently transitioned on the overall leadership of the U.S. from Leon to Eric. Eric's 15, 18 years with the business, was part of an acquisition all that time ago. Again, that was a managed change of leadership. Leon's done a fantastic job for the last five years. It's like all things, you hate to lose great leaders, but people have sort of life goals that they want to achieve. Eric coming in has been very well managed, and funny enough, it's been a very smooth transition.
He fully takes over the first of April, but over the last month, he's been doing Leon's job, and we've been paying Leon and him for doing the same job. From April onwards, we'll only be paying one of them. I think that's going well. In terms of London jobs, there's two still outstanding. We've actually renegotiated those in terms of their finish and compensation for them. At the moment, they're on track. They should be finished around the first half of the year. You know, we've got a very good line of sight in terms of cost to complete, and that's fully absorbed within our balance sheet. You never know until these things are over.
We'll be very happy to see the back of them because they have drug on for a long time. I think they're fully quantified. Anything you wanna touch on on that?
No.
Then, in terms of the balance sheet. Go on, Phil, I'll give you a go.
I was interested what you were gonna say. On the balance sheet, yeah, no, we're comfortable with the cash and where it's, it will be a decline in terms of cash. That's where we are in our kind of cycle on the portfolio of contracts, which we said we'll move back into, or continue to move into line on the working capital %. We'd assume that cash would come down. We're comfortable with that.
I think it's fair to say that our cash has been declining for the last five years. Well, the forecast at least.
We do have a question on the conference call as well for you. We'll go to conference call now.
I'll take the question from Gregor Kuglitsch on the conference call. Gregor, please go ahead.
Hi, good morning. Thanks for taking my questions. I've got three, actually. Just back on the working capital, I think you sort of ended at 15% of revenues. Obviously, you're talking, I think, 11%-13%, if memory serves me right. What's the risk that goes lower, you know, as yields go up so that, you know, your customer actually have an incentive to hold on to their cash, which I guess they didn't have for 10 years or so? Do you see any of that, or is it sort of contractually agreed? That's the first question. Second question is, can you remind us on HS2, how much is sort of the annual revenue contribution now, and sort of when does it peak and when does it tail off?
I appreciate, you know, the postponement doesn't mean it's gonna be, you know, indefinitely deferred, but obviously at some point I guess there'll be a bit of a headwind. Just wanna know when and how big that could be. The third question, the strategic one, is again going back to sort of Hong Kong, and it's been a good business, but obviously geopolitically getting a little bit tricky. What's your, what's your view on, on your ownership? Do you think you're the best owner of that business? Thank you.
Do you wanna do the working capital?
We're trying to move back into the range of 11%-13%. At this point, we're not getting any particular pushback across the group on, you know, milestone payments, a change of attitude from customers. You know, the whole model is built on this. If they wanna do that, then we're gonna have to raise prices, and we're gonna have to have more margin to cover what we're doing. We're not seeing that at the moment.
Okay.
That's that one.
HS2. First and foremost, it's extraordinary. It's very early days in terms of what the plan is around HS2. We have a little insight. I wouldn't say it's actually too profound at this moment in time. It'd be very difficult to say what the direct impact is and when the peak years or whatever, but there's no doubt it is gonna be pushed out a little bit. The point is that it was building. You know, it was this year's volume in terms of what HS2 will deliver would almost be 80% above what it did the prior year. I think what you might see is that the growth in that will be tailed off. I'll go back to what I said in the presentation. It's not about cancellation, it's just about delay.
Basically, you're gonna have a steady stream of earnings for longer, which actually, personally, I like. On a program which potentially could be very overheated in terms of how do you get the people to deliver it, you know, taking a breath is not gonna be a bad thing, in terms of performance and productivity. That's where we are on HS2. Yeah, real profound question on Hong Kong, Gregor, and it's one that's sort of crossed our minds and I'd have to say, it's obviously a very difficult one because nobody quite knows what China will do, especially in light of what Russia has done.
I would say that, I think our asset value is about GBP 100 million or HKD 100 million in Hong Kong, roughly, on the books, something like that. You know, we can look at measures to protect that investment in terms of, you know, how you manage the balance sheet and where you place debt. All I would say is we've made no decisions, but we are sort of conscious to see that we don't end up with sort of a stranded asset in the event that something does happen. Of course, we all know that if Hong Kong was embargoed for any reason, you'd see a lot of the measures that have been laid against Russia come into play.
We're cognizant of it and funny enough, I'm over with the chairman and the head of our audit in 10 days' time for a week. Obviously, that's something we'll be thinking about, but it's not a big number in terms of the value of the company. It's a very nice dividend stream and earning stream.
Thank you.
Hey, good questions, by the way, I thought. Yeah, very profound. That's not saying that all the other questions were bad ones at all. No, they were good too.
Dig yourself out of that hole.
Not as good. Yeah.
There are no further questions.
Great. Well, if there's nothing else in the room, thank you for your time. Thank you to my great team in getting this through with the auditors and getting it delivered on time. Herculean efforts all round. You know, well done. Well done. Thank you. Thank you for coming.
Thank you.