Good morning, everyone, thanks very much for coming in to join Costain's presentation on our 2022 full year results. I'm Alex Vaughan, Chief Exec of Costain, I'm gonna start the presentation with a bit of a operational highlights overview. Helen Willis, our CFO, she's gonna take us through the financial results for the business. I'll come back and finish off the presentation, just talking you through the progress we're making in delivering the strategy for the business and how we see the outlook moving forwards. I'm really pleased to be able to report a really strong set of results for 2022 that demonstrate that our strategy is now delivering results and we're on the road to where we want to be.
Operating profits are up strongly year-over-year, in line with our expectations, and we were able to deal with the inflation challenges that we faced into in the market. We ended the year with a much stronger balance sheet position, boasting a net cash of about GBP 123.8 million, with a significant improvement in our cash conversion. That also takes account of the provision that we'd made last year for the Peterborough and Huntingdon contract. We exceeded our own internal sort of free cash flow forecasts by the extensive changes that we've made through the business over the last couple of years, both in contract selection, how we bid work and how we deliver work, and also the broader range of services.
We're very confident that we're gonna see this underlying cash generation continue in the years ahead. We're also seeing a very strong pipeline of work across all of our marketplaces at margins that we aspire to. We have good visibility of future work ahead. We've got an order book of GBP 2.8 billion worth of work. I think importantly, the preferred bidder work, we've increased that from GBP 900 million last year to about GBP 1.6 billion this year. We've got that GBP 4.4 billion worth of work that we can touch and feel puts us in a good place looking at moving forwards. That also excludes over 50 consultancy frameworks that we have that every year we generate revenue as we're given works orders on those.
The strong performance last year has given us good momentum moving into this year, and with the continued improvements that we're making to the business in how we drive our operations and how we continue to broaden our services, gives us real confidence that we're gonna continue to be able to grow and develop the business moving forward. The momentum in 2022 has given us, you know, has really transformed the business in terms of the way that we run and operate the business, but also in terms of the services that we provide and the lower risk order book that we've now got as a business. That reinforces the ambition that we've got to actually grow the operating margins of this business.
We've set out for you today the sort of, the targets that we've set ourselves and the milestones at which we're gonna deliver the increase in our operating margins. It started within the second half of last year, delivering 3% adjusted operating margin across the business, then moving through 2023 and 2024, what we're saying is we're gonna be delivering margins of around 3.5% during across that year. Then moving into 2025, we'll be moving those margins up to 4.5%. What's really important is that that's driven by continued operational improvements that's really improving our underlying profit performance, growing the consultancy side of the business. In 2024, we're expecting to start really growing the digital services.
We continue to have the ambition to deliver margins in excess of 5%. Moving on to the operational performance in a bit more detail. In transportation, we've seen good growth in our activities with increases in the amount of workload and also the inflationary costs that have been absorbed in the business with revenue increasing by around about 21%. Last year, when we were announcing our results, we turned around and said that actually transportation outperformed our expectations. This year, transportation is sort of more in line with where we would have expected it to be. That said, transportation margins have been impacted by not recovering fee on some of the inflationary costs, so that dilutes margin.
Also, the fact that we've spent a lot more bidding some sort of what we call mega bids during the course of the year and investing in our digital capabilities. In our roads business, we're continuing to support National Highways as one of their strategic delivery partners, and we've added two new important wins. For the A303 Stonehenge contract, we've won the contract to be the client's delivery assurance partner, major strategic win for us. Also the A66 contract, which is one of the government priorities in infrastructure spend. In rail, we're making good progress on HS2, and I think some important milestones on HS2 was that we've now got a number of contracts that are totally diesel-free. HS2 is really shaping a change and transformation into a green energy future.
We're also continuing to deliver our Gatwick Airport contract for Network Rail, and we're, as a consultancy partner working with Network Rail, we're helping them on some of their future investment plans, moving forwards for next phase in CP7. Integrated transport continues to support our customers in the devolved bodies and local authority governments, including Transport for London. Across that marketplace, we're delivering a number of construction schemes, but also broadening the consultancy offer there. I think one of the highlights for us this year was winning major program of work with Heathrow Airport for the next five years, which is exciting for us. A really good solid, strong performance in transportation through the year. If I move on to Natural Resources.
Well, Natural Resources has performed really strongly in 2022, with really good progress being made across Defense, Energy and especially Water. We can see in Water that the industry is shaping up for a really significant AMP8 investment program, which is quite exciting for us. Revenue and profits have grown in Natural Resources as a result of real operational improvements that we've put in place. We're seeing, you know, growth in our consultancy and Energy and Defense and consistency of what's going on in Water. Obviously the operating margins have improved, and those are in line with the trend and the roadmap that we've got to drive additional profitability. Our Water programs in AMP7, working for six of the major water companies, are progressing really well, and we're having good conversations about, you know, AMP8.
Also our contract here in London on Tideway is progressing well as well. In energy, we've grown our activities by around about 9%. We've got customers asking us to help them, you know, drive performance improvements as part of the energy resilience plans, but also increasingly playing a role in the energy transition. I think the highlight for the year for us has been working with BP on the Teesside Net Zero project where, you know, it is a government priority, it's one of their big drivers, Carbon Capture Storage, and we've been the people doing the Front-End Engineering Design for that work, so a key milestone for us. Then defense continues to grow, so we've got good 36%. All the work, as you know, is around the submarine program.
Costain is basically integrated all the way through the value chain within the submarine program, supporting that work. In summary, for both divisions and for the group as a whole, a really good operational performance through last year. I'll hand over to Helen. I'll leave the clicker.
Thank you, Alex. Morning, everyone. I'll start by taking you through the headline financial performance for last year. You'll remember from previous results announcements that in order to provide clarity on the performance of the group and the divisions, we report revenue and adjusted operating profit and earnings per share on an adjusted basis, as well as a statutory basis. For now, I'm gonna take you through the adjusted metrics, but I'll make sure I explain the difference between the two as we go through. As Alex has said, adjusted revenue was up 21% last year. Adjusted operating profit was GBP 36.3 million for the year, ahead of expectations and up 21% on last year.
We returned an Adjusted operating margin of 2.6% for the year, consistent with 2021. Positively, for our second half, the Adjusted operating margin was 3%, and I'll talk to our pathway on margins as we get to a later slide. Adjusted basic earnings per share for the year was 9.9 pence, compared to 9.6 for 2021, and that's a growth of 3%. We returned a really strong free cash flow of GBP 72.9 million, and that's an increase of 37% over the GBP 53.1 million delivered last year, where free cash flow is defined as our cash from operations, excluding adjusting items and pension deficit contributions, less capital expenditure and taxation. Turning now to the revenue walk.
Focusing on the middle of the slide, you can see adjusted revenue has grown by 21% to just over GBP 1.4 billion. This is driven across both divisions. In transportation, adjusted revenue growth was 21%, that's a result of volume increases and inflation protection mechanisms in contracts. This growth was complemented by 19% adjusted revenue growth in natural resources, primarily driven by strong growth in energy, as Alex was just explaining. As the bars at the right-hand side of the chart show, there were no contract adjustments made in FY22, therefore no impact on reported revenue in the year. That's a demonstration that there have been no contract issues in 2022.
The adjustments, represented by the bars on the left-hand side of the chart reflect the impact of the contract adjustments that we made in FY21. Moving on to the operating profit walk. Again, focusing on the middle of the slide to start with, you can see the adjusted operating profit has grown by 21% to GBP 36.3 million, ahead of expectations. Profit in transportation did reduce by GBP 9.9 million in the year, where increased volumes were more than offset by the impact of inflation, increased bid activity on a series of major opportunities during the year, and targeted upfront investment in our digital capability, as we mentioned at the half year.
GBP 17.6 million of growth was delivered in natural resources, due mainly to an improved operational performance as well as revenue growth, and in particular, in the new higher margin contracts within energy. That was partially offset again by upfront investment, pardon me, as it was for transportation. The investment in our consultancy and digital capabilities has adversely affected our adjusted operating margin by about 90 basis points, and increased bid activity has contributed to a reduction of about 30 basis points.
Central costs were one and a half million pounds higher than last year, with inflationary pressures the main driver for the increase. On the left-hand side, you can see contract adjustments made in FY21 of GBP 39.2 million as well as GBP 0.4 million on the last of the amortization of acquired intangible assets. On the right-hand side, you'll see other adjustments of GBP 1.4 million in FY22. During the year, we incurred GBP 5.7 million of costs relating to the ongoing transformation and restructuring of our business.
We also recognized GBP 1.4 million of age tunnel boring machine write-off costs, and these are partially offset by the recognition of an insurance receipt of GBP 5.2 million relating to the Peterborough and Huntingdon contract, as well as half a million pounds of recognized profit on the sale of a non-core asset. Balance sheet has strengthened, with net assets increasing from GBP 199 million at the end of last year to GBP 211.2 million at the end of FY22. This was driven by our strong underlying cash flows and repayment of our term loan. I'll talk about this on the next slide. We also maintained a pension surplus at GBP 60.2 million at the year-end.
A triennial actuarial review of the Costain Pension Scheme was started in 2022, and discussions are currently in progress. We'll have those completed by the end of June 2023 as we finalize the valuation. Our trade receivables and other current assets balance has reduced. In FY22, we've included an insurance recoverable of GBP 9.4 million. Hence, the year-on-year comparable shows an underlying reduction of GBP twelve and a half million as working capital continues to be managed well. Other movements of note include a decrease in trade payables and other liabilities. That's driven by the settlement of the Peterborough and Huntingdon provision earlier this year. I'd like to draw your attention to the green bar on this chart representing adjusted cash flow from operating activities of GBP 73.9 million over the year.
This is a result of a continued focus on strong execution and strong working capital management. We incur capital expenditure of half a million GBP and tax payments of half a million GBP, taking these together with our adjusted cash flow from operations results in adjusted free cash flow for the year of GBP 72.9 million, up 37% on the same period last year. This includes GBP 16.9 million of early receipts from customers compared to GBP 8.4 million last year. The red bar, excuse me, on the left of the chart shows cash flow on adjusting items of GBP 46.4 million, which represent payments in the year on contracts against which we've previously taken a significant contract adjustment.
Most notably, the payment of GBP 43.4 million settlement provision on Peterborough and Huntingdon, as well as other final costs in relation to this contract and net of a insurance receipt of GBP 5.2 million and final costs on the A465. It's worth noting that our operating lease expenditure, which is really a cost of us doing business, is shown outside of cash from operations under IFRS 16. We made cash contribution payments to the pension scheme of GBP 10.8 million over the course of the year. After lease payments of GBP 8.4 million, repayment of borrowings of GBP 40 million payment of interest costs of GBP 2.1 million and GBP 0.8 million on cost of investments less sale of PPE.
We've ended 2022 at a net cash position of GBP 123.8 million. The Prompt Payment Code continues to be a focus for us. During FY22, we paid more than 98% of invoices within 60 days. Costain has been ranked as one of the top three fastest paying main contractors in construction following the submissions to the government's duty to report on payment practices and performance. Net cash position at the end of FY22 comprised Costain cash balances of GBP 67.3 million, cash held by joint operations of GBP 56.5 million, and borrowings of nil compared to GBP 40 million at the end of December FY21. During the year, the group's average month end net cash balance was GBP 99.2 million as compared to GBP 107 million over 2021.
Only a slight reduction despite the Peterborough and Huntingdon provision payment at the very start of the year. In November 2022, the group successfully concluded its negotiations with its bank and surety facility providers to secure a one-year amend-and-extend of its facilities with a maturity date of the 24th of September 2024, ensuring the group has in place banking and bonding facilities to meet current and projected user's requirements. The objective of our strategy is to deliver long-term value to shareholders while maintaining a strong balance sheet that underpins our financial position and supports our growth prospects. The board recognizes the importance of dividends for investors and is committed to returning to dividend payments at the appropriate time. For now, we're focused on investment for growth, maintaining discipline in contract selection, increasing our cash balances, and strengthening our balance sheet. Moving now on to the order book.
Costain enjoys good overall forward visibility with our combined order book and preferred bidder book at December FY22 increasing to GBP 4.4 billion from GBP 4.3 billion at the end of FY21. This combined view is increasingly relevant as we anticipate a shift in our business mix towards the preferred bidder book as we secure long-term framework positions with our customers. The order book stood at GBP 2.8 billion at the end of FY22, lower than the GBP 3.4 billion at the end of FY21, however, an increase from half year. This reduction reflected the timing of major contract bids, our customers' investment programs maintaining discipline in contract selection, and the shorter lead time of consulting and digital work.
It's also important to note that the order book does not include any fixed price construction contracts, pointing to the quality of our order book. The preferred bidder book grew by to GBP 1.6 billion, up from GBP 0.9 billion at last year-end, with the main additions being contracts in road, water, and integrated transport, including Heathrow and the A66 contract. The preferred bidder book comprises awards for which there's no other competitor, and we're in final negotiations prior to entering a contract or it's an exclusive framework where further works orders are required. Taking this total picture we have more than GBP 1 billion of secured revenue for FY23 at the year-end representing around 80% of revenue. Our strategy is to deliver a transformation in the business in terms of assured delivery lower risk contracts in our order book, and a broader business risk. Mix, sorry.
Our ambition remains to deliver improving long-term operating margins. Our transformation program is driving change across the business. We're seeing changes in the quality of new work secured and in the culture of raising any issues and dealing with them promptly through the life of a contract. We've launched new values and behaviors to support the culture we're striving for. In our contract selection, we're shaping our contracts to better re-reflect the balance of risk and reward, working with our customers and using the government's Construction Playbook to guide us. We're continuing to invest in our risk and assurance activities throughout the contract life cycle through our bidding activity across the delivery of contracts, and of course planning the contract completion with a strong focus on risk awareness and mitigation rather than risk aversion.
The Operational Excellence Model gives us a grounding of brilliant basics, and we're focused on continued operational improvements in the delivery of contracts. This is important to drive resilience in those contracts and certainty of outcomes for our customers, responding to the challenge of improved productivity to drive better ESG outcomes and to deliver on plan. We're investing in improved processes, tools, and systems to support more efficient delivery of contracts on the ground. This overall program is driving simplification and efficiency through the business while investing in key capabilities to drive growth. This focus and investment drives our pathway to higher margins.
We've delivered 3% adjusted operating margin for the second half of FY22. We set margin milestones to deliver, firstly, adjusted operating margin of 3.5% during the course of FY24 as we increase effectiveness within the business through the implementation of our transformation plan the implementation of our Operational Excellence Model, growing our consultancy services, and increased effectiveness in procurement and ongoing control of operating costs. The second milestone, adjusted operating margin, of 4.5% during the course of FY25 by improving margins within complex program delivery, further efficiencies from our transformation plan and OEM and an increasing mix of higher margin contracts. We continue to have an ambition for an adjusted operating margin in excess of 5%.
We remain mindful of the changing macroeconomic and geopolitical backdrop, recognize the challenges created by higher commodity and energy costs, and the constraints on some customer spending in the near term. We're making improvements to our operational performance, have a strong cash position and clear strategic priorities, and hence remain confident of managing these headwinds. Looking ahead, as a result of our broad customer focus, we've already secured more than GBP 1 billion of revenue, representing around 80% of expected revenue for 2023. Importantly, we also expect to increase our net cash position in FY23 building on what was a very positive year for cash in FY22. We remain confident of the group's strategy and long-term prospects. With that, I'll hand back to Alex.
Thank you, Helen. Right. Thanks, Helen. I'm now going to give you an update on the progress we're making on implementing our strategy and the business outlook. As I've talked about in previous presentations our national infrastructure is experiencing significant change. That change is driven by a number of trends. We're working hard to address climate change and the impact and the drive to get to net zero. It's about resource, environmental, and economic resilience for the country. We need to transform the way that we deliver infrastructure and the way that infrastructure operates because we need more of it. We need to invest in more of it than we have the resources to do it. We also need to balance and enable economic growth and social change.
All of that is the essential drivers that was behind the government then launching their National Infrastructure Pipeline that turned around and said that there was gonna be GBP 600 billion worth of investment by 2030 to address all of those challenges. We've purposely positioned our business to turn around and address transportation, water, energy, and defense. We've positioned ourself in those markets firstly because we believe there's long-term strategic investment that is gonna be committed in those markets to deliver those needs.
Secondly, those are markets where Costain can build strong competitive advantage in that place. But in those markets, we've chosen to work for the tier one blue-chip customers because they operate on long-term strategic programs and they procure their work on five-year programs and they want to work in a closer, more strategic relationship that enables Costain to be at our very best. Very clear driven by the trends in the market, government investment, the key markets we're focused on, and the type of blue-chip clients that we're working for. As I said, our customers predominantly operate under sort of long-term, underwritten, and committed five-year investment programs. It's important that we've got a track record of being on these programs and being able to secure places on the next phase of those programs which positions Costain really well.
These markets, the customers we're working for, and the focus on long-term strategic programs is what's really exciting for Costain. It's what gives us great positivity around the future direction of the business and the future opportunities of the business about how we're gonna drive growth in our business and how we're gonna drive economic value for Costain. If I can bring some of these to life at the moment, National Highways are coming towards the end of their Road Investment Strategy 2. We've been a strategic partner through all that, throughout that program, and we're currently in discussions with them. They're engaging with the whole supply chain around RIS3 and RIS4, and they're actually looking to procure work for the next 10 years worth of work.
High-speed rail, positively, the government has committed to deliver high speed HS2 all the way to Manchester from Euston. Costain has already had four contracts on high-speed rail, we expect to play a key role in high-speed rail all the way through to Manchester. From an Integrated Rail Plan, huge investment going on. Network Rail currently procuring their CP7 control period work at the moment. For local government, that includes for us, you know, aviation. If we look at Manchester Airports Group, who we're working for, Heathrow, we're working for, we're seeing them now procuring, you saw that we announced last year the win of the Heathrow contract for the next five years. I've talked about water already.
AMP8, in all the conversations I'm having with the chief execs of the water companies and the regulator Ofwat, AMP8 is gonna be a major uplift in terms of investment. We all know why, because we all see what's in the press. There's gonna be huge investment to safeguard the environment and ensure that we protect a resilient supply of water for the U.K. We're expecting in the budget tomorrow for there to be further announcements on energy around nuclear and also around carbon capture, and that investment is gonna continue to grow. If we look at defense, overnight, we saw announcements around the submarine program, which we're essentially involved in, and we see good growth opportunities in defense and in nuclear. Exciting opportunities for us.
What we've decided to do is we want to be a very different type of organization, and we, you know, we want to be that new kind of company. We're not focused on only helping our clients deliver their capital delivery programs. We're a business that's looking at our clients' whole ecosystem and how can we help them meet their business needs. We bring together our unique mix of experts in our business to provide a broad range of solutions for our customers. It really depends on how the customer wants to procure. We can support our customers either as the contractor or as the consultant or as a digital services partner. It's really geared around what is driving their decision-making.
Very much, we are a business that are proactively shaping the solutions that customers are looking for in the market today. Two examples are we're working with Ofwat at the moment and a number of water companies looking at how can we turn wastewater into hydrogen, and how can we then connect that water company with cities to actually drive clean transport networks. We're also working with the Department for Transport at the moment, looking at how can we electrify the overhead electric lines on the motorway network that actually we can have HGVs driven by electric overhead power. We're also expertly supporting our customers in the delivery of their capital infrastructure investment programs. Predominantly, that's been as a contractor where you see us on HS2, for the water companies, for National Highways, where we're a contractor delivering that.
Increasingly, we've built a leading position, one of the leaders in the market at the moment around being a delivery partner. In that consultancy role, we're helping AWE, we're helping Cadent, we're helping Babcock, we're now helping National Highways on the A303 Stonehenge to really be able to deliver their programs for them, be their delivery partner to manage their supply chain to be able to deliver those programs. Then we're also helping our customers to maintain and optimize the performance of their existing infrastructure, their operations. For United Utilities, we're supporting them in their maintenance transformation plan in how they maintain, and we manage all of their maintenance on their behalf. We're helping EDF extend the life, and you'll have seen the announcement by Centrica this morning. We're helping EDF extend the life of their nuclear power generation.
We're helping water companies optimize the performance of their existing networks that prevents them having to make additional capital outlay. We're helping National Highways improve the productivity of its highway by bringing digital technology onto that highway. Our focus on our markets, our focus on the type of customers that we want to work with, and then the broad range of solutions for us is what's really exciting and what presents huge opportunity for us in helping our clients. In terms of the progress we've made today, we are a leading tier one contractor. We're delivering major programs for Thames Tideway, the A30 for National Highways, HS2 at West Ruislip, the Preston Western Distributor Road, Gatwick Station major upgrade, and lots of water assets right across the UK. Really strong leading position as a tier one contractor supporting blue-chip customers.
We've also grown a position as a really strong consultancy business. I've talked about this delivery partner role. That is really bringing the DNA of Costain as a construction company to bear as that delivery partner who makes sure programs get delivered. You know, we've grown that from AWE to then Cadent, to Devonport, to now National Highways on the A303 and also Heathrow T2 baggage. Major growth. That's a big area that we wanna continue to grow. We're also growing our solution de-design and project control services into customers. We're a significant designer for TfL, looking at their underground networks. We support water companies in designing new asset infrastructure. We're obviously helping BP, as I've talked about, and EDF on their project controls and as well as Network Rail. A growing area of that type of work.
From an advisory point of view, this is where what the client's looking for is someone who helps drive innovation, someone who helps come up with solutions, someone who turns around and makes things happen. That's making a big difference. We're seeing a great reaction from our clients that they're looking for someone who's proactive, rolls their sleeves up and help make things happen. As Sam would say, "Gets things done." That's, that's our real value. We're really pleased with the growing consultancy. We're also helping our customers on their, on their digital solutions. This is where a digital solution is gonna help optimize the performance of infrastructure. We've been helping Anglian Water optimize their existing networks.
We've been helping TfL be able to manage their security within London, but also help them manage their operations across every single CCTV camera in London. Playing a proactive role with National Highways in shaping the future of their digital road strategy and what digital roads is gonna look like in the future, and helping a number of customers to transform through data and insight how they can get to net zero quick. I've got to be very clear, the progress we've made in digital isn't as fast as we wanted to make it. This year we've got a program of work that we're doing to really work with customers, getting involved in their five-year business planning moving forward to really help them think about actually what are the transformative effects that digital could bring that could actually drive cost reduction elsewhere in their program.
We're looking forwards to making more progress in that area. ESG for us is a clear point of differentiation for Costain. You cannot win a contract for HS2 or Tideway or a water company if you don't display that you can deliver green solutions, that you can work with and develop strong supply chains, that you can access the necessary skills to deliver projects, that you can build relationships with the wider stakeholders because you're gonna bring great social value. It's one of the big differentiators. If you wanna operate in our market, you need to be a leader in this area. What's positive is it drives business performance. All of this area is delivering better results for Costain. It's giving us access to stronger SMEs. It's giving us access to greener solutions.
It's giving us access to new skills, it's helping unlock local support and buy-in for infrastructure because of the social value. This is a business imperative for us, we see ESG as a critical factor that's gonna support our growth. That's why we have an SME academy to develop SME businesses to help them grow, develop, and become more entrepreneurial. It's why we have social value champions throughout our business to really drive and engage local communities. It's why we're proactive on shaping hydrogen and clean energy solutions. This is not just a slide. This is core to everything we do in Costain. It is vitally important. In final summary, I'm really pleased, as you can tell, with the performance in 2022.
It's great to be able to deliver these results, which has been a result of an outstanding amount of work and hard effort put in by the whole Costain team. you know, the overall commitment to infrastructure investment is really positive to see, really clear to see within the Autumn Statement right across our markets, as I've talked about. Our focus remains on bidding work, delivering contracts really well, really strongly, and improving those margins all in line with the sort of risk matrices that we've got. We've got a good level of work secured for this year and further opportunities ahead of us. I'm very confident we're on the right path, and we're making really good progress to deliver the growth and margins that we aspire to.
As Helen said, we are mindful of the macroeconomic situation at the moment, and we're also mindful of customers' spending priorities and the timing of their spending. What I would say is, with our broadened customer base, with the further improvements that we've been making to the operational performance of the business and the really strong cash position that we've built, we are confident of being able to navigate these times, and we're well positioned for future growth. Thank you very much, and we'll take some questions. Charlie? I'll sit down, but you can still answer.
Good morning. Joe Brent from Liberum. Can I ask three questions, please? Firstly, I think Helen mentioned that no fixed price contracts. Am I right in thinking that's the first time you've said that? Could you just give us a sense of the trajectory of that? Secondly, you talked a lot about consultancy and digital. Is there any thought to giving some sort of further detail on the numbers, you know? Is there some overlap between digital and consultancy? What sort of percent of the business is it, and what's it gonna become? Thirdly, Alex, you talked about AMP8, which does seem like it's gonna be quite exciting for natural resources. Could you give us a little bit more color and a sense of where AMP8 could be relative to AMP7?
Okay. Thanks, Joe. Do you wanna take one and two, and I'll do the third one?
Yeah, sure.
Wanna make sure the answer's right.
Yes, I think it is the first time we've said clearly no fixed price contracts in our order book. I guess that's been a progression as we've been working through contracts. It's the demonstration of the type of work that we now take on. Thinking about that management of risk, the risk and reward is really important for us. I guess that's just a proof point for you that that's what we've been working on. On consultancy and digital, we don't call it out separately. I think you're right, Joe. There is a bit of overlap between the two, between digital and consultancy.
In terms of quantum, if you look at the natural resources page in the RNS, you'll see the energy number is at GBP 79 million revenue, and defense GBP 58 million. By and large, you can consider that to be consultancy with delivery partner included in there. That gives you a sense of the scale that we're building towards. It is a continuum of the construction complex program delivery through consultancy and digital wraparound. It's not that clear-cut, but I think that gives you some sense of scale, if that's helpful.
presumably highways includes a lot of delivery partner work, which is consultancy as well.
Absolutely right. Exactly right.
Obviously, you know, we've now got Heathrow Airport. We've got the A303, which was an amazing win too, wasn't it? You know, those contracts are in there as well. You know, the Transport for London consultancy work. It's just the way we run our business is we're focused around our customers, totally focused around our customers. It's about how do we, you know, how do we support them in what they want to do, as opposed to having a consultancy team over here and that just causes a disjoint. That's not how we run the business. If I come to your third point, AMP8 is gonna be exciting.
I've got a meeting with the Ofwat board coming up, just to sort of run through that. We've been talking with the customers. You'll have seen everything that's been in the press recently around sewage discharge into river courses and coastal waters. AMP8 is gonna be a real program of work to address that challenge. The water companies are going to invest significantly more money right across the patch, every single water company, to address that challenge over and above what they've been doing. In addition, looking at resilience, there's gonna be a big investment in reservoirs as well.
Probably the first time that reservoirs are gonna be invested in for a long time in the water sector, just recognizing that, you know, if we have summers like we had this last summer, then we need more resilience and capacity.
Will it double AMP7?
Very close to double AMP7. Yeah.
Thank you.
Thanks, Joe.
Thanks. Jonny Kuba at Numis. Could I ask firstly, on the increased bids in transportation in the year? It would be good to understand, you know, you said there were major projects. Did they land in H2, or are they in the preferred bidder, backlog now? Yeah, any indication of what they might be?
Yeah. Yeah, there was a significant number of bids in transportation through the course of last year. Some have landing. You've obviously seen us win the A303, which was positive. You've seen us win Heathrow that we've announced. There are other contracts. I think I said last year that there was the next phases of HS2 that we've been bidding. There's also further local authority work that we're bidding at the moment. There are things in the pipeline that we hope that we'll be able to announce progress on later, you know, later on this year.
Thanks. On HS2, there was a lot in the press last week about the project being rephased, and it seems even with phase I, certain parts of the project are moving quicker than others. Have you had any discussions with HS2 Limited about changes to phasing of the project and how that might impact the contracts that you're on?
Yeah. The answer to your question is yes, we have been in dialogue with both the Department for Transport and HS2. All of the supply chain's been involved in those discussions. I think, you know, and as Helen said, and as I said, you know, we're very mindful of the government's phasing and the government's priorities for investment. The real positive thing from the announcement last week is that HS2 is gonna be built all the way from Euston to Manchester. What we're talking here is about a rephasing of priorities. I think you've also got to step back and look at what the government is investing and other people are investing in infrastructure.
You know, if you're gonna invest in driving clean energy and the energy transition in nuclear and carbon capture, as, you know, we're expecting them to announce, if you're gonna drive the investment to be able to support the submarine program, which we're actively involved in at the moment, which is, you know, billions of GBP worth of investment, and you've got HS2, and you've got highways, and you've got rail, you know, you have to move things around. I would just sort of say, we can't just look at one project in isolation. We need to look at the whole ecosystem and the amount of money that's being invested.
Thanks. The last one from me is on capital allocation. You've you know, maintained commitment to paying a dividend. Given the strong increase in free cash flow in 2022, was there a discussion to pay a dividend, a final divvy this year? What stopped that, and kind of expectations of when that might be reinstated?
Yes, we've, we have been discussing it. You know, there is a real commitment, as you say, to return to it. We recognize that's really important. There is a lot that we would like to do with the cash that we built. There's investment in our transformation program and in building capabilities that are gonna support the strategy and our growth ambitions. Our feeling for the moment that it's right to continue that investment and to continue to build the resilience in the balance sheet. Yes, we'd like to get back to it as soon as we can, but I don't think I can give anything more firm than that at the moment.
Thanks.
Yeah, Andrew Nussey from Peel Hunt. I guess just following on from Jonny's question there, has the pensions or discussions with the pension trustees had any influence over the dividend decision for the second half? It's the first question.
It is a factor. We're looking to complete the negotiations by June of this year. We have a payment plan. You saw the GBP 10.8 in the cash flow for 2022, that is an existing commitment along with dividend matching. We are deep in those conversations with the pension trustees, looking at what the actuarial conclusion is, and therefore what the art of the possible might be. There's a lot more work to do there yet.
Okay, second question. Alex, in terms of sustainable free cash flow, you highlighted three reasons that you think life has got a little bit better for Costain. I'm just curious, the reference to how you bid work and how you deliver work, what has fundamentally changed that leads to more sustainable free cash flow moving forward?
Well, I think we've good question. Thank you. We've just set ourselves some very strong criteria around the type of work that we will take on and the type of risks that we think are the right risks to take on, in other words, those that we can manage. Therefore, we've just become very proactive in engaging with our customers to help shape their procurement to try and get it in the right place. If after all of that, they choose not to give us a tender that has the right T's and C's, then we decline those tenders. We're very rigorous in terms of the type of work we will pursue and we won't pursue.
I think the key thing I would make there is the proactive thing to try and shape and help customers understand why we have an issue with perhaps some of the things that they've been trying. We've had a very positive reaction. We've had a number of contracts where they've totally changed their procurement when they understand from our end of the telescope, how we see things. Then just from an operational point of view, you know, we brought in the Operational Excellence Model, really part of being a learning organization, which has just been helping everyone understand how what good looks like and how we continuously improve and how we industrialize the learning in the organization.
That's one of the things, and that's one of the things that Sue and David have been leading in the organization. I think one of the other, the third thing I would highlight is just the cultural change that Helen's brought since she's come in to, you know, the commercial and financial rigor in challenging ourselves as to, well, what might be the downside? What might be the upside? Just that more holistic overview of contract performance rather than, "You are on track, aren't you?" Tick in the box. It's really, you know, challenging ourselves as to what needs to be true, what actions we're gonna take, and being able to make those decisions early and making sure the business is, you know, accounting things on a more conservative basis than before.
I think just one add to that, it's really rigorous working capital management thereafter. In this industry, collecting your cash from the sorts of customers we have is not a problem. The problem is managing change and scope on a contract, which is what Alex is referencing. For us, it's that management of working capital, work in progress balances and being on that very quickly all the time, that then turns into cash.
I guess sort of reading into that, were there some good wins in 2022 in terms of tidying up aged balances and what have you, that really underpin the cash performance?
I think in 2021, I referenced that as well. I think 2021 and 2022, there's still a little bit opportunity left to go, but that might slow down. Yeah, it's just good solid operational management.
Last question, just in terms of the preferred bidder status, should we really be thinking that should be 100% conversion from preferred bidder value into effectively revenues? That is your level of confidence in terms of what's there.
Yeah. You know, the, I mean, the, essentially, we're just trying to be a lot more conservative in how we look at the order book that, you know, if it requires a final government, sorry, a final customer decision before we can actually commence work on that contract, we've decided to put it into a preferred bidder. We are the selected partner to deliver that contract. We have essentially entered into a head contract for that piece of work to do that piece of work. It's just that it requires another... You'll all remember, you know, part of that is, you know, we just wanna make sure we don't have to reverse stuff out because it doesn't go ahead.
Is that different to 12 months ago? Effectively, you've changed how you recognize-
I think it's different. We talked about it at the half year, but definitely from 12 months ago, there are things that probably historically we would have put in the order book that now are in the preferred bidder book.
Okay. Thank you.
Alistair Stewart from Progressive Equity Research. A couple of questions. First of all, on the risk management slide, you've got the contract selection and senior management review in the work winning and contract duration examples. Most of that seems, you know, industry best practice, I've not heard of it before. Independent review, is that a new departure for you? And how does that manifest itself? Is it genuinely independent from outside the group? That's the first question. The second question is on your top three best payers. Quite a few companies say, you know, they've improved their payment terms, but nobody seems to have actually measured the benefits. Maybe from the client side.
Are some public clients more willing to take you on? Are your supply chain more likely to sharpen their pencils and have a tangible margin benefit? Have you actually measured that?
Yeah. Look, let me take, I'll have a go at both of those, and then you can build, Helen.
Sure.
From an independent review, this isn't people outside of the company. This is just making sure that if we've had a team that is focused on winning a tender, then we bring in another Costain team from outside of that area that's got a different area to come in and just stress test some of the assumptions, some of the thinking. Just really as that devil's advocate, why do we think that's gonna happen? Why have we assumed that? It's been really. We've also got our head of risk group role involved in that. We've got head of internal audit gets involved because obviously they see things around the business as well. It's just a good sense check. We felt the risk is that people get caught in the chase.
Yeah.
Yeah. When they're trying to win a bid. This is a way of making sure that we ask ourselves the questions that, you know, we probably would rather we didn't ask ourselves, but we do ask them to make sure we get the right answer. That's the independent review. It's been really beneficial actually, because it's really helped us in how we communicate our win themes. You know, sometimes you sort of by just having that probing, you get a better answer. In terms of the best, the top three best players, I think what we see is we put a lot of focus, and it's something that David Taylor, our Group Commercial Director, has been driving for a long time on supply chain relationships.
We have really strong strategic partnerships with suppliers, and they really value the behaviors that we bring in, that we're here to care and look after them. We win a lot of our work because they help us come up with a better way of delivering the solution, whether that be an earthwork solution, a structural steel solution. They just really help us think about doing it differently. That's what we really value.
I mean, I quite understand that you would win more work, but have you actually measured it or given any sort of analysis?
I'll be honest with you, we haven't-
Yeah.
We have, you know, we haven't measured it. We just, we just know that by having more strategic relationships with our supply chain, the same way that our customers choose to have a more strategic relationship with us, that closer relationship, that forward look ahead, that getting involved early enables people to contribute and develops the solution to be better. Have we got a KPI dashboard that turns around and says, paying people equals this? We haven't done that yet. We add that to our long list of measures that people want in the business. It's a good challenge. Thank you, Alistair. Got Stephen at the back.
Stephen Rawlinson. Hi. Just on a couple of questions. Firstly, with regard to sort of your capacity to deliver the margin improvement you talked about, could you touch upon your own experience of staff retention and recruitment? I'm thinking about availability and affordability of the people, particularly in the area of consultancy, where skills might be lacking to get to the sorts of points you're talking about. I think we've talked a little about the subbies as well, in what you've just said, but again, there's an availability and affordability issue there, along with are the skill sets there to do the delivery that you want, and how do you grab those resources in a competitive environment? The second question is related to ESG.
You positioned it as a differentiator, a competitive weapon. There are two elements to that, specific questions really around are there additional cost to that, to Costain compared with your competitors? Secondly, how do you present that to your clients, to customers, and say, "We're better at ESG than the other guys"? 'Cause everybody in this room goes to meetings, and they all say they do ESG, and they're all good at it. How would I know as an outsider that you're better at it? Because you did say it's a differentiator, but it is a competitive weapon. Could you just talk us through that point, in particular, whether there is an additional cost to that? I get your issue about, you know, developing hydrogen from wastewater as being an innovation, but that's not for free.
There must be something going on there. If you could explain that a little better, it'd be great.
Okay. Thanks, Stephen. Well, look, I think, I think for all of us, staff retention is a key issue. When you get the annual report, you'll be able to see some of the headline results from our staff survey that we've done. There's a lot of work going into how we help, you know, everyone in the business flourish to be at their very best. We're putting a lot of work into staff retention. We don't really have a problem in attracting people to Costain, which is great news, and I think that's generally the type of work that we're doing and the type of business that we are and the culture we've got is great. We still have a lot of vacancies because we've got a lot of demand. In the business.
A lot of effort goes into having to recruit people. You know, if we look at, you know, some of the programs we've got around the country, you know, if you take, you know, the net zero challenge we're gonna have up at Teesside, you know, the reality is Teesside has been an area that has been underinvested in for a long, long time. What we're looking to do is bring all of the learning that we had in Crossrail with the skills academies and that to be able to drive long-term. That's why we really need the government to set out very clear long-term plans because this is gonna be about long-term investment to grow the skills to meet the demand because there just isn't, there just isn't that skill base.
It is a challenge which, you know, drives a lot of people to want to look at automation and things like that. I'm not gonna hide from the fact that we have to work really hard to recruit. You know, we don't have a problem attracting people, but we have to work really hard to recruit the number of people we recruit every single month. We're working really hard to retain people, you know. In London, it's been a challenge, what with the scale of HS2 has been to keep people, so as we came off Crossrail to make sure they wanted to come onto our part of the program to go elsewhere. There's a huge amount of work that we're doing across the business to manage that and similar in the supply chain.
You know, I think coming back to the strategic relationships with the supply chain and giving them long-term visibility of the workload, that's what drives you getting the supply chain that you want, is that you can help them manage the peaks in flow in their demand. If you can give them continuity and you can give them good terms and conditions and you can give them the ability to add value, then you'll have the people choosing to come and work for you as opposed to someone else. You'll be able to tell me in a minute whether I answered your question or not. If I come on to the ESG differentiator, I think what I would say is nobody can just walk off the street and work for HS2, National Highways, a water company, Network Rail.
You have to demonstrate these capabilities. To get on the list, you've got to be good at ESG. We pride ourselves. I think if you look at HS2, the people who have got the best carbon reduction statistics at the moment is our joint venture, and that's something we're very proud about driving that. We want it to become something that is increasingly a differentiator in the market. I'm not saying we're miles better than the other people who compete in the same marketplace as us, but we want to be the leader in the pack, which is why we're so proactive. It does cost money.
You know, we are investing money. When we work with the DfT on the innovation around overhead electric lines, we're making an investment on behalf of Costain in helping shape that because we believe we're gonna create a new market that we're gonna create a position for us in. The same in hydrogen. Long before hydrogen became a thing, we were investing in PhDs at Chester University, where it is where they've got the big hydrogen sort of think tank to sort of work in shaping some of that. We are investing in putting people in to shape the market. You know, we had a climate change director and have got someone leading climate change for the business. We're investing in that role 'cause it's really important for us driving forward.
We've got people who spend a lot of time supporting the supply chain, building relationships, running. We run a Supply Chain Academy. We fund that. It's to help our supply chain become more resilient, better, more innovative than what we are. Yeah, there is a good level of investment we make in making us better, but that's because it helps us win. It's part of our work-winning budget to grow this business. Oh, Mr. Nussey again.
Just to follow up as well. Obviously margin targets are welcome. It's very difficult for us outside observers to look at run rates and measure that. In terms of the 4.5% during the course of FY25, should we be thinking that as a target for the second half to deliver in terms of FY25? I know it's a long way away, but it's just in order to try and measure that progress.
We're not being that firm. I'm giving myself a little bit of wriggle room, as you might imagine. That's why we've said during the course of, you know, at the very least it would be the exit rate coming out of that year. We'd love to beat it. You know, we're doing everything we can to move things in that direction. I don't think we can commit to that just yet.
Okay.
Thank you.
We have a number of questions from the online audience, the first of which from Dan Dutton at Barner Management. Digital has been spoken about for a number of years now. Why hasn't it progressed as quickly as you anticipated, and why are you confident that progress will be forthcoming?
Right. Thanks, Dan. Look, I think we are disappointed with the growth. It isn't that we're not winning, the contracts. It's just at the moment that customers have got other priorities where they're spending their money at the moment and, it hasn't grown as an addressable market at the rate, that we'd have wanted. What I am pleased on though is that we have broadened our footprint of capability and the foundation that we've got in terms of digital capabilities as we've been working with customers, to develop that, which has been a great success. Why do I think it's gonna be different? I think just talking to the chief execs of the customers that I go to see on a regular basis, it's very clear in their thinking. They're really talking about it.
They're talking about some of the sort of first no regrets starter projects that they're looking at doing in this space. Certainly we can see that the boardrooms of our customers are talking about this becoming a bigger and bigger part of their business and that's why we've had a piece of work with the team at the start of this year working and getting around our top customers to turn around and understand what's in their business plan, share ideas, help shape their business plan investments so that we can then see that investment rolling through.
Okay. Thank you. The next question comes from R. Widdon, who's a private shareholder. Net finance expense was GBP 2.1 million. If interest rates were to stabilize at the current level and given the repayment of interest-bearing loans and borrowings during the year, would you see this figure becoming positive in 2023?
Thank you for the question. We'll definitely see it moving in that direction. The timing of it depends on the fees for our facilities and regardless of whether we utilize them or not. Clearly it's dependent as well on the interest rates as we go through the next couple of years. We're definitely will see that expense reducing, possibly to flat and who knows, depending on interest rates, how that might then move into positive, but I couldn't give you an indication on that, of course.
Thank you. As there are no further questions from the online audience, I'd like to hand back for any additional or closing remarks.
Okay. Well, look, thanks very much and, as I said at the start, look, we're absolutely delighted to be able to announce a really strong set of results and, you know, see strong opportunities in the marketplace ahead and we're very confident in the continued growth and development of the business. With that, I'd like to close and just thank you very much for taking the time to join us this morning. Okay. Thank you.