Good morning, everyone. Thanks very much for taking the time to join this morning, for Costain's sort of half-year results for 2023, our presentation. I'm Alex Vaughan, Chief Executive of Costain, I'm gonna sort of give you a set of headlines to our results this morning. Then Helen Willis, our Group CFO, will come and take you through the financial results. That's the bit you're really interested in. Then I'll return and sort of give you an update from a business point of view of the strategy and the outlook that we've got for the business.
Look, I'm really pleased to be able to report a, a strong set of results this morning that demonstrates the sort of resilience and strength of the business, we're absolutely on the road to be where we want to get to. You know, an increase in adjusted operating profit in line with expectations. Cash conversion remains a real strength of this business, with a period in net cash of about GBP 132 million. Our strong cash performance is really benefiting from the, the risk management that we've got in the business and the sort of contracts that we select and the assured delivery that we've got. We remain highly confident that this cash generation will remain an aspect of how we deliver our business in the years, in the years ahead.
Look, as previously reported, we took some key actions in the year. We've reduced the cash payments into the defined benefit scheme, which is great, so that retains more cash in the business. Thanks very much to our banking and surety group for your support, that we've now secured a further three years working with you. You know, the good news was that we were able to move to a green finance deal as well. That just shows the confidence in the business and, and the strength of the business moving forwards. Look, we're really confident in the market outlook, as we look at it, and, you know, if I look at what the customers are saying to me and what they're going to invest, huge investment, to meet some of the challenges that I'll talk about later on.
That is evidenced by the sheer volume of work that we are bidding at the moment. I've got to say, we've probably never been as busy as we are right across the business in terms of the amount of work that we're bidding across all of our markets. All of that work is at the margins that we, we aspire to, to meet. We've got really good visibility with GBP 2.5 billion worth of high quality, low risk order book, together with another GBP 1.5 billion worth of forward bidder. That's GBP 4 billion worth of secured work, together with what customers are saying to us, together with how much work we're bidding, gives us really strong confidence for how we're taking, taking the business forward.
Our continuing momentum is really growing in how we're transforming the business, both in terms of the broader customer mix and in terms of the broader service that we're doing. Our ambition continues, and we're on track to deliver those growth in margins that we talked about at the full year. As a result of that confidence and the strong balance sheet position, the board is currently considering an interim dividend payment, and we'll update you on that very shortly. There's a process that we have to go through that some of you in the room will know more about. If I can move on to sort of the operational performance. You know, in Transportation, we've certainly, you know, we've seen a very small reduction in volume in activities.
That was what we expected, and an adjusted operating profit and margins that reflect the inflationary impacts. If you remember, when I presented the full year results last year, I did talk about the fact that there was a couple of contracts, that their margins were being a bit depressed by the inflationary, inflationary cost impacts. Look, as has been publicly reported, following high inflationary costs, the Department for Transport has had to rephase and rescope a number of their investment programs, and our HS2 contract has been affected by that, and that's really so that they can meet their departmental, Department for Transport spending limits. We see this as a very short-term issue at the moment to just rebalance the books following high inflation.
Certainly, the conversations I'm having with the Chief Execs of, you know, the Department for Transport agencies, is that spend will return to the sort of normalized levels that we've got. In our roads business, we're continuing with delivering 6 infrastructure projects at the moment with them, together with mobilizing the A303 contract, where we are the assurance delivery partner. We've announced, and we did announce previously, that we'll be ending our involvement on the A66, and that will happen probably in the second half of this year. In rail, our activities on HS2 continue to progress and progress really well, and we're working to a revised schedule of work and a revised budget, which is what we expected and what we said would happen when we ended the year last year.
We're continuing to deliver the Gatwick Airport station for Network Rail. Also, we're working on quite a number of other Network Rail contracts from a design point of view in shaping future investment plans for them. I think if you look at integrated transport, which is sort of how the rest of the UK gets connected, we saw the completion of a significant highway scheme in there. We are now beginning to see the growth coming through from having secured frameworks. The five-year program of work we've got with Heathrow Airport, the work we've got with Transport for London, the frameworks we're on with Manchester Airports Group, and a number of local authorities. We're really beginning to see that work coming through that will give us growth in those areas as well.
From a Natural Resources point of view, look, it continues to perform strongly with good progress from Defence and Nuclear Energy, and in particular, water, where many of our customers are increasing their spend as they get towards the end of AMP7. Then the industry is really gearing up for the challenge of the sheer volume of investment that's going to be made in AMP8 and AMP9, with all of that starting in 2025. Revenue and profits have grown in natural resources as a result of really strong operational performance and consultancy growth, across energy and, and defense. And our adjusted operating margin has also improved in line with the roadmap that we've got for how we're going to move the group, margins up.
In water, you know, we're working for six of the major water companies at the moment, delivering a range of services for them, and those are going particularly well, and we're continuing to deliver the Tideway contract in London, which is also, which is also going well. We've secured our first AMP8 contract for United Utilities, which I think is a real positive sign, in terms of customers' confidence in the investment that they're going to be making moving forwards. In energy, we've now moved nuclear into defense, and that's really because, you know, it's all about nuclear and nuclear capabilities, nuclear expertise, so that's why we've moved them together. In energy, we're continuing to grow, and that's mostly consultancy work.
A really big focus on the industrial clusters for carbon capture, so we're leading the charge, working with BP on the Teesside industrial cluster. That's making really good progress, but we're also involved in the HyNet cluster and the Acorn cluster, and positively, both Acorn in Scotland and Viking on the East Coast have been added. We've now got four industrial clusters that the government is really prioritizing, so a really good opportunity there. Defense and nuclear continues to grow. A lot of activity around nuclear energy and nuclear decommissioning, but in defense, our work on the submarine program continues to, continues to expand. If I step back, overall, a really solid financial performance for the business, especially the cash performance in the business, and we're really confident moving forwards. Helen, I'll hand over to you.
Thank you. Morning, everyone. I haven't practiced with the flicky thing, so let me go, make sure I'm going the right direction. Thank you. Even. Thanks. Thanks, Alex. I'll take you through, first of all, the financial results, a quick, a quick run through those. You'll remember from previous results announcements, that in order to give clarity on the group and the divisions, we've reported revenue, operating profit, and earnings per share on an adjusted basis, as well as a statutory basis. For now, I'll focus on the adjusted metrics, which are in line with how we manage the business. As we go through the slides, I'll point out the differences to that statutory basis as well. Adjusted revenue, flat, first half of last-- compared to last year.
Adjusted operating profit, GBP 15 million for the half, that's in line with expectations and up 7% on last year. We returned an adjusted operating profit margin of 2.3% for the half. That's an increase of 20 basis points from the same period last year. Adjusted basic earnings per share for the half, 4.4 pence, an increase compared to the 3.9 of last year. We returned a strong free cash flow of GBP 26.5 million in the half, and more of that later in the presentation. As Alex already mentioned, we saw 1.5% adjusted revenue decline in transportation, and that's with growth in rail, driven by HS2, and then rephasing and rescoping of certain contracts in road.
This was offset by 3.9% adjusted revenue growth in natural resources, primarily defense and nuclear. As the bars at the right and the left-hand side of the chart show, there were no contract adjustments again for the first half of 2023 or 2022, and therefore, no impact on the reported revenue. This is a demonstration that there have been no further contract issues identified. That's for the first half of this year and the whole of last year. Focusing on the middle of the slide here, you can see the Adjusted Operating Profit has grown by 7% in the half to GBP 15 million, as I just mentioned.
Profit in transportation did reduce by GBP 3.7 million in the year, in the half year, and that's increased volumes, more than offset by the impact of the reduced margins in road, primarily due to the dilutive impact of inflation. GBP 4.9 million of growth delivered by natural resources, due mainly to an improved operational performance as well as revenue growth. On the left-hand side, you can see other adjustments made in the first half of last year. It's GBP 2.1 million, and that was made up of GBP 2.6 million of transformation and restructuring costs, offset partly by GBP 500,000 profits from the sale of a non-core asset.
On the right-hand side, you can see other adjustments totaling GBP 7.4 million made in the first half of 2023, GBP 2.1 million of costs relating to transformation and restructuring of a business, as well as GBP 5.3 million charge on the impairment of intangible asset, relating to the repositioning of digital towards service growth. Alex will cover this later in the presentation. Costain enjoys good overall forward visibility with our combined order book and preferred bidder book at H1 '23 of GBP 4 billion, slightly down from last year end. This holistic view is increasingly relevant as we anticipate a shift in our business mix towards a preferred bidder book as we secure long-term, that's five to 10-year framework positions with our customers.
Our order book stood at GBP 2.5 billion at the end of H1 2023, lower than the GBP 2.8 billion at the end of FY 2022. An increase on the previous first half. This reflects the timing of major contract bids, our customers' investment programs, maintaining discipline in contract selection, and the shorter lead time of consultancy and digital work. As I mentioned at the full year, it's important to note that our order book no longer includes any fixed price construction contracts. The preferred bidder book was GBP 1.5 billion at the end of H1 2023, slightly down from the GBP 1.6 billion at the end of last year, with contracts in road, water and integrated transport, including Heathrow.
The preferred bidder book comprises awards for which there's no other competitor, and we are in final negotiations prior to entering into a contract, or exclusive frameworks where further work is, is a further works order is required. As an example, at the full year, we'd included work with United Utilities in the preferred bidder. Following the approval of the contract that we announced, this has shifted into the order book. We also note that some of our framework and consulting revenue is not recorded in our order book or preferred bidder book.
It's expected to represent an increasing proportion of our future revenue. Our strategy is delivering a transformation in the business in terms of assured delivery, lower risk contracts in our order book, and a broader business mix. During the first half, we continued to invest and upgrade.
For example, we further invested in strengthening our risk and assurance team, embedding activities to raise risk awareness and build risk mitigation approaches. We've invested in a group-wide procurement and supply chain function, mindful of the need to manage the supply chain for our customers and indeed, the opportunity this presents. Our gating and governance reviews are being further enhanced to provide stronger financial scrutiny. As a consequence, we've continued to maintain our discipline in bidding, stepping away from unattractive bids. We've created timely improvement plans where needed, and of course, we've had another half year with no contract issues.
As I mentioned at the full year, this focus drives the pathway to higher margins. We remain on track to deliver firstly, adjusted operating margin of 3.5% during the course of FY '24, as we increase effectiveness within the business through the implementation of our transformation plan and the Operating Excellence Model, growth in consultancy services, and increased effectiveness in procurement and ongoing control of operating costs. Secondly, an adjusted operating margin of 4.5% during the course of FY '25 by improving margins within complex program delivery, further efficiencies from our transformation plan and OEM, and an increasing mix of higher margin contracts.
The strong balance sheet position from year end has been maintained, with net assets of GBP 210.3 million, as compared to GBP 211.2 million at the end of FY '22. This was driven by our strong underlying cash flows, and we also maintained a pension surplus at GBP 58.7 million, against GBP 60.2 million surplus at the year end. Non-current assets balance reduced on the year-end position, driven by the impairment of an intangible asset. Trade receivables and other current assets increased slightly on the year-end position. We saw increased contract assets partially offset by decreased trade receivables in our, in our, continued good working capital management. Other movements of note include an increase in trade payables and other liabilities, driven by increased subcontractor accruals, partially offset by decreased trade payables.
It's important to note that Costain was reconfirmed again this year as one of the top three fastest paying lead contractors in construction. On to the cash bridge. I'd like to draw your attention to the green bar on this chart, representing adjusted cash flow from operating activities of GBP 26.6 million over the half year. This is a result of continued good working capital management, which benefited from further positive cash collection timings during the half.
The red bar to the left of the chart shows cash flow on adjusting items of GBP 4 million, which represent payments relating to our transformation program in the period, as well as 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 Costain Pension Scheme of GBP 5.7 million over the course of the half. After lease payments of GBP 9.4 million and receipt of net interest income of GBP 0.9 million, we've ended half one 2023 at a net cash position of GBP 132.1 million. We expect our year-end net cash position to be broadly similar to that at the end of H1 '23, as the underlying free cash flow from the business is likely to be offset by the unwinding of positive working capital benefits, timing benefits accumulated at the end of FY '22 and throughout H1 '23. The net cash position at the end of half one was strong at GBP 132 million, as I just mentioned. During the half.
The group's average month-end net cash balance was GBP 127.9 million, as compared to GBP 99.2 million over 2022, a demonstration of our continued strong underlying cash flows. On the 26th of July, 2023, we announced that we'd successfully concluded negotiations with our bank and surety facility providers to refinance a new three-year agreement of our bank and bonding facilities. The group's new facilities agreement to September 2026 comprises a GBP 85 million sustainability-linked revolving credit facility, which was previously GBP 125 million, and surety and bank bonding facilities totaling GBP 270 million, previously GBP 280 million. This new agreement replaces the previous one-year amend-and-extend of our facilities from September 2023 to September 2024, as announced in November last year.
This is backed by 4 banks and 5 sureties, with NatWest joining the banking group. The sustainability interest rate margin linkage has 3 key performance indicators relating to reduction in greenhouse gas emissions, spend with small local businesses and charities, and an increase in gender diversity. Next, look at the positive impact of our pension scheme revaluation and agreement with the trustees during the half. The triennial valuation of the Costain Pension Scheme, as at March 31, 2022, concluded in June 2023. A deficit of GBP 25 million was agreed, a significant improvement on the last valuation in 2019, and representing a funding level of around 97%. Reduced payments have been agreed, with deficit contributions of GBP 3.3 million a year from July 2023 to March 2027, increasing in line with CPI inflation.
This replaces the previous contribution plan to the scheme, which from April 2023 had increased to an annual payment of GBP 11.98 million, paid in monthly installments. As a result of the new contribution plan, the full year 2023 pension contribution payment by the group will total GBP 7.4 million, and payments for 2024 and thereafter will be GBP 3.3 million annually, plus infra-inflationary increases, as already mentioned. An assessment to the scheme funding position will be carried out each March, the 31st of March, and if the funding level is more than 101%, contributions will stop from the following July to June. If funding levels fall below 101% the following March, contributions will resume for the next year, starting July to June, at a new agreed level.
This means we're able to respond to the change in funding each year, rather than waiting for the next triennial review, which is more normally the case. Given the group's improved financial performance, strong net cash position, and growth prospects, the board is considering resuming dividend payments, starting for the six months ended June 30, 2023. Dividends will typically be paid one-third at the interim stage and two-thirds at the final stage.
Under the dividend, dividend parity arrangement with The Costain Pension Scheme, an additional matching contribution will be made when dividends for a financial year paid to the shareholders of Costain are greater than the contributions paid to the pension scheme. While the dividend parity arrangements remain in place, the board is considering paying a minimum annual dividend to match broadly the GBP 3.3 million per year, plus inflation, to the defined pension scheme.
Potential increased dividends above this level may be considered by the board during this period, depending upon the group's underlying cash flow generation and the pension scheme funding level, in line with the group's policy of a target dividend cover of around three times underlying earnings. We will announce the board's decision on the resumption of an interim dividend payment shortly. We continue to trade in line with board expectations for FY 23. Our pipeline of future opportunities remains strong across the markets. We do remain mindful of the macroeconomic and geopolitical backdrop, recognizing the challenges it's created for inflation and energy costs, and its impact on the rephasing and rescoping of some major contracts, in particular in transportation.
With our broad customer focus, further improvements to our operational performance, strong cash position and clear strategic priorities, we remain confident of navigating these market headwinds and are well positioned for future growth. As a result of the successful implementation of our strategy and ongoing operational improvements, benefits from our transformation program and our revenue mix expectations, we remain on track to deliver an adjusted operating margin run rate of 3.5% during the course of FY 2024, and 4.5% during the course of FY 2025. We remain confident with the group's strategy in our chosen markets and in our longer-term markets. With that, I'll hand back to Alex.
Thank you, Helen.
Welcome.
Right, I'm now going to give you a bit of an update on sort of the business strategy and sort of outlook, on the business. Look, I think it's very evident, you only have to turn on the news this morning, turn on the news every single day, and these mega trends we've been talking about for some time are front and center of daily life. We our infrastructure is having to cope with some pretty major challenges. The whole climate change, we've either got too much water or we've not got enough water, too much heat, or it's too cold. Then obviously, resource and environmental and economic resilience is a massive challenge. You know, we've seen it in the energy space with the, with the war in Ukraine.
We can certainly see it from a water point of view, you know, the finite resource, I don't know whether many of you were watching the BBC this morning, talking about the lack of water that the world has. We've also got the need for transformation and affordability. The amount of infrastructure that this country needs compared to the budgets that the government can afford and our customers can afford is a big challenge, and we need to change the way our industry delivers. We've also got to drive economic growth and social change within society and within the country, and infrastructure is a key enabler to that. Those are the really big challenges that U.K. government. Those aren't decisions that you can just not make. We've got to map that.
When we talk about we're focused on where the non-discretionary spend is focused, we're focused on meeting those challenges. The government has published its pipeline that says that the infrastructure ecosystem is going to spend about GBP 60 billion a year meeting exactly those challenges. We've chosen to focus on those markets where we believe long-term strategic investment is going to be made and where Costain has a real clear differentiator, and we can excel in those marketplaces. We've chosen to work for those customers who want to work with their supply chain in a very strategic way, where they want us to add value, they want to create the right environment, that we can add value and we can bring our very best, so that we can help them meet those key national needs.
Our customers in our chosen markets generally predominantly operate through five-year business plan periods. They get their business plan signed off, they get their investment budgets agreed, and then we get appointed to work with them on five-year programs rather than one-off programs. We've got a very strong track record for securing a position on these large investment programs so that we can help them shape, create, and deliver pioneering solutions to solve their business plan needs. These markets and the customers committed investment programs through our broader offer, provide a significant opportunity for us as a business, for us to drive growth and increase the value of Costain.
If I can just sort of share some of the examples on here, you'll turn around and see that National Highways is currently in the middle of delivering its RIS 2 program. I was only talking to the Chief Executive of National Highways last night about RIS 3. They are focusing on developing their plans for RIS 3 so that they can then come to market on that. I think you've seen both political parties, the Conservatives and the Labour Party, both confirming that they need to deliver HS2 all the way through to Manchester. Yes, it's the largest scheme in Europe. Yes, it's a very challenging scheme, but it is fundamental to the economic growth and prosperity of the U.K. to deliver HS2.
Network Rail, at the moment, we're part of the teams bidding for GBP 40 billion worth of investment in England, for CP7, for Network Rail. We see that coming through. Heathrow Airport, Manchester Airport, Gatwick Airport, a lot of the local airports, they're all cracking on with delivering their growth expansion plans, their airport capacity. If you look at Stansted, the plans at Stansted are to double the number of passengers, and that's just Ryanair alone. We're talking about significant growth in this space. Then you've got the water industry shaping up. Am I whetting your appetite? Right, we've got the water industry shaping up for a really big AMP8 program, as they tackle into addressing the major challenges: water resilience, water quality, and release into rivers and coastal waters and addressing that. A really big focus.
Then we're tackling into energy resilience, and we're tackling into the net zero agenda. You can see the government has now added even more of the industrial clusters. Huge investment going into the energy space, and then defense spending is continuing to grow, as I said earlier. Key to the resilience of Costain's business and what will help us navigate the current short-term challenges that we've got around transport and government spending, is the fact that we are offering a broader service to our customers. We're able to help them with their whole ecosystem. We're not just sat there looking at the capital delivery. That gives us a bigger market opportunity. We're also broadening the number of customers that we work with. Still large, big, blue-chip customers, but we're adding people.
In the last two years, we've added Heathrow Airport, Manchester Airports Group, Transport for London, Babcock, Shell, BP. Those major customers are now big customers for, for Costain. Our strong balance sheet and operating performance really gives us the ability to turn around and dial in and address into this market. I've talked about our broadening of the service that we offer, and we are a very different type of company to anyone else in the sector. All right? We focus on our clients' whole ecosystem, not just capital delivery or front-end consultancy. It's where we can really help them meet those business challenges. We can do that by bringing together our unique mix of experts that we've got in our business with their solutioneering, project management, innovation, expertise to turn around and help deliver those challenges.
We act as construction, consultancy, and digital partners to our customers. We are increasingly influencing, shaping, and advising our customers, doing design work for now over 12 customers in helping them shape the future solutions that they want to infrastructure, but also to bring project management and project controls expertise to help a number of our customers improve their operational performance. We expertly support the capital delivery programs, as you know, predominantly as a contractor on schemes like HS2, the 6 highway schemes, the 5 water frameworks that we're working across, Thames Tideway, highway infrastructure in aviation and for TfL, where we are the contractor, but also increasingly as a delivery partner.
As a consultant delivery partner, program manager, overseeing the client supply chain in how they deliver those programs. We're doing that for Cadent, for AWE, for National Highways, Babcock, and Heathrow Airport.
Importantly, and growing in importance, is helping our customers maintain and optimize the infrastructure ecosystem that they've got and help them get more out of it. As I've said before, you know, we're helping United Utilities, and we've had it extended for Amey on their maintenance transformation program, where we manage the maintenance of their existing asset. Where we're helping EDF manage a GBP 2 billion investment in extending the life of their nuclear facilities, and helping a number of water companies really optimize their regulatory performance.
I think our focus on our customer's whole ecosystem is a very clear differentiator and is really enabling Costain to grow and create greater competitive advantage. Today, we're very much a leading complex delivery organization as a contractor and as a consultant, and we deliver a number of schemes right across the UK.
We're also a growing consultancy business, but bringing that construction DNA, people that roll their sleeves up and make things happen and come up with the, with the solutions, growing our delivery partner, which is the real bulk of our consultancy work, where we're the sort of construction manager, program manager for a number of customers. Also bringing our construction expertise to be that insightful designer in making sure that we increasingly, and as I said, 12 customers we're working for, where we're designing, but also providing project controls, project management.
Then we're also growing our advisory piece, where actually people come to us and they ask us to influence some of their strategic thinking, some of their business planning, and really help them think about how they're gonna solve some of the big challenges that they're dealing into. A very different type of company.
From a digital point of view, look, it's all about exploiting digital technology, digital know-how, to be able to solve some of these challenges. We certainly help customers optimize the performance of their existing infrastructure. We help them manage security, we help them manage use, and optimize that as well. As I said last year, we undertook a sort of market assessment, and we've been successfully growing the digital services part of our business, and it's been really moving forward. We've decided that that's where we're gonna focus all of our energy, and we're now gonna discontinue our operations around being a product manufacturer. There is no longer a real market for making bespoke CCTV cameras or, or screens and things like that.
We're moving away from the hardware, which is gonna reduce the fixed cost base within the business, which will be helpful, make us a lot more agile. We're really gonna focus all of our efforts on the services side of the business, where in conversations we've had with the clients, is where the real growth opportunities are and the higher margins. I hate having this slide, and I hate having this slide is because it looks like a token slide. ESG is fundamentally core to the culture and behaviors of every single person in our business, and our credentials are a very clear point of differentiation, and I've had that externally verified that Costain is one of the leaders in the pack in this area.
It's important for our customers, it's important for our stakeholders, and it's important for our, our staff and the general public that we really drive the performance in this area. This ensures that we can target opportunities and work with our customers on the future opportunities, that we are able to secure better banking facilities, that we can attract new talent, and that we can deliver better solutions in the marketplace. Our work in this area gives us the permission to trade, but it also enables us to deliver better results for our customers, a stronger supply chain, better solutions, greener solutions, and new skills that are critical to the business.
We see the whole ESG agenda as a key factor in our future growth as a business, is a positive force for change, we are a positive force for change for the industry in how we help our supply chain to develop and become better, how we create social value in the communities that we work with, how we're shaping clean energy solutions with our customers. The list, the list goes on. If I can just close. In final summary, look, I'm really pleased with the performance that we've delivered in the first half of 2023, in the continuing momentum in the business, the fact that we're on track to deliver board expectations for the full year are really positive. We're on track to meet the margin milestones that we set out last year.
We are considering returning to an interim dividend, which is a really positive demonstration of the confidence that we've got. The overall commitment to infrastructure investment-... the challenges that we need to face into across the market remains very strong, despite some of the very near-term challenges around government spending levels. Our focus remains on bidding responsibly and then delivering our work in an, in an assured way so that we meet our margins and deliver against our risk profile. We've got a good level of work secured, incredibly busy bidding new work, and have a lot of opportunities ahead of us. I'm extremely confident that we're on the right track. We're making really good progress. We've got a great team, and I look forward to updating you again at the full year. Thank you.
I think we'll go to Scott, we're gonna go to questions, so we'll start in the room. I'll go and sit down, and then, yep, sorry. Alex. If you could just say who you are, even though we know, but just for the record.
Good morning, both. Congrats on the results. Alex O'Hanlon from Liberum. Just a couple of quick questions, if I may. The first one is just on the preferred order book. What's the kind of the conversion rate from work in that preferred order book into the actual order book? And the second question is just at Morgan Sindall's interim results, they referenced, concerns around weakness in the supply chain. Is that something that you're also facing? And if it is, is there anything you can do to help the supply chain out, given that you're already paying them very fast at the moment?
Okay, thank you. Shall I start with those and then... In terms of conversion to the preferred bidder, generally, the majority of that does convert. We have had one contract, which I think was in the public realm, which was one of the smart motorway contracts, where the affordability, it just wasn't an affordable scheme and the risk profile of doing it. With National Highways and the whole alliance, we agreed that we wouldn't proceed with it. Otherwise, as you saw, United Utilities move, move from there. A lot of the Heathrow work is now moving from preferred bidder into the order book, and we've also had, since the period closed, a lot more work on the Smart Motorway Alliance has moved from that preferred bidder.
Generally, everything in the preferred bidder, provided nothing changes, should flow straight in, just to give you confidence. The good news is we've added more opportunities to the preferred bidder book. I think the weakness in the supply chain is something that we're very mindful of, really, because whilst we're a responsible business working for responsible customers, that's not the same for every organization and every market. One of the things that Helen talked about is we've upgraded the sort of procurement function, brought in a very strategic leader to lead that. That's really, I mean, we're already very close to our suppliers, so we work very closely. The same way our customers want to work with a fewer number of suppliers, we're the same with our supply chain.
We wanna work with a fewer number of suppliers in the supply chain. We wanna work with them on a longer term basis. So what we do to help them, we've got a supply chain academy for small businesses that we just help them develop themselves and become strong and thriving businesses. We give them good visibility of our infrastructure pipeline. We pay them promptly. We spend a lot of time briefing them, getting close to them, so that way, you know, we understand them. You know, and, you know, we horizon scan with them. We're very interested who else they're working for, what type of work they're doing, just so that we're alive to any risks that, that they might have.
Thank you very much.
No. Thank you, Alex.
Good morning, Andrew Nussey from Peel Hunt. 3 questions, if I may. First of all, when we look at the transportation margin, really a bit more color around the GBP 3.7 million reduction, because one would imagine the growth in rail would have been at an attractive margin, given the primary contract in that space. One would imagine most of the attribution is to road, which I think you alluded to in the presentation. Are there any one-offs in there to do with sort of the rescoping and rescheduling of projects? How much was the inflation impact that you alluded to? Effectively, I'm just trying to get a feel for how much is one-off as opposed to recurring. Then 2 questions around sort of the balance sheet capital allocation.
Net cash of GBP 132 million. I see there's around GBP 50 million is still sort of sitting in joint operations, which has been pretty, pretty consistent. Should that level be broadly maintained over the short to medium term? Allied to that, does the agreement with the pension trustees restrict the ability to do a share buyback or some other form of capital return beyond dividend?
Okay, thanks, Andrew. I'll, I'll take the first one, and then I'll allow the expert to answer the second and third one. From a transportation margin point of view, all of that is due to the dilutive impact that on the way the contract was structured on a couple of highway schemes, and the way inflation has been dealt with on those contracts. You know, the, the impact of hyperinflation over sort of normal levels of inflation has diluted the returns on those contracts. You could treat that as a one-off, because those were historical contracts signed quite a while ago that are just trading through. On the highway schemes that we're doing at the moment, we don't have that position.
It's not a, it's not a one-off contract issue, but it is just the fact that inflation, those contracts weren't designed to cope with inflation levels that we've had, and it just dilutes the margin that we make on them.
In layman's terms, they're fixed-price contracts?
No. They're not fixed price, so we get paid all the costs, but there is a dilutive impact on your margin. You get paid everything, including the inflation, but your fee is regulated, so that's the thing.
Absolutely not fixed price.
Yeah.
Is that okay on that?
Yeah.
I'll hand over to Helen on the other thing.
Cash, yes, that joint venture cash balance of around GBP 50 will probably remain similar for the next couple of years. Clearly, I'd rather have that in our bank account than in a joint venture bank account, but it is still our cash. On share buybacks for The Costain Pension Scheme, yes, we would have to dividend match if we were to do a share buyback, for example. However, I'd point out the really important additional change in the triennial valuation agreement was this annual check. Because we're so close to being fully funded, we're at 97%, each year we do that check such that if we then tip into actuarial surplus, the dividend matching stops and the contributions stop. Every year, we can take a new view rather than with the triennial.
Clearly, clear in the title, you'd have to wait three years. We think there's some opportunity there.
Thank you.
Thanks. Jonathan Coubrough from Numis. Could I ask, firstly, on the costs that are coming out in the transformation plan, what they relate to? Also the digital hardware business that saw the impairment, when was that in original investment made? Could I ask, secondly, on natural resources, do you expect further margin improvement to come through, and are you seeing changing contract terms going into AMP8?
Do you want me to take the first?
Yep, if you want to take the first one.
Yep. Cost out. The transformation program goes across the business. It's classic, look at business model and operating model, people process system. We have been looking across the business to find efficiencies, take out duplications, find ways to automate what we do. It's, it's, it's widespread, flattening out our organization and so on. It's, it's, it's a classic transformation program, and those costs out are coming out across the business. However, as I talked about just earlier on, we're really investing in the business as well. And, and the places we're investing is really to drive the strategy, really to underpin that margin resilience, and our milestones.
Investing in the risk and assurance teams, investing in tools and so on, that we, we help the projects to deliver with, investing in the procurement supply chain, as I talked about. You know, across the business, we are reinvesting in the business where we believe we need those different skills and capabilities to, to drive our margin ambitions. You're not seeing everything falling to the bottom line. We're, we're really rebalancing our skills and capabilities to set us up for, for success on the strategy.
Okay. Thanks, Johnny. I think, I'll try and answer the question. I think the digital business, I think we acquired a business, I think it was 2017. I might be wrong, so don't, don't shoot me on that date, but I think it was roughly around, around that date. We acquired that business, and it does, and it did a mix of configuring hardware for operational technology assets, but it also did do the situational intelligence work that we've successfully grown. What we have found is that, you know, the world of hardware has significantly changed since then. If you look at CCTV cameras now, they are totally different. No longer do you have the rotating CCTV cameras. They've...
It's very cheap now to have a number of CCTV cameras that just point in every direction and are able to do that activity. What we have found is that customers are no longer seeking services in configuring digital hardware to meet their particular needs. They're adapting and just buying what's available on the market and integrating it. Therefore, the big focus is how do we integrate technology, and how do we do situational intelligence? Positively, in the period, we've significantly grown our digital twin capabilities, especially around operational twins, as opposed to sort of BIM models. This is helping customers understand the relative real performance of their infrastructure, and that is really helping them optimize the performance. Hopefully, that gives you a bit of a flavor, Johnny.
In terms of natural resources margins, look, I think natural resources margins reflects strong operational performance, which we'd expect for that to continue. It also reflects the fact that we have a growing amount of consultancy work in that division, certainly energy, defense, nuclear, and we would expect that to continue to be in place. I think Sam, who's in the room, who's the managing director of Natural Resources, he's been quite robust with the water companies in terms of terms and conditions around AMP8 and expectations. You know, there are water companies that we work for at the moment that we have good terms and conditions for, and we work well with, and those are the terms and conditions that we would like to work with, with more customers moving into AMP8, because it does bring out...
There's a direct correlation between the terms and conditions and your operational performance, which is quite interesting. In other words, where environments, where the customer creates the right environment for us to succeed, we can be tremendous, and that's what we're trying to get across... Does that answer your questions all right?
Yeah, absolutely. Thanks. Perhaps if I could just ask one follow-up on the margin. In terms of the margin target milestones, which I think is 3.5% for FY 2024, should we then expect over FY 2025, that margin will be delivered at the group level?
Yes. We, we've, we've used some sort of, suitably caveated language you will have spotted. During FY 2024, getting to 3.5%, so that means the exit rate coming out of, of 2024 will be 3.5%, is our, is our, ambition. Then again, build through 2025, such that the exit rate coming out of, of, 2025 is, is a 4.5%, so.
I think it's fair to say, Johnny, that the margins in natural resources will be higher than transport, just because of the mix of work.
Mm.
There is a greater volume of consultancy work in natural resources, 'cause that's what we do in energy and defense predominantly, than there is in transportation. You know, transportation will be dominated by larger construction contracts.
I suppose the, the exit rates may be something you see, but we don't really. If the exit rate's gonna be 4.5%, what, what should it mean over the full year? What should the, what should the group margin be?
That's what we haven't given you, clearly. You can see, you can see us building towards it. When we get to this end of this full year, my, my hope is that we'll be, we'll be pretty close to that, to that milestone for 2024 anyway. I, I can't give you more than we've already, already put out. You'll see, you'll see our progression each, each half year, as we move towards those milestones.
Well, I think one of the positives on margins is, I think you now hear from every, every player in the market that's turning around and talking about similar sort of margin levels and ambitions.
Alastair Stewart, Progressive Equity Research. Three questions, please. The first is a bit broader. you know, looking 3-5 years ahead, where do you think the revenue split might be, very roughly, between natural resources and transport? it's natural resources was 27% in, in the half year. Given that, you know, transport can be lumpier, a bit of a political football, where, whereas, the natural resources is, you know, much longer term. You know, do you see more of a narrowing in, in the divide there? just very roughly. Secondly, how much was the nuclear revenue in, in H1 last year when it was in energy, and how much is it in this half year in nuclear and defense?
Just to get an idea of where that's going. Finally, probably for Helen Willis, you mentioned the, the, the positive cash flow position could unwind a bit. You know, just in terms of the, the, the actual final year number, you know, is it gonna be higher or lower than we were here? Because usually, usually it's higher at the full year level.
Okay. Thanks, Alastair. I'll, I'll take the first one, and then Helen can take the, the next two. We sat down as, as, as an exec. I think our expectation is, if you look ahead in five years' time, probably the revenue split between the two divisions is gonna be pretty equal.
Yeah.
That's, that's a combination of transportation growing the consultancy as well. If you look at the A303 contract that we've got for National Highways, that's a consultancy contract overseeing and being, being the client's advisor on assuring the delivery of the A303. Certainly, you know, that's our focus. You know, if I look at the work we're doing with TfL, Network Rail, people like that, so changing that mix. I think it will. You know, I think the quality will improve, and the size probably won't massively increase. I think natural resources, naturally, we would expect that to grow as certainly the water industry grows. We'd expect our water operations to grow, and we've got big ambitions around growing the other markets as well.
I think it would be an equal, an equal split would be what the business would look like in the future.
Just a quick one, on the transport element there. You say there'll be, say there'll be more of a fee element. I, I, I presume it'll still be largely contract driven, but the, the, the mix will change?
Yes. It'll I mean, what we're, the, the target we've got is having a much broader customer mix...
Mm
And less, less sort of scale with, with big customers like HS2, National Highways. Yeah, we, you know, we anticipate working for Network Rail, working for National Highways, working for HS2. You know, bear in mind, HS2's got a long way to go. TfL and other, you know, customers doing construction work with them. Also, you know, the frameworks we're winning with those customers is we're also doing a lot of consultancy work for them. Okay?
Yeah.
Nuclear split, we, we haven't in the past and still aren't splitting out the nuclear element. It was, as I said, in energy now, now in defense and nuclear. We have restated, the comparatives are consistent.
Okay.
Just to help, obviously GBP 9.7 up for nuclear and defense. I think it increases in both, but probably primarily, primarily defense. Yeah, you've got, you've got consistent comparatives.
Yeah.
Yeah, exactly right.
Yeah.
On the cash, yes, there will be an unwind, just working capital movements, and we're thinking around about GBP 130 for year-end net cash as we manage through the unwind during the balance of the year.
Thank you.
Yeah.
Anything else in the room? No?
A number of questions from the webcast. First question is from Stephen Rawlinson, who is from Applied Value: Can you talk about the relationship with National Highways on future contracts? Have final accounts been settled on the work around Preston, mentioned in the release, Western Road project, which finished work in the period?
Okay. Thank you, Stephen, for your questions. Look, the relationship with National Highways is very good, very productive. You know, I think that's evidenced by the fact that we're mobilizing the A303, and we're continuing to work with them on a number of future schemes at the moment, and the fact that we're helping them with quite a number of their innovation projects as well. Certainly, the relationship with National Highways is productive and positive. You know, obviously, the A66, you know, elephant in the room, the A66 was, you know, a disappointment, but it was a decision that both of us felt was right at the time. We've moved on. You know, we've got a lot of other work that we're doing for them. A very positive relationship.
From a Preston point of view, yeah, look, that contract's come to an end. There's no issues. We're going through the final account. We only handed it over, I think, Sue, last month. It only completed last month. That was a contract for Lancashire County Council. No, it's gone, it's, it's gone very well, and they've publicly turned around and said that they're very pleased with what's been delivered.
Thank you, Alex. Question from Mr. Crosby, who's an investor: Are you able to say when the possible interim dividend will be announced?
I can answer that shortly, is the answer, very shortly. I can't give you an explicit date. It's in, it's in a process. It's a very short process, it'll be announced very shortly.
Superb. We've got no further questions from the webcast. Pass it back to you, Alex, for closing remarks.
Okay. If I can just conclude. Look, thanks very much again for taking the time to join us and for all of your support. Really appreciate, you know, you joining us today and for your questions. Look, we're very confident in the strategy. We're making really good progress on the back of these results, the actions we're taking, the strong outlook that we've got, and we look forward to updating you again soon. Thank you very much. Have a good day.