Okay. Good morning, everyone. Thank you for joining us for our half- year results presentation. It's great to see so many people in the room here in person. Also, I could extend a welcome to those joining us by the webcast or on audio. I'm Andrew Davies, I'm the Chief Executive of Kier Group, and I'm joined today by Simon Kesterton, our Chief Financial Officer. I will walk you through the highlights from the last six months to December 31st, 2021, and then hand you over to Simon to talk through the group's financial performance. This will be followed by an operational review, which I'll give, an update on the ESG, and we'll finish off with our outlook. Then there'll be an opportunity for question- and- answers at the end.
We'll be taking questions, if I may, from the room first, and then those of you who are on the conference call, the audio system, will have the opportunity after that to ask any questions you have. If we move through the disclaimer. We delivered a strong set of results in the first six months of the financial year. Simon will talk through our financial performance in a moment, but in short, we achieved revenue of GBP 1.5 billion. That is 5% down on the prior period, but as expected, an adjusted operating margin of 3.5%. This is very strong, especially in the context of where the group was financially and operationally this time last year, as well as in the context of the construction industry as a whole.
We've achieved our medium-term plan margin target that we set out at the start of the financial year. We had a positive momentum within the business, in particular in our infrastructure services and property businesses. In our construction business, we had lower activity as anticipated, however, slightly higher margin due to the disciplined management of our overhead. We've now increased orders coming through, and that's reflected in our order book at December 31st. Orders placed through January, February, and March this year. We believe some of these orders relate to delayed growth from prior years, which we've previously alluded to. The group's order book has increased 4% from our June 30th 2021 year-end position and now stands at GBP 8 billion.
We continue to win high- quality work through our long-standing client relationships, and this is delivered by our regionally based business model. Most importantly, we've not compromised on our discipline or quality to achieve this. We're focused on the risk and reward profile from entry to execution. The high-quality order book sets us up well for the medium-term plan and demonstrates that we continue to benefit from U.K. government spending. We continue to allocate capital to our property business, which is delivering return on capital employed of 15%. The investments are controlled and disciplined and in line with our strategy. With that, I'll hand over to Simon, who'll take us through the detailed financial results.
Thank you, Andrew. Morning, everyone. Turning to Slide 6, this slide sets out a high-level income statement for continuing operations. Revenue is down 5%, and as expected, that reflects the procurement delays we've previously highlighted. I'll walk us through this on the next slide. We delivered adjusted operating profit of GBP 54 million in the first six months of the year, driven by business mix and management actions. The group achieved its medium-term plan margin target of 3.5%. The business has made a statutory profit of GBP 10 million after adjusting items, amortisation, and tax. We achieved adjusted EPS of 7.8 pence as compared to 10.4 pence in the last period. EPS was impacted by the increased number of shares issued as part of the recent capital equity raise. On a like-for-like basis, this would have been a 3 pence increase.
Net debt of GBP 131 million reflects the traditional seasonal working capital outflow and further reductions in CapEx. Average month-end net debt was significantly lower than last period, reducing to GBP 191 million. Turning to Slide 7, starting on the left-hand side, we have revenue of GBP 1.6 billion. Infrastructure services revenue increased by GBP 105 million, primarily due to the ramp-up of capital works on HS2. Construction was down GBP 222 million as a result of procurement delays and the successful completion of HMP Five Wells Prison (Wellingborough) . It's worth mentioning the average size of construction contracts is typically GBP 12 million, whereas the HMP Five Wells was approximately GBP 250 million. Property revenues increased by GBP 29 million and relate to disposals of industrial sector assets during the period.
Accordingly, revenue for the period amounted to GBP 1.5 billion. Moving now to the adjusted operating profit bridge, we started with adjusted operating profit of GBP 48 million. Volume mix and price changes have resulted in a reduction of GBP 7 million, largely due to the lower activity in construction. This was more than offset by management actions of circa GBP 9 million, which you can see further along the bridge. Management actions primarily related to restructuring in our construction business. The property business was up by almost GBP 8 million as a result of the completions mentioned earlier. This was a great performance by the property business and demonstrates what it can achieve. Over time, this will become a sustainable performance as we increase the capital deployed in the business towards GBP 170 million. Cost inflation over the period amounted to GBP 3.4 million.
We continue to see inflationary pressure given the macroeconomic environment, but also continue to mitigate the majority of this. The result is an increase in adjusted operating profit to GBP 54 million. Adjusted items amounted to GBP 30 million in the period. Approximately 60% of these items are non-cash. These are the amortisation, impairment charges for property as we consolidate our office footprint, and the write-down of our recycling facility. The remaining GBP 12 million cash items relate to our construction restructuring and some cladding costs. Given the construction projects we typically engage in, we see limited exposure to cladding and estimate this could be at worst a single-digit exposure. Moving on to free cash flow, operating cash flow conversion was in line with expectations. Adjusted EBITDA in the period amounted to GBP 77 million. We then have GBP 143 million investment in working capital.
This was the business reverting to a traditional seasonal outflow. We also had GBP 10 million of VAT payments on account and a further GBP 10 million reduction of CapEx. CapEx at the December 31st 2021 amounted to just GBP 69 million. It's worth pointing out that the prior period numbers were impacted by accelerated payments under Procurement Policy Note 04/20, and this offset the benefit of the VAT DRC charge. CapEx in the first six months amounted to almost GBP 20 million. Over GBP 16 million of this relates to payments made, and the lease is now capitalized under IFRS 16. We maintain supplier payment days at 34 days on average. Lastly, we've paid GBP 16 million to HMRC in relation to deferred taxes. We have just GBP 3 million remaining to pay. Turning over to page 11, we have the net debt bridge.
The key takeaway here is the significant reduction in non-trading items. We start on the left-hand side with FY 2021 closing cash of GBP 3 million. We then see the free cash flow I've just talked about. We had a net COVID-19 impact of GBP 16 million. Adjusting items of GBP 16 million relate to the GBP 12 million I just talked through earlier and GBP 4 million that was accrued at the end of the previous financial year. Finally, pension payments of GBP 6 million. We then see the final fees of GBP 6 million from last year's capital raise, partly offset by other cash benefits of GBP 4 million. This results in a net debt position of GBP 131 million. Moving to financing and liquidity, this slide shows the current debt structure of the business following the equity raise last year.
As a reminder, our facilities were extended and are due to mature in January 2025. You can see the gap between our average month-end net debt and period-end net debt has reduced to circa £60 million. Slide 13 sets out our order book position. Our order book is high quality and has increased 4% to £8 billion compared to the June 30th 2021. We've secured 96% of our FY 2022 revenue, and we continue to win work in our chosen markets. Significant effort has been made to improve the quality of the order book. We have exited low and loss-making contracts, and we are focused on winning work with U.K. Government and regulated authorities. We continue to focus on managing risk and reward. Approximately 55% of our order book is under target cost or cost-reimbursable contracts.
Within construction, our average order size is only circa GBP 12 million. The order book is underpinned by long-term framework positions. Moving to capital allocation, we are focused on optimizing shareholder returns. Accordingly, as we generate cash from operations, we expect to deploy that in a number of ways. CapEx is minimal, but it's worth remembering we plan to invest further in our property business in order to generate consistent returns in line with what we have seen during the period. We will continue to do this in a disciplined and controlled manner. Further deleveraging, as you are aware, we target a sustainable net cash position in the medium term. We are targeting a dividend cover of around 3x earnings through the cycle. With regard to M&A, the group will consider value-accretive acquisitions in core markets where there is potential to accelerate the medium-term plan.
Now I'll hand back to Andrew for the operational update.
Thanks, Simon. We turn to infrastructure services, first to slide 16. We have experienced positive momentum in our infrastructure services business. Revenue was 16% higher than the prior year, and that's primarily due to the ramp-up of the capital works on HS2. Overall, adjusted operating margin improved by 10 basis points to 4.2%, and in absolute terms, adjusted operating profit increased by 25% to GBP 33 million, and this was driven by both timing and business mix. Within this mix, the utilities businesses experienced a margin reduction relating to mobilization costs from increased activity in our telecoms business. We've been awarded a significant number of awards, especially within our highways business, with over GBP 1 billion worth of new work won. This includes the A66 Northern Trans-Pennine scheme, the A417 Missing Link in the Cotswolds , and the M6 Lune Gorge structures .
In our infrastructure business, we've been appointed by Network Rail to deliver the design and enabling works for the GBP 65 million Oxford railway station improvement project. Looking forward, 98% of our revenue is secured for FY 2022. If we move to construction volumes were lower, as we said, and that is as anticipated. This reflects the procurement delays as well as deferred orders. Revenue was also impacted, as Simon said, by the ramp-down in activity following the successful completion of the HMP Five Wells Prison project (Wellingborough) . Despite the lower revenue, the business was able to improve margins through taking cost out of the business on a timely basis in anticipation of that reduced activity. We're now seeing the delayed orders come through, and the order book for construction has grown in the first half of the year.
In addition, we continue to see increased orders over the last three months as we continue to benefit from U.K. government spending. We've been awarded places on frameworks worth over GBP 11 billion in the period. The recent awards in this sector include our appointment as main contractor to phase two of the GBP 107 million digital campus in Gloucester, and a place on the Procure Partnerships North West framework worth up to GBP 1.8 billion. Our construction segment includes Kier Places, our housing maintenance and facilities management business, and Kier Places continue to benefit from increased work opportunities from existing customers, such as housing associations, local authorities, and the U.K. government clients. In this sector, 93% of construction revenue is secured for FY 2022.
Finally, if we move to our property business, it was a very strong performance with revenue up 65% to GBP 76 million. Adjusted operating profit up from GBP 2.6 million to GBP 10.4 million. We're also delivering return on capital of 15% due to significant disposals in the industrial sector. This business has also done well in securing a pipeline of work. It's recently entered into a joint venture with PGIM Real Estate to develop a portfolio of light industrial and urban logistics warehouses across the U.K. The joint venture has already secured two Logistic City developments in Bognor Regis and Knowsley, and is working on securing another site in Greater London. It's worth noting the great performance of our property business in the first half of the year is evidence of what can be achieved.
However, as Simon sort of mentioned, it's not yet sustainable given the lumpy nature of the transaction. It takes time to selectively invest in sites, season the capital in those sites, and then transact the sites. We believe a sustainable performance is achievable in the medium term. If we move on now to sustainability. This is our sustainability framework. Hopefully, this slide is familiar to most of you by now, but thought we'd remind you of the focus areas we have for Kier. We reframe sustainability from being an environmental specialism to being a strategic and business-critical mindset. We believe this balance balances the need for environmental resilience, community resilience, and profitability in day-to-day decision-making. The framework is governed through our recently formed ESG Committee. Turning to environmental, this slide details Kier's response to environmental concerns in particular, the fuel we use.
As part of the government's changes to tax relief on red diesel, Kier has taken the opportunity to trial more sustainable and alternative types of fuel, such as hydrotreated vegetable oil (HVO) . HVO could save our site's carbon dioxide emissions by up to a net 90% and nitrogen oxides emissions by up to 27% in comparison to red diesel. We're expecting to complete these trials by the end of next month. On the social side, Kier is committed, and always has been, to creating and reporting on social value. We recently transitioned to the THRIVE social value tool to measure our social value impact. The tool enables us to calculate our social value and quantify the positive contribution Kier makes to the communities in which it operates. This is important for when we're bidding for work with both current and prospective clients.
The THRIVE tool contains over 109 social value metrics, which also enables us to benchmark ourselves versus our competitors. Finally, take us to the summary and outlook. I'd like to summarize by saying that the first six months of the year reflects our significantly enhanced resilience and strengthened financial position as we continue to deliver on our strategy. We achieved our medium-term plan margin target in the first half of the year, despite cost inflation pressures. The Group's well-positioned to continue benefiting from U.K. government infrastructure spending commitments, and has seen strong levels of awards in the first half of the year. We continue to trade in line with expectations. Our strong order book, underpinned by long-term frameworks and agreements, gives us confidence in our medium-term value creation plan and the continued success of the Group.
Before we move to questions, just wanted to remind everyone of our capital markets day. This will be held on the May 25th 2022. It will be a great opportunity to meet our operational leadership teams from each of our core businesses. We'll provide details in due course, and look forward to seeing as many of you as possible on the day. With that, I'd like to open up to questions and answers. If we could take questions from the room first, please, and then we'll go and take questions from the conference call after that. Over to you. Go.
Good morning. Joe Brent from Liberum. If I could have three questions, please. At the property investments business, could you give us an idea of the trajectory of the capital employed and the return on capital? How do you see that progressing to the GBP 170 million, and where does the ROCE get to? Secondly, we hear this word target cost reimbursable a lot. I think it can mean different things in different situations. Can you give us the parameters of kind of what that means? 'Cause I think other people talk about quasi target cost reimbursable . Finally, could you talk us through the exceptional cash impacts in 2022?
Do you wanna take the first, I'll take the second, you take the third?
Yep, okay. Yeah, property, great question, Joe. You know, we've seen that 15% return on capital employed, and that clearly is the target we're trying to get to consistently. Obviously, deploying the capital depends on the projects you come across, and we're being quite selective. But what we do say is, you know, we expect to be achieving that level of returns consistently on around GBP 170 million of capital invested within the medium term.
On the types of contract, Joe, I mean, every individual contract is an individual contract by their nature. Target cost reimbursable . Cost reimbursable is sort of what it says on the tin, so you'll get your cost reimbursed. What it tends to be is that you tend to have a fee which is moderated over and above that, which is based on performance, and one of the performance parameters could be a target cost, which you achieve it, you'll get a enhanced fee. But if you don't achieve it, you could have a degree of pain or gain share. But the cost reimbursable contracts, it means that in all circumstances, you will get your costs reimbursed, and it's the fee that is getting moderated. That's what we're alluding to on the 55%, I think we said, of our contracts.
That gives us the protection against the inflationary pressures in the cost base.
Okay, and then, and finally, exceptional cash, Joe. Yeah, I mean, clearly you've seen it's reduced significantly by GBP 60 million, GBP 12 million of that due to costs in the period. If we move forward, we've got, of course, the QEQM contract, so there's about GBP 5 million there per year accrued, and that'll probably run for the next four years. It's got four years left to run on it. Then we see the final restructuring of our construction business, and that's probably gonna roll through the second half and then just into next financial year as well. Cladding, I mentioned, you know, we don't see any specifics there. We see the risk is quite low given the projects we've been involved in. Again, I give that number, worst case, we're looking at a single-digit exposure.
The construction number would be roughly what?
We don't give the exact details of the construction number, but it won't be a huge number. You know, similarly similar to, I guess, over the next 12 months, what we've seen over the previous 6 months.
Thank you.
Question there.
We haven't seen in our supply chain too many of those issues impacting. There have been some, but invariably, if you know a range of supply chain partners, you've got the relationships with them, long-standing relationships. If one does fail for whatever reason, you can then move to another 'cause of that relationship. I don't wish to diminish the point, but I think the very nature of our structure, in particular in construction, where most of these failures are happening, means that we can mitigate them to a degree. But they are happening. You know, I'm not sitting here saying, you know, we're immune from it. We are experiencing that. But you can manage it through those relationships. No, you didn't have a third part to your question. Andrew.
Oh, sorry.
The mic's over there. Oh, sorry. Yeah, sorry.
If I could go next. Thanks. Jonny Coubrough at Numis. Three questions from me, please. Firstly, on construction, you know, following the end of that large contract, HMP Five Wells, are there any other contracts we should be aware of, either that are due to come to completion or that are in the order book? And then secondly, on the margin in construction, it looked a high level in H1, was that at all materially impacted by the end of that HMP Five Wells contract, or do you see that being a sustainable level going forward? The third question would be on capEx. That's clearly come down maybe a bit more than expected. Could you see that going to zero?
I mean, what's driving the reduction there? Also, are there any other financial impacts we should be aware of with that reducing beyond the cash flow impact? Thanks.
Well, Five Wells was a uniquely large contract and uniquely successful contract in many, many aspects, not least in modern methods of construction, you know, the modularity of the build and the success of the build. Simon opened it last week, I think, with the Deputy Prime Minister personally. You know, it was a, to a degree, a one-off contract. You know, the relationship we're forging with the Ministry of Justice, you know, we anticipate more such projects coming through as part of the Prisons Alliance, which we're part of. So, you know, it won't be, you know, the last by any means. But are there any such contracts in the portfolio at the moment of that scale, which are gonna unwind? Which I think is your real question. The answer is no, we don't anticipate that.
I mean, Kier's average contract size, I think, in construction is GBP 12 million. You can see, as Simon said, you know, the nature of a GBP 250 million pound contract is going to have an impact as it runs off and the natural sort of outflow of working capital down to the margin on that contract. It was a reasonably unique and uniquely successful project as well. But do we want more of them? Absolutely. You know, this is the capability that Kier represents across all of its businesses, is the ability to operate locally an average contract size of GBP 12 million. On the other end of the spectrum, the ability to do contracts like the A417, you know, gap fill in highways, you know, Wellingborough and HS2. That's the range of capabilities the company has.
We will continue to have that range of contracts. Do you wanna take the margin one?
It was CapEx, wasn't it? I think.
CapEx, yeah.
Yeah, it was CapEx. Yeah, I mean, CapEx, we don't force anybody to use that. You know, we said we've been trying to bring that down and wanted it in a place where it could be paid off tomorrow and nobody would really notice, and it's kind of in that sort of area. You know, the reason why we keep it is actually we've got about 800 or 900 SMEs, and these companies like the flexibility to get paid when they want the money. You know, so they like the flexibility. They can draw that money down any day from day 7 to day 90, effectively. We'll keep it while there's a demand for it. I think that's it. You're seeing just a reflection of demand.
Clearly, us paying better, that encourages people to come off it. They don't wanna pay the discount fee. They wanna keep that money, and then they wanna get paid in 34 days. We're just, I think, seeing that dynamic, Johnny.
Both Simon and I were very clear when we started that we wanted to get CapEx down to a level which is a useful tool or adjunct to our business, to Simon's point, 'cause certain sub-subcontractors do find it a very helpful tool, and we find it a very helpful tool in bidding certain clients. As an instrument of financing, no. We were determined to get it down, and that's what we've delivered. Andrew.
Andrew Nussey from Peel Hunt. Again, a few questions. First of all, on infrastructure, obviously, you're highlighting the ramp-up of HS2. Where are we in that process of ramp-up? And then on highways, you're obviously signaling the sort of major projects, major activities out there and the opportunities. I'm just conscious of what your thoughts are around future mix, particularly in relation to that major projects and maintenance split. Obviously, there's a few contracts coming up for bid in the near term. And then secondly, on construction, obviously, you're saying the delays are sort of easing a bit. Is that now translating into sort of literally boots on the ground in terms of activity?
Allied, I guess, to that, Simon, has the framework success been accelerated post the fundraise last year and removing that element of uncertainty?
Thanks, Andrew. Yeah, I think thank you for those questions. HS2 ramp-up. We have delivered in the last calendar year 5 million cube of muck shift, which is roughly in six months, which is roughly the same amount we shifted in about two-three years at Hinkley Point C . Those of you who've seen the hole we dug at Hinkley Point C, which enabled the nuclear facility to then be constructed, will realize just how much that is. Going forward, we anticipate in this calendar year, in this digging seasons, which is starting roughly about now, the major digging seasons through to sort of October time, for obvious reasons that to be 15 million. There's a major ramp-up in activity going on across the piece on HS2.
Obviously, we've got the largest geographical size of a piece of HS2 in the U.K., EKFB JV. And so we'll have the biggest muck shift across it as well. There is going to be across the trace a very large ramp-up this year, and we are geared up to do that as well. So you know, we do anticipate that those volumes will continue to show through in the results. On highways, RIS2, as I said earlier, is coming, I think GBP 27 billion, which is a marked increase on RIS1. There's two things going on here. One is that there has been, within National Highways, a strategic decision, within National Highways that is, to so-called sort of renationalize large elements of the maintenance of their area network.
We've historically been very strong in that part of the market, and we still currently going forward. We have four regions at the moment. Going forward, we'll have three of those regions. We are still a very major player. Strategically across the piece in all suppliers, National Highways has taken the strategic decision to insource a lot of that activity. That's impacting everyone in terms of the volumes. Now, what they have done is in the SDF framework, they've allocated through a more diverse supply chain certain elements that used to be in with the old ASC contracts. We have also participated in that within the supply chain, and we won many elements on a regional basis. It's too complex to explain because each region has its different sort of cut of how the activity gets done.
It's quite a complex procurement strategy they followed. The mix within maintenance has changed, but the absolute statement there is they have insourced or renationalized a lot of the activity which hitherto was outsourced to industry. That's the first point that's gone on in the mix. We've compensated for that with an emphasis on local authority work. And probably the best example of that is Birmingham City Council. We've been the interim contractor and been extended to beyond the Commonwealth Games, now being in place for about four years. The size of that contract exceeds any individual contract for a region we used to have with National Highways. Just to, you know, give a point, people think National Highways dominate.
Yes, they do dominate on the national basis, but the local authority highways contracts are invariably bigger than some of the regions in National Highways. That's what's happening in the maintenance mix. At a more macro level, RIS2 has come in, recapitalizing the road network, a heavy investment going in. They're doing that through the Regional Delivery Partnership. We're in partnership in various areas. In our own right in the north of the A66, where we'll be doing the road dualling there witzh Balfour and Costain, who are our partners on the RDP, but it also allows us to bid into other regions as well and get access to other CapEx. That's where the A417 comes in. Lune Gorges is a directed procurement to us based on our performance.
If you look at the charts, National Highways charts, we are top of the National Highways league for the RDP performance in terms of project performance and in terms of safety as well. That's why we're doing so well in highways. The other point I would just add on highways, on the capital projects, we do all of these in our own right. You know, we don't have the need because we have the full set of capabilities to enter a JV. We do them on our own. Even the A66, we'll be doing an element of it, but in an alliance relationship with Costain and Balfour. Your third point on construction, activity boots on the ground and the frameworks. We did win a lot of frameworks throughout the process of the recapitalization and the readjustment of Kier.
Of course, getting onto a framework is an entry ticket to the party. You still have to win the contracts within that. I didn't see any diminution of our expertise in getting on and winning those frameworks. Many of those frameworks now will stand us in good stead as the money gets spent through the various contracts on them. We've continued that post-capitalization to continue to win good positions on frameworks, and we will continue to do it. The ESG credentials I mentioned are incredibly important for the qualitative aspects of getting on the framework. Clearly commercial is important for the client, but quality, which is ESG invariably, is also vitally important. That goes to the heart of what we are as a company, you know, with all of our family-friendly policies, the D&I approach we have.
This all matters in the regional networks in which we operate across Kier. Boots on ground. In the ground, the flash to bang from getting the orders announced through to getting, you know, production into the ground, it depends. It really depends, Andrew, on the type of contract. From a simple school, a primary school, it can be quite short. You know, the flash to bang period from sort of start to completion could be 36 months. Clearly, bigger projects take more complexity. Then the really big projects, when you talk about the highways projects, have also DCO orders which have to be gone through and achieved. Many of these, as you know, are being subject to challenges for various reasons, on environmental basis as well. That's in National Highways type. It's not a simple answer, I'm afraid there.
It's a wide-ranging answer.
Thank you.
Any more, excuse me. Any more questions from the room? No? Excuse me. At this point then, can I ask are there any questions on the audio call or conference call?
Absolutely. If you'd like to ask a question and have joined us on the phone, please press Star followed by one on your telephone keypad now. There are no questions from the call at this time, so I'll hand back to the room.
Okay. If there are no further questions from the room either, thank you very much for coming along. As you see, good, strong set of results and, we'll maybe see you outside for a coffee. Thanks very much.