Well, good morning to everyone, and thank you for joining us today. Welcome to the Kier call, following the full year results 14 days ago. My name is Robert Irvine, of RMS Partners, and I'll be hosting the call today. With me on the call from Kier are Andrew Davies, who you can see there online, and in the room, Simon Kesterton, CFO, and Andrew Collins, our Investor Relations. Before handing over to the team, some housekeeping points. There'll be a short presentation first, and then we'll be taking questions, following that.
Some attendees have taken the opportunity of sending in questions prior to the meeting, but if you do have any questions, then please do type them into the Q&A box by clicking on the button at the bottom of your screens at any time during the presentation. And now I'd hand over to Andrew. The floor is yours, and my colleague, Adam, is driving the slides.
So thank you, Robert. Good morning, everyone. Andrew Davies here. I'm the Chief Executive of Kier Group. If I take you through the FY 2023 financial highlights and then just give you an update on our medium-term value creation plan, then first I'll ask Simon to talk through some of the more detailed points, in particular relating to our cash position and also relating perhaps to our pension position as well. But starting on the FY 2023 highlights, I mean, FY 2023 was a very good year for Kier. We had good revenue growth of 5%, and that was driven really by strong operational performances in many of the markets in which we operate, and obviously, we operate in those markets predominantly for government and on frameworks.
If you perform under the frameworks, you get opportunities to get new contracts under those frameworks. The revenue growth was strong. It was most strong in construction, where we had a 15% growth in their revenue, and that back-ended as well. As we saw many of the contracts negotiations, which had been delayed historically over the last year or two, which we did inform the markets of, by inflationary pressures on budgets and budget assumptions, sort of working through the systems as we see a more realistic approach to setting budgets by the clients and therefore quicker two-stage negotiations and therefore getting spades into the ground and delivering, and thereafter, the cash.
So particularly good growth in construction, backed up by the strong order book, which they and the group have, and we're seeing that continue, as we said, the results into the first three months of this year. So the operating profit was up 9% to GBP 132 million, and that produced a margin at the adjusted operating level of 3.9%, which is ahead of our medium-term target of 3.5%, which we set out in 2021. There are some mixed issues going on within there. We're having, at the moment in our transportation business, in the highway sector, we're seeing a preponderance of design effort in the capital works programs for National Highways. That's a higher margin piece of work, albeit at low turnover.
What we'll see in the future is that converting into production, which will have a lower margin, but higher turnover, so you'll get a better return against your overhead, but you'll get a lower return against the work done. So there is a little bit of mix here, which, we think probably 3.9% will soften a little bit, but still be comfortably ahead of the 3.5% target, which we set, as I said, back in 2021. Cash flow is particularly strong, GBP 132 million. That's a cash conversion of 130%, and that really did follow a very strong quarter for performance, and, Simon can talk a little bit more about that later on in the presentation.
And it produced a net 64 at year-end, which was significantly ahead of the 3 million we had in FY 2022, and particularly so when you consider that we repaid the supply chain finance facility called KEPS. 50 million pounds was repaid of that. So extremely good cash performance in the business, and really, our cash position now is very, very clear, and Simon can explain, you know, what our approach to that is going forward later on. Average month-end net debt was 232, slightly higher than last year, but that, again, as I say, was after having paid off the KEPS facility, the average KEPS facility. And again, Simon's got a slide which can explain that more fully to everyone on the call.
But based on the strong operational performance, the good cash performance, and having now paid off all the debt-like items, which we had last year, we can see a very strong future on cash flow. And that's given us the confidence with the order book as well, and the operational performance, to be able to declare and resume dividend payments in FY 2024, which will commence with an interim dividend after the half-year results, sometime after March next year, when we announce them. So I said the order book remains very strong. Kier remains operationally a very good company, good relationships with clients, very strong framework positions, which we convert into the order book position. We don't include those frameworks in our order book. We only include them if they're contracted or in a two-stage sole source negotiation.
But as you can see, 3% increase, net increase in order book to GBP 10.1 billion, providing significant visibility, certainly over FY 2024, and thereafter into 2025 and 2026 as well. And this confidence as well has allowed us now to use the sheet to take advantage of an opportunity to acquire the assets of the former Buckingham Group in their rail division. The Buckingham Group went into administration due to issues in their construction and leisure division relating to the construction of sports stadia and football stadia. The rail division had many contracts operating for Network Rail on CP6, performing for EKFB, our joint venture, and HS2 in the Calvert's region, as well as operating for the West Midlands Regional Council and also TfL, pre-existing customers of ours.
So it was a great opportunity to strike very quickly. It allowed us to retain 180 highly skilled people out of Buckingham, preserve those jobs. And as we say in our announcement, has allowed us to sort of hopefully forecast a trade between GBP 50-75 million of revenue in the rail sector in the forward year. So a great acquisition, quickly executed, preserving 180 skilled jobs, but in a great position with Network Rail on CP6 and then into CP7 on the bids. And you know, accelerated our strategy in our transportation division for the rail business. So if we move on to the next slide, if I could please, just a reprise of where we are on the medium-term value creation plan.
We said in 2021 we were aiming for a forecast revenue of GBP 4 billion-GBP 4.5 billion. We achieved GBP 3.4 billion, despite the delays I referred to over the last sort of 12, 24 months, caused by inflationary pressures on budget assumptions. We're not seeing contracts go away, but we are seeing we were seeing certain deferrals, but that's worked its straight way through the system now. And we're seeing much quicker two-stage negotiations getting us into a situation where we can get spades in the ground, in particular in construction, which has allowed this revenue to grow with all the attendant cash benefits as well.
So if we extrapolate forward on that, we feel confident that we're on track to achieve within the 3- to 5-year timescale we set, that GBP 4 billion- to GBP 4.5 billion budget, four to four and a half billion revenue target. We are hitting our adjusted operating margin of 3.5%, 3.9. There are some mix issues going on there, and we'll be happy to take any questions on that. But we see perhaps a slight softening of the 3.9, but certainly comfortably above 3.5% going forward as well. So we've delivered that target. Cash flow conversion, we set a target of 90%. As I said, we achieved 130% this year. Very strong cash flow, in particular, back-ended in Q4 as well, so we're hitting that target.
And then the month-end net cash position, having now paid off all the debt-like items, while net debt did go up to GBP 232, and Simon can explain that more clearly with a slide. It is an extremely good cash position, and having cleared away those items now, all of the cash generation will now be focused primarily on paying down the average net debt, and we're seeing that into the first three months of this year. So we feel comfortable that we're on track. And that confidence has then, as I said, given us the confidence to announce a sustainable dividend policy and announce the first dividend, an interim dividend in FY 2024. So while we haven't achieved that, we are certainly on track to achieve it as well.
At that point, perhaps I can just hand over to Simon to pick up on a couple of the cash flow slides and, maybe then talk through the pension situation as well.
Yeah, so we might move to slide 13, I think, which really illustrates how the debt and debt-like items have moved. Perfect. That's the one. Yeah, so this slide shows the history and yeah, looks a little bit forward as well in terms of our month-end net debt and of course our debt and debt-like items, which if we go back to 2021 now, you can see a total stack of GBP 582 million, but which the blue line is reported net debt, so that's GBP 432 million. And then the remainder is kept in red, which is supply chain finance, which effectively is where you pay a bank in 90 days, and the supplier has been paid in 7 days. So it's debt by any other nature, it's just debt.
And then you've got HMRC is the black line, and what this is, is, during COVID, every company had the opportunity to defer, delay, PAYE, National Insurance, and VAT. So of course, government did that and would, of course, have to pay that back over time, which you can see there. So FY 2021, GBP 582 million, and you see that significantly reduced to GBP 286 million in FY 2022, and that's a combination of selling our living business, our house building business. It's a combination of raising equity and of course, it's the cash flows from that year. So GBP 286 million in 2022, of which reported net debt was GBP 216 million. So that's, what Andrew referred to earlier, our, our actually reported net debt has actually increased this year to GBP 232 million.
But you can see why, it's because a lot of cash has gone to reducing those debt-like items, being supply chain finance and the HMRC debt. And then you can see, looking to 2024, you know, all of the cash now being allocated to paying down reported net debt, we will delever by circa, it's circa GBP 100 million this year. And of course, given that's a look-back number, so FY 2024 will be 13 periods looking backwards. We're obviously the confidence Andrew alluded to earlier is because we can see that's happened already. So we know that's happened today, and all we're doing is basically continuing to trade, and we'll report that forward. And then by FY 2025, if you're reporting that between 30 to 40 million, I think that would be, depending on which analyst you look at, average net debt for the year.
Clearly, for probably the last six months of the year, you've been running in an average net cash position. So really average net cash for us, not very far away now, and we've made great progress. Pensions, I think, was another good success story, really, of the business and how things have changed. So if you on slide 16. And there's also a note on page 28 of the announcement, note 6, which talks to the retirement benefit obligations. So firstly, well-funded schemes. So on an accounting basis, I think someone makes the point that there is a reduction of the surplus, but it's a reduction of surplus. You've gone from nearly a GBP 200 million accounting surplus to nearly a GBP 100 million accounting surplus, so very well-funded schemes indeed.
And the accounting surplus is one thing, but I think really what's more important is the triennial valuation, the actuarial valuation, which in 2018, this was a deficit of GBP 233 million back in 2018. Now, a combination of better returns than would've been in that actuarial calculation, allocating cash to it, and of course, now what's more important, I think, is the strength of the balance sheet and the strength of the covenant that the employer provides. We're actually in a situation where on an actuarial basis, you've got a surplus, a big surplus, albeit it's six schemes, three are in surplus, and unfortunately, three are in a small deficit. So we still have deficit repayment plan, albeit, as you can see on this slide, it's a much smaller plan that will by the...
by FY 2028, reduced to zero. So well, well-funded scheme. And, and, and then I think there was one other question here about buyouts, and that's of course, something we look at continually, so we'll be constantly reviewing that. But I, I'm not sure it's a really sensible use of, of capital for the company. So, you know, just, and to illustrate that, I'll talk about the biggest scheme we've got, which is in the biggest surplus. So here, one scheme we've got has got nearly GBP 100 million actuarial and accounting surplus, and yet to buy that scheme out by an insurance fund, you'd need to pay GBP 100 million. And it's quite a lot of capital, and of course, what, what's the return you get on that capital? Well, probably actually nothing.
So if you, if you imagine that compared to our Property business, where you get 15% return on capital, clearly it's much better to invest in the business. And I think that's really actually the best thing for all stakeholders, shareholders, and pensioners really, would be to allocate capital to the business so that covenant just gets stronger and stronger and stronger. That's the most important thing, really, for the company is here to ensure that the last pensioner gets paid everything to their...
Great. Okay, Robert, should we open for questions?
Yes. Super. Well, thank you, Andrew and Simon, and we'll now open for Q&A. As a reminder, if you have questions, please do type them into the Q&A box at the bottom of your screens. We do have some pre-submitted questions, so the first question is on HS2. It says: Could you please outline the government's current position, which I think could be challenging. The second part is: Could you talk about what Kier is currently contracted for with regards to HS2 and what's in the order book?
Okay, so I'll take that one. We participate in HS2 at a couple of levels, primarily as a main works contractor on C2 and C3 72-kilometer section between north of the Chiltern Tunnels up to south of Warwick as well. And we're in the JV. We're a 33%, a 35% shareholder with the Eiffage, Ferrovial, and BAM as well. And I chair that JV as a non-executive chair, and Simon sits on as the Kier director on the board. We're contracted for the main works civils, so that's everything that underpins the rail systems. So that's up to and, but not including the track slab and the foundations for the catenary, which is the electrification of the railway.
So we do all the main earthworks, the civils, the viaducts, the tunnels, the green tunnels, on our section of it. This is phase I , so this is the London to Birmingham section. Currently, although Old Oak Common to Curzon Street section, 'cause the Euston bit is now officially delayed by two years, notwithstanding the media speculation this week. Phase I is contracted, and I can't... I will defer to Simon exactly what is in our order book, but the amount for currently contracted phase I , net of any future anticipated changes and inflation, is all in our order book. But we do not speculate on what may happen with inflation or any future changes on HS2.
We'll put it into our order book as and when those contracts come about, so we've got quite a conservative position. The debate, that's the facts of the matter. The contract is also a cost-reimbursable contract, and then you have a fee on top of that, which is moderated based on your performance in areas like cost control, like safety, like program adherence, et cetera. But in all circumstances, you get your costs covered under that contract, given the nature and the scale of the contract, and the multi-year nature of the contract. So if you move to sort of this week's speculation, which I suspect, which has prompted the question, this debate is really about the future of the London end of the railway, which is Old Oak Common into Euston.
We don't participate on any aspect of that. That's run by an entirely different consortium. And then the other speculation is about what happens north of Curzon Street, up to, Crewe on phase II A, and thereafter on phase II B up to Manchester. The second part of phase II B was deferred about a couple of years ago under the Boris Johnson regime. That was the bit that went up to Leeds. That was indefinitely deferred. So we have no assumptions in any of our financial forecasts for any work on phase II A or phase II B. And indeed, on those phases, certainly north of Crewe, there is no budget within HS2 for the next couple of years anyway.
So this is really talking about a deferral or potential cancellation of something that wasn't gonna happen for at least 2-3 years, in any event. There was a deferral of the piece, the spur north of Curzon Street, which is being done by, again, a different consortium to us, BBV, in the north, which was going out of Curzon Street up north towards Crewe. That's been deferred by 2 years as well. Pending that, I mean, the speculation is for everyone to see in the media. We've made representations, as you'd expect us to, as to what we believe to be the benefits of completing the railway up to Manchester, but ultimately, that's an entirely political decision.
As I said, in relation to our contract, Phase I, I don't think there's any serious debate or speculation about the future of Phase I, given the advanced nature of that contract in the ground. All this is speculation about Phase II A and Phase II B, which, as I said, we have no assumptions in any of our financial forecasts relating to it.
Great. Thank you very much. And you touched on the order book there as well. The next question is, the order book has grown again to GBP 10.1 billion, and there have been a number of framework bids. To add into that, part of the answer can be defined what frameworks are, just 'cause there's different level of knowledge on the call. Could you talk about when work is put into your order book? And is there any risk that projects in the order book could fall out of that?
Well, well, frameworks are multi-year sort of overarching commercial, programmatic and operational sort of contracts with entities which people like Department of Health, Department of Justice, Department of Education, local authorities. There's many, many different types of frameworks. You could argue there's far too many types of frameworks, but basically, they have their own types of frameworks which dictate the type of contract under which they want to let future contracts. It dictates the type of contractor they want in terms of their qualitative aspects, things like sustainability, their approach to social value, their approach to the environment, et cetera, their approach to employment, et cetera, et cetera. But frameworks in of themselves don't actually give you work. You still have to have bids within frameworks.
What frameworks do is filter the market, and they effectively act as a sort of a chinning bar above which you have to hit the required procurement note standards, which in particular government will set for you in respect to those areas of environmental, commercial, social value, et cetera. But then you have to have competitions within those frameworks. So if you have framework values as we do, and we say in our presentation, we actually have by OJEU advertised value frameworks to the value of GBP 140 billion. Now, clearly, you're not going to put GBP 140 billion into your order book. You're not gonna be capable of delivering GBP 140 billion. That's just the advertised value.
But if you look at the accessible market within that, i.e., contracts, which we think realistically we have the capacity and capability to deliver, we believe that figure is more around GBP 40 billion. None of that is in our order book, 'cause the criteria with which, Simon in particular sets for putting in our order book to make sure all of our future assumptions to the market are correct, are that you have to have a contract in place, or you have to be in a sole source, two-stage negotiation, if it's that style of contract. So, for example, if you're into a negotiation to build, a school, you'll get into a two-stage negotiation offer framework. There'll be predetermined conditions relating to your social value, relating to your environmental standards, relating to some of the commercials.
And very rarely are those contracts terminated, those negotiations terminated. So we always feel confident when we're in a two-stage exclusive negotiation, that we can put the total value of that contract into our order book. Anything else, though, we don't put into our order book. So it's a very conservatively put together order book, and we certainly do not include all of the advertised value of the frameworks in our order book.
Great. Thank you. And we've got a related question before a follow-up on pension. And this is: How under your management, have you tightened up the controls in the bidding process to make sure that you're not taking on loss-making contracts?
So when I started 4.5 years ago, and Simon started, we put in place an operating framework, which was put in place by our then Commercial Director, Stuart Togwell, who now runs our construction business. And the operating framework set the standards by which we were gonna operate this company in all assets, you know, all policy guidelines, as well as delegations of authority. Those delegations were very clear in respect to the types of contracts we were prepared or willing to accept. And if they went outside those barriers, who would take the decisions, including and up to the board level? As a general rule, you know, we operate off frameworks, we operate in business-to-business markets, we operate with government. 70% of what we do is with government, 15% is regulated.
So it's a very understandable and known client base we have in the business. That's our, our strategy as well. We don't take contracts such as single stage lump sum D&Bs, 'cause effectively what they're doing then is passing, the clients will be passing on unknown and unbounded risk to you. So 60% of our portfolio and our order book is in cost-reimbursable contracts as a result, where the, the risk of cost inflation sits with the client. And for example, on some of the bigger infrastructure contracts, that's what you typically expect. Now, that's, that's not a free hit, so to speak, because obviously if there are inflationary pressures, you know, clients have to bear those inflationary pressures, and that does then put pressures overall on programs. And perhaps that's, you know, what's happening on HS2, for example.
So, it's not, you know, there is a limit to what you can transfer in terms of risk or the clients can retain as risk. But on the other 40%, which is predominantly in our construction business, clients they want to get a degree of certainty into their costings, so they like to fix out the prices, but they'll only do so, and we'll only do so after a two-stage negotiated process, where we understand all the risks in the contract and the program. We'll bound those risks. We'll put contingency as appropriate into either the program or into the costings, and then we will fix it out. The clients like that because it gives them that certainty, and we like it because it gives us an opportunity to manage those risks better and then improve our margin.
But the other point I would say about many of those contracts, the average size of our contracts in construction is GBP 16 million, or 1.16. So therefore, the repricing of those contracts, if for any reason they are hit by inflationary pressures, is frequent. You know, a GBP 60 million contract realistically will be built out in sort of, 12-24 months period. So you're constantly repricing these types of contracts, and even if there is a pressure within the contract, you know, you're not going to be unduly hit your margin, as well.
The golden rule is, you know, we're happy to take fixed price contracts, but only in respect of contracts which we understand the risks and have contingent against them and can manage them more cost effectively than the client can manage them, and that's what two-stage negotiations are all about.
Great. Thank you very much. The next question relates to pensions, and it is, "Simon, good answer on the pension scheme. Pleased to see that profit and cash are moving in the right direction. Why have net assets shareholder value fallen?
Yeah, so I think that's the same point that we referred to. What's happened is it's an accounting for the pension. So it's an accounting assumption, and it's based on. Predominantly, it's the discount rate, which has moved from 2022, it's about 3.9% to 5.3%. So with that sort of change in discount rate, the surplus of our pension schemes on an accounting basis, which I have to say, you know, it's very subjective and very difficult to say whether that is, but you've moved from a surplus of GBP 195 million down to a surplus of not quite GBP 104 million. So, and that has impacted net assets. I don't believe that really translates to shareholder value.
What's really more appropriate for shareholder value is how much capital are you allocating to those funds? And there you see, you know, we've moved the triennial valuation from a massive deficit in 2018 to actually quite a significant surplus now in 2023. And what that means is our deficit repayment contributions have actually reduced at the latest valuation quite materially. And if you look at the presentation, page 16, you can see all the details of that.
Super. Thank you. And the next question is, you touched on the acquisition of the rail assets of Buckingham Group. Would you be interested in any other acquisitions that may present themselves?
Yeah. Yes, we would. And we've proven, I think with the Buckingham acquisition, we can move at speed. It was a very fluid situation. They were going into administration, and we had to sort it out and get the prepack sorted, which we did very effectively. And we showed that we had the financial wherewithal, as well as the sort of operational wherewithal to acquire them and innovate those contracts. But the... There's a couple of things I would say about that. Firstly, it aligns strongly to our strategy. We were very clear we had a strategy in transportation, and we were very clear within that line of business, we wanted to pursue rail maintenance and project opportunities, in particular with Network Rail on the CP7.
So industrially and strategically, we had a real interest in this area, and that's got to be the first prerequisite. This was a real accelerator for us. The second thing we did was it had to conform to our overarching medium-term plan that any acquisitions would accelerate that plan, including the delivery of a net average net cash position. So whilst we paid GBP 9.6 million for this, these contracts, and we bought contracts, we didn't buy the previous liabilities, so it was cleansed by the administration. So we only bought the future receivables under these contracts, and the people, the skilled people as well. Those contracts, you know, as I said, we will get the receivables. We will trade those contracts through.
We will make a margin that's consistent with margins we make in Infrastructure Services, which will be cash-backed, like that, and then, like the other operating businesses in the sector, we would expect a negative working capital. So the point about that is we expect the payback to be very fast, on that acquisition, which therefore will generate cash and be consistent with achieving the average net cash position under our medium-term plan. So yes, we would, but it has to firstly meet our industrial strategic criteria. Secondly, we're not taking undue risk, which we didn't here, and thirdly, it has to be consistent with our medium-term plan.
Great. Thank you very much. I guess related to an extent is: How will you think about capital allocation going forward, and do you see the resumption of the dividend being at the top of the agenda?
... Yeah, it's a great question. I think slide 15 shows basically the sources of cash and the usage of cash, so it's our capital allocation slide. Sources of cash, predominantly free cash flow. You'll see, you know, great performance. Last year, GBP 132 million of free cash, being 130% conversion against our 90% target, which is great. In terms of uses, and there's CapEx, of course, but CapEx is really minimal. If you look at our free cash flow, most of the CapEx there is actually just related to leases. The real CapEx is sort of circa GBP 5 million around them. So investment in the business in terms of CapEx is low, but what we do want to do is invest a little bit in our property business.
So our property business, great business, very synergistic with the rest of the group, and we've been capital constrained over the last few years. So of course, we've been extracting capital from this business, and if you remember, two years ago, very hot property market. We pretty much sold everything, so we were very low in terms of capital invested compared to sort of the range that we like to be with that business. This year, much more difficult market, so actually, having sold everything in a hot market was actually very fortuitous, and now the guys are sitting there with capital to invest. So we want to invest a little bit into that property market. We see that property market's probably going to start to recover now, so we do want to allocate a little bit more money into the property business.
And that's also helpful from a point of view that we're growing in our negative working capital businesses. So they're throwing off cash. That cash we'll have to give back if those businesses shrink again. So we can allocate it to our property division and then extract it if that turnover starts to fall, and we need to return it to some of our customers in our other businesses. Deleverage, so here, also very important, Andrew's mentioned it. We do have our medium-term value creation plan, is to get to a sustainable average net cash position, and so really, most of our cash is really being used to deleverage at the moment. You know, and if you look at the analyst numbers this year, circa GBP 100 million in terms of a net debt reduction. Then you get the dividend.
We've signaled our intention to pay that, and it's a 3x earnings through the cycle, so quite a cautious, co, dividend policy in place, and we're going to get there over time. You know, if analysts, if you look to what's in the market, I think they're expecting between a 4 and a 5 pence dividend, so that's not close to 4x earnings cover rather than 3x in this year. Interim, so one third, two thirds, so we're expecting a one third of our dividend to be announced with our half-year accounts. That's half-year end of December, that will be announced in March next year, so we're not very far away. Then the full year will be announced alongside our full-year accounts in September next year.
And then you can imagine, if we're really deleveraging by GBP 100 million, we're expecting that deleveraging to continue. I wouldn't expect it to take very long for us to be at our targeted dividend of 3 times cover. And then finally, M&A, as Andrew mentioned, we're fishing in a very small pond because it has to bring forward that medium-term plan, including getting to an average net cash position. So clearly, you can only buy companies there with a very short cash payback, as we did with Buckingham.
Great. Thank you very much. There's a follow-up question on the property business. Could you talk about the model there, please? Where do you see growth coming from? Yeah.
Yes, the model's brilliant. I mean, it's a great business, great team, and I mentioned earlier, quite synergistic. It's synergistic from a customer point of view. So the customers that we have in our property division tend to be the customers that we have in our other businesses. Network Rail, as an example, or the local authorities that want to redevelop a town center, as an example. So great customer synergies, and also there's an operational synergy there as well. Because if you can imagine, if you're redeveloping a town center or a train station, you can use our design capability, you can use our construction capability, you can even use our utilities capability, and of course, you can use our highways business, too. So fabulous synergies there from both the customer and the operational.
And then finally, there's even a, a financial synergy because, of course, I touched on it earlier. If our businesses grow, they throw off negative working capital. But of course, if they shrink, they, you need that cash back. So what you can do is you take that cash, and you can allocate it to the property division. You can enhance margins and returns, and of course, if you've done it on a cautious basis, as we do, you can extract that capital again to use it to... If you, because of course, unfortunately, life's just not like you're going to grow your top line, straight line. It's going to go up and down, up and down. So you need to be able to manage that volatility, and our property business helps us, us do that. So that's the model.
The other thing that's nice about this model is, you know, because last year, let's face it, a lot of property businesses, I think on average, they lost 15% in terms of capital. You didn't see that with our property business, and why is that? We have a model with our JV partners, our customers generally, where they put the land in, and the land absorbs any issues with the return. So if we make a really bumper return, they get paid for the land. If we don't make the returns that we expected, the land gets put in at a lower and lower price, to the point where it can be put in for free. So of course, with the market conditions last year, a lot of our projects now, there's land going in for free.
So what that does do is, of course, it protects our earnings, so we don't get those losses. Now what we're seeing is going forward, you know, where do we expect... I mean, you know, there's a huge amount of opportunity for us now, especially with sort of net zero targets. That's where we see the growth and where we see the opportunity moving forward.
Okay, thank you. And the next question is a follow-up on the dividend. You referred to a sustainable dividend. Can you give any indication of what this looks like for a shareholder?
Yeah, well, I mean, we've got a policy. It's 3 times earnings cover, so it should be pretty simple really. You take our EPS, divide it by 3, and there's the sort of dividend you would expect per annum. And we said 1/3, you know, we're gonna follow a pretty traditional 1/3 interim, 2/3 full. So I think that's reasonably clear, and we think we'll glide into that cover, you know, I think pretty quickly. You know, so you're right, we won't start immediately at 3 times cover, but we'll glide into that. I think 3 times cover, when we introduced that policy, it was meant to show how prudent Kier was. So probably over time, as we get to that average net cash position and we're at 3 times cover, there's probably gonna be downward pressure on that.
You know, is 3x cover the right number? It's probably a little bit cautious, and you'll probably find that we're able to actually lower that number and pay a slightly bigger dividend to shareholders over time.
Super. Thank you. The next question is on supply chain. Could you talk about how you monitor the health of your supply chain, and are you worried about any of your suppliers potentially falling in?
Yeah, it's a great question, and something we do, and it's obviously we do all of the traditional finance credit checks. But of course, when the credit check goes wrong, you're often already too late. So what's more important is how we manage the risk on a project-by-project basis. So clearly, you know, some, if you're buying, you know, a few screws, you can go to another shop and buy a few screws. So, you know, that this is, but, but really key supply chain, that's project critical. You'll find what we do is we have, on a project-by-project basis, a contingency plan, pretty much. You know, and then that contingency plan can range through a whole bunch of options, from self-delivery, alternative supplier. So we'll make sure, so, and, and I think, you know, we're quite cautious on this.
So, you know, it's something we've had in the spotlight for the last couple of years. It's something we're very good at now. And so, yes, we've had actually a few supply chain failures, but you don't see that in the numbers because of those contingency plans and our ability to mitigate it. And of course, Buckingham was actually a supplier to EKFB joint venture. And, you know, that's gone from, you know, a risk, actually, the acquisition goes to an opportunity rather than a risk. So yeah, something we're very cognizant of, something that we have seen an increase of, but something we're very good at managing in our day-to-day business.
Thank you. And then we've got a couple of questions on elections. But just to put those together, could you talk about the, in general terms, the impact an election could have on the company? And then also, what you perceive might be the impact of a government of a different view.
So two answers I can give to that. There's a procedural one, and then there's a political one. If I start with the political one, I mean, none of the parties really have issued their manifestos yet, so you can't really answer that question other than by a degree of sort of speculation as to where the parties may go. I mean, my belief, and anybody can have their own views on this, is that the existing government will stand on a manifesto of continuing to level up. That means investment in infrastructure and social infrastructure in particular, which means prisons, hospitals, schools, et cetera. And I don't believe that any incoming Labour government would necessarily spend more, because that's been their indication, is they wouldn't, but I certainly don't believe they'd spend less.
So I think what you have is probably around social infrastructure, a degree of bipartisanship. And therefore, we don't anticipate, although this is only speculation, any change in demand for what we do in Kier with a change in government in the foreseeable future, whichever government is in place. There's clearly debates around some of the very big programs on HS2, and but, you know, people can speculate. But as I said earlier, that doesn't impact us because we don't include it in our order book and our financial assumptions. And then the opportunity space elsewhere, when you get into the regulated sector, that's obviously in the private sector, not government, albeit it is government. It is regulated by government from the EA and Ofwat to the water sector.
But the political pressure there on the water companies, and on government to make water companies invest to stop them polluting, which is no longer deemed acceptable, albeit is common practice, but no longer deemed acceptable, means that there's ranges of investment required in water companies, you know, into some of the speculation is into GBP 100 billion. So the opportunity space there is enormous, albeit that is not direct government spending. So look, I think from where we sit, we think our strategy is right. We think whatever government is in is in power, they will want to continue to spend on social infrastructure, and the regulated sector will want to continue to invest in their capital works programs as well.
So on the procedural point, there is always a, an issue around elections, where there's purdah, where decisions can't be made. So if you're in a two-stage negotiation, that needs a decision to enter into a contract at the end, that can be delayed. So we're aware and alert to that. So a lot of effort goes into ensuring that we have contracted income in our order book, so that doesn't impact on us. And that in particular affects the construction business. They're very focused now on getting continuity of throughput and revenue by getting into contracts prior to that coming into place. But it's probably two months away. I think the election has to be, at the very latest, 2025. So we've still got some time, and we're working hard to ensure that we, we have a good position there.
Great. Thank you. The next question is around the competitive environment. Could you talk about how you're seeing competition in both the construction and infrastructure elements of the business, please? And do you think that peers are behaving rationally?
I think when you look at the public companies, I think all of their results indicate over the last sort of couple of periods that they are acting rationally, and they're delivering good, positive sets of results. So that's sort of the test in many ways in the marketplace. I think you'll always have competition. It is a competitive environment, and particularly in construction. But as I'll go back to my earlier reply, we have a very clear set of delegations of authorities which permit the businesses to operate within a framework, and if they're outside that framework, they need to seek prior approval, either up to myself and Simon or beyond that to the board. And the rules we have are, you know, the multi-year contracts is, you know, we will not take unbounded risk.
It is a competitive environment, but I think all the public companies operate within the government, and the government itself, in setting out the Construction Playbook, want a sensible, competitive environment, and that's what we're seeing at the moment, and I think proof point to that is the results of any of the public companies.
Great, thank you. Well, we've got two questions left in the question bank at the moment, so if anyone else does have a question, then please do type it into the Q&A box. And the next question is: will you see any opportunity from the cracked concrete issues we've seen in the school sector recently, and I guess more broadly?
So there's an opportunity to help your clients, certainly. You know, this issue is one of a couple of issues which the Department of Education have with an enormous schools estate across, you know, just England, let alone Wales and Scotland, which are obviously controlled by different administrations, but, you know, commensurate issues. That, as well as the health department, by the way, and some of the hospitals have been impacted by RAAC. So it's an opportunity for people like Kier on the framework to actually help clients, and we've done just that, you know, both in health and education. We've put teams in to the departments to help them survey the extent of the issue they're dealing with. And I think you have to remember, with the RAAC concrete, this goes back sort of to the 1950s, 1960s, 1970s, and 1980s.
In the contracting methodology then was very much traditional, where the risks of the specification and the design sat with the client. Also the limitations on warranty obviously would mean that anything built in the '60s, '70s, and '80s is well out of warranty, and, indeed, their expected life expectancy of this material was probably sort of 30, 40 years. So, you know, it's beyond all reasonable assumptions of any liabilities within the contracting sector, and I think that's the approach which these departments are taking. They're seeking help to solve their problem. So that's an opportunity to, you know, to help your client, and out of that does come various initiatives to try and, you know, sort of help the schools or the hospitals that are affected.
I think the government's been pretty clear, though, when the Chancellor said, "We will do what it takes to solve this problem," the caveat was within existing budgets. So I don't anticipate new money being allocated, but I do anticipate a degree of reprioritization of which schools and which hospitals get built or rebuilt first, or propped up first, or fixed first, or whatever the solution for that particular school or hospital is, and that's what we work through with the client. So I don't think there's gonna be 150 new schools, but what I do think there'll be a reprioritization, and those people who help the department tend to be the ones who help them fix the problem as well.
So I think there is a strong reputational opportunity here, and indeed, we will get some work out of it, but there's no new budgets allocated for it per se.
Great, thank you. We have a couple more questions submitted. The first one is: How much off-balance-sheet debt does the group have in joint ventures, and is this increasing or decreasing?
Yeah, I mean, that's a, it's a quite a small number now. I think a lot, most of the sort of off-balance-sheet debt, and when we're talking about off-balance-sheet debt, I mean, these are in joint ventures where you've got a minority or lack of control, so there's assets and liabilities that are off the balance sheet. Most of that went when we sold our Liberty business, so I think it's substantially smaller than it has been. And yeah, doesn't, hasn't, I don't think, moved materially at all over the last couple years.
Great. Thank you very much. And the next question is, COVID is potentially on the rise again. How are you managing the potential risk of another pandemic?
Very topical. I actually have COVID at the moment, which is why I'm not sitting with you in that room today. But it doesn't stop me working, as I have been working all week. But sensibly, the advice from NHS is that you should give it five days to isolate, not to further infect people, and that's the advice I've taken, but that hasn't stopped me working. So look, we, during the last pandemic, you know, obviously a much unknown situation, and we managed it extremely well. All of our sites adapted extremely effectively and very, very quickly. We've got extra accommodation, temporary accommodation. We did employ distancing. We reoriented the logistics management of our sites to adhere to the two-meter spacing.
I think the huge difference this year and this time around, and the advice, which I, you know, obviously I'm quite topical of, versus the last time, was it was, you know, you will separate to the extent you can by two meters. Now, the advice is you don't have to test, 'cause the vaccination program has created such an immunity within the population that the impact of COVID on any individual is going to be greatly diminished as well. So the advice is very, very different now because of the vaccination program, than what it was two years ago. But my point, two, three years ago, but my point is we managed it very effectively two or three years ago, and I anticipate we'll manage it now.
And Kier also has a lot of welfare and health, policies in place, and we do take great pride in what we've put in place in terms of GP referral systems and other sort of app-based systems to ensure the health and welfare of our, our workforce. So we, you know, any, any advice that the government issues out, we will also take very seriously and implement. But at the moment, I think, we, we're seeing COVID in the light of everyone else is seeing COVID. It's not the threat it was two years ago.
Great, thank you. And the last question's on margins. Margins look healthy and ahead of the medium-term plan. Can you talk about the outlook for these, please? And, do you think the medium-term target is still appropriate?
Yeah, I mean, that's a good question. So circa 3.5%, and we hope, you know, we say circa 3.5%, you prefer us to be slightly above that than below it. But we've got, I think Andrew touched on it in the opening, a bit of a benefit from mix here in both of our businesses. So if I deal with the infrastructure services, and there's a slide 19 here for infrastructure services, and there's slide 21 for construction. So our two biggest revenue businesses. There's some mixed things going on here that's benefiting the margin. So in infrastructure services, first and foremost, slide 19. Here we've got a lot of highways work, so new build roads that are in the design phase.
So in the design phase, you've got low revenue, and you've got double-digit return on sales. So as that design phase is gonna come to an end over the next 6-18 months for these projects, they're gonna go into the construction phase, which is much higher revenue, and actually just the operating profit, probably absolute terms, a bigger number, but it'll be low single digit return on sales. So that's gonna dilute 4.7% that you saw and push it back down towards FY 2022 is a good number, still 4.2%. So that's gonna happen in infrastructure services, so downward pressure on the relative margin, not necessarily the absolute margin. I still think that's gonna be nice and healthy going forward. And in our construction business, you've got a similar mix dynamic as well.
Two businesses in our construction business, Regional Build and Places business. The regional build is where the growth is gonna come through, and regional build is low single-digit business. In terms of places, however, where the mix is swung towards at the moment, this is high single-digit margin. So there'd be, I'd expect, downward pressure again on that 4.2% in our construction business. As not, not for a bad reason, but because, just because our regional building business, it's where you've seen the order book increase materially. It's where we expect growth to come, come from, and it's low. It's lower than the sort of average margin, so it's gonna come through that growth, but lower. So those, those dynamics mean we feel the circa 3.5% is still appropriate. And finally, property, where we'll expect a tailwind.
I think that, you know, unfortunately, that tailwind is not gonna come from until probably two years out. Because, as I mentioned earlier, we've extracted capital from that business two years ago. Pretty much it was way off the bottom end of where we'd like to have capital employed in that business. We're only just starting to deploy that capital into a market, which has had heavy distress this year. And so basically, I'm not expecting those returns to come through and sort of that margin enhancement to come through for the next 24 months or so.
Okay. Great. Thank you very much. Well, that concludes the Q&A session. I don't know if I can hand back to any concluding remarks?
Yeah, look, I'm very happy to conclude. I mean, it has been a very good year for the company. We've made good progress on our medium outperforming the margin target on those plans. Cash has been very strong this year, performed cash for investment, and that provides multi-year sort of visibility for us. And FY 2024 now, three months in, has started well, and we're trading in line. So no change to the current outlook. And now with that, I will close off. Thank you, Robert, and everybody for listening.
Super. Well, thank you very much. Two final things to say. Firstly, there'll be a short survey which will appear on your screens, and the company will very much appreciate your feedback to that. And secondly, the trading update and AGM are scheduled for Thursday, the sixteenth of November. So thank you very much, and that concludes call today. Thank you.