U.S. Markets closed

Edited Transcript of JLG.L earnings conference call or presentation 22-Aug-19 8:00am GMT

Half Year 2019 John Laing Group PLC Earnings Call

London Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of John Laing Group PLC earnings conference call or presentation Thursday, August 22, 2019 at 8:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Luciana Germinario

John Laing Group plc - Director

* Olivier Brousse

John Laing Group plc - CEO & Executive Director

* Patrick Francis John O'Donnell Bourke

John Laing Group plc - Group Finance Director

================================================================================

Conference Call Participants

================================================================================

* Alexander Wheeler

RBC Capital Markets, LLC, Research Division - Associate

* John Fraser

HSBC, Research Division - Global Equity Head of Building Materials and European Building Materials Analyst

* Olivia Rosalind Peters

Macquarie Research - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [1]

--------------------------------------------------------------------------------

All right. Good morning, and welcome to our results presentation for the 6 months ended 30th of June 2019. But first, let me introduce to you Luciana Germinario, our new CFO. Luciana joined us with a wealth of investment experience. And in a short time with us, she's already been a great asset to the team. In a moment, she will introduce herself, and she will take you through the financial performance.

Obviously, I'm sure you've seen this morning that our results so far this year have been mixed. They don't change our outlook for the year, they don't. But let me explain to you where they come from? What we're doing about it? And why we remain confident for the rest of the year and beyond? So let's look at the headlines.

First, in terms of net asset value, we've increased NAV per share from 323p at the end of December '18 to 325p, which represents growth of 0.6% or 3% after adding back the dividends that we paid in the first half.

As I said, obviously, these are mixed results. But you have to understand that they come on one hand, from a very strong value creation from project delivery, representing 0.35p per share for the first half. And on the other hand, from issues we had from some of our renewable energy assets in Australia, not coming from the projects themselves, but from transmission problems with the grid, they accounted for 13p per share. And also from low-wind yield forecast in some European countries, which resulted in a write-down of 11p per share.

In terms of renewable energy problems, we believe that the worst is behind us. And at the same time, we continue to generate value from delivering all the other projects. And clearly, the second half is going to be very busy in that respect.

In terms of realizations, we had a good start with a total of GBP 131 million in the first half. Obviously, the market for operational assets is very active. And as you know, we've got a very attractive portfolio of such assets to take to the market.

Our forward pipeline of investment opportunities, I will detail it to you later on, remains very healthy, GBP 2.1 billion worth of future opportunities. Even if, as you would expect, we've changed little bit because of the renewable energy challenges. I will explain that.

In terms of new investments, we've been very selective in the first half. And we committed GBP 7 million by the end of June, since then, we committed almost an extra GBP 140 million, and I will give you more details in a minute about that.

And finally, in terms of dividend, we're declaring an interim dividend of 1.84p per share, which is up 2.2% from last year.

As I said, these are mixed results for the first half. But as you know, our business model is resilient, and we are maintaining our guidance both in terms of investments and disposals, and as I said, we remain confident about our 2019 outlook.

Let's look now more specifically at our activity in the first half. In terms of investments, as I said, we committed GBP 7 million to a student accommodation project, the PPP project in the U.K. And since the end of June, we committed GBP 75 million to a wind farm in Texas in the U.S., alongside a large international renewable energy developer. And as we disclosed earlier on this week, we committed a further GBP 62 million to our first project in Latin America, a road in Colombia called Ruta del Cacao, alongside one of our long-established partner, Ferrovial-Cintra, which has been in the country and in Latin America for many, many years.

In terms of realizations, we sold our stake in the Optus Stadium in Perth, which was a very successful project completed in 2018. So successful that it saw the Wallabies recently upset the All Black 47-26 for once. With hindsight, we should have sold it to the Wallabies.

Beyond that, we also saw some of our wind farms in Texas, namely Rocksprings and Sterling in the U.S., one of them is in New Mexico. We sold them to Masdar from the Emirates. What is important to note with these disposals is that these are the first disposals we make in Australia and the U.S. It's very important because, as you know, our value-creation cycle is based on the yield shift between the entry IRR preconstruction and the exit discount rates upon disposals. And you can see that in these 2 countries where we've been investing for several years now, many projects are coming to completion, and we'll now enter into our recycling program.

Let's talk about these projects. I mean, many of them are familiar to you because we discussed them with you in the past. And as I said in the first half, we've made major progress on the delivery of some of our most complex projects. The first one is obviously probably one of the most visible ones, the Intercity Express Programme in the U.K., the phase 2 of it, which provides trains to the Department of Transport for the East Coast mainline, running from Kings Cross to Edinburgh. These trains have a similar design than the ones we deliver to the Great Western services in the last 2 years. And so far, for the East Coast mainline, 18 trains have already been accepted into service, some of them have started to run up to Edinburgh. And the remaining 47 trains are planned to follow into service before June next year. This is a very complex project, but this is also a very successful partnership with Hitachi, the manufacturer. And our team is embedded in the project company and absolutely instrumental to the delivery of this project.

The second one that is also familiar to you is Denver Eagle. This is our first rail PPP project in the U.S., as such, it is obviously very important. And as you know, the first 2 lines, including the one serving Denver International Airport, the first 2 lines have been operating very successfully since 2016. But the third one, called the gold line, suffered from delays coming from tricky regulatory approvals with level crossings. And finally, top into service in April this year, which means that the project is now completely operational, and we've received our first dividend in the first half of 2019. This is a very important asset for John Laing because we believe that this is going to be a template for many cities in the U.S. that either want to connect their airports to city centers or to build urban rail networks from scratch. But beyond that, it shows all the benefits of public-private partnerships, when public authorities want to build complex rail networks and transfer the risks to the private sector and for the private sector to take the risks and deliver the projects. And beyond that, the project company is managed by one of John Laing employees, which shows that, again, John Laing is at the center of the delivery of such projects.

The third one, which is also familiar to you is in Sydney, the Light Rail system that is due to really transform public transportation in the heart of the city, including George Street. And as you know from past reports, this project was severely delayed by problems in claims, mainly arising from underground utilities.

But in June 2019, recently, a settlement was reached between all parties, clients and the banks and obviously the contractors to settle the claims and revise the completion timetable. Some of you will remember, James Bramley, one of our directors, who chairs the project company, he made the presentation to the -- during the Capital Market Day last year. Well, James and his team have been absolutely at the center of the settlement, the negotiations and again, instrumental in trying to make -- even making this project happen. So much so that today, all the track work has been completed. The trains are being tested during the day, and the first vehicles will enter a passenger service before the end of this year.

And finally, let me give you an update about another project, called New Generation New Generation Rollingstock, the largest rail project in Queensland in Australia. Again, we reported to you in 2018, the project was tricky, we're running late mainly because of design floors with the vehicles. And John Laing was very actively involved in trying to find a settlement between the client and Bombardier Transportation. I attended myself several meetings in Brisbane with the clients in Bombardier to try to help. And finally, we agreed on the revised delivery schedule, the number of trains accepted in service now totaled 63, and we've got 75 to deliver, and the final train is due to be delivered before the end of this year. Every time the projects made progress in completion, they obviously generate value for John Laing. And when they are complete, they transfer from our primary portfolio to the secondary portfolio. And this is what is happening under you watch for these 4 major and complex projects.

Beyond the delivery itself, these projects all contribute as it happens, they're all about transport. They all contribute to improving mobility. They all have an impact on local communities, and they contribute to our ESG credentials that we are very proud of because we make a difference to people's lives, and this is why John Laing is brought back into new projects. They are part of our credentials. They are, as I said, an essential part of our value-creation process. But also, there are good news for the future because all the stakeholders, partners, be they public authorities, train manufacturers or civil engineering companies will call us back on future projects, they do call us back on future projects because they know that we contribute to delivering their projects.

Now let's talk about our challenges. As I said, we faced some quite serious challenges in renewable energy in the first half. At the end of June, we had a total of 46 projects in our portfolio, total value of approximately GBP 1.5 billion. This includes 25 renewable energy projects. And out of these 25, 6 of them got into some difficulties and suffered some write-downs in the first half of this year for a total of 24p per share.

First, in Australia, the entire energy generation sector experienced transmission issues by surprise as a result of a surge in capacity of renewable energy projects connected to the grid recently. We currently have 8 renewable energy projects in Australia, and 2 of them are impacted by these issues, even if they are still under construction. But what's happening is that the negative impact is based on loss factors coming from the grid, i.e., the amount of power that is lost between the generation point and the delivery point. And this accounted for GBP 66 million write-down in the first half. Now our teams have tried to improve in the situation, address the problem, generate other value enhancements, and they managed to generate another GBP 28 million of value enhancement, but still -- the net impact is still GBP 38 million.

So you understand, these forecasts come from the national grid operator, called AMO, which every year gives us a 1-year forecast of these loss factors, which depends on the amount of power that is transferred to the grid to be transmitted, 1-year forecast. But of course, we can't deal with 1-year forecast only. So when we got the latest forecast from the grid, which, as I said, to the entire industry by surprise, probably the grid operator itself as well. We commissioned our own long-term forecast to have a little bit more visibility about the future, independently from the rest of the industry. And on the back of this forecast, we decided to take a write-down to reflect the write-down in the value of our assets. Even if, as I said, these assets are not yet operational.

Having said that, in the future, we believe that even if we have a problem, the industry has a problem and the country has a problem. Because if the grid is obviously unable to carry the additional power produced by renewable energy generation, well, that leads to a serious problem for the future, i.e., capacity of the country. And there is no doubt that the industry, the regulator, even the government will try to find a solution, either to improve the grid, which is the only long-term solution possible or to spread the pain differently between the different generators. This is what is happening, and John Laing is actively engaged in this process. But again, we don't know yet how long it's going to take for them to fix it. And this is why we've decided to take this prudent approach.

As I said, we had another problem, another challenge in the first half with our European -- some of our European assets. Especially in 2 countries, Germany and Ireland, where the wind yield has been quite subdued in recent months. And because we're preparing these assets, these assets are operational as opposed to Australian. Because we're in the process of preparing these assets for sale, we decided to commission our own updated long-term energy yield assessment. Again, we're talking about future wind yield over the next 10, 15 years. And this led, unfortunately, to a negative impact that we reflected in our valuation for GBP 55 million. At the same time, our team generated GBP 14 million worth of different value enhancements from the RE portfolio, but that is still left us with a net GBP 41 million negative impact. This issue is obviously completely different from the one we face in Australia, transmission from the grid in Australia, wind yield in Europe. But on the back of that, because we are prudent investors, we're balance sheet investors, we've decided to put on hold our investments in these 2 regions, time for us to understand better: first, the quality of our forecasts; and second point, the potential solutions to the current challenges.

And finally, in our third region in the U.S., the situation is different. As I said, we sold 2 of our 8 RE projects at the start of this year in satisfactory conditions. And the other 6, one of them is a wind farm the 5 other is are solar farms, are currently performing according to expectations. So much so that some of them could be sold in the near-term and hopefully confirm the forecast returns. And this is why, by the way, earlier on this year, we decided to invest in another wind farm in the U.S., which closed last week because we felt that on the back of everything we learned elsewhere, including in the U.S., the risk-adjusted returns were still attractive, and that we would not experience the same problems that we've got elsewhere. But despite all that, our renewable investment strategy in the U.S. is first to put the emphasis on recycling the existing assets. We believe these are good assets. And this is the priority. And when we start to recycle them, if we find good opportunities, we may reinvest some of the proceeds in new projects, including renewable energy ones. Needless to say, our teams are working very actively on trying to identify performance improvements, imitating measures. And at the same time, here in the center, we're making sure that we're learning all the lessons from the problems we encountered in order that we avoid in the future.

I will now hand over to Luciana.

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [2]

--------------------------------------------------------------------------------

Thank you, Olivier, and good morning, everyone. Just by way of introduction, I was previously the CFO of Eight Roads, the financial investment of -- principal investment arm of Fidelity. And prior to that, I held different finance positions in General Electric and its worldwide subsidiaries across different sectors. And since I came onboard in May, I spent my time, of course, learning about the business, but also ensuring that we optimize the value of our portfolio.

Few observations of what I've seen so far. Although, we experienced a mixed first half in terms of performance, I have observed that our business model is very resilient. And I've also observed the quality of our people. Despite the write-down in Australia and in Europe, our team have delivered GBP 78 million of value enhancement through value optimization and asset management, and we expect more to come in the second half.

Of the back of 2018, we have strong financial performances -- sorry, strong financial resources, and this has given us the flexibility to dispose of assets at the optimal time rather than through necessity to fund future investments.

And finally, the portfolio of the business continues to deliver despite the issue that Olivier spoke about on the renewable energy side. The portfolio is well diversified and resilient, and therefore, stronger in face of political and macroeconomic challenges.

Now if I may will go to the next slide and start unpacking the numbers a little bit. Looking at the NAV growth per share, our NAV grew by 0.6% or 3%, including dividend paid in the last 6 months. As you can see, the Australian industry transmission issue and the lower-wind-yield forecast reduced now by 24p. These are one-offs, and I do not expect them to reoccur in the second half.

Other remaining fair value movements accounted for 35p. As I said before, there is a lot of embedded value in our portfolio. And this, together with expected value enhancement in the second half, is what gives me the confidence to maintain the outlook for the full year unchanged.

Other contributor to NAV movements were an IAS 19 pension gain worth 4p, which was offset by other smaller P&L items and dividend paid of GBP 38 million in May, reducing NAV by 8p. The endpoint being 325p per share.

Now before we move on to the balance sheet, I'd like to take you through the components of the fair-value movements, which totaled GBP 52 million and added a net of 11p per share to earn up as we saw in the slide before. The first 2 lines, unwinding of discounting and reduction of construction risk premium, they contributed GBP 88 million in the 6 months. And these are factors linked to the progress of delivery of our projects. They are embedded in our business model. And as long as we continue to deliver on our project, we should continue to see value uplift in the portfolio going forward. We also recognized GBP 78 million of value enhancement from the optimization of our portfolio in the first half and actions on this side are continuing in the second half, and we expect more to come for the full year. I'll give you an example what falls into this bucket. These are things like extension of asset lives or saving on operating costs.

The next line, net losses from project performance that accounted for GBP 44 million and includes losses in the European renewable asset portfolio, offset by value uplift from reduction in asset-specific risk premium, reflecting the good progress that we observed in certain PPP project, like Olivier mentioned on the Sydney Light Rail, New Generation Rollingstock and others. The next 2 lines, they represent the main external factor that negatively impacted our fair value, being the industry transmission forecast in Australia and the changes in the power and gas prices. Overall, the movement in fair value totaled GBP 52 million compared to GBP 194 million last year. And as a reminder, last year, we benefit from a one-off gain of GBP 87 million from the disposal of IEP Phase 1.

Moving on to the balance sheet. Our total net assets were GBP 1.6 billion at the 30th of June, with the key item being the value of our portfolio, which was GBP 1.5 billion. Other significant balances were cash collateral of GBP 129 million and IAS 19 pension surplus of GBP 14 million as opposed to a deficit in December 2018, mainly from a GBP 29 million cash contribution that we completed in March and then cash borrowing of GBP 77 million.

Now moving on to the investment portfolio itself. As of the 30th of June, the value was GBP 1.535 billion. The weighted average discount rate for the portfolio as a whole was 8.3%, down from 8.6% at December 2018, and 8.3% includes the discount on the primary portfolio, which is 8.6%, and then the discount on the secondary portfolio, which you will see on the next slide, which is 7.8%. The primary portfolio comprises 17 projects under construction, 13 PPP and 4 renewable assets for a total value of GBP 896 million. The reduction in the primary discount rate from 8.8% to 8.6%, reflects the success in the delivery of our projects with a large number of them progressing to the last stage of construction. Reduction in project-specific risk premia, where positive progress has been observed. And also change in mix of the portfolio with PPP now representing 63% of our portfolio versus 55% back in December 2018. This slide also showed the valuation range for the top 5 investment in our primary portfolio, with the biggest one obviously being IEP Phase 2 value and more than GBP 300 million.

Moving on to the secondary investments. The secondary portfolio consisted of 29 projects in operations, 8 PPP and 21 renewable asset one, for a total book value of GBP 639 million. The weighted average discount rate on the secondary portfolio reduced from 8.1% to 7.8%, mainly due to 2 things: one, the completion of the Denver Eagle project, the transition from secondary -- from primary to secondary; and the reduction in operational benchmark discount rate for selected investments.

One thing I'd like to point out that you probably have already seen on the last 2 slides is that, out of the top 10 project in the primary and secondary portfolio, only 1 was in the U.K. as a true assessment of the international nature of our business.

Looking at the business as a whole, we have a resilient and well-diversified portfolio. Starting with the sectors, we're still well diversified with a continuing high proportion of transport-related investment, which actually reflects where we see the opportunity of many of them in our pipeline going forward. Our renewable portfolio was valued at GBP 549 million, which was 36% of the overall portfolio, down 9% since December last year.

In terms of revenue type, the availability-based investments represent 55% of the portfolio, 6% up versus December last year. And while this percentage is difficult to predict with a level of certainty going forward because it's based on procurement timetable that are outside of our control, our intention is to maintain a high percentage of investment in availability-based one.

And looking at the currency, lastly, 74% of our portfolio was denominated in currency overseas and 26% of the portfolio was sterling denominated at the 30th of June. In terms of sensitivity to FX movement, a 5% movement, of which, currency were invested in against sterling would bring an increase or a decrease of the value of our investment of GBP 57 million. Now in the RNS and on the back in the appendix of this presentation, we put some other sensitivity and the impact that those have on our portfolio. But overall, we feel our investment portfolio is well diversified in terms of geography, currency, sector and revenue type.

Moving on to the key components of cash flow. Cash yield was GBP 35 million. We have invested GBP 89 million in our projects, and we realized proceeds of GBP 133 million in the 6 months. GBP 131 million from the disposal of the 3 assets that Olivier talked about earlier and GBP 2 million as a deferred consideration from the sale of IEP Phase 2 -- Phase 1 so that we completed last year.

Lower down the table, there are 2 balances that I mentioned before, the cash contribution to the pension fund of GBP 29 million and the dividend paid in May of GBP 38 million.

And finally, moving to the income statement. The profit before tax for the 6 months was GBP 35 million, GBP 140 million down from the first half of last year. And as we've said before, the first half of last year benefited from a one-off gain on IEP Phase 1.

Going through the main components, I'll skip the first one, the GBP 52 million fair value movements, which we talked about before. Looking at the second line, Investment Management Services revenue, these are related to fees from Jura and JLEN. The increase in the first half is related to proceed received from the sale of the JLEN investment advisory agreement, which completed in the first half and also acceleration of fees income from the second half, follow termination of the Jura advisory agreement. Going forward, we don't expect to see fees here in relation to the provision of director to project company Board, which, for the first half of the year, accounted for GBP 0.5 million. Staff costs increased slightly, but we expect this to go down in the second half, following the transfer of staff with the fund management activity. Overall, we delivered earnings per share of 7.1p.

And now I'll hand it over back to Olivier.

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [3]

--------------------------------------------------------------------------------

Thank you, Luciana. Let me start again by spending a few minutes on the global infrastructure landscape are. Firstly, the drivers for new infrastructure around the world are as strong as ever. You know them, population growth, urbanization, climate change, and now more and more air quality, these will force cities and regions to adapt sooner or later and many public authorities around the world are taking advantage of public-private partnerships as they've always done in the past to transfer the delivery risk of the projects to the private sector, where obviously John Laing is strongly established. Even though, the current level of activity in Europe is subdued. There is no doubt that infrastructure plans will come back on the political agenda just as it is currently hotly debated in Australia, in the U.S. and in many of the countries, facing a rapid urbanization or population growth. Just to put things in perspective, the world is due to grow by 1 billion people in the next 20 years, all of them in urban areas, which means that cities are threatened by complete gridlock and severe air quality problems, London included. And decision for new infrastructure, not even the completion of the existing ones, will have to be taken very soon, otherwise, some cities will just become nonoperational.

As an example, close to home, there are nearly 9,000 buses in the greater London, less than 100 of them are fully electric. And today, TfL wants to tackle seriously the air quality program, let alone the carbon emissions one, there will be an ideal opportunity for a new IEP scheme, 9,000 buses times GBP 0.5 million each makes a lot of money. And it's not dissimilar from what we offer to the Department of Transport some years ago to replace the IEP trends, and this is the same for many other European capitals. And this is why, as always, we are prudent in the short term, we are really confident about the midterm prospects of public-private partnerships, because they are the best way for public authorities to catch up with the work they've got to do with new infrastructure.

And then on the flip side of that, in terms of fundraising in the infrastructure space, 2018 was yet another record year with GBP 85 billion raised around the world. And this came on the back of a record year in 2017. And apparently 2019 is expected yet again to be another record year. So much so that today, the dry powder for infrastructure projects totaled GBP 172 billion, most of it wants to go into operational assets. And the demand for operational assets is currently very strong and far exceeds the number of projects available for sale. This is good news for John Laing because John Laing -- as you know, it is a producer of operational assets for long-term investors. And today, as Luciana said, our portfolio is made of 46 projects with a total value of GBP 1.5 billion as we speak today, great projects that sooner or later we will take to the market. Our strategy today is to sell assets not only for funding purpose in order to fund our growth, as you know, but also to take advantage of the high level of demand for operational assets, and Luciana is specifically focusing on this strategy.

Having said that, inevitably, some funds venture into the Greenfield sector as well into the market for new projects, many of them don't have the credentials to do it, nor the technical expertise that we've got in John Laing and they prefer to wait for the assets to become operational before they invest into them. But still some of them venture, as I said, into Greenfield, and inevitably, they make our market more competitive. And at times, we see returns that we feel don't reflect the true nature of the risks. This is why we need to be prudent. But our model at the end of the day is unchanged. It's the one you've seen for the previous years, and we benefit, as I said, from strong credentials, very strong partnerships with world-class partners, with very strong and experienced people, the experience in moving into new countries or sectors. And obviously, this allows us to continue to source attractive opportunities for future investments.

So how does this translate into our pipeline? As I've said, short-term, we want to be very selective. Because we want to make sure that the risks are properly priced in the projects and the returns that we expect from projects, no matter the level of interest from other deep-pocketed investor. And this is why we've decided to trim our pipeline a little bit, mostly on renewable energy project, no surprise here for the total amount still which is a very respectable GBP 2.1 billion over the next 3 years. As you can see, it includes 9 short-term PPP opportunities for a total of approximately GBP 270 million.

As you can see from the chart, the interesting part is that the PPP part of our pipeline has increased quite significantly from GBP 1.5 billion to GBP 1.9 billion. This is great because this is the core of the expertise of John Laing. And this is done on the back of strong prospects in the North American market and also the emergence of the Latin American one.

In the U.S., the market continues to gain momentum year-after-year, despite the absence of the federal infrastructure plan that was promised by the current administration. But despite that, what we see is that several cities Los Angeles, Seattle among them, or several states are finding the way to fund their long-awaited infrastructure project with their own funds and obviously to get them delivered via public-private partnerships.

In Australia, there were local elections earlier this year, and following the new elections and the new teams being now in place, we expect a new wave of projects. And as you know, our team over there is very active and very successful.

And as I said, the European market, U.K. included is currently subdued. The needs are there. They're obvious. But governments obviously are absorbed by other priorities for now. But we're absolutely confident that at some stage they will have to catch up with infrastructure needs. In the meantime, we're exploring all the countries like Poland, some of you may remember that we successfully invested in Poland a couple of years ago. Well, this is a large country with significant transport infrastructure needs that are essential for its economy growth, other countries in the region. And further afield, we're also looking at some projects in Israel, which has some light rail, metro trains project, where some of our industrial partners have been looking at for several years and invited us to join their consortium.

And obviously, as I said, there is Latin America, which, it's no surprise to you, we've been looking at for several years now. And we are just about to close our first investment in this road in Colombia, which is good, first; because we've got in Latin America, our partners we know very well, starting with the Spanish construction companies. And as you know, we work with ACCIONA in Australia, we work with ACS, we work with Ferrovial. So we know these partners globally, and we know them well. The second point is that the need and the pipeline for new road train metro projects in the region is significant that may be a good opportunities -- may bring good opportunities to us in the future. We're very selective. Having said that, we have done our first one. We've got the team on the ground. We will look carefully at the next ones.

And as I said, in terms of renewable energy, we've decided to reduce quite significantly for now, the number of projects we're looking at to a -- as you can see to a mere GBP 175 million, which includes the U.S. project that we mentioned this morning that we're about to close for GBP 75 million. It includes a pump storage project and maybe another RE project in the U.S. But again, we will look at that in sync with our disposal plan that we've put in place for some of RE projects.

The bottom line is that this pipeline, GBP 2.1 billion, even if it's slightly trimmed compared to what we've seen in the past, is still very sizable, very interesting, but it is consistent with our footprint, with our people, our skill sets, our funding capacity, our investment strategy and our investment guidance of GBP 1 billion over 3 years. We feel this is the right approach in the current market, and we feel this will enable us to deliver on our guidance and invest over the next 3 years the GBP 1 billion we mentioned.

Beyond this pipeline, what you don't see here is a number of either late-stage opportunities. Some of you will remember that our largest investment in the U.S., which is an interstate in Virginia called I-66 that we did with Ferrovial was a late-stage entry that was offered to us by Ferrovial. We've never made it in the pipeline. It just went from the proposal from Ferrovial to a decision from to invest, which means that this doesn't include the kind of late-stage proposal that we get offered. It doesn't include either a number of new sectors or new countries we're looking at, but we feel it's still too early to consider them as reliable pipeline.

So finally, having said all that, how does the future look like for John Laing. First thing's first. I'm sure it's obvious to you, we are currently focusing on the assets we already have, the ones in our portfolio, ensuring that the projects under construction are delivered. This is where the essence of our value creation come from, ensuring that the operational issues with some of the renewable energy assets are being managed and ensuring that the assets that are earmarked for disposals, maximize market value. We've got GBP 1.5 billion worth of assets to manage to value enhance and a large pipeline of secondary assets to sell in the near-term.

And then we've got the future investments, as I said, we feel that even if there was not a lot in the first half, we're on track with our 3-year guidance, not only from the pipeline that you saw a minute ago, but also from new markets and sectors that we are currently exploring. We're looking at countries in Southeast Asia. We're looking at sectors like telecom, broadband, new transport solutions, decarbonization of transport that will -- some of it will make it to our pipeline in the future. And even if, as I said, we choose to be more selective today in our investments, we are confident about the future of our projects. And we're steadily growing as one of the prime specialist investment platforms for new infrastructure projects around the world. In fact, we are planning to further develop our image in order to appear as what we are, which is a solution provider for public authorities for construction companies when it comes to delivering complex projects. True, we are showing our growth in the RE sector. But in fact, this allows us to deploy us -- to deploy more time and resources to other sectors. As I said, broadband, maybe electric vehicles, hydrogen, buses, trains. We are transferring some resources and time on new sectors that we feel are exciting. Our business model, you know it, we've published it year-after-year, and it proves to be resilient because as Luciana said of the diversified nature of our portfolio, but also because of the experience of our people, their ability to find solutions to infrastructure problems. And even as when we're quoting to unforeseen external factors, for instance, the current transmission problems in Australia, you can see that we managed to mitigate the impact by generating more value from other projects. And to make the most of the 3 pillars of our value-creation model, which are quality investments, active project delivery and now active disposals. This is why, at the end of the day, we maintain our full year outlook. We're confident in the mid-term prospects of our company, and we maintain our guidance, both in terms of investments and in terms of disposals.

Thank you for your attention. We're now ready to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Olivia Rosalind Peters, Macquarie Research - Analyst [1]

--------------------------------------------------------------------------------

It's Olivia Peters from Macquarie. I have 4 questions, please. My first question is, you've just reiterated your full year guidance. You've started publishing a consensus of 358p per share. Are you confident that you will be able to meet that consensus, given that you say that results will be second half weighted? And what gives you confidence you can get there if that is the case?

My second question is on the renewable energy write-down, particularly in Europe. Those assets have obviously been in the portfolio for a while. And I'd like to know exactly what has changed there apart from wind to meet you write-down those assets?

My third question is on the I-66 and the I-77. Ferrovial have obviously had a write-down of those contracts, and the I-77 has been delayed in terms of delivery, what are the implications for John Laing?

And fourthly and lastly, you're obviously investing more in assets that are post-financial close, i.e. I-67, I-77 Ruta del Cacao and the wind farm you just invested in. Is that a shift in strategy? And what are the implications for NAV growth going forward if that's the case?

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [2]

--------------------------------------------------------------------------------

All right. Shall I take the first two, and you take the last two, Olivier?

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [3]

--------------------------------------------------------------------------------

Yes, yes, please.

--------------------------------------------------------------------------------

Patrick Francis John O'Donnell Bourke, John Laing Group plc - Group Finance Director [4]

--------------------------------------------------------------------------------

Okay. About the full year outlook, Olivia, and the guidance that we're giving. I think if we go back to the Slide 8 of the presentation that we went through in which we look at the movement in fair value, it's probably a good place for us to start. We closed the 6 months at 325p per share. And as I look at the second half, what gives me comfort is that I don't expect the 2 break down industry transmission and operational performance of 24p to reoccur. So then the remaining fair value movements of 35p, they have been driven by our ability to deliver in our projects, and also on the value enhancement that we have been delivering. And both of these 2 factors we expect to reoccur in the second half quite strongly. I won't talk about the pension and the P&L because they kind of offset each other, and we just declared a dividend of 1.84p. So that what -- while I cannot give you a number, that is the path that I see to deliver full year forecast.

On the second question, you're right. The renewable energy assets in Europe has been around book for a while. As Olivier said before, we are in a seller market now. And we have been preparing to take advantage of the dynamics of the market. And therefore, we're preparing this asset for sale. As a consequence of that, we have commissioned new operational yield assessments. And that's where the news on forecast had come true. Now I just wanted to remind you that usually, they take assets have been in operation for a while and they have actual wind data and they use those to extrapolate future forecasts. So these are forecasts, usually based on 12 to 18 months of data for the next 10 to 15 years. So we're conservative, we've taken them and we take the write-down, but they are forecast.

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [5]

--------------------------------------------------------------------------------

In the end the market will decide, as you know. So that's why we're interested to take them to the market. And by the way, even if the wind yield has been low in some countries recently, some of them -- some of our plants have been operational for only a couple of months, these assets have strong value to the investors. They are backed by long-term feed-in tariff, which doesn't exist anymore in the world of RE. So let's see, at the end of the day, what view the market forms of these assets when we take them to market.

Olivia, good questions, of course on, first, I-66, I-77, the write-downs announced by Ferrovial approximately if I -- my memory is right, were around EUR 350 million. They're on the construction side of it. So in fact, they come -- they have an impact on Ferrovial Agroman. As you know, in our PPP structure, we're protected from cost -- construction cost overrun. I mean, we enter into fixed-price contracts with the contractors. So basically, no impact to the value. Maybe there is an impact on the delay, as you say, with I-77, but no impact on the value of our projects and no impact on the project companies. This is a matter for the construction companies and the other part of Ferrovial. You make a very good point about the investments post-financial close I-77, I-66 Ruta del Cacao, they all have come from the same culprit, which is Ferrovial. And let me tell you -- so it's not a shift of our strategy. It's just -- what I'd like to see in that, it's too early to say. But Ferrovial in the past has been a very good partner to John Laing. In fact, the first PPP John Laing deal was in 1962 in Spain with Ferrovial that was the highway going from Bolivia to Bilbao. And then because of different strategies, the 2 companies stopped working together. And we've got the impression now the Ferrovial is coming back to us, post-financial close. They're calling us in on I-77, as you said, and then, again, on I-66. And now in Ruta del Cacao, which they've invested in, I think it's almost 1/3 already built. They're calling us in to help. We'd like to see that the fact that our relationship with them is on the right foot again and they want to do more business. And hopefully, in the next one, we will bid together maybe why not manage Laing in the U.S., we will bid together rather than them calling us at the last minute. But yes, I mean, we've got other strong partners, including in Spain, as you know. But for these ones with Ferrovial, Ferrovial is obviously a great company, one of the prime Spanish construction companies. And as you know, as opposed to some others, it's a true concessionaire company. So they like concessions and PPPs, and I hope that our relationship will get even closer. So it's not a change of strategy, but that may be a good partner for the long term.

--------------------------------------------------------------------------------

Alexander Wheeler, RBC Capital Markets, LLC, Research Division - Associate [6]

--------------------------------------------------------------------------------

It's Alex Wheeler, RBC. Two questions from me, please. Firstly, can I just go back to the renewables write-down in Europe? I just want to drill into that a little bit more. Is it a case that on review the load factors on these wind assets is actually lower than you initially assumed in the portfolio? Or is it the case that you're actually saying that geographically, you think that the wind content in these areas will be low?

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [7]

--------------------------------------------------------------------------------

Sure. But is this the case -- the first part of your question?

--------------------------------------------------------------------------------

Alexander Wheeler, RBC Capital Markets, LLC, Research Division - Associate [8]

--------------------------------------------------------------------------------

That you assumed load factors on these wind assets. On review it's actually lower than you were initially assuming the portfolio.

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [9]

--------------------------------------------------------------------------------

I think that's what it is, it's compared to our preconstruction assessment. The forecasts that have come back are lower.

--------------------------------------------------------------------------------

Alexander Wheeler, RBC Capital Markets, LLC, Research Division - Associate [10]

--------------------------------------------------------------------------------

Okay. So it's not -- it is asset-specific than as opposed to the actual geography that they're operating?

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [11]

--------------------------------------------------------------------------------

It is both.

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [12]

--------------------------------------------------------------------------------

It's both, yes.

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [13]

--------------------------------------------------------------------------------

Part of it is regional, i.e., the wind yield over north of Germany, for instance. Part of it is specific to the assets with at least for the first month, some performance issues that are not big, but that are lower than expected in the plant.

--------------------------------------------------------------------------------

Alexander Wheeler, RBC Capital Markets, LLC, Research Division - Associate [14]

--------------------------------------------------------------------------------

Okay. Just to follow up on that. Is that all of those 4 assets, don't they all operate in the same geography?

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [15]

--------------------------------------------------------------------------------

3 in Germany and 1 is in Ireland.

--------------------------------------------------------------------------------

Alexander Wheeler, RBC Capital Markets, LLC, Research Division - Associate [16]

--------------------------------------------------------------------------------

Okay. And then my second question is on IEP Phase 2. Obviously, the secondary market demand for those assets is very, very strong at the moment. And I just wondered whether you had a time line on a potential divestment or whether that was something you're actively assessing at the moment?

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [17]

--------------------------------------------------------------------------------

Can I take -- yes.

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [18]

--------------------------------------------------------------------------------

Please.

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [19]

--------------------------------------------------------------------------------

So I think IEP Phase 2, Olivier said it's progressed and soon will get to completion. At the moment, we have 18 trains in service, and we expect full delivery of all the rest by June 2020. So we think the project is well derisked. So we are preparing to take it to the market. The timing of it will be the side a bit later on. But in the right time, definitely it will come to the market pretty soon.

--------------------------------------------------------------------------------

John Fraser, HSBC, Research Division - Global Equity Head of Building Materials and European Building Materials Analyst [20]

--------------------------------------------------------------------------------

It's John Fraser-Andrews, HSBC. First question is around the discount rates. It doesn't seem to have been much of a reduction and what there has been, would seem to be justified by asset improvements. So my question is, Olivier, with the market seeming to be quite hot. Why haven't we seen a yield shift in your secondary portfolio? And particularly when bond yields have fallen sharp here at the back end of the second quarter? So that's the first one. And the second one is, can you talk about the returns profile in Latin America? And also how discount rates may have changed in renewable assets in the 3 main geographies?

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [21]

--------------------------------------------------------------------------------

All right. The first point is why don't we see more of a reduction in discount rates. I think part of it comes from the fact that some of our markets, as I've described, like Australia and the U.S., where we've got more and more assets getting to completion, haven't seen a lot of transactions. So for instance, in the -- as you know, in the U.K. for many years on the back there is a PFI way, which I think, produced more than 700 PFIs. You've got a lot of data points where we've only sold the half of an asset in Australia. This is not enough to reflect across the rest of the portfolio same in the U.S. So I agree that obviously in the face of the reduction in interest rates and the level of interest from investors for operational assets. We could be surprised, like we've been, by the way, in the past with IEP, as you know. But the truth of the pudding will be in the eating. So the answer to your question is, we're taking these assets to the market. Let's see what the market says. And we'll have more data points.

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [22]

--------------------------------------------------------------------------------

And if I may, Olivier, on that, usually, discount rate like 6 to 12 months, where we're seeing the interest rate on the secondary market side. So I think by the time we get to market, we'll probably see some of that compression.

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [23]

--------------------------------------------------------------------------------

Yes. And it's interesting because, as you know, in the past -- certainly, in the past 10 years, most of our assets went to JLIF and JLEN. And now because of the international spread of our activity, now we're really getting to the market, taking the assets to the market. So let's see what feedback we get. But again, as I said, we are focused, and Luciana is really involved in trying to market these assets in the coming months.

On Lat Am, John, the -- yes, the return profile, obviously, we look very closely together with our Board at country risks or even supply chain risks in those new countries and delivery risks. And yes, there is a material premium in the returns that we seek from these assets. First, entry IRRs, otherwise, we wouldn't put our money there. And the second point is not only we are -- we're looking closely at entry IRRs, but also, we're looking closely at the size of the secondary market because we will exit at some stage. And Colombia, in that respect, has made significant progress since it has joined the OECD because now you can see a lot of funds, including funds based in London looking for assets in the region. So we're also looking at secondary discount rates. And we feel that -- so there is a sizable yield shift, no doubt. Let's see if it really reflects the level of risk that we've assessed, but yes, we're looking at it carefully.

Discount rates in renewable energy, it's been changing a lot. I think we have to separate different countries. The good point about our RE assets in Europe despite the wind yield problem we mentioned is that they are all backed by long-term feed-in tariffs. Whereas, as you know, in Australia and the U.S., assets are backed by short-term corporate PPAs, 7 years, 10 years, 15 years. I mean, the market takes it, but in Europe, we still have kind of old generation assets, which benefit from long-term state subsidies. So we haven't sold for some time. I think in the coming months, maybe before the end of the year, we will sell some in Europe, we will have a good assessment of the discount rates. We believe the German market is quite low in terms of discount rates, but let's see, probably lower than the U.K. one. But again, we're going to do that in the coming months. So we're on the prudent side until we see what the market says.

--------------------------------------------------------------------------------

John Fraser, HSBC, Research Division - Global Equity Head of Building Materials and European Building Materials Analyst [24]

--------------------------------------------------------------------------------

Just a supplementary to that, did the write-downs include an outward movement in the discount rate as well as the change in forecast?

--------------------------------------------------------------------------------

Luciana Germinario, John Laing Group plc - Director [25]

--------------------------------------------------------------------------------

In the cash flows, we have reflected the write-down in the cash flow, right? And therefore, the discount rate has reduced because there's less uncertainty about this cash flow now.

--------------------------------------------------------------------------------

Olivia Rosalind Peters, Macquarie Research - Analyst [26]

--------------------------------------------------------------------------------

I'll just ask one more question. Historically, you have infilled, I suppose it would be a way of putting it, the PPP pipeline by investing in very small renewable energy projects, which are faster to turn. You've obviously put renewable investments on hold in Europe and Australia. Should we expect project wins now to be much more lumpy and that's frequent? And how does that impact NAV going forward?

--------------------------------------------------------------------------------

Olivier Brousse, John Laing Group plc - CEO & Executive Director [27]

--------------------------------------------------------------------------------

Yes, that's a good question, and this is also partly why we move to a 3-year guidance because we don't want to use RE investments just to make numbers at the end of 1 year. That's not what our investment model is about. So true, we take our time to select the best projects, and PPPs are lumpy because of the cycle of public procurement and the cycle of elections. So to your point, if we reduce our investment inevitably, we will see what we saw in the first half, which is not a lot of investments. But over a period of a year or probably more 18 months to 2 years, which is more consistent with the public procurement cycle, there's no doubt that we're looking at exciting opportunities. But yes, it's very rare that from announcement to decision, it's very rare that in terms of PPPs, public agencies do it within 12 months. It takes more time. So inevitably during a calendar year, we may have what we saw in the first half, which is not a lot, but I don't think there is a -- this is a matter for worry in the -- over a 3-year cycle at all.

Any other question. No? Thank you for your presence. Thank you for your attention. Thank you.