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Edited Transcript of KIE.L earnings conference call or presentation 19-Sep-19 8:00am GMT

Full Year 2019 Kier Group PLC Earnings Presentation

London Sep 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Kier Group PLC earnings conference call or presentation Thursday, September 19, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Andrew O. B. Davies

Kier Group plc - CEO & Executive Director

* Beverley E. J. Dew

Kier Group plc - Finance Director & Executive Director

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Conference Call Participants

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* Alastair Robert Stewart

Progressive Equity Research Limited - Analyst

* Andrew Nussey

Peel Hunt LLP, Research Division - Analyst

* Howard David Seymour

Numis Securities Limited, Research Division - Director of Equity Analysis

* Joe Brent

Liberum Capital Limited, Research Division - Head of Research and Equity Analyst

* Saravana Bala

Jefferies LLC, Research Division - Equity Associate

* Stephen Joseph Rawlinson

Applied Value Limited - Director & Analyst

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Presentation

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [1]

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Okay. Good to go. Okay. So good morning, everyone. Welcome to Kier Group results for the year ending 30 June, 2019. I'm Andrew Davies, the Kier Group's CEO. For those of you I've not already met -- have already met, nice to see you again, and for those of you I haven't, maybe we'll have a chance to catch up after this presentation.

So this is my first time hosting Kier's results presentation as I joined in April this year. I spent the first few months familiarizing myself with the business and undertaking a strategic review of it. And given the circumstances of my appointment, it's not surprising.

This is a business in the sector which I'm familiar with, having previously been the CEO of a direct competitor, Wates Group Limited, and therefore, I'm reasonably well versed with many of the issues Kier has faced over the past year. As part of my induction program and, certainly, in support of that strategic review, I've taken the opportunity to review many of our larger projects across our major businesses, including Hinkley Point, Luton DART, Broadmoor Hospital, Morley House, Exeter leisure center and Exeter student accommodation as well as areas 3, 9, 6 and 8 with our Highways England contracts and have also taken the opportunity to sample a range of our small- and medium-scale education, health, Housing Maintenance and utilities' projects across all of our businesses as well as visiting many of our regional offices.

There's no doubt in my mind that Kier has some market-leading businesses and capabilities, but equally, I'm under no illusions as to the scale of the challenge ahead, but this is a project well worth undertaking, given the scale of the opportunity it has. I would caution, however, that whilst we're very much on site on this job, it is very much work in progress.

This is the agenda today. I'll talk more about the strategic themes later in the presentation after Bev takes us through the financials. As you know, Bev steps down as CFO shortly and leaves the business at the end of the month. He's replaced by Simon Kesterton. Where are you Simon? If you must stand up, whom I think some of you will know, and Simon joined us in mid-August from RPC Plc.

So now let's turn to the results.

Our core business remained resilient with revenues on par with last year, which was a strong year for Kier. Regional business -- sorry, Regional Building led the results with a strong performance. They've won several project awards over the year, which drove revenue growth of 6% in the Buildings division. Highways, as we flagged in June, suffered from lower volumes and the change in mix away from higher-margin maintenance work. This will have an ongoing effect on our Highways business this year. Utilities also experienced reduced volumes but this has more to do with regulatory cycle as water companies await their drafted terminations in December on AMP7. And finally, Infrastructure Services were stable with good work won both on Hinkley and the early works contracts on HS2.

We had a record order book last year, and we're pleased that this year's is broadly in line, which is a good result given the turbulence which we've experienced. It's a testament to the strength of client relationships Kier has and the resilient nature of those relationships which are held via long-term frameworks or partnerships. However, with the government's recent decision to launch a review the HS2 project, we have decided to clarify our order book going forward to derisk it for HS2 uncertainty and reflect the fact that our plan is not beholden to that project.

It's been a difficult year and it shows that we need to grip the business and make some serious changes. We need to adjust our cost base to reflect volumes, slim down on discretionary spend, ensure competitiveness, most notably in respect of central overheads. We need to get back to basics to do what we do best, which is Construction and Infrastructure Services.

As part of sorting this out, the Group has reported GBP 341 million of exceptional charges, including costs relating to the preparation for exit or sale of businesses, restructuring costs and material losses on Broadmoor Hospital redevelopment project. Whilst exceptionals are high, it should be emphasized that the aggregate cash outflow forecast of future years relating to them is only a net GBP 32 million.

We'll pursue the sale of our Living business, which is progressing well, and I will address our focus on cash management later in this presentation. But now I'd like to hand over to Bev, who will take us through the financials.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [2]

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Thank you, Andrew, and good morning. This morning, I'll be presenting the results for the 12 months to June 2019. These results are the first prepared under the IFRS 15 accounting standard on revenue recognition, and the Group has also moved to a presentation of profit before exceptional items rather than underlying operating profit as presented in the previous years. The change in presentation allows the Group to present its results in a more linear manner with a clear definition of exceptional items rather than the qualitative assessment of underlying or nonunderlying nature of transactions.

Looking at the financial headlines. Operating profit for the year before exceptional items is reported at GBP 124 million. Exceptional charges including intangible impairments and restructuring charges totaled GBP 341 million for the year, of which GBP 275 million are noncash in nature with associated cash costs in the year of GBP 34 million and future cash outflows of GBP 32 million.

Net debt is as guided at GBP 167 million with average net debt for the year of GBP 422 million. The debt balances benefited from the net receipt of GBP 250 million following the December rights issue and this helped fund working capital outflows of GBP 182 million, which included a reduction in our average days to pay our supply chain from 57 to 41 days.

In reviewing the income statement before exceptional items, Group turnover is flat including joint venture income. Excluding JVs, overall volumes contracted by about GBP 100 million.

Profitability from the Buildings division increased by 13% to GBP 62 million reflecting the continued growth of the U.K. Construction business. Within Infrastructure Services, reduced profitability within the infrastructure projects business, the sale of the Australian Highways business and the inclusion of previously nonunderlying mining operations combined with the reduced volumes in Utilities and Highways maintenance to push profitability down by 41%.

Reduced transaction levels in Property and reduced legal completion levels in the Residential business saw overall profitability in Developments & Housing fall by 22% to GBP 56 million.

Central costs of GBP 50 million reflected delays in the generation of benefits from Group's FPK problem -- program and was GBP 15 million higher than the prior year. This includes increased insurance costs of GBP 4 million.

Net finance costs of GBP 27 million are GBP 4 million higher than the prior year reflecting the increased net debt position in the year, and these give rise to an overall basic EPS of 58.2p after adjusting for the rights issue bonus factor.

Exceptional items total GBP 341 million. GBP 275 million of these are noncash in nature, and we present these under 6 groupings. We would note that the future cash effect of these items is a net GBP 32 million with the balance having previously been reflected within the Group's cash flow.

Firstly, restructuring costs of GBP 56 million where GBP 11 million represents an accrual for future fees and staff exit costs in the 2020 financial year. Secondly, costs and impairments recognizes a consequence of the strategic review and the proposed business exits. These total GBP 172 million. I'll expand on both of these totals in the next 2 slides.

The Group charged GBP 25 million worth of noncash amortization in respect to the contract rights acquired with May Gurney and Mouchel as in prior years.

In the year, the Group impaired balances totaling GBP 17.8 million in respect of items on 1 contract that were in existence prior to the existence -- prior to the acquisition of McNicholas where the recovery of these balances are not now likely. In addition, integration costs of GBP 12 million were incurred in merging the back-of-office processes and management within the Group's existing Utilities businesses. These charges total GBP 29 million.

In respect of exceptional contract losses, a provision of GBP 50 million has been taken in the year in respect to the Broadmoor and Mersey Gateway contract. This represents a further GBP 18 million over and above the position reflected in the March statements on Broadmoor and is a full provision for the Group's claims against the client. A GBP 6 million charge has been recognized in the Group's Mersey Gateway project.

Finally, within pensions and other, the Group has reflected a net gain on its pension liabilities in the year following the GMP loss recognized at the half year and gains on its pension increase exchange exercise undertaken through the second half. The Group has also revised its treatment of volume-based procurement rebates, moving to a cash-backed basis.

Turning to specific restructuring costs incurred during the year. Reductions in volumes experienced in the year across the Group's Highways, Housing Maintenance and Utilities businesses have resulted in redundancy costs of GBP 19 million over and above the reorganization costs associated with FPK with GBP 5 million still to pay. GBP 20 million relate to the staff exit costs associated with the Group's FPK program, slightly lower than anticipated, reflecting a lower level of redundancy payments. GBP 6 million cash will flow in 2020 as a result of this charge. Fees and costs associated with the FPK program and strategic review has resulted in a charge of GBP 17 million, which has been paid in full in the year.

Looking at costs relating to businesses being prepared for disposal in detail. And as a reminder, in June, the Group issued its strategic update highlighting the disposal of or exit from the Residential, Facilities Management and Environmental Services business. GBP 50 million of these costs represent the noncash impairment of the mothballed land within the Residential business. Future disposal proceeds here are assumed to be GBP 10 million. GBP 10 million represents the noncash impairment of software associated with the businesses being disposed. GBP 6 million of the loss reflects the net loss and associated fees of the disposals undertaken in the first half of the year including the Australian Highways business, which generated a total of GBP 27 million worth of cash income in the 2019 financial year.

The Group has agreed to exit its Environmental Services businesses. The GBP 35 million charge associated with this is principally driven by GBP 27 million in respect of exiting a single contract, and this balance represents cash flows over 6 years from the summer of 2020. We should note that the costs of this are more than compensated for by the overhead saved from closing this business.

The Facilities Management businesses exited a number of contracts in the period and incurred GBP 18 million of impairments and redundancy costs as a result with a single office lease impairment representing the balance.

And finally, in reviewing the goodwill associated with the Developments & Housing cash-generating unit, the Group has reflected the probable divestments in Housing and Property in the 2020 financial year. The Group has also increased the weighted average cost of capital applied to its goodwill calculations to 10.1% from circa 8% applied in prior years. These changes have resulted in a noncash charge in respect of impairment of goodwill and other assets of GBP 48 million.

Moving to the operational performance of the business units. The performance of the regional business -- Regional Building business is the main driver of the 6% increase in Buildings revenue. Noting that Facilities Management and the international business both reduced in scale. Strong margins at 3.3% improved on the 3.1% reported in 2018 reflecting the leading position of the Regional Building business in the U.K. The Construction order book is 95% secured for the current financial year and remains consistent in structure with average project size of GBP 8 million and 2/3 of the work secured on the frameworks.

Within the Infrastructure Services division, revenue was down 4% including the impact of the sale of the Australian Highways business, but this masks reduced turnover in H2. Year-on-year, our second half volumes were down 12%.

We should note that the prior year profitability has been reclassified to reflect the contract loss now presented as exceptional, which was previously presented us underlying in nature.

Profitability in the current year includes a charge of GBP 4.3 million in respect to the previously nonunderlying mining operations. Materially reduced profitability in the Group's infrastructure projects businesses reflecting the timing of profit recognition and some loss provisions and the disposal of the Australian Highways business in 2018, these items combined with the mix impact of lower Highways maintenance income, and reduced overhead absorption from the fall in turnover were the main drivers for the fall in margin to 3.4%. The order book remained strong, reflecting the long-term nature of the majority of this work.

Within Developments & Housing, profitability of GBP 56 million was GBP 16 million lower than the prior period. The volume of completions in our Residential business were down 6% at 1,926 units, and turnover in the Housing Maintenance business was impacted by the ownership speculation in the third quarter of our financial year. A small handful of transactions due to complete in the final month of the year in both the Property and Residential businesses were also impacted by the news flow around the Group, and this adversely affected both the overall profit of the division by circa GBP 10 million and the return on capital, which moved downwards in both Residential and Property. We should note that the net asset value of the Residential business as at the 30th of June is GBP 173 million. This includes GBP 10 million of residual value in respect of the mothballed land.

The opening order book of the Group of GBP 9.8 billion has been restated to reflect the disposal of the Australian Highways business in December 2018 and this moves to a closing order book of GBP 9.4 billion.

As the Infrastructure Services businesses moved to the end of the AMP6 cycle in water and reservoir regulatory cycle in Highways, we are seeing anticipated runoff of their workload and a gearing up for higher levels of bidding and work-winning activity in the 2020 financial year.

We have here separately disclosed the order book associated with HS2, recognizing the potential volatility around this project.

In reconciling the Group's opening net debt position of GBP 186 million to its closing position of GBP 167 million the following cash flows should be recognized: firstly, the operating businesses generated GBP 178 million of operating cash inflow and this is analogous to EBITDA. Working capital outflows of GBP 182 million include the cash impact of accelerating payments to the supply chain in the period. This is reflected in the statutory payment practices reporting a reduction in payment days from 59 days in the prior year to 41 days in the second 6 months of the 2019 financial year. Also included in this working capital balance is circa GBP 30 million in respect of our Residential business where legal completions were around 150 units behind plan. We should note that there was a small outflow within working capital, circa GBP 10 million, arising from the reduction in the utilization of the Group's supply of finance facility which fell to GBP 170 million from GBP 185 million in the prior year.

CapEx was in line with expectations at GBP 37 million. Exceptional items, as previously noted, accounted for an outflow of GBP 34 million in the period. Pension, interest and tax payments totaled GBP 68 million in the year and overall investment in the Property and Residential businesses totaled GBP 35 million principally in the Residential business.

The dividends paid in the period were the final dividend for the 2018 financial year and the interim dividend for 2019. We would note that in June 2019, the Group announced the suspension of its dividend for the current financial year and the 2020 financial year.

The rights issue proceeds of GBP 250 million after fees were the final item that have enabled the Group to report net debt of GBP 167 million. The Group's spot net debt of GBP 167 million and average net debt of GBP 422 million should be measured against the available facilities of the Group, of which GBP 922 million is committed. GBP 30 million of the USPP debt is due to repayment in December '19 with the balance being long-term in nature.

The Group is targeting the reduction of its utilization of its supply chain finance facility by around 50% in the coming year. This has now commenced and will be accelerated by the disposal of the Residential business, which has a GBP 35 million allocation of the overall GBP 195 million facility.

Thank you for your attention. I'll hand you back to Andrew now to take you through the drivers and outcomes of the Group's strategic review progress.

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [3]

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Thank you, Bev. So on my first day at Kier, I announced that we'd be down to taking a strategic review that would address those strategic imperatives the Group faced, namely the need to simplify the business model, generate more cash and strengthen its balance sheet. The process we adopted was fourfold. Firstly, to look at each business unit through the strategic lens of those criteria that directly address these strategic imperatives; secondly, we looked at what an appropriate and competitive cost base would be for the business; thirdly, we wanted to drive performance into the business, what I've referred to as performance excellence, to drive value out of our excellent order book position; and finally, determine a viable, realistic yet pacey program to deliver the process. And we believe this process will allow us to restore firm foundations for the Group.

The first step of the strategic review is to look at each business unit through the strategic lens. We looked at over 15 variables to judge where our strengths lie as a Group. Criteria such as B2B versus boot B2C, scale, investment profile and working capital intensity and volatility were considered. But the 3 factors that were the strength of the market position, whether we -- where the businesses were inherently cash generative or whether their route to market benefited from long-term tendering frameworks that play to our experience and intellectual capital in managing large-scale projects from design to delivery over several years.

It was clear where our focus needs to be, in Construction and Infrastructure Services. We're the market leader across our core businesses in these 2 sectors and that's fantastic competitive strength. Regional Building is by far the leading builder of schools in the U.K. We undertook over 90 education projects last year, building numerous educational establishments. In the health care sector, we built 30 hospitals, and across the public sector, delivered over 200 projects. We're the leading supplier of Highways maintenance to Highways England, developing 225 kilometers of smart motorways and maintaining over 31,000 kilometers of roads. We're a top supplier to the services -- of services to utility industry, winning new business across water at crucial regulatory period, including Severn Trent as new customer supporting over 20 million properties in water and power, maintaining over 475,000 miles of water mains and over 2,200 miles of waterways.

In Infrastructure Services, we have the scale and expertise to undertake world-class projects that few companies can manage, such as Hinkley Point C, Crossrail and HS2. These are strong businesses, inherently cash generative based on long-term tendering frameworks providing stability of revenues. The long-term frameworks themselves provide both high barriers to entry, long-term visibility of orders and, therefore, opportunity for long-term visibility of earnings and opportunities for higher margins, which, by way of example, is what we've traditionally enjoyed in our Regional Building business. They also provide the basis for sensible risk management of our portfolio projects coming from repeatability and average size of the construction projects of around GBP 8 million each.

Equally clear was the determination that our Property, Residential business known as Kier Living, Facilities Management and Environmental Services business did not fit our strategic model. Residential is an attractive business but does not complement our investment and working capital strategy. It's a B2C business. We announced in June our intention to sell the business, which is progressing very well. Property, again, an attractive business given it's focused on mixed usage, but it's a capital intensive business with notable working capital movements. As we announced previously, our objective is to reduce the capital invested in this business over the next year to GBP 100 million and look at opportunities to reevaluate the accelerated reduction of capital invested in this business.

Environmental Services is not our expertise and nor do we have a cost base or scale to compete effectively. We plan on exiting the business over the course of the year.

And finally, our Facilities Management business is subscale in the market in which it competes. We will restructure this business ready for sale later in the year.

As a result of these strategic decisions, from this financial year, we'll be focused on 2 industry segments: Construction, including Regional building, Major Building Projects, such as those with the MoJ and MoD and Housing Maintenance; and the second segment is Infrastructure Services, which will include Highways, Utilities, Infrastructure and our international business now focused solely on the Middle East.

As part of the strategic refocus, we are also creating a leaner and flatter organizational structure with lines of accountability, reducing management layers, with our core businesses reporting directly to me.

Our second driver in our strategic review was getting to an appropriate cost base. The Future Proofing Kier, or FPK, program I inherited was well-founded but needed more pace. We decided to accelerate it straightaway, and it's already delivered cost savings from 650 people leaving the business in FY '19. The program is all about reducing costs predominantly from the central overhead and eventually devolving more responsibility to our restructured core businesses. By the end of the current financial year, 1,200 people will have left the business, and we are well on target with a further 100 people having left to date in FY '20 and the balance of 450 identified against defined cost efficiency programs. So we're confident we'll reach our target cost saving of GBP 55 million run rate per annum from 2021. We've also had to extend FPK to right size the business units, notably in Highways, in which, like most in the industry and as Bev said, we saw reduced volumes.

We've already explained our focus on 4 core businesses, inherently cash generative, B2B, based on long-term tendering frameworks and the strategic focus on simplifying the Group. The next phase is to embed a culture of performance excellence throughout the Group, focusing on leadership culture with clear accountability for performance, efficient operating systems based on the core principles of Kier, strong execution and improved cash generation. We have a good order book and strong market positions, so we need to drive value and cash from these positions by performing excellently.

These are our 4 pillars of performance excellence: firstly, people. They're at the heart of our business, using their skills and creativity to deliver business solutions and services to our clients and our customers. Performance-centered leadership is a framework for enabling high-performance culture and allowing our people to be the best they can. We need to lead, engage, motivate our teams in an authentic and meaningful way. Performance-centered leadership will focus on 5 key areas: performance management, development and training, career management, reward and leadership.

The second element is process management of the core principles of Kier. A company that has a turnover of GBP 4 billion, 19,000 employees and 1,200 programs in total needs to be underpinned by a governance and operating framework so that people know what's expected and what good looks like, who signs off on what and a proper approach to evaluating risk and accepting risk when it fits our culture. Whilst Kier has such a governance model, we need to ensure its best in class, simple to use, easily accessible and, most importantly, all contained in one place, the operating framework so our people, suppliers and customers all understand their respective responsibilities.

The third element is project execution, which is the foundation of what Kier is all about, delivering projects safely, on time, to budget and defect-free. Our reputation, our profitability, our balance sheet directly reflect how well we deliver our projects. Performance excellence will challenge all of us to look at how we can apply best practice and innovation across the complete life cycle of our projects in a consistent manner that will perpetuate a culture of continuous improvement and, we hope, best-in-class.

Performance excellence and project execution will set out a framework that will be applicable to all projects and clearly define the minimum standards or mandatory requirements that are to be adopted throughout Kier while, at the same time, allowing individual businesses to include what is required to deliver their specific projects and client needs, i.e., tailoring the process, less specific business requirements.

Four key principles, four key lifestyle stages of any project are preconstruction, design, construction, handover and aftercare. Performance excellence will clearly define what our core processes are, who is responsible for them, when they need to be done and why. We need a strengthened risk evaluation and management, one that is transparent that when we take a project on, we and our suppliers and customers understand the risk framework, and we need to improve our bidding, preconstruction and project management and contracting skills.

And finally, cash management. Cash is paramount. Faster cost reductions through FPK, focus on disposals of the businesses we've identified and a tighter cash management throughout the supply chain. All these 4 elements were building momentum, and we're socializing these themes within the business.

So the timescales for these strategic actions. There's a lot to execute against but we have a clear path and a vision for where we're going. We've taken the first steps with the strategic review, refocusing on our core business and simplifying the Group. The next stage, which is already underway, will be to reduce costs and strengthen the balance sheet through disposals, starting with Kier Living. And as I said, that process is progressing well.

Facilities Management is being restructured for sale. Environmental Services, we've agreed an exit with a customer of one of the contracts so the business can now be restructured for sale. All these actions will clean up the balance sheet but also improve cash generation and reduce costs in the future.

Facilities Management, Environmental Services will require a significant support from central overhead, and Living, as you know, is a disproportionate working capital requirement. Their disposable will benefit all of these areas.

So in summary, it has been a difficult year, but we're building firm foundations for the future and 2020 is going to be a year of transition. We've taken decisive action, which allows us to concentrate on our clear market-leading positions, and these positions benefit from a robust order book and very supportive clients. Culture of performance excellence we have laid out today will allow us to drive significant value from our order book and pipeline and allow Kier to regain its leading position in the construction and infrastructure markets. The key is to get back to what Kier really is, a strong, successful market leader in robust financial health.

Thank you, and I will take any questions either directly or, I think, on the phone.

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Questions and Answers

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [1]

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So there is a roaming microphone, and I think Andrew Nussey got his hand up first.

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Andrew Nussey, Peel Hunt LLP, Research Division - Analyst [2]

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Andrew Nussey from Peel Hunt. Three questions, if I may. First couple for Bev. In terms of the working capital movements, obviously, in the first half, there was significant impact from payments in terms of advance of cost. Could you just give us a feel for what happened in the second half and what trends you might be seeing in July and August, if there's been any sort of deviation to that?

And secondly, if -- a successful sale of Kier Living and the various other business are being exited, a rough feel for how much is sitting in central overhead that might need to be adjusted for that?

And thirdly for Andrew, in terms of the Highways business, and I appreciate your beholden a little bit to your largest clients, but I just wonder what they're sort of saying to you in terms of what RIS2 might mean in terms of a restoration of sort of maintenance spend and other forms of activity?

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [3]

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Do you want to go first?

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [4]

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Okay. I'll go first. So firstly, good relationships with Highways England. I've been seeing them myself, had quite a long, extensive conversation with them. We are the market leader in maintenance for Highways England. There is a rephrasing of their budgets going on between the maintenance side and the CapEx site, as Bev alluded to. That has had a degree of volume and margin pressure on us. However, RIS2 is substantially bigger than RIS1, that's been identified. And we're confident when that comes through, we will see a degree of restoration of our activity both in the maintenance and in the emerging and developing regional development programs which are the medium-scale CapEx programs within Highways England's programs. So we see the outlook as good in the roads program but RIS doesn't come until next year, RIS2. So positive outcome, but a lot of work to be done.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [5]

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Okay. And if I just take those 2 initial questions, Andrew, first of all, in terms of payments in advance -- at the half year. So when we disclosed our results for December, we highlighted a GBP 97 million adverse working capital movement in terms of advance payments. That has significantly come back in our favor across the full year, and that's roughly GBP 20 million to GBP 30 million in terms of the overall adverse movement in working capital in respect to advance payments by the time we got to June. That hasn't really moved. What we're seeing is very supportive behaviors, very mature behaviors from our customers. I think it's important to recognize that the majority of our customers are repeat customers and they know Kier very well. And whilst there is -- whilst there has been some noise around us, where our customers know us and understand us, they continue to support and value us, and you can see that coming through in the order book.

Second question there in terms of the potential impact of the disposals in terms of the central costs. We have 2 businesses in terms of Environmental Services and Facilities Management. Whilst between them, they only constitute around 5% to 6% of the overall Group turnover, broadly constitutes just over 1/3 of the back-of-office transactions in terms of either revenue, in terms of payment cycle or in terms of HR transactions. So there are material opportunities to look at the cost base again, if those businesses are exited in a timely manner. Residential is slightly different. There are much fewer transactions within the Residential business, albeit we do have a dedicated team to support those. So there are opportunities there to either support any new owner of that business or to provide that owner with a ready-made base for them to take on.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [6]

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Howard Seymour from Numis. I've also got 3, if I may. Firstly, 2 on building. Slightly confused on the IFRS 15 as to where that fell because, clearly, it does have a P&L benefit. Was that predominantly in that division? If so, does that mean that the underlying profitability didn't do what you said?

Secondly, sort of a bigger aspect on the Building that is we have seen the order book being very good. I think the -- sort of the concern people potentially have is that Kier has been chasing volume over that period, I mean, just to indicate that all if you possibly can.

And then thirdly, just on the FPK and just looking at sort of the numbers you allude to, as we sort of try to model and look at that, how much of that on a general basis do we perceive we can look at from central costs, which is a tangible big number of GBP 50 million just gone. And how much divisionally over the next 2 to 3 years should we be looking to apportion to those businesses out? Sorry, that's quite a bit question but just to get some idea of where we see the magnitude of that.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [7]

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Very good. So if I take the first and third part and leave Andrew to be appropriately clear on the bidding disciplines that exist in the Group. So on IFRS 15, the margin that we declared in the Building business was broadly 3.3%, there's around a 50 bps benefit there in respect to the timing of profit recognition around IFRS 15, okay?

In terms of FPK and central costs, we've been very explicit in that we see a GBP 55 million overall benefit in respect to the FPK program by the time we get to financial year '21. Similarly, in terms of our guidance for financial year '20 should then give you a very clear idea about where the balance is. We see a GBP 25 million reduction in central costs from GBP 50 million to GBP 25 million driven by the FPK program with the balance broadly accruing across the Group.

Andrew, do you want to take on the bidding discipline piece?

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [8]

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So I can tell you what the situation will be going forward. We've appointed a new Group Commercial Director, Stuart Togwell, we've worked with in the past. We will have a disciplined approach to bidding work. We'll certainly have a disciplined approach to bidding the large projects. And as I said in the performance excellence piece, when we talk about process and the core principles of Kier, a key element of that is ensuring we have an appropriate set of delegation of authorities, we have an appropriate tender vetting approval preconstruction phase going forward. So that's what will happen going forward. We'll be disciplined about it.

In the past, I can't comment for the dim in distant past, but I think it'd be fair to say that, no, Kier hasn't been chasing volume, that would not be correct. I think Kier has been benefiting through this area of turbulence from the good relationships it has with its main clients and the frameworks it has with the main clients. And I can speak personally because I've spent a lot of time with those clients and I've known them in my previous life as well with Wates, they have a very, very high regard and respect for Kier and everything that Kier does and it's a very strong partnership. So I'm reasonably confident that the bidding processes is well founded and based on good relationships and frameworks rather than anything else.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [9]

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Joe just raised his hand I think.

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Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [10]

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Joe Brent from Liberum. I've got 3 questions as well, but maybe just take them one at a time to make it a bit easier for all of us. Firstly, on the Property disposal proceeds of, say, GBP 80 million to GBP 100 million for the year, could you tell us if that's in the consensus to estimates?

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [11]

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So firstly, on Property, we haven't taken a decision yet to divest Property. We're investigating options to accelerate release of capital out of that business. What we have taken the decision on is we'll reduce the capital invested in that business down to GBP 100 million of invested capital by the end of this financial year. So that's where we're at on the decision process, but we are evaluating options for acceleration opportunities over and above that.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [12]

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So Joe, just on the consensus debt position, there are 2 big movements, if you like, outside of the normal generation of profits of our EBITDA and then the, if you like, servicing of our capital structure, pension, interest, tax, et cetera. Those 2 big movements are: first of all, the explicit statement that we've had that we'll make GBP 85 million of Property divestments in the year, moving that capital base down to around GBP 100 million from GBP 185 million; and secondly, as we reduce the level of our supply chain finance facility, we will see a reduction of around GBP 85 million there and that will, obviously, cause a working capital outflow. So between those 2 measures, those are in the guidance that's being given in respect of debt for 2020.

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Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [13]

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And the second question, if I may, in your very helpful debt bridge, I think you talk about working capital outflow of about GBP 180 million in the first half, but it sounds like creditors are about GBP 130 million of that. Could you link that to the accounts? And where were those numbers appearing in the accounts that...

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [14]

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We have a detailed reconciliation which we've given to all of the analysts which currently sits with our IR Director. So that will be sent out to all of the analysts in short order.

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Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [15]

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Great.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [16]

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Sorry, that's a line-by-line reconciliation from the cash flow to the bridge.

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Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [17]

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Excellent. And finally for me, on the pension, clearly an IAS 19 surplus, but I would imagine actuarial deficit. Could you remind us of the timing of payments, I think there's a double payment in FY '21, and how you think future contributions might end up being adjusted post the actuarial review?

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [18]

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So the actuarial review is ongoing. I think I'll leave Andrew in a second just to talk about his engagement with the trustees, but the actuarial review based on a March 2019 reference date is ongoing. The -- over the last 3 years, the pension deficit on an accounting basis has, obviously, materially reduced and, as you quite rightly say, now moved to a surplus. We would anticipate some of the benefits of that coming through and being recognized as part of the actuarial valuation. You quite rightly point out that in July 2020, there is an additional payment of just over GBP 20 million to the pension trustees, and that is clearly articulated in the reporting accounts. If you get to read the pensions note, I think it's 9 pages. So we were quite painful in our disclosure of that last year and this year. We will obviously require the pension fund's consent for the disposal of the Residential business this year. That will be running in parallel with the conclusion of the tri-annual valuation. So there will be a set of detailed and quite complicated negotiations with the pension trustees just to go through the -- how those 2 matters interact.

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [19]

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And to that, I've had a number of engagements with the trustees, a number of engagements with the Chairman of the trustees who is an independent Chairman of trustees and an engagement with the pension's regulator as well to set the tone and the scene for that discussion as and when we get to seeking the permissions to sell the business.

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Joe Brent, Liberum Capital Limited, Research Division - Head of Research and Equity Analyst [20]

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And just following up, the over GBP 20 million payment in July 2020, do you think that's set in stone? Or is that part of the negotiation?

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [21]

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We have a set of negotiations that we have to undertake with the pension trustees over the next 6 to 9 months, which will encompass both the disposal of Residential and the future obligations in respect of deficit reduction contributions. Kier has been a very good citizen in terms of managing its pension scheme. Over the last 3 to 4 years, we've contributed around GBP 100 million over the last 5 years, more than that, in fact, to the pension scheme. We'll work with the trustees to do that. I'm very reluctant to commit, as you can obviously hear, Joe.

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Saravana Bala, Jefferies LLC, Research Division - Equity Associate [22]

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Saravana here from Jefferies. Just two questions from me, please. I was wondering if you can provide a bit more detail on the possible methods being explored to accelerate that capital reduction in Property. And I also wanted to check whether the initiatives are to get to the GBP 100 million capital target quicker? Or do the current -- does the current GBP 100 million target assume some of that is captured?

Second question is regarding the Infrastructure Services margin. You mentioned the change in margin mix is expected to continue in FY '20. I appreciate this refers to not expecting it to reverse, but I was wondering if we should expect flattish margins from that or can we still see some improvement going forward?

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [23]

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Can I take those? I'll take those.

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [24]

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Okay.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [25]

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Okay. So in terms of the capital reduction that we see, GBP 200 million in Property, that's countenanced in our current business plan. Those are individual schemes that come to maturity over the financial year 2020. We are not contemplating fire sales. This is not contemplating pushing assets out prior to that maturity. We don't have to do that. So this is part, if you like, of the normal cycle as these come on through.

In previous years, what we would've done is reinvest that GBP 80 million. The Group is not in that position. We don't have the luxury on our balance sheet. So as a consequence, we're crystallizing that and will be using that to pay down debt.

Second part in terms of the Infrastructure Services margin and where we are on Highways maintenance, as we disclosed in June, what we're seeing during the year is a little bit of a switch in spend from -- in particular Highways England from maintenance projects to capital projects. That has a slightly disproportionate hit on us as we have a much larger share of the maintenance market than we do have the capital works market. We don't see any material change in that mix or the mix we experienced in financial year '19 until RIS2 comes and starts, which will be in our fourth quarter of financial year '20. So barring any other issues, we wouldn't see any material movement in that Highways margin.

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [26]

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Any more questions? One at the back.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [27]

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One at the back. One at the back, one at the front. Stephen, you've got the mic.

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [28]

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Stephen Rawlinson. Two for me, if you can help me. One is first on the Residential. Just trying as an outsider to understand better what the evaluation might be that we could actually think about the results from this. Could you just give us a guide to -- you've got 4,000 plots in the land bank. So what was the gross development value in your minds of that?

And secondly, with regard to that particular transaction, the pension surplus in the Kier main scheme, which I assume is where the people reside in this particular part of the business, has -- had a surplus that's noted in the accounts here. So just talk me through, if you can, what sort of expectations you have around that. Obviously, the Homes England joint venture is a different issue, but notwithstanding that. I mean the current market, you know we've seen [gleys] and abort the sale of its strategic land operation and limited sort of demand for housebuilding businesses in the U.K. at the moment. So I just want to talk through that a little bit, but particularly the gross development value that you have in your minds as the start point for any discussion, I guess.

And secondly, with regard to Environmental Services, you got a long, drawn-out period of withdrawal from that. I mean to what extent is the Board discussing accelerated process there and being possibly constrained by lack of cash to actually contribute to your current customers' coffers in some way or other to get out of those contracts early? Because that, obviously, is a long period of time to get out of a contract which requires quite a bit of management input.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [29]

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So Stephen, shall I deal with those in reverse order? So just for clarification. The provision that we have taken in respect of our longstanding obligations in respect of our Environmental contract enables us to hand that contract back to the client and we no longer have any management intervention required from the summer of 2020.

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [30]

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Apologies if I missed that.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [31]

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So we close that out and we close the business in (inaudible).

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [32]

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That is the [quite] contract, yes?

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [33]

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That's Cheshire West and Chester that was acquired in the acquisition of May Gurney. So beyond the summer of 2020, Kier will have exited in full all of our obligations under our own Environmental Services contracts, okay? Firstly. Then on the Residential business, we won't be commenting on the value that other people may ascribe to our Residential business today. We are in an active process with a handful of very engaged buyers. We've been very, very explicit on the value that we hold this on the balance sheet at, which is GBP 173 million, of which GBP 10 million is -- sits with our mothballed land and potential future value for that. So we will be working with those very engaged buyers in the medium term to crystallize the transaction. Andrew?

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [34]

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No. I don't think I've got anything to add.

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [35]

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And just one further point in terms of timing. I mean, obviously, it's a complex transaction because you require the approval of your JV partners and you require some clarification with regard to the pension schemes, and trustees are notoriously cautious in that matter. So is there any comment you can make with regard to timing?

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [36]

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The only comment I'll make is we've engaged with all parties here. We're very active. We're upfront. We've got in ahead of the curve with the regulators, with the trustees, investment community of the trustees, with Homes England, with our Cross Keys JV partners as well, engaging all those parties, explaining our strategic rationale, did that last June, and I think they're very engaged in the process.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [37]

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Okay. I think there was one in the back.

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [38]

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One in the back.

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Alastair Robert Stewart, Progressive Equity Research Limited - Analyst [39]

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Alastair Stewart, Progressive Equity Research. A couple of questions. One, quite short, just following on from Stephen's point. The net asset value prior to the debt in Housing -- Homes & Development (sic) [Housing & Development] was GBP 173 million minus GBP 10 million for the mothballed land. Is that mothballed land staying with the Group, just to confirm that? And of the remaining GBP 162 million, is there anything ascribed to the homes maintenance business which won't be going with Kier Living divestment?

And then on -- in terms of the working capital, you've given quite a lot of detail already. Forgive me if I missed it, but of your GBP 182 million, what -- I may have missed it, what was the effect of the amount of the payment days going down to 59 -- from 59 to 41? Will -- has that process still to -- will that process still see a negative effect in 2020 because it was a part year effect in 2019?

And finally, again with working capital, there's an indication that some of the Infrastructure businesses may see volumes going down. Are they working capital negative? Quite often Infrastructure business aren't. What impact, positively or negatively, could the likely shrinkage of workload there have in 2020?

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [40]

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Okay. So if I deal with that 4-part question, forgive me if I forget a bit. So in terms of the Housing balance sheet, quite rightly, GBP 163 million of assets are countenanced in the sales perimeter of Housing. That includes none in respect to the Housing Maintenance business, that's a separate business. We're maintaining that, and we see significant opportunities in that as well as synergies in terms of the core basis of operations.

In terms of that GBP 10 million of mothballed land, we are currently actively selling that separately. These will be a series of smaller transactions and receiving significant interest on those.

In terms of the working capital, the broad components of GBP 182 million, GBP 30 million in terms of work in progress in Living broadly driven by the reduced level of completions there, GBP 30 million in terms of reduction in advanced payments and the balance then being the accelerated payments we've made to our supply chain.

In terms of that position, obviously, the bridge, that's a spot position, so that reflects our practices in June. You might gather that the average has moved materially during the last 6 months of our financial year, but the spot position is where we are currently trading at. Our principal objectives in and around payment practices are to comply with the proper payment code, move towards compliance with that, which is 95% of transactions being paid in less than 60 days, and pay competitively. Kier is utterly reliant on its subcontractors to deliver its work. Our subcontractors are key to our business. We need to pay them in a timely, correct and as rapid a manner as we can. But we don't see any material shift in that going forward, so maybe couple of days here or there.

Andrew, anything to say on that?

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [41]

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No. We're driving our business towards that fair payment practices code, that's the aim and ambition. It has cost us money, that's the working capital outflows, but we'll continue to finish that job. That's the commitment we've made. Got a good plan, we've submitted it. I think the feedback has been good of the CICM, et cetera. So that's our strategy very clearly laid out.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [42]

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Okay.

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Andrew O. B. Davies, Kier Group plc - CEO & Executive Director [43]

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Okay. Any questions more? Any on the phones or anything?

Okay. If there's no further questions, I think just to repeat the messages we said, it has been a difficult year. I think we are building firm foundations with a new management team that's been established and put in place. Simon is sitting there. We have taken those decisive strategic actions which we believe are necessary to refocus the Group back to the core structure. We do have very strong businesses, as is evident by today's underlying performance and the good quality in the order book. Our sale of Kier Living is progressing well, and we are reshaping the Group to reduce indebtedness and restore Kier back to robust financial health again.

There's no further questions or points. Thank you for attending, and good morning.

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Beverley E. J. Dew, Kier Group plc - Finance Director & Executive Director [44]

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Thank you very much.