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Edited Transcript of MGNS.L earnings conference call or presentation 7-Aug-19 8:00am GMT

Half Year 2019 Morgan Sindall Group PLC Earnings Call

London Aug 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Morgan Sindall Group PLC earnings conference call or presentation Wednesday, August 7, 2019 at 8:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* John Christopher Morgan

Morgan Sindall Group plc - Founder, CEO & Director

* Stephen Crummett

Morgan Sindall Group plc - Finance Director & Director

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Conference Call Participants

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* Adrian Mark Kearsey

Panmure Gordon (UK) Limited, Research Division - Support Services Analyst

* Howard David Seymour

Numis Securities Limited, Research Division - Director of Equity Analysis

* 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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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [1]

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Well, good morning, everybody. I'm going to just say a few words, then I'm going to hand over to Steve, who's going to go through the financial and operational view. And then I'd like to say a few words on infrastructure, and then obviously questions after that.

So we feel as a company, as a group, we have real positive momentum, and that comes through in a strong first half performance. Cash and a strong balance sheet is really, really fundamental to our business and, we believe, the industry as a whole at the moment, particularly fundamental to us because we are targeting a lot of long-term work streams. And when people are looking at us for long-term work streams, they really, really want know who they're dealing with.

So our strategy is completely unchanged to what it's been for the last few years. It is organic growth and self-help. We believe there's huge amount more we can do to our businesses to make them better and better for everybody, for the people that work in the businesses, for our supply chain, for our customers, and indeed ultimately, our shareholders. So we are pretty optimistic about the opportunities ahead. Obviously, we're aware of the backdrop of some negative news. But on the back of how optimistic we feel, we've slightly increased our forecast for the full year or our expectations for the full year slightly ahead of previous expectations. I'll now hand you over to Steve.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [2]

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Thanks, John, and morning, all. As usual, I'm going to do the -- cover the financial and operational review this morning. So in summary, then, we've had a strong first half, as John said. The 4 big numbers in green here really tell most of the story. Revenue of GBP 1.4 billion is level with last year, but off of this, we've had a 20% increase in the profit before tax to GBP 36.3 million, GBP 123 million of average daily net cash and an 11% increase in the interim dividend. So those are the headlines.

So starting off first with the summary income statement. This really does show us the benefits of us focusing on operational delivery and quality of earnings, with the operating margin growing by 40 basis points to 2.6% and operating profit up 18%, and this is all off revenue, which was level with last year. With lower interest in the period, profit before taxes end up 20% to GBP 36.3 million, which is then taxed at a rate -- an effective rate which is slightly above the U.K. statutory rate this time around, give you earnings per share of 15% to 64.2p. And as I just mentioned, we've increased the interim dividend by 11% to 21p per share, a very comfortable 3.1x cover for the period.

So looking at the divisional makeup of this and just moving down from the top. Firstly, Construction & Infrastructure with another period of margin improvement. Its margin is now up to 2.0% and profit up 23% to GBP 13.9 million. Fit Out was, as expected, slightly lower revenue and profit, down 4% and 13%, respectively. But with profit of GBP 16.4 million, a still very healthy margin of 4.0%. Moving down, Property Services has got a lot of traction in the period, with its margin now up to 2.9% and profit up significantly to GBP 1.6 million, albeit it is still a relatively small number in the overall context of the group as a whole.

On the regeneration side, Partnership Housing has shown early signs of improvement with profit up 39% to GBP 6.4 million, but it's obviously still well short of where it needs to be. While Urban Regeneration's had another good period. Lots of activity in its development portfolio, leading to a profit of GBP 8.3 million, which is up 36% on last year. Investments then lost GBP 0.9 million, central cost of GBP 8.2 million. This gives group operating profit of GBP 37.5 million, which, as I said, was up 18% and a margin of 2.6%, which is up 40 basis points from last year.

On to cash. And you can see here the operating cash flow for the 6-month period, which really just does reflect the usual working capital seasonality and outflow since the year-end. Just a couple of points to bring out here and to note. Firstly, the cash flow here includes working capital investments in the period of around GBP 54 million in the regeneration businesses, and this is shown separately in one of the gray columns. And secondly, the rest of the working capital outflow of around GBP 63 million is due mainly to an increase in contract assets. And this is where we've done -- actually done the work, but not yet had it certified or invoiced. So this really is just a timing issue and not a concern to us.

However, as I said before, looking at the cash for every 6-month period is never really fully representative. And as you know, cash flow statements just measure cash performance point to point, and it's determined simply by the cash balances at the opening day of the period and the closing day of the period. What they do is they miss out completely what goes on in between.

So what I've done here, in relation to our payables and trade creditors, I thought the best way of trying to illustrate the underlying trends here is to look at our payment practices reporting for the period and look where we stand on this. So the table on the left here you can see shows the payment details just for our construction divisions as submitted recently, and reported on, for the 6-month period to the 30th of June 2019. The smaller table you'll see on the bottom is the comparable table for the second 6 months of last year.

Now our job is to ensure the group is best placed to attract the best supply chain partners, and this will, in part, depend upon the way we pay them. So payment terms and importantly, payment reliability, are key differentiators for companies in our sector and our market. And this is where our strong balance sheet and net cash position does help us significantly.

Now there's always room for improvement on payment days and terms, of course, there is. This is a continual process. But hopefully, what this slide shows is that we're on with it. We are improving, and we're getting better. And in certain areas where we're not, we're identifying them and addressing the issues. We take our supply chain relationships very, very seriously, indeed.

Anyway, just back on to cash. The numbers on the right here are the real key measures for us. Now firstly, our average daily net cash for the half year was GBP 123 million, GBP 10 million higher than last year. And I've said this before and I will keep saying it, the average daily position, whether it be cash or debt, for companies in our sector remains the best and probably only metric for really understanding the true underlying cash position of an organization. So just to repeat, our average daily net cash for the period was GBP 123 million. The period-end spot cash was GBP 114 million, GBP 17 million higher than last year. But as I just mentioned, this is just a position on one day, and you can't read too much into this number.

Now looking ahead to the rest of the year, based upon our current plans for investment in the regeneration and profile of cash flows, our best estimates at the moment is for average daily net cash for the full year to be in excess of GBP 90 million, which is slightly better than our previous guidance. And then just to complete the picture at the bottom, our bank facilities remain at GBP 100 million [GBP 180 million] and extend out to 2022. So this gives us plenty of headroom and plenty of financial security and allows us -- what it does, it allows us to make long-term decisions based upon the best long-term interest of the business rather than just short-term decisions made on short-term cash considerations.

And then, so in the context of the last few slides on cash. We've got a strong balance sheet. Net cash, no pension concerns and net tangible assets of GBP 144 million, all of which stands in good stead with our customers, our suppliers and importantly, our own people.

Now on to the order book. We've also had a really good period of winning work. Total of our future workload stands at GBP 7.5 billion. Now on the left-hand side of this slide, you'll see the secured order book, which is relevant mainly to our construction businesses, and this grew 19% from the year-end, up to GBP 4.2 billion and was the aggregate of various divisional movements, which I'll cover separately.

Now just as a reminder, the definition of what we include in order book is actually quite stringent. We only include projects where we have actual signed contracts or signed letters of intent. We do not include situations where we are preferred bidder nor when we're only at stage 1 of a 2-stage procurement process do we ascribe any value to the project in our order book other than any amounts which are subject to stage 1 preconstruction agreements. So it's a high hurdle definition and very prudent. But what it does is it enables us to plan and budget and forecast our business accordingly.

Generally, on work winning though, the common theme across the whole group remains the absolute focus on the quality of work we take on. On the right-hand side, we've got the regeneration and development pipeline, which is only relevant to our regeneration businesses and stands at GBP 3.3 billion, up 6% from the year-end. And again, just as a reminder as to what this is, this comprises our share of the gross development value of secured schemes only. Our secured schemes here are ones which we've already won and are signed up, and again, it does not include preferred bidder or prospectives. So at GBP 3.3 billion, it gives us really good visibility for the long term, with over 73% of its value being for 2021 and beyond.

So those are the real group headlines, the overall group picture. Strong profit growth, strong cash, strong balance sheet and a high-quality and growing order book. So if you just look closely -- a bit more closely at each of the divisional performances. Construction infrastructure, again, we've had another much improved performance here.

On the construction side, we're doing well with a continued margin progression reflecting the benefit of us focusing on operational delivery and disciplined contract selection. So although construction's headline revenue is down 7%, which was well flat previously, the margin is now up to 2.0%, up 30 basis points from last year.

On the Infrastructure side, another good performance here also, with revenue up 13% and a margin of 2.1%, which is up 40 basis points from 1.7% last year. So it's also moving in the right direction.

Now you can see here, the overall divisional order book for construction infrastructure at GBP 2.4 billion is up 24% from the last year-end. And within this, we've got infrastructure's order book up 21% and construction's order book up 32%. This is a really strong performance for us, and it's all good, high-quality work.

Now much of construction's growth in order book in the period is actually just conversion into final contract of work where we were preferred bidder at the year-end, and it's this work which will support construction's return back to revenue growth in future years.

Regarding infrastructure, I'll leave John to talk through the detail in his section. However, suffice to say, the Sellafield win, which we announced earlier in the year, is a very good one for us going forward. Our construction infrastructure to us is all about discipline. It's about disciplined bidding, disciplined operational delivery and disciplined risk management. Despite some of the recent negative industry news flows and gloomy indicators, there's enough work out there for us to -- in the marketplace for us to win. We just have to keep our discipline on what we take on and what we deliver, and that's precisely what we're doing.

Just to reiterate here, the strategic focus for this division remains firmly on the quality of work and the quality of earnings, not on chasing volume for volume's sake. And to this point, we're maintaining the appropriate and preferred risk balance in the order book, with 90% of its value at the year-end being derived either through negotiated work, frameworks or 2-stage tenders. And this all goes to support our confidence that there's more opportunity here for further margin growth in the division. And again, John will elaborate on this a bit more in his section on infrastructure.

So moving to Fit Out. Although Fit Out is down year-on-year, it has performed as expected against a very strong prior year comparator with a profit of GBP 16.4 million. This is still a good result.

During the first half, we've seen a general tightening in overall market conditions, again, as we predicted, which has translated into the lower margin. However, we do need to keep this in perspective. With its market-leading position and strong project delivery, the margin of 4% remains very healthy. The order book for Fit Out as at the 30th of June this year was GBP 464 million, which is down 12% from last year, but interestingly only down 1% from the year-end. This is encouraging. Demand for Fit Out still remains strong. Of this total order book, GBP 331 million is for the second half of this year, which compares favorably to the same time last year. In fact, it's GBP 11 million higher. Now as you know, we always have limited forward visibility in this division. But with this level of orders for the second half, we can be confident that the full year result for Fit Out is heading towards the top end of its target profit range of around GBP 35 million.

Property Services here. Revenue was up 12% driven by new contracts and from increasing the scope of existing contracts. Now the good news here is that the impact of this revenue increase and the improving operational and contract efficiency is really starting to drop through to the bottom line, with profit up to GBP 1.6 million and a margin of 2.9%. There's some great work going on in this division. And we've got some good contracts which were mobilized in the first half of this year. So therefore, for the second half, as the volume from these contracts regularizes and settles down, we expect further margin improvement, and as such, we should meet and surpass the 3% margin target, which we've previously set ourselves. With the order book up 33% from the year-end to GBP 962 million, there's plenty of opportunity and work to go for here. So we feel good.

Partnership Housing. We've seen a better performance here, but it's obviously still early days in getting this division to where it needs to be. What we've done in the first half, though, does give us confidence that we'll get there and that we are moving in the right direction. Profit was up 39% to GBP 6.4 million, and the margin improvement of 70 basis points up to 2.7% was driven by improvement in operational delivery in the contracting side, and further improvement is expected in the second half here. This division and its market remains a significant opportunity for us and a key priority has been to reset our approach to work winning, which is an area where I think we've fallen behind others over previous years, so we are playing a little bit of catch-up here in this area.

So what's good news that is we've seen some early signs of success following a number of previous periods where the order book was declining. So it's good news, both the order book, regeneration pipeline have grown, up 8% and 6%, respectively. But again, let me also reassure you, there's no compromise here on the quality of work we're taking on, nor has there been any loosening of our returns hurdle rates simply to win work. Again, we're maintaining our discipline in all areas for long-term success, setting the business up for long-term success.

The capital employed in the period was as planned, increasing GBP 49 million from the year-end to around GBP 156 million at the period end. And further significant ongoing investment is expected during the second half, with average capital employed for the year still expected to be around the GBP 150 million mark. Now based on the last 12 months, the return on capital was only 10%, which remains well below our stated target of 20%. And although we're expecting higher profits in the year compared to previous, progress towards this returns target will take some time.

Urban Regeneration, though, has had another good period, and again, one which absolutely reinforces our regeneration strategy. Profit was up 36% to GBP 8.3 million and is indicative of the high level of activity across its development portfolio. The profit was generated across all sectors and all geographies. And the pipeline, which stands at GBP 2.2 billion, was up 6% from the year-end and reflects this diverse spread. Now there is a slide at the back of your packs in the appendices, which shows the split of the pipeline.

The average capital employed for the last 12 months increased to GBP 105 million, which then reduced down to GBP 97.5 million at the period end. So for the full year, we expect average capital employed to be around the GBP 100 million mark. Now the return on capital here over the last 12 months was 19%, which is right up at its stated medium-term target of around 20%. However, what we need to do in Urban Regeneration is get it delivering a return at this level consistently over a rolling 3-year period, and this is the challenge to this division. But that said, this rocky performance in the period gives us confidence and shows that this business is more than capable of delivering returns at this level.

For investments, although as expected, we've made a small loss in the period. Positive progress was made across all its joint ventures and in developing new opportunities for construction and regeneration work across the group. Good news in the period was the division's selection as Brentwood Borough Council's preferred joint venture partner to deliver a long-term program of development with a potential GDV of up to GBP 1 billion, 50% of which will be to us. Now none of this is included in the pipeline as it doesn't yet meet the strict criteria and the strict definition for inclusion. So what this is, it's another example of hidden future value coming from this division. Now the loss for the full year is likely to be in the range of GBP 2 million to GBP 2.5 million. However, as I said, this should just be seen in the context -- the overall context of it providing significant value to the rest of the group.

So in summary, then, financially and operationally, these are a strong set of results for the first half, and we've upgraded our expectations for the full year. The balance sheet remains strong with average daily net cash now expected to be in excess of GBP 90 million for the year, all this and an increase in the interim dividend of 11%. So thanks, and I'll pass you on to John now.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [3]

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I'd like to now just talk about purely our infrastructure division for a few minutes, if I may. So over the last few years, we've made good progress, but we've got a long way to go to be best-in-class in infrastructure. We've grown turnover and we've grown margin, but we do feel much more confident about the business. Our previous target was medium-term target of 2.5%, and we're now upping that to 3%. One thing we particularly like about this division, and the way that we're running the division helps, is to give us higher visibility of earnings. So I think this shows where we've been over the last sort of 4.5 years. You can see turnover has gone up a little bit, but the margins have gone up quite significantly.

I think this is a really interesting graph. It shows how the order book has changed in the last 3.5 years. It's actually grown by 125%. I would remind you, as Steve said, we have a very, very high hurdle rate before something can be classified as an order. Also, 90% of the orders are now frameworks. Because the order book is getting longer term, and we are specifically looking for long-term frameworks, turnover will increase at a slower rate than the order book.

So our strategy is very much long-term frameworks. We like long-term frameworks because it's lots of work for the same clients over a number of years, and it's not sort of big, high-profile jobs. We're looking to reduce our reliance on joint ventures. We find joint ventures are hard for us to have full control over and quite hard also to make certain that people in the joint ventures that work for us feel completely committed to us as a business. So we're also looking for fewer high-profile jobs.

Clearly, social value is now fundamental. It's no good just building things unless we can really demonstrate social value, and that is fundamental also for winning the jobs. Our clients are also looking for us to be -- to come up with real innovation to find cheaper, better ways, quicker ways of doing things. So I've got here, the sectors we work in. I think specifically, it's worth mentioning sectors we don't work in. We don't work in marine and coastal, and we don't work in energy from waste. There's a little sliver there of 2%, that 2% tends to be sort of engineering design services often sold into our joint venture partners.

I'd like to start off with aviation. Most of the work we do is at Heathrow, and we've been at Heathrow for the last 25 years, and this came through the Amec acquisition about 10 years ago. We're working on Q5, which is about to be extended for another 2 years, and we're working both landside and airside.

On energy, we work for National Grid and Scottish and Southern. They are sort of 2 of the 3 transmission companies. We don't work on distribution. We're purely high voltage. We've got one framework with National Grid, and we would actually like to do more work with National Grid. We've got 2 frameworks for Scottish and Southern Electricity Networks, and they are beginning to sort of ramp up, and we're getting more turnover from them. We see this as a growth area for us.

With highways, it's Transport for London, Highways England and various local authorities. We are sort of underweight in terms of what we do for Highways England, and we will see that growing, but it's going to take medium- to long-term before we are significantly bigger in that area. But there's quite a lot of potential to grow with local authority frameworks. A lot of local authorities come together and have frameworks. Like Midlands, we're on; East Anglia, we're on; and Yorkshire that we're on, and we do see growth coming from there. So we do expect to grow in this sector, but we think it's going to be more medium- to long-term before it's a huge growth.

Nuclear is a very, very interesting area for us. This picture here is Sellafield, and we expect to be Sellafield's largest supplier over the next few years. We've got 2 frameworks in Sellafield. There's the ISA, which we've been on for now about 10 years, and that's worth about GBP 100 million a year to us. And then there's the PPP, which is a 20-year partnership that we have recently won. On that, there are 5 partners, and we will be doing all the civils work on that. Now although that is expected to be about GBP 1.6 billion, clearly we haven't put it in the order book at GBP 1.6 billion. We put in the order book at GBP 370 million, which are the jobs that we've actually got sight of, but we fully expect it to be worth GBP 1.6 billion, and clearly we have a contract for the whole 20 years.

We also have a framework with the DIO, the Defence Infrastructure Organisation, which is a fairly new framework. Now on that framework, it's not exclusive to us like the Sellafield job. And so there's 3 of us who will share GBP 500 million worth of work. We would only have that in our order book at under GBP 500,000 because that is the work that we have won. We see, without winning any more work, real growth in this sector.

With rail, we work for the Underground, Transport for London and Network Rail. Again, we're underweight in the terms of market share with Network Rail. As you know, they're going through a big change at the moment with their decentralization, and we expect quite a lot of work to come out that isn't going through the framework. We expect growth from TfL and London Underground on the frameworks that we're on. So again, this is a key target growth area for us.

Move on to water, where we've got a -- we're on a joint venture with Tideway, Yorkshire Water, Welsh Water. So our relationship with Welsh Water goes back 20 years, and we're expecting another 5-year extension for that job. We probably don't see water as a real growth sector for us. We find it quite a tough market, and we think it's better for us to put our resources elsewhere. Our big JV in infrastructure is the western section of Thames Tideway, which is about halfway complete, and that is currently worth about GBP 40 million a year turnover to us.

So if I could just summarize on infrastructure. We are looking for work streams which are long term. We've currently got 89% visibility for next year, of which 79% is in our order book, 10% in preferred bidder. And we have about 60% visibility for 2021. As I said earlier, we expect our medium-term operating profit margin to increase to 3%. We are looking to avoid high-profile jobs. We want long-term work for existing customers. And I would say that we probably see very limited Brexit risk in this space.

So if I could just sort of summarize what Steve and I've been talking about today. We actually feel very good about life. We've had a good first half, we're in the businesses we want to be in, we're not looking for acquisitions. It's all going to be organic growth and self-help. We just want to make our businesses better and better and better. We have a real positive momentum. Our job is to really keep that momentum going. Our job is to stick to our strategy and remain complete discipline on the work that we go for. Sorry to be so boring. Any questions?

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Questions and Answers

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [1]

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Howard Seymour from Numis. I've got a couple, if I may, on different parts of the business. So I'll just sort of plow through. If I start on the Property Services side of the business. You alluded to the margin getting better, and actually clearly, you're hitting the sort of scale that you've talked about on -- actually on a sort of lower revenue perhaps than you projected previously. At which point do we start pushing the numbers on that to a higher number in terms of what the capability of the business is? And how are you hitting the margin earlier? Is there any specific reason that you'd look up on that?

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [2]

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If I do -- I will address the first point first in terms of the margin. We expect -- I said we expect to do 3%, probably better than 3% this year. You quite rightly say, our medium-term target stated was 3%. I think we'll come back in February and tell you where we think the business can go to. Let's get that first. I think confidence is high that we will get there this year, but we'll come back in February. That's definitely on the list to do that. In terms of how we got there, I just think we've done a bit better. I think the IT platform that we have underlying the business is second to none, first class. We've got a great team there. A lot of people working very hard. We've got some great customers, great clients. It's a really good business with a good feel.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [3]

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Okay. Second question actually was on the urban regen business. And you alluded to, Steve, the fact that you're trying to look for greater consistency across the years.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [4]

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Yes.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [5]

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When you look back over the past couple of years, it's not been of your making in terms of the timing of disposals, et cetera. So what can you do in that market to get that capability? Because you do it over a 3-year basis, but you're sort of saying, you're trying to see more smooth...

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [6]

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There is an inevitable lumpiness in terms of...

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [7]

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Yes.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [8]

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Profit here. Where we're trying to get to is a sufficient critical mass in terms of its developments on the go at any one time, such that when there is inevitable slippage, we've got more than enough to cover it, to ensure that we are consistently delivering that return on capital up towards 20%. So it really is a question of scale, and that's -- I think that's why the -- this -- the increase in the development pipeline really gives us confidence. This shows what the business is capable of. And I think that really does give us great confidence in this area, that we can get there.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [9]

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Excellent. And then third question, really just on Sellafield and the PPP. Because you alluded to the fact that it's GBP 370 million in the order book but clearly will be substantially more. When we look at it as the sort of the growth potential in that, is that just longer work as to what you're doing? Or are we scaling up at the moment? Because you didn't -- I don't think you gave us the -- how much it is per annum, which you do in the ISA. Does it scale up from here or does it just stay at the levels of work that you've got now for longer?

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [10]

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Yes, when I talked about GBP 100 million per annum, that was the...

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [11]

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Last year.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [12]

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That's the old framework...

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [13]

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Yes, absolutely, yes.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [14]

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The one we've had for many years. The new one could be similar, but it's just building up now.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [15]

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So it's in -- it's scaling up at present?

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [16]

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It tends to be bigger jobs and it's scaling up.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [17]

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Right. Okay. Okay. And so as that comes through, will that scale up to a significantly bigger number than what's already there on Sellafield? Or is it just longer on what you've got?

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [18]

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We would expect over the 20-year period to do about GBP 1.6 billion on that contract.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [19]

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Okay. Right. And that should be relatively linear in terms of...

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [20]

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And as we get sight of individual jobs on that contract, then it will come into the order book.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [21]

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Okay. Okay. If I can just move for one last one. It's more a general comment. Because clearly, you're doing, I think, a lot better than the industry in terms of payment practices. And I take your point on the balance sheet. I noticed quite recently, however, the government may be sounding a little more sensible in terms of payment practices, perhaps moving to sort of nearer a 75% than 95%. Just wondering if you've seen any more, as you say, more sensible commentary coming out from the government. It's seemed to be very adversarial for some time and perhaps now seems to be a little bit more, maybe, realistic. Or am I being optimistic on that front?

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [22]

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I think we just focus on trying to do as best as we can and continuous improvement. And as we said, it's -- attracting the best supply chain partners is critical to us. It's -- it needs to be a competitive advantage and part of the differentiator is how quickly you pay people and how reliable you are. So it is a -- to be perfectly honest, it's a continuous exercise to continually improve, and that's what we'll do, irrespective of what the external sort of diktats are.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [23]

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Why have a good balance sheet if can't use it to our advantage?

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [24]

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Stephen Rawlinson. Can you just -- 2 questions, really. Firstly, with regard to the average net cash, GBP 123 million in the first half, and you're pointing to GBP 90 million as the number for the year as a whole. So that implies quite a lot of cash going out in the second half, the maths of that tell me. Could you talk us through where that's going? And possibly related to that, could you just talk us through the Partnership Housing business in a little more depth as to what are the blockages to getting this sort of 20% rocky target? Part of which might be you touched upon earlier about joint ventures in infrastructure, but obviously you will need to have joint ventures in this particular part of the operations. And is that one of the issues? But I don't want to major on that. I'd like for sort of a more open answer, if it's possible, as to what the blockages might be. But first of all, this average net cash position going -- pointing to being GBP 60 million in the second half from GBP 123 million in the first, if the GBP 90 million is correct.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [25]

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I think I'll start by saying that the average daily net cash is notoriously difficult to forecast. It's one of the sort of -- it's a great thing to, for full transparency, to report regularly to the outside world, but it is notoriously difficult to forecast because obviously receipts, if they get slipped, or our brand can impact that quite significantly. And again, you'll remember at the year-end, we put out our daily cash balance for the last 2 years, which showed a profile of starting off the year strongly, dipping and then taking a big dip in Q3. But it's followed a very similar profile this time around. If we were to sort of map the first 6 months back on that graph, you'd see a very similar profile. It's just tracked at about GBP 10 million higher.

So there's nothing really significant driving this. But in Q3, particularly, we are going to see a significant investment in our Partnership Housing business. This is a lot of cash going on in developments, which we can see is bricks and mortar. It's good stuff. It's been in the plan. Now inevitably, you'd expect me to have a pretty prudent forecast as well. So what we're saying is that GBP 90 million -- in excess of GBP 90 million is the floor. So we said circumstances -- at no circumstances at the moment do we envisage going below that. I would hope that in due course as things move around, cash comes in, cash goes out, we could do better than that. But confidence is that in excess of GBP 90 million, that where I stand at the moment. So you're right, it would imply an average for the second half of GBP 60 million. Are we going to do that? That's a worst-case scenario.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [26]

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Your question on Partnership Housing in JVs, absolutely right. There will be JVs, and I see a huge difference between joint ventures in Partnership Housing where we're joint venturing with housing associations or councils or other property owners to doing a joint venture with other contractors, where there's 3 of you who have pretty much got the same skills. So I see that as completely different. And what we need in Partnership Housing is more volume and more schemes. And we are building them up. And we see the pipeline coming.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [27]

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So going back to the return on capital question. We will get to 20%, that still remains the target. I think what I'm saying is that it will take a bit of time. It's not going to be next year. You're not going to suddenly see a spring increase up to 20%. What we're going to see, though, is continued profit improvement. But because the capital is going in as quickly as the profits are increasing, unfortunately, the return on capital is not going towards 20% as we expected. It will take a bit of time, but we'll get there.

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

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Sorry, just had a follow-up, if you don't mind. Just with regard to this particular area, can you just talk a little bit about market risk that you might be taking at the moment with regard to the properties that you'd be selling out of the joint ventures, but possibly your income will be dependent upon the completions of the sales, obviously in a market that might be getting sticky in the second half?

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [29]

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Yes, the market may get sticky. It's holding up okay at the moment, outside of London. The London market is a little softer. But we are taking market risk on the houses we're selling. But of course, they are predominantly houses, not blocks or flats. So you can just slow the sites down a bit, but we are taking market risk on those.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [30]

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And we're also aimed pretty much at first-time buyers. We don't have significant exposure to the secondary market. We don't have significant exposure to Central London. So health of buyer's important to us.

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Adrian Mark Kearsey, Panmure Gordon (UK) Limited, Research Division - Support Services Analyst [31]

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Adrian Kearsey, Panmure. You made a reference a moment ago with the chart that you had in your prelims announcement with the daily net cash. I think from memory, in Q3, you had a low of GBP 25 million. Are you sort of expecting a similar kind of low point for this year?

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [32]

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I should never pull that graph up. Yes, probably. In all likelihood, don't know. I can't predict what the cash is going to be on any one day, wish I could. But it's -- it will show a similar profile. We -- it might be lower. But again, we know where it's going. I think that's a really critical thing. We know precisely where the cash is going, rather than it's going out the back door without knowing, through receivables or something and you can't track it. We know precisely where the cash is going.

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Adrian Mark Kearsey, Panmure Gordon (UK) Limited, Research Division - Support Services Analyst [33]

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So it's going to be there or thereabouts, plus or minus a margin?

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [34]

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It will reduce in Q3.

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Saravana Bala, Jefferies LLC, Research Division - Equity Associate [35]

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Saravana from Jefferies here. Just a couple of questions, please. Just on the infrastructure 3% margin target. Just a bit more detail on what's driving confidence in that higher-margin target. I mean you mentioned you have higher visibility going into 2020 and also 2021. Is it that -- do you feel that the order backlog is sufficient to achieve or exceed 2.5% to 3% going forward? Or is it also a function of becoming more selective than you already are being currently?

Second question is just on Partnership Housing. Just a bit more detail on resetting Partnership Housing that you mentioned, so that's being taken under the new management team there, and how current market conditions are facilitating that going forward. [10%] -- perhaps confidence in the division being rebased from 2020 going forward to return to growth.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [36]

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So on infrastructure first. Our gross margins have always been okay, but the overhead is perhaps a little high relative to the gross margin. And we now have a situation where the turnover is going to increase. The margins will increase slightly but not -- sorry. The gross margin will increase slightly, but not hugely, but the net margin will be able to move up a little bit because the overhead will be a slightly smaller percentage.

And on Partnership Housing, but -- yes, we've not only changed the management team, but we're also investing more money in the business as well, and it's getting a lot of attention. And I would say, in the team of the top 10 people, 6 are sort of new into their post, and of which about 4 would be -- also be new to the business. So it is quite a change and quite a generational change.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [37]

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I think what is resetting our approach to work winning means, it means getting out on the pitch with creative solutions, going proactively to clients, looking at land opportunities rather than sitting back waiting for the phone to ring. Now that's worth reiterating but it's that sort of thing. It's realizing that land is the scarce resource, that's the currency, and we need to be able to come to clients with creative solutions to satisfy their own needs.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [38]

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And obviously, it's fair to say that we think we've got opportunities in all of our businesses. But Partnership Housing has the greatest opportunity and needs the greatest amount of self-help.

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Saravana Bala, Jefferies LLC, Research Division - Equity Associate [39]

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Just a quick follow-up. And as part of that resetting, is there also a function of unwinding perhaps less profitable contracts, which can help improve profitability going forward in ROCE?

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [40]

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I think we're being much more demanding and rigorous in our appraisals, definitely. Definitely. Yes.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [41]

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Nobody asked a question on Fit Out. You're not getting away that easily. Just -- the Fit Out side of things, certainly the body language seems positive in terms of what you are doing. But just thoughts on the wider market. You've suggested that selectivity enables you to do better. Are you seeing, however, in the market that the squeeze is happening and competitors are starting to certainly try to price down product? Or is it a bit more sensible market there as well?

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [42]

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Are you talking purely about Fit Out?

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [43]

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Purely, Fit Out. Absolutely.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [44]

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I would say that we're in a good market, but we've had a couple of years where the market was great, and it's now good.

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Howard David Seymour, Numis Securities Limited, Research Division - Director of Equity Analysis [45]

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And from the point of view of competitors, John, they're not really pricing down, therefore, against that backdrop because they don't -- I mean, it's always a competitive market, but historically, what you're saying is relatively suicidal at the bottom end, just to maintain high profits.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [46]

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Out of the construction markets, Fit Out tends to be less suicidal because the clients are actually pretty concerned about getting the right contractor. It's also the least fragmented of the construction markets we operate in.

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [47]

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Just one more, if you don't mind, please. In the text of the release this morning, construction's mentioned on 2 occasions in brackets, including design. Now it's probably me, but I can't recall seeing that before. Could you just sort of remind us of the significance of that and why you've done that on this occasion? Because it's just a little unusual. If you could just help us out there, please.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [48]

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We have included that probably every release I've ever written. I think I'm right in saying that. But it's always there. It is always there.

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [49]

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But could you remind us of the...

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [50]

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I'll let John do that.

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [51]

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Of the significance of it?

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [52]

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I wish the contribution to the profits was significant.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [53]

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Yes, not.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [54]

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And they're not.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [55]

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At the moment. In due course, it should be. But in this time around, not.

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [56]

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That's just an indicator of strategic direction, then, is it, more anything else?

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [57]

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I think it's just -- to be honest, it's an indication of factual accuracy they included in those numbers. It's a design business. It's as simple as that. And I'm visually looking at what we wrote last time. Yes, construction, which includes design. There we go. Phew. It's always been in there. It's always been in there. No, got a good business, got a good business. It just needs to start contributing more.

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Stephen Joseph Rawlinson, Applied Value Limited - Director & Analyst [58]

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Is that 300 people? If I remember last time that you spoke about it, is that about right?

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [59]

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More than that.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [60]

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More than that. Really.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [61]

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Yes, but it needs -- when it becomes material, then we'll need to talk about it.

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John Christopher Morgan, Morgan Sindall Group plc - Founder, CEO & Director [62]

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Great. Any other questions? Well, thank you very much, indeed, everyone. Thank you.

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Stephen Crummett, Morgan Sindall Group plc - Finance Director & Director [63]

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Yes. Thank you.