Costain : Analyst presentation - results for the half year ended June 2020

Half year results

Six months ended 30 June 2020

14 September 2020

1

Alex Vaughan

Chief Executive Officer

2

Overview

• All contracts now operational following impact of COVID-19 with necessary safety measures in place
• Adjusted operating profit of £5.7 million
• Results impacted by charges due to A465 contract (£45.4 million) and Peterborough & Huntingdon contract (£49.3 million)
• Changes made to leadership, contract selection and risk management
• Strengthened balance sheet with over £140 million of net cash
• Over £2 billion of contracts and framework positions secured in H1
• Good momentum towards delivery of strategic objectives
• Strong pipeline of opportunities in our core markets.

3

A465 and P&H contract update

A465

Contract Issues:

• Previous adjudication award in
  Costain's favour
• Arbitration decision reversed the position and resulted in £45.4m charge to income statement in H1 to level of cash received to date

Peterborough and Huntingdon	➢ Contract terminated by mutual
	agreement in June 20

➢ One-off charge of £49.3m to income statement in H1 to level for cash received to date

➢ Legal resolution process over next 18 months

Contract Issues:

• Dispute resolution process highlighted an ambiguity as to the assumptions and responsibility for contract risks
• Changes in the ground conditions resulted in changes to the design and works information, significantly increasing the size and scale of retaining walls and associated works; increasing cost and extending the duration of the operations.

• Ongoing resolution process highlights insufficient of clarity of design assumptions
• Increased scope of work and change due to design changes
• Late commercial escalation in addressing recovery for change.

4

Decisive actions taken to address issues

Client/Contract selection		Leadership

Enhanced contract risk

management

• No longer pursuing Energy EPC contracts
• Targeting long term investment programmes
• Reduction in acceptable level of downside risk on any new contract
• Increased minimum level of acceptable profit for all new contracts.

• Changes to leadership including appointment of new transportation MD
• Removal of two leadership layers to enhance accountability
• Project and commercial management training
• Change culture from cost growth is beneficial to delivery on budget and time - challenging client change.

• Implementation of Group-wide 'Operating Excellence model' on all contracts - enhancing project execution
• Five-stagegated approval process prior to signing any contract, including independent risk review prior to target cost approval
• Updated policy setting clear commercial expectations for our risk appetite
• Enhancements to monitoring and administration of scope changes to identify/ escalate cost increases at the earliest stage
• Monthly review of contracts in standard and mandatory format - including change trends.

5

COVID-19: Business resilience

Our priorities

Doing the right thing by our	Delivering critical services
people, our clients, society and
throughout lockdown
protecting our business

Operational impact

Initial operational impact recovered, operating at 90%

productivity with resilient working practices

Mitigating actions

Strict safety	Enabling effective	Safeguarding jobs	Management
measures put in	remote working and	and supporting job	actions to protect
place to protect	supporting the	creation	our financial
our workforce	wellbeing of our teams	programmes	strength

Our team, partners and clients have been outstanding in their

response during the pandemic

6

§

Tony Bickerstaff

Chief Financial Officer

7

Revenue

		Revenue1 by sector
350
	301
297	296
300
		-15%
250			253

200

£m

150

100

50

0

Q1 2019		Q2 2019		Q1 2020		Q2 2020
	Rail		Highways		Water		Energy		Defence

Total H1 2020 adjusted revenue1 down 8.4% at £548.7m (H1 2019: £599.2m)

COVID-19 impact reducing month on month:

	April	May June
Reduction in				c 90%
2020 revenue1				productivity
compared to
			level from
the same
	-12%		July 2020
month in 2019
	-20%	-17%
		Revenue £m		% change
Revenue	Rail		-23%
change	Highways		-9%
Q2 2020
Water		-8%
versus
Q1 2020	Energy		-32%
		Defence		-

See appendix for all notes	8

COVID-19 impact and actions taken

Impact: disruptions to productivity

			Restrictions to
	Paused		personnel on		Delays to the
		site due to		award and start
	activities on
		social		of new
	several projects
		distancing		contracts
			requirements
	Additional costs		Costs of re-
	for maintaining			Costs relating
		planning
	social			to support of
		activities to new
	distancing and			furloughed
		operating
	safety			employees
		procedures
	equipment

Actions taken

	Utilised		Almost all 360		PAYE and VAT
	Government
		furloughed		deferred (PAYE
	CJRS*,
		employees		paid July 2020,
	successfully
		have returned		VAT due
	safeguarding
		to work		March 2021)
	jobs
	£1.6 million				Salary
		No Government		reductions of
	recovered
		loan schemes		10%-30% for
	through CJRS*
		utilised		three months to
	to 30 June 2020
				30 June 2020

* CJRS - Coronavirus Job Retention Scheme	9

Segmental income statement

		H1 2020				H1 2019				FY 2019
		Adjusted				Adjusted				Adjusted
	Adjusted	operating			Adjusted	operating			Adjusted	operating
	revenue1	profit2	Margin		revenue1	profit2	Margin		revenue1	profit2	Margin
	£m	£m			£m	£m			£m	£m
Transportation	353.2	5.1	1.4%		380.2	14.6	3.8%		742.9	29.7	4.0%
Natural Resources	194.5	4.5	2.3%		216.0	9.2	4.3%		434.4	15.4	3.5%
Alcaidesa (Spain)	1.0	(0.1)			3.0	(0.1)			5.6	(0.7)
Central costs		(3.8)				(2.5)				(6.5)
Adjusted operating profit2
548.7	5.7	1.0%		599.2	21.2	3.5%		1,182.9	37.9	3.2%

See appendix for all notes	10

Reconciliation to statutory reported figures

Revenue, including share of joint ventures and associates

Less: share of joint ventures and associates P&H contract adjustment

A465 contract adjustment

Revenue

Operating profit before other items

P&H contract adjustment

A465 contract adjustment

Other items

Group operating profit/(loss)

Share of results of joint ventures and associates

Group profit/(loss) from operations

Net finance expense

Group profit/(loss) before tax

Taxation

Profit/(loss) after tax

Basic earnings/(loss) per share

Adjusted3	P&H	A465	Other items	Statutory reported
£m	£m	£m	£m	£m
548.7	-	-	-	548.7
0.4	-	-	-	0.4
-	(42.0)	-	-	(42.0)
-	-	(45.4)	-	(45.4)
547.3	(42.0)	(45.4)	-	459.9
5.7	-	-	-	5.7
-	(49.3)	-	-	(49.3)
-	-	(45.4)	-	(45.4)
-	-	-	(1.4)	(1.4)
5.7	(49.3)	(45.4)	(1.4)	(90.4)
	-	-	-	0.1
0.1
5.8	(49.3)	(45.4)	(1.4)	(90.3)
(2.0)	-	-	-	(2.0)
3.8	(49.3)	(45.4)	(1.4)	(92.3)
(0.7)	9.4	8.7	0.2	17.6
3.1	(39.9)	(36.7)	(1.2)	(74.7)
2.1p	(26.6)p	(24.6)p	(0.8)p	(49.9)p

Other items	£m
Impairment of Alcaidesa	(0.6)
marina (on sale)
Impairment of legacy	(0.6)
investment in hotel business
Profit on sale of Zimbabwe	1.0
property holding
Capital raise refinancing	(0.7)
advisory fees
Amortisation of intangible	(0.5)
assets
Total other items	(1.4)

11

H1 2020 cash bridge

£m

Note:

Cash in joint operations:

Opening = £84m

Closing = £85m

Average = £83m

Average month end net cash1

£56.3m

(H1 2019: £63.7m)

Year end net cash1 expected:

1. £70-80m

H2 2020 movements include:

• timing unwind
• PAYE payment
• P&H & A465 cash out

Average supplier payment in

38 days

Invoices paid within 60 days:

90%

See appendix for all notes	12

Strengthened balance sheet

Assets

Non current assets

(excluding pension net surplus)

Trade and other receivables

Cash and cash equivalents

Current assets

Total assets

Current liabilities

Total assets less current liabilities

Non current liabilities (excluding pension net liability)

Pension surplus net of deferred tax

Total equity

				31 December
30 June 2020		30 June 2019		2019
£m		£m		£m
		136.5		112.3
128.8
234.8		312.9		254.4
		130.5		180.9
202.9
437.7		443.4		435.3
		579.9		547.6
566.5
(334.7)		(328.6)		(328.9)
231.8		251.3		218.7
		(76.6)		(65.9)
(64.4)
12.1		3.7		4.9
179.5		178.4		157.7

	Target balance	Position at
	sheet measures	June 2020
	Net assets	£180m
	> £200m
	Current asset ratio	1.31
	> 1.3
	High positive	£140.9m
	net cash
	No structural debt	✓

New capital raised

Enhanced financial strength

Increased client

Banking facilities of	Bonding facilities of	Maturity date of
£183m	£320m	Sept 2023

confidence

13

Strong order book

2020

2019

2021

2020

2022

2021

2023

2022

2024

2023

2025+

2024+

				Order book revenue by year							Order book of £4.2bn at 30 June 2020
																					plus over £1bn from Smart
																					Motorway Alliance and other frameworks
																					(£4.2bn order book at 30 June 2019)
																					Over £2bn of contracts and framework
																					positions confirmed and secured in H1
																				2020
																					c £900m of work secured for 2021 plus
																					additional contribution from frameworks
																					(c £900m secured for 2020 at H1 2019)
0	200	400	600	800	1,000	1,200	1,400	1,600	1,800	2,000
									£m

June 2020	Smart Motorway Alliance/		June 2019
	other frameworks

14

Alex Vaughan

Chief Executive Officer

15

Meeting our clients' changing needs

Transportation

Highways | Rail | Aviation

Natural Resources

Water | Energy | Defence

							Digital technology
								solutions
							Consultancy and
								advisory
								Complex
								programme
			Evolving our service mix				delivery
2019		2024
		Focusing on complex	Increasing the	Increasing
		programme delivery,	proportion of
		divisional margins
		consultancy and digital	higher margin
		to 6% - 7%
			services	services

16

Our core markets

£600 billion

TRANSPORTATION

WATER

• Highways England RIS2 and Network Rail CP6 investment programmes continuing
• HS2 progressing the procurement of the next elements of the programme
• Accelerative measures being developed as part of the Government's Project
  SPEED
• Aviation clients and TfL impacted by COVID-19
• Water companies progressing approved AMP7 investment programmes
• Some impact to year 1 due to challenging regulatory determination and COVID-19 response

UK Government commitment to infrastructure investment over 5 years

£23 billion per annum

addressable market

ENERGY

• Oil price decline has deferred many conventional energy investment programmes
• Government progressing pathfinder schemes looking to increase zero carbon energy

DEFENCE

• Clients continuing to progress their critical defence equipment related programmes

Investment priorities evolving to

focus on increased capacity, improved resilience, efficiency, decarbonisation and enhanced customer service

Changing client spend; greater proportion of consultancy and digital tenders

17

Complex programme delivery

Focused on strategic long term investment programmes

Digital technology

solutions

Consultancy and

advisory

Complex

programme

delivery

2020

2021

2022

2023

2024

Our strong secured foundation (H1 wins):

• Anglian Water Strategic Pipeline Alliance
• Highways England Smart Motorway Alliance
• HS2 Main Works contract
• Highways England A30 upgrade
• Thames Tideway tunnel
• United Utilities managed services programme
• AMP7 capital programmes
• Highways England routes to market
• Network Rail Gatwick rail station
• East Sussex CC highway services
• Lancashire CC Preston distributor road
• Highways England maintenance contracts.

18

Consultancy and advisory

A 'disruptive' partner adding value with implementation bias

Delivery partner

Design services

Advisory commissions

Frameworks

2020

2021

2022

2023

2024

Our growing position (H1 wins):

Delivery partner

• Cadent CMO
• AWE

Design services

• Pale Blue Dot CCS
• Sellafield DDP
• Network Rail design services framework

Advisory commissions

• Bradford Smart Street Lighting
• Thames Water PMO
• EDF project controls
• Dreadnought Alliance

Long term frameworks

• Yorkshire Water Technical Services
• Highways England SPaTS2
• National Grid professional services
• South Staffs Water asset management.

19

Digital services

Optimising performance by integrating leading digital solutions

Digital delivery

Digital component

Digitally led

2020

2021

2022

2023

2024

Step changing performance (H1 wins): Digitally led

• Thermal imaging cameras at London Heathrow
• DfT Intelligent Infrastructure Control Centre
• Level crossing enhanced safety solution
• Highways England TMTii framework
• Cooperative Intelligent Transport Systems

Digital as a key component

• Anglian Water SPA - digital twin
• SMA - stopped vehicle detection
• United Utilities managed services programme

Digital delivery

• Smart delivery platform, GIS mapping, BIM 4, U-Route, ANNIE.

20

Creating a stronger mix of business

Smart Motorway		SPaTS2 Framework		Digital railway safety		Strategic Pipeline		Programme Management
Alliance			solution		Alliance		Consultancy

Client: Highways England

Framework value: £4.5bn

Term: 10 years

• Delivering critical safety and capacity improvements across
  England's strategic road network
• Greater emphasis on technology and increased efficiency
• Costain to deliver the Northern programme

Client: Highways England

Framework value: £300m

Term: 4 years

• Providing a range of specialist technical consultancy services
• Supporting strategic objectives including delivery of road network which is safer, more reliable, more integrated, greener and digitally enabled
  Transportation

Client: Network Rail

Contract value: £7m

Term: 2 years

• Designing and developing a digital solution to enhance pedestrian safety at remote level crossings.
• Commencing implementation of the
  'Meerkat' solution at level crossings - phase 1 in the UK

Client: Anglian Water		Client: Cadent
Framework value: > £350m		Contract value: £160m
Term: 8 years		Term: 10 years
• Providing a range of		• Providing strategic
integrated services		planning and
including strategic		programme
programme		management of
management, digital		Cadent's capital
technology expertise		investment programme
and complex		• Blending expertise in
programme delivery
	asset optimisation,
• Supporting Water		digital systems and
Resources		complex programme
Management Plan		delivery
Natural Resources

21

2020 strategic progress

Progress Leading Edge strategy and accelerate deployment of higher margin services

• Over £2 billion of contracts and framework positions secured incorporating our consultancy and digital capabilities

	•	Focus on long term investment programmes
Enhance contract risk management	•	New Operational Excellence model in place

• No Energy EPC contracts

Improve operational efficiency to deliver £20m of annual efficiencies within 3 years

• £7m of efficiencies secured for FY20
• On track for £12m of annualised efficiencies by FY21

Focus investment and recruitment to enhance competitive proposition

• Strengthened leadership team including appointment of Sue Kershaw, MD transportation
• >50% of work winning investment on higher value services.

22

Our path to delivering the strategy

Strategic milestone

Increase margins

Consistent profitability in complex

programme delivery

Grow higher margin services

Improve efficiency

Enhance Group capabilities

Run rate by December 2021

Margin progression across both

divisions c. 3.5% - 4%

New (Q3 2019 to date) secured contracts delivering 3% - 5% divisional margins

>40% profits from higher margin

services (6% - 8%)

£12m annualised efficiency

Secure two further delivery partner

programme positions

FY2024

6-7% divisional margins

All contracts delivering divisional

3% - 5% margins

55% profits from higher margin

services (6% - 8%)

£20m annualised efficiency

Delivery partner on five major

programmes

23

Summary and outlook

• All contracts now operational following impact of COVID-19
• Addressing the A465 and Peterborough & Huntingdon contracts. Actions taken to mitigate other contract risks
• Strengthened balance sheet
• Over £2 billion of contracts and framework positions secured in H1
• Good momentum towards delivery of strategic objectives
• Strong pipeline of opportunities in our core markets
• Confident in delivering significant growth in profit for 2021 and beyond.

24

Q&A

25

Appendices

26

Ensuring a sustainable future

Create a

greener future

Ensure Costain is a	Enhance the value
safe, inclusive and
that Costain
great place to work,
contributes to society
where everyone can
be at their best

Our H1 achievements:

• Climate change action plan launched
• Reduction of 39% in carbon impact from travel
• Exceeded targets for spend with SMEs, voluntary, community and social enterprises
• Supported our communities with PPE, food bank donations and volunteering
• Maintained focus on diversity and inclusion, including 'Let's talk about race' workshops
• Job creation through traineeships, graduate and apprentice programmes.

27

Net cash position
	H1 2020			H1 2019		FY 2019
				£m		£m
Net cash1 at beginning of period	64.9			118.8	118.8
Cash from operations	(81.6)			20.0	26.0
Changes in working capital	74.7			(66.0)	(33.2)
(excluding pension deficit contributions)
Cash flow from operating activities	(6.9)			(46.0)	(7.2)
Pension deficit contributions	(5.4)			(10.9)	(16.3)
Dividends	-			(10.0)	(13.5)
IFRS 16 leases	(6.5)			(8.0)	(13.6)
Share capital, interest, tax, fixed assets,	94.8			(3.1)	(15.1)
investments and currency
Alcaidesa sale	-			-	11.8
Net cash1 at end of period	140.9			40.8	64.9
Net cash reconciliation:
Cash and cash equivalents at end of period	202.9			130.5	180.9
Less bank overdrafts/borrowings	(62.0)			(89.7)	(116.0)
Net cash1 at end of period	140.9			40.8	64.9

1. Net cash balance is cash and cash equivalents less interest-bearing loans and borrowings.	28

Other items and tax

Other Items

• Impairment from loss on sale of the Group's remaining non-core assets in Spain of £0.6m (completed in August 2020)
• Profit on sale of the Group's non-core legacy assets in Zimbabwe of £1.0m
• Impairment of the Group's non-core minority equity in a hotel company of £0.6m to a carrying value of £nil, reflecting the significant impact of COVID-19 in that sector
• One-offcosts of £0.7m associated with advice received in renegotiating the Group's bank facilities alongside the new capital
• Amortisation of acquired intangible assets of £0.5m (H1 2019: £1.1m)

Tax

• The Group has a tax credit of £17.6 million for H1 2020 (H1 2019: £0.9 million charge). The tax credit includes permanent non-deductible items which offset the rate change recognised in respect of the Group's deferred tax assets resulting in an effective tax rate of 19% in line with the statutory corporation tax rate.

29

Legacy pension obligation

Legacy defined benefit pension scheme (closed fully to future accrual in 2009)

• As at 30 June 2020, the Group's pension scheme surplus in accordance with IAS 19, was £14.9 million
  (30 June 2019: £4.5 million). The position of the scheme has improved in the year due to the Company contributions and a liability reduction from using more recent mortality tables more than covered increases in net liabilities due to market movements.
• Full actuarial valuation carried out as at 31 March 2019, £99 million deficit on prudent actuarial basis
• Deficit recovery plan agreed with the Trustee at £10.2 million per annum (increasing with CPI) to 2029
• Additional contribution to match total of annual dividend

Fair value of scheme assets

Present value of defined benefit obligations

Recognised asset for defined benefit obligations

30 Jun 2020

30 Jun 2019

£m£m

1. 815.1
   (845.3) (810.6)

1. 4.5

30

IFRS 16 impact

Balance sheet impact	£m
Fixed assets opening adjustment	29.7
Additions in H1 2020	12.1
Disposals in H1 2020	(3.1)
Depreciation	(6.5)
Fixed assets closing adjustment	32.1
Opening increase in current liabilities	(12.8)
Opening increase in non-current liabilities	(17.2)
Closing increase in current liabilities	(12.6)
Closing increase in non-current liabilities	(19.7)

Income statement impact	£m
Decrease in operating costs	7.0
Increase in depreciation	(6.5)
Increase in finance costs	(0.3)
Net impact on income statement	0.2

31

Notes

Page 8 - Revenue

1. Including share of joint ventures and associates and excluding P&H and A465 contract adjustments.

Page 10 - Segmental income statement

1. Including share of joint ventures and associates and excluding P&H and A465 contract adjustments
2. Before Peterborough & Huntingdon and A465 contract adjustments and other items; amortisation of acquired intangible assets, employment related deferred consideration and other one-off costs as shown on the income statement. As detailed in note 3 to the interim financial statements

Page 12 - H1 2020 cash bridge

1. Net cash balance is cash and cash equivalents less interest bearing loans and borrowings

32

Cautionary forward-looking statements

This presentation contains forward-looking statements based on current expectations and assumptions. Various known and unknown risks, uncertainties and other factors may cause actual results to differ from any future results or developments expressed or implied from the forward-looking statements.

Each forward-looking statement speaks only as of the date of this document. The Group accepts no obligation to publicly revise or update these forward-looking statements or adjust them to future events or developments, whether as a result of new information, future events or otherwise, except to the extent legally required.

33