Keller Group PLC

LSE:KLR

Earnings Call Transcript 2020-Q2

[Operator]

Good morning, ladies and gentlemen. And welcome to the Keller Group plc Half Year Results 2020. My name is Adam, and I'll be the operator on today's call. [Operator Instructions] Without further ado, we will now begin.

[Michael J. Speakman, CEO & Director]

Good morning, everybody, and welcome to the 2020 interim results for Keller Group. I hope you are all safe and keeping well. Mark and I will be presenting our results this morning and we'll answer some of your questions towards the end of the presentation. We'll be following our usual agenda format today. First, I'll provide a short summary. Mark will then go through the financial detail of the results. I will then address the business overview and also the outlook and summary towards the end. Starting with the summary. In short, we've had a strong first half. It would have been even stronger hadn't been impact of the COVID-19. Whilst the pandemic reduced our revenue, down 5% year-on-year, all of our other profit measures improved significantly. Operating profit up 20%, margin up to 4.6% and earnings per share up 37%, all on a constant currency basis. As the quote in the press release states, "these great results are a result of the Keller team responding well to the challenges of COVID-19." And as you'll see a little bit later, we made good progress in both conventional and COVID-19 related safety. Despite the obstacles of travel restrictions, we continue to make good progress on implementing our strategy, and we will continue to do so. After a short pause to reflect and assess the impact of the pandemic, the Board decided to continue our policy of paying dividends through the cycle, maintaining a 26-year record of doing so. And finally, looking forward, we've had a strong first half, and our order book will support much of the trading required in the second half, providing we're able to execute it. The relative strength of the first half and the longer impact in the second half of COVID-19 means that we don't expect our normal second half waiting. More on the outlook a little bit later. I will now hand you over to Mark, who will go through the details of the financial performance.

[Mark Hooper, Group Financial Controller]

Thank you, Mike. Good morning, everybody, and thank you for joining us. I'm delighted to have the opportunity to talk you through the financial results for the first half of 2020. Slides in this section are consistent with those used in recent presentations. I will provide some comment on financial performance, in the income statement of the underlying and non-underlying results. I'll provide a causal that identifies the key bridging items between profit from the first half of 2019 and the first half of 2020. I will talk through the cash flow, some balance sheet highlights, including net debt and then some look ahead modeling considerations as we go into the second half of 2020. Let me start with the income statement. This first slide shows the income statement for the first half of 2020, being the 3 columns shaded to the left of the chart and the comparative amounts for the first half of 2019, 3 columns to the right. This is a direct lift of the income statement from the announcement that we put out this morning. The 3 column income statement shows on the left, the underlying trading performance, the non-underlying trading performance in the middle column and the sum of those gives the statutory result in the third column. The presentation from last year, both the half year and the full year include an additional column for IFRS 16, the new leasing standard which became effective from the 1st of January 2019. For 2020, the results are both in the current year and the comparative period. As such, we've not included disclosure of the IFRS 16 impact. As I walk through on the income statement on the following pages, I will talk first about underlying. Then I will present a causal, showing the key bridging items from 2019 through to 2020, and then we'll move on to nonunderlying items. On this next chart, you'll see the same income statement. The focus here is on the underlying items, being the left-hand column for 2020. Year-on-year, revenues declined by GBP 52 million or approximately 5%. On a constant currency basis, we have seen growth in North America. We have, however, seen a decline in Asia Pacific and in EMEA. The year started very strongly through the first quarter, with good performance across all 3 divisions. Q2 performance was adversely impacted by the onset of COVID-19. Underlying operating profit in the first half was GBP 47.9 million, an increase of 25% year-on-year. Foreign exchange accounts for 5% of this growth, and with no acquisitions during the period or the prior period, the underlying organic growth was 20%. In the next slide, I'll provide a little bit more information around the key drivers for that profit performance. Looking down the income statement. Net finance costs decreased from GBP 10.8 million through the first half of last year through to GBP 7.6 million in this year. Both the current year and the prior year, as I mentioned, have IFRS 16 charges in there. There was a small favorability on IFRS 16. The key driver of the reduction in net finance costs is the true underlying interest charge driven by the lower gross debt and lower interest rates year-on-year. Taxation at GBP 11.8 million for the first half is an effective tax rate of 29%. This is a marginal increase from the 28% that we recorded in the first half and the full year of 2019. There are no fundamental drivers; the increase is simply a reflection on the geographical mix of profits. The Board have deferred the decision on any interim dividend until later in the year. Whilst not referenced in any of the call out boxes, I would just draw your attention to the first half underlying diluted earnings per share, which at 39.5p per share is up by 46% from the 27.1p through the first half of 2019. The next slide I'll move on to, shows a bridge of operating profit between the first halfs of 2019 and 2020. This chart bridges the first half underlying operating profit for 2019 at GBP 38.3 million, which is the yellow bar at the left of the chart, to the equivalent performance for the first half of 2020, 47.9, which is the yellow bar on the right-hand end of the chart. Foreign exchange has a small increase, we see a benefit of GBP 1.6 million through the first half, and that's the first -- first green bar. The 3 groups of bars show key drivers for the three divisions: North America, EMEA and APAC. As Mike mentioned earlier, COVID-19 has had an impact on our business through the second quarter of the year. We had strong momentum from the first quarter that was obviously curtailed as COVID-19 set in. I would say that the 3 amounts that I've called out for COVID-19 are estimates. They're based on known site closures and the anticipated impact through the loss of momentum into Q2 as a result of the spread of the pandemic. Let me start with North America, the first group. North America operating profit on a constant currency basis was up by GBP 4.8 million to GBP 38.6 million. The estimated impact of COVID-19 on North America was GBP 7.5 million. North America was impacted later than the other divisions, and whilst the majority of sites remained open, there was a general slowdown in order intake through the second quarter. The second call out box for North America is Suncoast, our pretensioned steel business. That reported a strong first half, both in terms of volume and margin. The final bar for North America shows an increase in operating profit of GBP 5.6 million. There are a number of drivers in here through the less adverse weather conditions that we saw through the start of the year, operational efficiencies and other cost savings through the delivery of the North America foundations reorganization effective 1st of January. Moving on to EMEA. Operating profit on a constant currency basis was down by GBP 2.9 million to GBP 8.4 million for the first half. The net COVID impact is estimated at GBP 4.3 million. The European markets within EMEA were impacted earlier in the quarter. All EMEA markets have been impacted by COVID-19. The European markets were impacted initially. And the Middle East, Africa and Latin America were impacted later than the European markets. Northeast Europe, which benefited from a reorganization during the end of 2019 and finished the year strongly, has continued this good momentum into the first half with an increase in both volume and profit. I've called out, for the rest of EMEA, the difference between volume and margin. We've seen a decrease in revenue and an improvement in margin. There were a number of reasonably large contracts in the range of GBP 5 million to GBP 15 million that were completed during the second half of 2019. As a result, revenue is down. The number of contracts in that range that we've taken on -- that we've delivered during the first half of 2020 is less. However, there's been an improvement in margin. Included in this bracket is the oil terminal project that we've been working on in Mexico. Moving to APAC. The APAC increase in our underlying operating profit was GBP 6.9 million. This is the largest divisional contribution to the overall group improvement. In Australia, sites have remained largely open in the face of COVID-19. India was affected by the short notice shutdown towards the end of March, [ was marked with sites that are ] recovering. In ASEAN, Singapore has been shut down and remains closed at this point in time for construction activity. The 2 key drivers of profit growth in APAC are austral, which has benefited from good momentum through the end of 2019 into 2020, including work on the Cape Lambert project and also the closure of the loss-making business in Waterway, which ceased activities from the first half of 2019. Central costs increased by GBP 0.8 million through some central investment initiatives. Moving to the next slide I will cover, of non-underlying items. Again, you see the same income statement, but this time, I will focus on the middle column and non-underlying items. Non-underlying operating costs during the first half were GBP 18.1 million. The largest item included in that sum is GBP 10 million in respect of the loss on the disposal of the Brazil business, which was completed in early April. The disposal of Brazil resulted in a small cash outflow of GBP 0.1 million. Restructuring costs were incurred in North America of GBP 4.6 million during the period, following closure of certain branches. Additionally, during the first half, we announced the plan to restructure our Franki Africa business. Some activities will be closed, and the remaining business will be integrated into our Middle East operations. The EMEA restructuring cost of GBP 3.3 million are in respect of this Franki Africa restructuring. The restructuring and integration into the Middle East is due to be completed by the end of this year. The vast majority of the non-underlying costs, including those restructuring items, will be noncash. Moving down, we see amortization charges on intangibles of GBP 2.5 million. That's the routine amortization, including Moretrench and Astral. Other operating income of GBP 0.7 million relates to a claim on the contract. The costs of the contract had previously been reported as non-underlying. It's only therefore appropriate that GBP 0.7 million claim income gets reported as non-underlying also. The tax charge of GBP 1.2 million reflects the tax benefit of the items included in non-underlying items above. It should be noted that a large number of these items are not allowable for tax purposes. The sum of all the items across the bottom of the income statement, the underlying and non-underlying, sum to GBP 10.2 million first half statutory profit. Having talked about underlying and non-underlying performance, that completes everything I wanted to say on the income statement. I will now move on to the cash flow. This next chart shows the summary of cash flow, from operating profit down to net debt. The cash flow is presented on an IFRS 16 basis. At the bottom of the cash flow, I have, however, called out the net debt on the lender covenant or IAS 17 basis. I think the most important take out from this chart is that looking at the bottom, net debt has reduced significantly from the year-end. On a lender covenant basis, net debt reduced from the GBP 213 million at December 2019 to GBP 155 million at the half year, an improvement of GBP 57 million. Compared to this time last year, net debt has improved by GBP 178 million, demonstrating the very strong cash flow performance that we've achieved over the last 12 months. Leverage at the half year was 0.9x, that was marginally below our target range of 1.0x to 1.5x. For reference, leverage at the 2019 half year was 2.1x. And at December 2019, 1.2x. Just moving up the chart, we see a free cash inflow of GBP 74 million. This compares with the outflow at last year of GBP 32 million. This improvement year-on-year is, therefore, more than GBP 100 million. EBITDA at GBP 94 million is GBP 10 million ahead of the prior year. This is largely driven by the operating profit improvement that I talked through earlier. The most significant driver in terms of the free cash flow improvement is, therefore, a more tightly controlled balance sheet, most notably in the area of working capital. Typically, the group has reported a working capital outflow during the first half of the year. Last year, there was an outflow of GBP 65 million. In the first half of 2020, we've delivered a working capital inflow of GBP 24 million. The working capital decrease is attributable to 2 items. First, a continuation of the increased focus on working capital that we launched at the end of 2019; and secondly, a reduction in the volume of business through the final -- through the second quarter of 2020 compared to the very strong final quarter of 2019. In March, I mentioned that the year-end working capital performance in December benefited from an accelerated timing benefit on both receivables and payables, estimated at GBP 40 million. The majority of this has unwound in the first half of 2020. Two other points just to call out on the chart. The first is cash tax, which is GBP 6.5 million benefit from the COVID-19 tax payment deferrals across a number of jurisdictions. And finally, you'll note that there's been no dividend payment made in first half of 2020, compared to the GBP 17 million payment made in the first half of 2019. This is through the deferral of the AGM to the 30th of June. Approval was given at that meeting for the payment of the final dividend, and in August 2020 we'll pay approximately GBP 18 million in respect of that final dividend. This slide shows a summary balance sheet as at 2020 compared with balance sheet amounts as at December 2019 and June 2019 as well. The balance sheet here is shown on an IFRS 16 basis, including intangible fixed assets, right of use assets, and included in net debt the lease liabilities under IFRS 16. The balance sheet itself is fairly unremarkable, but I'll call out a few of the movements between December 2019 and June 2020. Looking at intangibles, there are no significant movements. The increase of 5.2 million is the net of the foreign exchange increase of 7.9 million and amortization of intangibles of 2.7 million. Looking at tangible fixed assets, this shows an increase in the period of 4 million to 464 million. The large part of that is in respect of foreign exchange. If we remove the foreign exchange increase of 26 million, there's a net decrease in the period of 22 million. This reflects CapEx additions net of disposals being less than the amount of depreciation charged in the period. You'll see a significant reduction in debtors and inventory, and this is largely attributable to the 82 million reduction in trade -- in receivables in the period, driven by volume and performance as we talked through earlier. The final callout box breaks out the total net debt between the statutory net debt of GBP 232 million. Including in there is GBP 77 million worth of IFRS 16 lease liabilities. So on a covenant basis, we arrive back at the GBP 155 million worth of net debt. On the subject of net debt, I'll move to the next slide, and that provides a little bit more detail on the phasing of net debt during the period. From previous feedback, I know that this slide is well received. The slide shows the last 18 months' worth of net debt at a month end position on a covenant basis; that is, before the impact of IFRS 16 lease liabilities. In previous presentations, I've showed the monthly net debt amounts for the 2 years next to each other. I've changed the format of the chart this time to show the continuation on -- the 18-month continuation of those balances to better show the trend on net debt over the period. Looking at the chart, you see that the net debt peaked in August 2019 at an amount of GBP 368 million. The chart shows since that time, we've seen a continuous decline in net debt through to the GBP 155 million reported at June 2020. You'll see in December 2019 the dip for the line through the year-end. In the first quarter, we'll see an increase in net debt as the working capital benefit from 2019 unwound through the first quarter and continually through there an improvement in net debt through to the half year number. There's no obvious dive of the line in June that we saw through December. I said when delivering the presentation in March that I would look -- that I would hope to see us flatten the net debt line through 2020. I think looking at what we've achieved in the first half, the flattening has happened through that first half performance. And looking ahead to the year-end, we expect to see a net debt number broadly in line with the half year amount of GBP 155 million. Average month end net debt through the first half of 2020 was GBP 224 million, significantly down on the GBP 334 million through the first half of 2019. As noted on the slide, we have committed facilities from the $125 million U.S. private placements and our GBP 375 million revolving credit facility. In June, we announced that we had confirmation from the Bank of England that we could access their CCFF scheme up to an amount of GBP 300 million. We have not drawn on the CCFF funding. And we do not intend to, unless there is a material decline in market conditions or customer payment behaviors. I would just mention that CCFF funds are not committed until drawn. We have operated significantly within our headroom on the facilities, and well within the covenants. Again, I'll just mentioned the leverage at the end of June was 0.9x, marginally ahead of our 1.0x to 1.5x target range. We do have a very supportive 8-bank syndicate behind the RCF, and I'd like to extend my thanks to them for their continued support through the first half of 2020. The next slide, moving on, is the last one from me, and shows some look-ahead modeling considerations into the second half of 2020. This slide is intended to provide some insight into how some of the drivers of our financial performance should be considered as we go to the second half of 2020. These are the same drivers on the left-hand side of the chart that I referenced in March. And what I've tried to do in the second column is show what we mentioned in March. The third column shows what we've seen through the first half of 2020 and the final column shows the considerations as we go into the second half of 2020. Let me run down them one by one. Starting with Suncoast. Suncoast, as we touched on earlier, has had a very strong first half, driven by volume and margin. Suncoast is affected by steel tariffs, as they're imposed in the U.S. We've seen no impact through the first half of 2020. As the result of the recent antidumping suit in the U.S., we expect to see margin in Suncoast Titan as those tariffs kick in. Large projects we referenced at the start of the year. Cape Lambert will be ongoing through 2020. Cape Lambert has continued through the first half and will continue through to 2021. Looking ahead to the second half, we expect -- while we anticipate award of large packages of work on HS2 to C1 and C2/C3. Mike will reference both Cape Lambert and HS2 when we get into the business updates. APAC recovery at the end of 2019 reported that APAC had returned to profit in the second half of the year and for the full year. I'm pleased to say that APAC has been profitable in the first half, and we expect APAC to be profitable in the second half of 2020. On the portfolio action, again I'm pleased to say that we've made progress in both the areas we called out in March. Our Brazil business was sold at the beginning of April, and we announced the restructuring of our Franki business towards the end of the half. In the second half of the year, we expect to see continued portfolio review. And as plans develop, we will update you accordingly. The operating profit percentage called out in March, we would expect to see an improvement in operating profit percentage, and we've seen that through the first half. Operating margin has increased from 3.5% in the first half of 2019 to 4.6%. Looking to the second half, we anticipate a tightening margin given the impact of COVID-19 and the potential risk from macroeconomic uncertainty. On operating profit phasing, as Mike mentioned, our expectation at the start of the year was to see an H2 profit weighting, as we've seen in past periods. What we've seen through the first half of 2020 is strong Q1 and then the impact of COVID-19. Looking to the second half, the expectation is we will not have that second half profit weighting and the 2 halves will be more broadly balanced. Our expectation of the usual H2 bias is not now anticipated to be repeated during 2020. We had a much stronger first quarter than expected, and fourth quarter performance is likely to be affected by a softening order book and macroeconomic uncertainty. Interest, the expectation at the start of the year was a reduction in the charge from 2019, and we've seen that through the first half of 2020. And I expect a continuation of the saving with a reduction against second half of 2019. Tax rate, as I touched on earlier, is 28%. It's a marginal increase from the 28% plus or minus that I talked through in March. The expectation for the second half is that tax is maintained at 29%. The FX rates, I've called out there, I've listed the budget rates and what we've seen through the actual FX rates for the primary currencies. The key call out there, I guess, is U.S. dollars. The budget was 1.3. The actual through the first half is 1.26. But what we've seen in recent days is a tick up in the U.S. dollar rate to around that 1.3 number. On the cash and debt -- cash and debt look aheads, I guess the key message is that our net CapEx has been less than depreciation, and we expect that to continue through the second half. We've tightly controlled CapEx and spend is restricted to key projects and key items of capital expenditure. Working capital, seen strong improvement through the first half, and my expectation that will remain broadly neutral through the second half of the year. Tax cash. As I touched on earlier, we've had the benefit of some deferrals under COVID-19, which will unwind during the second half of the year. And finally, on leverage, we finished the first half at 0.9x, just marginally below our range of 1.0x to 1.5x. I expect for the second half, we'd be at the lower end of that 1.0X to 1.5x range. In summary, I would say second half delivery is largely underpinned by the GBP 1 billion order book. However, that's -- any second wave of material lockdowns that -- across the countries in which we operate will have an adverse impact on financial performance in the second half. With that, I will pass back to Mike, who will walk you through the business updates. Thank you.

[Michael J. Speakman, CEO & Director]

Thank you, Mark. I mentioned a little earlier that I was pleased with the way the Keller team have responded to the challenges of COVID-19. I'm now going to show you a short video that will give you some insight to exactly what I'm talking about.[Presentation]

[Michael J. Speakman, CEO & Director]

I hope you agree that's a great video. I'm now going to deal with the business impact and our response of the COVID-19. Starting with the impact. And this will be more or less in reverse order at a summary level, as I'll deal with the detail level when I get to the business reviews. APAC was the first, and in relative terms, hardest hit of our divisions, followed by EMEA. This was hit second and the impact was felt differently from country to country, according to the level of lock-in that regulators put in place. And then finally, North America. The last division to be impacted. And again, it varied across the geography in North America, depending upon the reactions of different states. In terms of our response to the pandemic. Firstly, as you would have seen in the video, our primary response was to look after and protect our people. Secondly was protecting the business. And you'll see on the slide, some of the actions we've taken to reduce cost and preserve cash throughout the period. Moving on to safety in a more conventional sense. Here, we've also made some good progress led by John Raine, our group leader for health and safety. We've implemented improvements and more standardization to the management process for monitoring, investigating and learning from incidents. Over time, this will help us focus more quickly on patterns and trends of incidents and ensure lessons are shared more quickly and more efficiently. We've also improved our accident frequency rate by almost 20% year-on-year. But not that we're complacent. Safety is a continuous journey of improvement. And 1 of the tools we're using to achieve this improvement is insight. You may recall I talked about the software initiative at the preliminary results. At that time, we set ourselves the goal of rolling it out across the whole of the North American organization, and I'm pleased to report that we've been successful in this endeavor. It has been well received by the crews that use it, which I'm very pleased about because that means they're more likely to use it. The value of the system can be seen by the COVID-19 brief shown on the slide. We know that this particular briefing was issued and published to everybody who had access to the system, all on the same day. There'll be further development of this platform, both in terms of geographical coverage and functionality as we move forward. Now moving to the operational reviews, starting with North America. Overall, at constant currency, revenue improved by 2% and profit by 14% year-on-year. This reflects the great start to the year in Q1, which benefited from good weather and the momentum created by the One Keller organizational launch. This followed by a quarter 2 that was increasingly impacted by COVID-19, especially on the East and West Coast extremities. During the first half, we restructured the Prairies business in Canada in response to a continued softness in that market caused by the prolonged low oil price. In contrast, the Suncoast business in the South continued to perform very well throughout the period. I mentioned earlier the momentum that's been created by the One Keller reorganization. This has been a big project and I'm pleased to be able to provide you with an update on its progress. The reorganization has proceeded very well. The major elements of the change are now in place, and the organization is beginning to bed down. In terms of measuring the benefit, I'm pleased to report that we're already ahead of the target for both revenue and cost benefits that we expected. I think James Hind, Eric Droof, Brent Byford and indeed, the whole North American team have done a great job in implementing this quite significant project. Moving on to EMEA. This division has been more severely impacted by the pandemic, with revenue down 15% year-on-year and profit down 26%, margin being maintained around 3%. In terms of the COVID impact, Germany, Poland and everything east of there more or less continued trading as normal. Some significant logistical challenges, but they were largely overcome. Italy, Scandinavia and Austria were interrupted for a month or so but came back pretty quickly after that, not quite to the same levels, but reasonably so. U.K., France, Spain, were probably the most impacted in Continental Europe. And indeed, U.K. is still slowly recovering, whereas Middle East, Africa and Mexico have all been impacted very late in the period and to some degree, are still under various lockdowns. Despite the disruption, we've been moving ahead with the execution of our strategy. We've successfully disposed of our business in Brazil, and we're making good progress on the rationalization of Franki Africa and its integration into the Middle East business unit. The order book for EMEA is reasonably robust, and it doesn't yet include the benefits of the HS2 contract. On the subject of HS2, we've just finished an early stage works element for the C1 scope of works. This section is close to the M25, and the work scope includes the slope stabilization that you can see in the photo. This is now complete and ready for the tunnel boring machines to start their work. Our wide range of skills and capabilities have already been put to good use in this project. We've just also begun some early works elements in the C2, C3 section of the route, and are in the final stages of negotiating both of these contracts. And finally, APAC. This is the earliest and arguably the most impacted in relative terms by the COVID-19 pandemic. Revenue was down 13% year-on-year, and profit has been a turnaround with a strong performance from Astral and the closure of waterway being the main contributors. If we look at the impact of the virus across the region, India closed with 4 hours notice, was shut for about a month and has gradually opened up ever since. Singapore closed and has largely remained closed, and indeed, even now, is only just beginning to open up. Whereas Malaysia, where we have very little business, was quite disrupted initially, but is, again, gradually beginning to open activity. Finally, Australia. In the East of the country, markets have been a little bit softer and have been disrupted a little bit by logistics, whereas in the West, where we have a significant Cape Lambert project, which I'll come on to next, this has been significantly impacted by logistics and specifically the restrictions on interstate travel. Moving on to the Cape Lambert project. You may recall this project from the preliminary results. But by way of reminder, the project will have a value in excess of AUD 141 million and is set to run into the middle of 2021. And there are some big technical challenges, you can see from the slide, and there's also some big logistical challenges, given that this project is in Western Australia and cross-border travel restrictions across the whole of Australia have put some pretty significant challenges in place. We have an excellent relationship with the client, and we have an excellent commitment from our crew. There are about 70 people and approximately half of them come from the East Coast. So as you can see, the logistical challenges of cross-border restrictions are quite significant on this project. However, the team has been very, very committed, as evidenced by the fact that some of them anticipate only spending 2 to 3 weeks at home from the period from March all the way through to Christmas. Moving on to the order book. As you can see from the graphic, our order book has been gradually building over time. And in terms of year-on-year, EMEA is particularly healthy. Most recently, whilst tendering has generally held up, order intake has declined, and this is something we'll clearly have to keep a very careful eye on in the coming months. Moving on to the outlook and summary. Looking forward to the second half. Strong first half performance with good progress on business performance and strategic actions has been hampered by the impact of COVID-19. Clearly, there are challenging market conditions in the second half, but the current order book will largely underpin our trading in the second half providing there aren't any further significant or material lockdowns, which means that the strong results from the first half and the momentum of the current order book in the second half will result in a resilient year overall, but without our typical second half weighting. There's been a big improvement in cash in the first half and the second half will carry the burden of paying the final dividend for 2019. So we expect the cash and debt results at the end of the year to be more or less in line with this first half. In summary, a strong first half with improved profit and cash performance year-on-year and continued execution of our strategy, and all of this despite the disruption of the pandemic. We've got strong momentum into the second half. The current order book largely supports the second half trading. The challenge will be to avoid any impact from lockdowns. Overall, we expect a resilient result for the year but without the usual second half weighting. Looking into 2021, we're somewhat cautious, naturally so. It's too early to be definitive. But if you look back to 2008, 2009, you can see there's a lag in the impact of the recession on Keller. We're going to be looking carefully and monitoring our order intake over the next couple of months, and we will take proactive management action as required. In the longer term, we're in great shape compared to many of the competition, and the fundamentals remain strong. We remain optimistic about the future trading prospects for the group and the strategic opportunities that will emerge over time. Thank you. We'll now move on to questions and answers.

[Operator]

[Operator Instructions] Our first question comes from Glynis Johnson of Jefferies. Can you give us some color around your net debt priorities? Firstly context, what cash flow should we be thinking about for the second half, such as restructuring and working capital? And then priorities for spending such as M&A and dividends, et cetera?

[Michael J. Speakman, CEO & Director]

Okay. And with response to this, what I'd like to do is to hand over to Mark, first of all, in terms of the organic internal side [ of investing ], I think we talked to working capital and CapEx. And then I will address with the more strategic [ steps ] towards the end.

[Mark Hooper, Group Financial Controller]

Thank you, Mike. In terms of the working capital, as we touched on, we've seen a strong first half performance on working capital. Net-net, the expectation is broadly neutral. I talked the year-end about potential unwind of favorable working capital No such unwind expected through the second half. So broadly, a neutral working capital performance from H1 through to H2. In terms of CapEx, we've controlled CapEx tightly through the first half, and we will continue to do that during the second half of the year. And the expectation is that we will maintain CapEx at less than depreciation as we go throughout -- through the second half. Michael, do you want to pick up the rest? Thank you.

[Michael J. Speakman, CEO & Director]

Yes, sure. In terms of broad capital allocation, clearly, we will be making a decision on the dividend later in the year. As far as other, if you like, strategic opportunities are concerned, right now we're keen to see how the pandemic plays out in terms of order intake and activity levels. But at the same time, we are also looking and mindful for potential opportunities, which may emerge that will actually accelerate and derisk the execution of our strategy. And we will be looking out for those as we go through the next 12, 24 months, and we'll respond accordingly. But we will make sure that whatever we do makes commercial sense and fits the strategy rather than is just a financial arithmetic that happen to be working at the time.

[Operator]

Our next question comes from Joe Brent of Liberum.

[Joe Brent, Head of Research and Equity Analyst]

It's a bit out of line, but 3 questions, if I may. Firstly, could you elaborate on the potential impact of tariffs in the U.S. on your Suncoast business and elsewhere? Secondly, could you give us an up-to-date view of the COVID impact across the U.S. as we stand at the moment? And finally, could you give some indication of the total value of the various HS2 contracts? I think you've given C1, if you could give C2 and C3 as well, please?

[Michael J. Speakman, CEO & Director]

Okay. I will deal with the last question first. I mean, in the round -- and clearly, these contracts vary in scope as you move forward. I mean they are well-structured contracts, but the HS2 contract, I would expect to be, in totality, somewhere between GBP 200 million and GBP 250 million over a 4 year period, 4 to 5-year period. And they -- we hope to be signing the C1 and indeed C2, C3 in the coming months. They are in the very final stages of being prepared. I'm going to throw over to Mark the tariffs question in a moment. I will answer your second question, however. The U.S. at the moment, it is variable over time. We're now seeing a situation where the 2 coastal extremities are perhaps a bit more open to activity than they were during Q2. But you're also seeing a dampening down in a couple of states in the center. Florida, for instance, is a little bit more subdued than it was. But overall, I'd say the level of activity is what we -- more or less what we saw in Q2, maybe just a little bit higher. We are seeing a few more delays in projects. But in terms of sites being open and remaining open, it's pretty much steady state at the moment. With that, I'll hand over to Mark to answer your question on tariffs and Suncoast.

[Mark Hooper, Group Financial Controller]

Thank you, Mike. Joe. The antidumping [ placed ] on steel [ had an ] impact on Suncoast in the second half of last year. We called this out in our bridge historically over the last 18 months, the tariffs, the ability of the organization [ to bypass ] on tariffs in terms of the long-term pricing arrangement on the [ high rate ] impacts the business. I think the second half impact is I think perhaps half of the benefit that we thought we [ called out in the bridge ] so maybe GBP 3 million to GBP 4 million through the second half of 2020.

[Operator]

Our next question comes from Clyde Lewis with Peel Hunt.

[Clyde Lewis, Deputy Head of Research]

I'm struggling with a bad line as well. But a number of questions, if I may. One, can you just sort of take us through, I suppose, your experience in terms of sort of project deferrals that you might have seen so far? And what those clients are saying and whether there's a sort of a particular sort of sector that's sort of seeing a worse level of deferrals than others? The second 1 I had was on the $30 million worth of contract wins that you've highlighted that have been won as a result of the restructuring in the U.S. Can you sort of maybe expand on that and give us a little bit more color as to how you've managed to win those extra contracts? And I suppose sort of carry on, on the contract side. I mean, given, obviously, the sort of weaker tendering position, what are you able to do as a business to maybe go out and look harder for sort of work that is out there? I mean, do you think you're hitting all of the bases at the moment in terms of sort of where work is being delivered and whether there are opportunities for the group to sort of go searching more for it as opposed to sort of waiting for the work to come back in?

[Michael J. Speakman, CEO & Director]

Right. Okay. They sound like all 3 of those are probably in my court. First of all, project deferrals. I think in the main, perhaps in a geographic sense, we're seeing more of this in the U.S. than we are elsewhere. I think that APAC, clearly Singapore is stopped for the moment. So there isn't a deferral of [ these things ] as much as the continuation of the existing work. But that's going to come back. I anticipate that they will go back to the [ more ] level of activities as Australia. But as you move further west, there's perhaps a little bit more deferral that you see around the glope, certainly explicit anecdotal feedback that the most of it is actually currently in North America. I think in terms of -- on the subject of North America and the $30 million, this is quite interesting, actually. And it's come faster than I anticipated it would. But essentially, if you think about the whole thesis of why we've done the One Keller reorganization, it was basically moved from a product-based organization, which was effectively, each of those products was geographically bound to an organization which was geographically based, that can provide all of the products and services everywhere we are were and everywhere we actually have a site or a branch. And effectively what the $30 million is, is incremental sales from branches where we've never sold our service before. So we know quite explicitly, that this is genuine incremental sales [ so it's ] genuine gains in market share. And that is where we will continue to get momentum. And I think in terms of your last question, certainly some of the upside we're looking for and some of the additional hunting that we will be encouraging will be exactly that, to accelerate the benefit of the One Keller organization. And riskier after it. Now we've clearly got to temper that, making sure that people have the skills to deliver those services. And the face and the tenders and everything that goes to develop the right risk framework, but the team are very conscious of that. They're very alert to it. They've got a process by which they then make sure that they don't overstretch themselves. And I'm sure there'll be a few wrinkles as we go along. But to date, it's worked very well [ for the teams ]. Elsewhere in the globe, people are deliberately going after more expansively opportunities than they have [ passed ] before. And certainly the management team are alert to the fact that we have to actively go and seek out more at this moment in time, but also be aware that we're not committing to contractual commitments and levels of return, which we don't want to be caught into in terms of using our capacity. So there's a judgment to be made in the short-term on that and people are alert to it. Some good questions, Clyde. Thanks.

[Clyde Lewis, Deputy Head of Research]

Can I have 1 follow-up as well, probably 1 for Mark, just in terms of any outstanding contract negotiations that you've got, I mean, you've obviously sort of settled 1 in the first half. Could we expect anything in the second half at all?

[Mark Hooper, Group Financial Controller]

Clyde, nothing substantial to your report. There's always a general underlying put and take, but nothing substantial expected to [ undercut ] results in the second half.

[Operator]

Our next question comes from Christen Hjorth with Numis.

[Christen David Hjorth, Analyst]

Just 3 questions from me. The first one, I think I was right in hearing you say that tendering has held up reasonably well, but that order intake has fallen more recently. Can you touch a bit more on the drivers of that dynamic? Is it perhaps that others are pricing a little bit more keenly and not running as many tenders. The second 1 is just on the Slide 8, where you've helpfully called out the net impact of COVID-19. If you're adding that back to the H1 number for this year, it would suggest EBIT that's even 1/3 higher than what you delivered. And I think that would be a record by some way versus recent years for H1 profitability. I mean, is there anything that we should be aware of in that number? Or actually, if the world went back to normal tomorrow, that would be sort of a normalized H1 number going forward. And the third 1 is -- and I'm aware there's only so much you can say around this, but on the streamlining of operations. I do understand there's a bit more to go for. You sort of operate in [ 40 ]-plus countries. I mean, how should we think of that going forward, is that likely to reduce significantly in terms of the number of countries? Or is it actually more around the edges?

[Michael J. Speakman, CEO & Director]

Okay. I'll answer the first and third of those, and then I'll let -- I'll introduce Mark to talk to Slide 8. Christen, in terms of tendering, I think there's a kind of a mixture of situations we're seeing here. I think partly it is people retending work and trying to get a keener price. And we -- typically, when you get a change in economic circumstances like this, that is not uncommon, I'd suggest, and I think we are seeing bits of that. And frankly, that sometimes plays into our strength because through our design capabilities, we can quite often give people alternatives, which structurally take cost out, and that puts us in a better position compared to some of our competition. So that's not always a bad thing. It just means that the client has to be a little bit more innovative, which provides us with opportunity. In other situations, I think they're just sitting on their hands, frankly. They're tendering [ to see ] what options are available and then frankly, they're just selecting what things they are investing behind. And I suspect some of those it's just a timing issue. In terms of streamlining operations, your third question. From a strategic perspective, we will be, as you say, streamlining where we are present and making sure that the resources we commit, both in terms of our people, our human capital, and also our financial capital actually gets the rewards that we require. And quite oftentimes, it's the people that's the bottleneck, frankly. It's -- we do have in certain areas, as do all of our competitors, very keen to make sure we're deploying people sensibly and getting the best return for them. And typically, and this is probably going to get exaggerated by the global turmoil that we're going to go through in the next 12, 24 months, is that I suspect that certain economies will be more favorable to us in the long-term than others. And frankly, it will just accelerate our strategic change. I think that over time, you'll see us concentrate more in North America and Continental Europe and some of the selected economies in APAC as a foundation, if you will, in terms of our bases, but we will do projects in other areas that provide lucrative opportunities which we can fulfill on a technically challenging and commercially sensible basis. And we will be more opportunistic about those, but we won't actually commit a large fixed cost base in countries and territories which frankly have not got the volume of quality work to sustain it. And we will accelerate that. I'm now going to hand over to Mark with Slide 8, and I'm sure he will caveat it quite heavily with respect to the estimates. Mark, over to you.

[Mark Hooper, Group Financial Controller]

Thank you, Mike. Morning, Christen, thanks for the question. Yes, the challenge with, I know it's a side of interest. The challenge is filling out a few key points across the very and thousands of contracts that we do and the 22 businesses that we have to summarize on this slide. The estimates, as Mike said on COVID-19 is based on what we saw in terms of site closures as well as a loss of momentum that we experienced as we went into Q2, having performed very strongly through Q1. And in terms of the call out to the strong Q1 performance, I think in all 3, because we had good momentum carried forward from the end of 2019. And year-on-year, we had the benefit of less adverse weather conditions in North America and in Mainland Europe we had very extreme weather through the back end of -- sorry, through Q1 2019. And in Asia Pacific and Australia, particularly, we had cyclonic storms and flooding that affected particularly Austral. So I think it was the benefit of the weather, of the good momentum that we got in or improved. I think it --would have been a stronger result if it wasn't for the impact of COVID-19, but as Mike said, the quantification here are very much that they are estimates rather than specific contract-like contract quantifications.

[Michael J. Speakman, CEO & Director]

Make no mistake though, absent COVID-19, we would have had an absolutely [ stomping ] first half.

[Operator]

We have a follow-up question from Glynis Johnson. Please can you give some color what the HS2 and Mozambique projects could do to your order book?

[Michael J. Speakman, CEO & Director]

In terms of Mozambique, that's quite elastic. I think from recollection -- Mark can correct me on this -- we've already added, I think, GBP 22 million, GBP 23 million of the first phase of Mozambique project. There are 2 quite large facilities there, and there are, I would say, half a dozen packages of work that will become available over the next 2 years, I think, which are various different sizes and depending on how the clients [ even so ] the board actually address them, they could be of much different sizes. So I'm going to resist the temptation [ to put a ] number on those because it is tremendously elastic. In terms of HS2, I think I mentioned earlier that overall, I'd expect that this can be somewhere in total between GBP 200 million and maybe GBP 250 million over 4 or 5 years delivered off the total scope we can see potentially in front of us. I think C1, C2 -- sorry, C1 is probably the order of circa GBP 90 million plus and C2, C3, probably slightly less than that. And then you've got the S1, S2 works in there, so there are bits and [ bops ] on top of that as well. And you will see this come out over, hopefully, the next few months, and we will keep you posted in subsequent trading updates as to what's included.

[Operator]

Operator Instructions] It appears we have no further questions.

[Michael J. Speakman, CEO & Director]

In which case I can just wrap up the conclusion. Clearly, this is a new mode of presentation for us including the Q&A, which have been a little bit technically challenging, but I hope that you've all got answers to your questions and got good insight into what I think has been for us a good set of results. Clearly, there are -- there's a H2 to get after this year. And I think we're reasonably confident with that. And we've got an order book to get after and then we face the challenges of 2021, which we are alert to what those challenges will be, and we'll respond accordingly. Thank you very much for listening and for participating in the presentation. And if anybody has any further questions, please come back to Caroline, Victoria, Mark, or myself. And finally, I wish you all a good day. And do, please keep safe. Thank you.

[Mark Hooper, Group Financial Controller]

Thanks very much. Bye-bye.