INTERIM MANAGEMENT REPORT Business review

Transcription

1 Business review The Group delivered a resilient performance in the first half of the year against the backdrop of mixed trading conditions and increasing uncertainty in a number of markets. Revenue was stable at.6 billion (H 206:.6 billion) although headline total operating profit was 46. million (H 206: 64.3 million), reflecting the impact of cost headwinds absorbed and restructuring actions taken in the period. In the UK, Support Services generated stable revenues, although profitability was impacted by a number of anticipated regulationdriven cost headwinds, the upfront costs associated with further efficiency improvements and by the phasing of profit recognition during the early stages of mobilisation of major new contracts. Construction UK continues to face an ongoing period of challenging market conditions which, coupled with areas of underperformance in operational delivery on a small number of contracts, resulted in a small loss for the division. We expect the restructuring and cost reduction measures we have taken in recent months to benefit both divisions performance during the second half of the year and beyond. In our Exited Energy from Waste business we are making progress on all projects. Overall we continue to believe the provision taken in 206 remains appropriate, although significant risks and uncertainties remain. Internationally, we performed well in construction throughout the Middle East with Support Services International returning a modest profit, as a result of cost reduction actions taken in the second half of 206. Equipment Services produced another strong and geographically broad-based performance, driven by focused expansion and selective new product and fleet investment together with rationalisation of under-performing business units. Results summary H 207 H 206 Revenue,647.7m,632.9m Headline total operating profit 46.m 64.3m Gross operating cash flow 8.m 29.7m Headline earnings per share 2.5p 32.3p (excluding Exited Business) H 207 YE bn 7.6bn Net debt 387.5m 274.4m As restated DIVISIONAL REVIEW We segment our results into three main areas of service Support Services, Construction and Equipment Services each of which is supported by central Group Services. SUPPORT SERVICES Support Services focuses on the management and delivery of outsourced operational activities, including facilities management, a broad range of process- and accommodation-related services and services direct to the citizen. Our customer base is comprised of both public- and private-sector organisations in the UK and overseas. Operations in mainland Europe, which are managed from the UK, are disclosed under Support Services UK. Results summary H 207 H 206 Revenue UK (consolidated revenue) 897.5m 899.3m (including share of associates) 02.3m 47.2m Contribution to total operating profit 29.0m 43.2m UK 28.m 36.7m 0.9m 6.5m Operating margin UK 3.% 4.%.2% 4.5% H 207 YE 206 UK 5.6bn 5.7bn (including share of associates) Blended underlying margins of associates and subsidiaries Support Services UK 207m 92m Revenue was stable at million, reflecting the hiatus in government procurement around the 206 EU referendum and this year s General Election as well as our increased margin discipline and selectivity in the work we bid for. As expected, operating profit was impacted by new regulatorydriven cost including an additional three months of impact of the National Minimum Wage increases (introduced in April 206), the Apprenticeship Levy, increased IAS 9 pension service charges and changes to the application of holiday pay and travelling time on our large workforce. Profits were also impacted by a number of large contract mobilisations and some underperforming accounts which are being remedied through contract improvement programmes. We have taken a range of actions to mitigate the impact of these factors and to enhance our operational efficiency through investing further in automation and technology. We expect to realise the benefits to profitability of these actions during the second half of the year. 04

2 We continue to maintain strong revenue visibility through our order book ( 5.6 billion in UK Support Services) and are encouraged by the levels of contract bidding opportunities we are now starting to see across our core markets, as clients continue to look to outsource work to offset their own rising costs and to conclude procurement activity that had stalled during the recent political hiatus. We reinforced our position as one of the Ministry of Defence s largest infrastructure partners during the period, winning a two-year contract extension worth up to 265 million to continue as the infrastructure support provider for four overseas UK Armed Forces bases (in the Falkland Islands and Ascension Island in the South Atlantic Ocean, as well as Gibraltar and Cyprus in the Mediterranean). We were also awarded a one-year contract extension to provide total facilities management services to the Ministry of Justice (MoJ) worth 6 million, building upon our longstanding and wide-ranging relationship with the MoJ, which has seen us provide facilities and probation services to the department for a number of years. In the transport sector we secured a further five-year facilities management contract with Network Rail worth 65 million. We will deliver a range of facilities services across of Network Rail s managed stations in London, Reading and Bristol, which include eight of the UK s 0 busiest stations. The new contract, which will be delivered by a single provider for the first time, builds upon Interserve s existing relationship with Network Rail, which has included providing cleaning services across the organisation s estate for the last five years. We continued to develop our growing frontline public-services business during the period by investing further in our learning and skills division to maximise the opportunities presented by the Apprenticeship Levy and expect to build on recent contract wins with BT Group, Stagecoach Group, Grafton and Unilever during the second half. Our capability in designing, delivering and evaluating apprenticeship training within our learning and skills business is now playing an increasingly valuable role as higher employment costs and regulatory requirements drive employers to invest more in training and skills, either to defray their Apprenticeship Levy or to gain additional productivity from an increasingly costly workforce. In the justice sector, we were named as preferred bidder to run a range of employment training schemes at Wrexham s HMP Berwyn, where inmates can improve their skills, employability and qualifications to ensure they are work-ready when they are released. Support Services International Internationally, we provide outsourced services in sectors such as hospitality, leisure, education, defence, retail and oil and gas across the Middle East region. In the face of reductions in client spending during 206 we took decisive action to address the cost base in our oil and gas operations, which form the majority of the divisional activities. As a result of this, and despite volumes falling a further 20 per cent since the second half of 206, we returned to profit, delivering 0.9 million of operating profit (H million loss). Market conditions in the Middle East facilities management market in which we delivered a small profit during the period - are more favourable, enabling us to leverage our extensive UK experience and longstanding customer relationships in the region. This was exemplified in the period through securing a 34 million facilities management contract with Musanada, which delivers maintenance and infrastructure projects for the Abu Dhabi government. We also won a 0 million contract to provide facilities management services at Qatar s Doha Festival City Mall and a 5 million support services contract with Emirates Aluminium. The division s future workload at the end of June was up 8 per cent at 207 million (YE 206: 92 million). CONSTRUCTION We provide advice, design, construction and fit-out services for buildings and infrastructure. Our focus is on forming long-term relationships, developing sector expertise and delivering repeat business, predominantly through framework agreements. Results summary H 207 H 206 Revenue (share of associates) 45.3m 4.0m UK (consolidated revenue) 536.2m 468.3m Contribution to total 6.3m 0.5m operating profit 8.3m 6.0m UK ongoing business ( 2.0m) 4.5m Operating margin 2 5.8% 3.9% UK -0.4%.0% - International (share of associates) H 207 YE m 365m - UK.bn.3bn Excludes Exited Business 2 Underlying margins of associates 07

3 Construction International Our associate businesses in the Middle East grew well with contribution to operating profit increasing by 38 per cent to 8.3 million (H 206: 6.0 million) while margins strengthened to 5.8 per cent, above both our 206 half-year (3.9 per cent) and 206 full-year (5.5 per cent) margins. Work-winning during the period remained resilient, especially in Dubai s hospitality sector where we won refurbishment and fit-out contracts worth c 80 million with the Jumeirah Group (Jumeirah Beach Hotel) and Dubai Properties (Double Tree Hilton). In Qatar, we won a 02 million contract to build a range of substations and continue to make good progress (with our joint-venture partner ALEC) in delivering Doha Festival City. The recent political developments in the region have led to some isolated project deferrals in Qatar and remain a clear risk to the business that could impact during the second half of the year and beyond. We continue to monitor the situation closely and prepare contingency plans for our people and our operations in the region. During the period we won contracts for civil and building works for the new 445 MW combined power plant in Oman for SEPCO and for 74 million worth of buildings, civils and underground piping work on the Liwa Plastics project, which is part-funded with the support of UK Export Finance. Construction UK The continuation of a long period of challenging market conditions, coupled with areas of underperformance in operational delivery on a small number of contracts, resulted in a 2.0 million net loss for the UK Construction business. In response to these difficulties and those involving the Exited Business (reported separately, below), we have made further management, systems, procedural and other organisational changes across the division to enhance our financial and commercial controls and reporting. As well as further strengthening operational controls, we have also narrowed our strategic focus, restricting work winning activity to core sectors and activities and have refined our risk appetite in new work that we take on. As such, we anticipate an improved performance in the second half of the year and beyond as older, less favourable contracts are completed. Our future workload fell by 0.2 billion during the period, reflecting the recalibration of our risk appetite and our selective approach to the work that we take on. We expect to see the workload reduction feed into more modest revenue from 208 onwards. The substantial majority of our UK Construction activity is now focused on projects with an average value of less than 0 million, constructing a range of buildings and infrastructure, plus selective larger contracts within our core competences, such as the Defence National Rehabilitation Centre, which is progressing well. Our operating model combines a strong regional presence and exposure to framework agreements with infrastructure and public-sector customers, in sectors such as defence, education and healthcare, along with a growing presence in fit-out markets. While we expect this business to be smaller in the future, we are encouraged by the evolution of our forward order book, with an increasing emphasis on higher quality, repeat business within our core competence, as evidenced by our success in winning work in the education and health sectors two of our most important and established markets. We won contracts with an average value of c 20 million to build four schools in Yorkshire and Wales and secured a place on a new construction framework launched by specialist healthcare property company, Prime, and Yeovil District Hospital NHS Foundation Trust (YDH). This continues our 5-year role on UK health frameworks, through which we have delivered over billion of diverse healthcare facilities across more than 250 projects, including the UK s first Proton Beam therapy unit, currently under construction at The Christie in Manchester. Exited Business Work on our remaining Energy from Waste projects is progressing albeit with some delays. We expect to substantially complete the construction of the projects in the first half of 208. Overall we continue to believe the provision taken in 206 remains appropriate, although significant risks and uncertainties remain. During the period, the waste treatment centre we are building in Derby started accepting the first loads of waste, which marks the start of testing the facility. EQUIPMENT SERVICES Equipment Services, which trades globally as RMD Kwikform (RMDK), provides engineering solutions in the specialist field of temporary structures needed to deliver major infrastructure and building projects. Our engineers solve complex problems for our customers through the application of world-class design and logistics capabilities, backed up by technology and fulfilled through an extensive fleet of specialist equipment. Results summary H 207 H 206 Revenue.0m 08.0m 2 Contribution to total operating profit 24.9m 24.9m 2 Margin 22.4% 23.% Excluding exited geographies 2 As restated Equipment Services performed well during the first half, matching the record performance delivered during the first half of 206, achieved through geographic expansion, engineering excellence, product innovation and fleet investment over the last few years. Further investment was made in people, technology and systems in the period that will help to drive the next phase of growth in the business and the evolution of our engineering and technology-led customer proposition. Margins remained well above 20 per cent, reflecting healthy demand, strong pricing and market positioning across the broad range of global infrastructure markets in which we operate. The division continues to have good momentum across its international markets, particularly the Far East, Middle East and UK. 08

4 In Asia-Pacific, we delivered strong performances in Hong Kong and the Philippines, driven by our ongoing work on large-scale infrastructure projects, including the Kowloon Rail Terminus, the Hong Kong Macau Bridge and the Manila Bay Development. We again performed well in the Middle East, with demand continuing to grow in the UAE where we won work on the Dubai Ports Bridge project, and in Saudi Arabia, where we continue to work on the Riyadh Metro scheme. We delivered a strong performance in the UK, with work on several major projects continuing, including the Mersey Gateway Bridge, the Medway crossing and Defence National Rehabilitation Centre. Work also continues on sizeable rail improvement projects in Reading and on the Stockley Viaduct project near Heathrow airport. As part of our ongoing improvement programme we have invested further in innovation and new product development. As part of this we have launched new products within the UK ground shoring market, which are performing well, while we have also rolled out further new technologies to our global sales teams. Additionally, we have made good progress with the restructuring of our operational footprint, and have exited two of our smaller, less attractive markets. The remaining markets selected for closure are expected to be exited by the end of the year. GROUP SERVICES All central costs and income, including those related to our financing, central bidding and asset management activities are disclosed within the Group Services segment. Group Services costs during the period were 4. million (H 206: 4.3 million), reflecting the ongoing investment in back-office capabilities, IT infrastructure, people development and communications. OUTLOOK UK We expect Support Services to deliver a stronger second half performance than the usual seasonal weighting following the actions we have taken to reduce the division s cost base, which include headcount reductions, increased automation of back-office tasks and increased profit contributions from mobilised contracts. In Construction, we expect the management, systems, procedural and other organisational changes that we have implemented across the division in recent months coupled with our more selective and risk averse approach to the work we take on to return the division to profitability in the second half of the year and beyond. International We expect Equipment Services to continue to perform well in the second half of the year, helped by our improved fleet utilisation and capital efficiency and the continued impact of actions arising from our improvement programme. In the Middle East, the oil and gas market slowdown, the impact of which was witnessed by Support Services International in the second half of 206, is likely to continue to dampen volumes during the second half of the year. However, we believe the mitigating actions we have taken on our cost base has created a smaller, more resilient business, which can deliver a profit in a market where volumes are suppressed, while being agile enough to react when market conditions improve. Current trading conditions are positive and the outlook in the region s construction market is broadly favourable, with a less certain near-term outlook in Qatar given recent political events in the region. However, strategic development plans such as the UAE s plans for Expo 2020 and the ongoing need for infrastructure development, to keep pace with rapid population growth across the Gulf, all continue to stimulate activity. NET DEBT AND OPERATING CASH FLOW Net debt at 30 June was million. Aggregate bank facilities were extended in February 207, as previously disclosed in our 206 Annual Report and Financial Statements, and stand at 640 million with a weighted average expiry of April The key covenant of net debt to EBITDA stood at 2.5x (maximum 3.0x). Covenant compliance is measured on 30 June and 3 December each year. Average net debt, measured as an average of month-end net debt balances, was million for the first six months of 207. The average for the full 2 months of 207 is expected to be in the range of 475 million to 500 million. This compares to our previous guidance of c 450 million, the movement being driven principally by revised timing assumptions on insurance receipts in the Exited Business and by working capital investment in major public-sector outsourcing contracts. Year-end 207 net debt is expected to be in the range of 400 million to 425 million. million H 207 H 206 Total operating profit before exceptional items and amortisation of intangible assets Depreciation and other amortisation EBITDA Net capex (4.4) (3.8) Dividends in (deficit) / (.0) 5.4 excess of JVA profits Working capital movements (34.8) 60.2 Other (.4) (4.) Gross operating cash flow Exited Business (Energy from Waste) (67.) (52.8) Gross operating cash flow (59.0) 76.9 including Exited Business Pension contributions in excess (8.) (0.6) of income statement charge Tax and interest (2.7) (3.9) Investments (3.4) 3.8 Dividends paid to equity shareholders 0.0 (23.7) Other (.9) 0.7 Movement in net debt (3.) 33.2

5 Net capex was 4.4 million in the period. We continue to invest in both our back-office IT and front-office operational systems and expect to see the efficiency benefits of this coming through from the second half of 207 onwards. We generated a net 6.7 million of cash from hire fleet disposals whilst continuing to grow the business as the actions of our strategic review continue to drive increased utilisation and efficiency. Following an exceptionally strong year for cash repatriation in 206 the 207 dividends returned from JVAs more closely mirrored profit generated. Working capital outflow of 34.8 million in 207, excluding Exited Businesses, predominantly reflects an increase in Group receivables. Significant contract mobilisations in our UK Support Services business led to a temporary increase in debt and work-in-progress as contract procedures bedded in; we expect this to be reversed in the second half of 207. This was paired with slower than expected cash receipts in our Saudi education business, where the timing of Eid holidays delayed period-end cash collections. Within the exited Energy from Waste business we incurred cash outflows of 67. million in the first half with the costs of completing our construction obligations in line with our earlier expectations. We continue to prepare and pursue a number of material insurance claims and the net cash profile of the Exited Business remains sensitive to the timing of any cash receipts on these. Our approach continues to be to prioritise the quality and strength of our case rather than seeking a quick cash settlement. This has led to slower receipt of cash during the first half of 207. Albeit we have received some cash receipts from insurance claims and expect additional significant inflows in the second half of 207, we anticipate aggregate net outflows of c 25 million in the second half of the year. We expect net cash inflows in 208 as commercial matters on the portfolio of contracts begin to conclude. Joint-venture investments of 3.4 million comprise planned equity injections into Derby Waste and a further investment into our Haymarket development. PRINCIPAL RISKS AND UNCERTAINTIES The principal risks and uncertainties which could have a material impact upon the Group s performance, together with the mitigation strategies adopted, have been reviewed and have not changed significantly from those set out on pages 26 to 29 of the Strategic Report included in the Group s 206 Annual Report and Financial Statements. These risks and uncertainties arise from: Failure to win new or sufficiently profitable contracts in our chosen markets or to deliver those contracts with sufficient profitability, due to adverse changes in the business, economic and political environment. The termination or unsatisfactory execution of major contracts. A breakdown of the relationships in the businesses in which we do not have overall control. Failure to recruit or retain key people. Failure to manage health and safety adequately. The financial risks discussed in the Financial Review on pages 30 to 36 of the Group s 206 Annual Report and Financial Statements. Damage to reputation resulting from issues arising within contracts, the management of our business and its IT systems or the behaviour of our employees. Environmental change which could have uncertain implications for our business and for many of our customers. The Group continues to have no material exposure to currency risks. Whilst it does not trade in commodities, the Group operates in countries where their economies depend upon commodity extraction and are therefore subject to volatility in commodity prices. The Group s principal businesses operate in countries which we regard as politically stable. AUDITOR Grant Thornton UK LLP has been the Group s auditor since 204. Reappointment will be subject to approval by the shareholders at the next general meeting. 2