Preliminary Results

Kier Group PLC 20 September 2000 KIER GROUP plc PRELIMINARY RESULTS FOR THE YEAR ENDED 30 JUNE 2000 * Growth continues for eighth successive year * EPS up 30% - turnover now over £1 billion - turnover now over £1 billion * 'Construction' and 'Homes' both strongly positioned and improving * Kier remains committed to building sector, where prospects are good * 'Support Services' and 'Project Investment' coming through for the future * Pre-tax profit up 28% at £17.7m (1999: £13.8m) * Final dividend of 7.3p making 10.7p for year, up 15% (1999:9.3p) * Operating profit up 24% at £15.6m (1999: £12.6m) Chairman, Colin Busby, reports: 'Building the Business' is the theme of my Report to Shareholders this year as our growth in profits and earnings continues for the eighth consecutive year. Turnover has now passed the £1 billion mark and earnings per share at 39.8p have grown by 30.1% this year, and have averaged increases of 25.6% pa over the four years we have been listed on the London Stock Exchange. In both our business segments, Construction & Services and Homes & Property, operating profits and operating margins have each increased, indicating that our businesses are improving in quality as well as in quantity. We continue to seek further improvements and are developing our support services and project investment sectors so that these too will become more significant contributors to future profit growth, to which we are strongly committed. Year's Results Total turnover at £1,034.8m increased by 7.5% (1999: £962.9m), with total operating profit (including our share of joint ventures) up by 23.8% at £15.6m (1999: £12.6m). After crediting profit from disposal of investments of £0.5m (1999: Nil) and net income from net cash balances and investments of £1.6m (1999: £1.2m), profit before taxation was £17.7m, an increase of 28.3% (1999: £13.8m), and after taxation was £13.01m, an increase of 321.3% (1999: £9.9m). Profit before tax and earnings per share adjusted to exclude profit on disposal of investments were £17.2m and 38.3p respectively, increases of 24.6% and 25.2% over 1999. We are proposing a final dividend on the Ordinary shares of 7.3p (1999: 6.3p) making 10.7p for the year, an increase of 15.1% on 1999's 9.3p. The dividend will be paid on 12 December to those on the register on 6 October and there will be a scrip alternative. Strong cash flow supported further increased investment in land and development work-in-progress, with balance sheet liquidity of around £40m (1999: £42m), and total net assets increased by 32.8% to £44.5m (1999: £33.5m). Business Strategy Building is our business, and will remain so. All our operations are related closely to our position in the building sector. In contracting, our share of the UK market continues to grow, and our evident commitment to the sector is swelling the proportion of negotiated work in our order book. In residential development, we are building a significant regional presence in our selected markets. In commercial development and in PFI project investment, we are creating a series of important investment assets. In property-related support services, we have established a platform for future growth. Many of our competitors are de-emphasising their construction activities and (in some cases) migrating to other stock market sectors. In our view, this underestimates the opportunities now in construction. It is a commonplace that there has been massive under-investment in the infrastructure and built environment of Britain for many years: structural changes in the economy and public finances now present the real prospect of redressing the years of neglect. We believe the prospects for construction in the UK are very strong in the period ahead and the cyclical influences that bedevilled the industry in earlier decades are greatly reduced. Kier's trading record shows that strong and consistent profit-growth is possible in the sector, and the trends that have underpinned our recent record still have a long way to go. Kier's history and Kier's skills-base place us firmly in the construction sector, where we have a strengthening franchise. Building is our business. Broadening the earnings base of our Construction segment by expanding our support services activity is, however, very much a strategic objective, and one where progress has been significant this year. In recognition we have renamed this segment 'Construction & Services'. We have started to make inroads into the FM services side of PFI through our Caxton subsidiary and into the local authority 'best value' market through our selection by the London Borough of Islington for the externalisation of their building services activity. These long term services contracts (between them valued at £285m) will provide core workload to our services operation for many years to come as we continue to build this activity towards critical mass, when it will be separately reported as a third segment in our business operations. Project investment under PFI is another strategic activity which has not yet shown up in our results (other than as a significant addition to central costs), but which we are pursuing nonetheless for the long term benefit. Returns on this investment will start in the second half of our 2001 financial year, with the commissioning of the new hospital at Hairmyres, East Kilbride. New projects where investment has been committed this year comprise a hospital in South Wales and a library in Southern England. Together, these projects will represent equity and loan investment by Kier of £7m. Meanwhile, the financial strategy, whereby the growing cash balances generated by the Construction & Services segment are invested in Homes & Property, funding its expansion, a strategy which has underpinned the Kier story since 1993, continues to deliver remarkable returns on shareholders' funds, once again in excess of 40% (pre-tax). Investment in Homes & Property has increased this year to £100m (1999: £76m), taking our residential land-bank to over 2,000 plots. Construction & Services We have been working to improve construction operating margins, and the result from this segment demonstrates the success we are having, with operating profit up 62.5% at £6.5m (1999: £4.0m) on turnover up 9.3% at £937.4m (1999: £857.6m). Further margin improvement is an important objective for us. Kier Regional's network of local construction businesses raised turnover to £598m, up 14.6% with strong order-intake particularly evident in central and northern England and parts of the South East. Most of this growth has come in the second half year, and with an order book carried forward of £307m, 38.3% above last year, we expect further growth in the new year. We attribute this increasing market penetration to our evident commitment to the industry and to the quality of service we are giving our clients. In Kier National, our major projects division, the same trends can be seen in the building company, Kier Build, with a 26.1% turnover advance to £103m, while the civil engineering, mining and rail company, Kier Construction, had a quieter year, with turnover down 21.6% at £116m. Its various markets were subject to a number of disruptive influences this year, but we expect demand in civil engineering to recover as the Government's long-term transport proposals take shape. The international company is starting to respond to management changes instituted twelve months ago, with its full year operating losses reduced from last year and from those reported at the interim stage of this year. Workload is improving, particularly in Hong Kong and the Caribbean, and it is making progress in difficult circumstances in India. Every effort is being made to return this business to profitability: as I said last year, an overseas presence is an important part of our strategy to remain at the forefront of the UK industry, but it must earn its keep. The focusing of our facilities management and other support services activities, and their expansion, has gathered momentum. During the year, turnover of our existing units grew by 13.4% to £37m, and significant long-term contracts were awarded which will impact in the future. In May we announced the signing of a 27 year contract for non-clinical support services by Caxton Facilities Management at the new Neath and Port Talbot Hospital in South Wales: this was followed in June by our appointment as preferred bidder by the London Borough of Islington to undertake a programme of building and housing maintenance in partnership over ten years. A new company is being formed, Caxton Islington Ltd, to carry this out. Our support services order book, including these projects, now stands at over £350m. Homes & Property Improved operating margins have also been achieved in Kier Residential, with further useful profits from Kier Ventures, our commercial property development company. The overall operating profit of £13.2m plus investment income of £0.3m compares to 1999's profit of £12.0m, a 12.5% increase. Additionally the investment sale profit of £0.5m in this year's result has also been earned for us by Kier Ventures. Kier Residential experienced strong sales demand in both its English and its Scottish regions, continuing the drive up- market we started last year. Average selling price rose to £142,300 (1999: £130,400) on a lesser number of completions (573 no, 1999: 610 no), operating margin improved to 13.1% (1999: 11.9%), and a greatly enhanced forward sales position was carried into the new financial year (up 52% on 1999), along with a land-bank of just over 2,000 plots owned, paid for and with planning consent. We are continuing to build volume at our Scottish subsidiary, which was profitable this year, its second year of trading. Demand in our South East England markets has continued throughout the summer, with our forward sales position currently well ahead of last year. To us, this is evidence that although some of the heat has come out at the upper end of this market, transaction levels generally remain active and will sustain our growth. Kier Ventures made exciting progress with two joint venture developments, with construction now under way on the 300,000 sq ft distribution centre pre-let to GDA-Hotpoint in Northamptonshire, and terms agreed for a pre-let to J Sainsbury (subject to planning) for a 700,000 sq ft distribution centre at Waltham Point on the M25. Two investments will be created from these developments which will be very attractive to the property institutions. Our property team has a number of complex brown-field opportunities where the Group's construction, development and facilities service skills can be harnessed, as has been the case at Waltham Point. Project Investment As in property, it is the creation of attractive long-term investments by harnessing the Group's operating skills that is the core objective of Kier Project Investment, our PFI and PPP promotions subsidiary. In the PFI health sector, we have two fine examples in course of creation, in the district general hospitals at East Kilbride, Scotland and Baglan, South Wales. East Kilbride will become operational next spring, at least four months earlier than originally programmed, due to time saved in the build phase. Baglan started building earlier this year and will become operational in 2002. Kier owns half of the East Kilbride project and one quarter of the Baglan project. We shall add to this portfolio, with a selection of healthcare, education and other opportunities now before us. Kier People The skills and motivation of Kier people is crucial to our success and the board places a high priority on maximising both qualities. Many staff at all levels are, of course, shareholders, a reminder of our history as an employee buy-out of the early 1990s. We need no convincing that share ownership is a strong motivating influence, particularly in a business where the team effort in delivering complex projects on time is of such critical importance. We are therefore very interested in the new all-employee share ownership schemes coming on stream and intend to make use of them. On the skills front, we continue to look for the brightest graduates each year and our training department is continually reviewing its range of internal courses. We have had a tremendous response from our staff this year in managing the growth that so many parts of the Group are experiencing, and I thank one and all. Prospects I remain of the view that the UK market is more promising now for both construction contracting and residential development than at any time in the past decade. The extreme cyclicality of the past has levelled out. Housing volume and price pressures will continue to fluctuate to a degree, but will maintain an active level of trade. When I see the forward sales position we have established in our chosen regional housing markets and couple that with the very strong order books we have in all our UK contracting companies, I have great confidence that the established major divisions of the Group will continue to deliver improving returns. When to this is added the burgeoning activities of our support services companies, whose markets are also fast-growing, the opportunities we are working on in commercial property and the growing maturity of our project investments, it is clear to me that we will continue 'Building the Business' for some years yet and that shareholders will not be disappointed with the results. C R W Busby Chairman For further information, please contact: Colin Busby/Duncan Brand Kier Group plc Tel: 01767 640111 Jerry Wood/Caroline Sturdy Bell Pottinger Financial Tel: 020 7353 9203 Consolidated Profit and Loss Account For the year ended 30 June 2000 Notes 2000 1999 £m £m Turnover - Continuing operations Group and share of joint ventures 1 1,034.8 962.9 Less share of joint ventures turnover (8.3) (8.4) Group turnover 1,026.5 954.5 Cost of sales (966.4) (904.4) Gross profit 60.1 50.1 Administrative expenses (44.9) (39.2) Operating profit - Continuing operations - Group 15.2 10.9 Share of operating profit - joint ventures 0.4 1.7 Total operating profit: Group and share of joint ventures 1 15.6 12.6 Profit on disposal of fixed asset investment 0.5 - Income from investments 0.3 - Net interest receivable - Group 1.3 1.4 Net interest payable - joint ventures - (0.2) Profit on ordinary activities before taxation 1 17.7 13.8 Taxation on profit on ordinary activities 2 (4.6) (3.9) Profit for the year 13.1 9.9 Dividends 3 (3.5) (3.0) Retained profit for the Group and its share of joint ventures 9.6 6.9 Earnings per Ordinary Share 4 - basic 39.8p 30.6p - diluted 39.3p 30.2p Adjusted Earnings per Ordinary Share 4 (excluding profit on sale of fixed asset investment) - basic 38.3p 30.6p - diluted 37.8p 30.2p Consolidated Balance Sheet At 30 June 2000 2000 1999 £m £m Fixed assets Tangible assets 43.6 46.3 Investments Investments in joint ventures Share of gross assets 57.8 43.2 Share of gross liabilities (55.2) (41.0) 2.6 2.2 Investment in own shares 0.6 - Other fixed asset investment - 0.9 3.2 3.1 46.8 49.4 Current assets Stock 149.5 115.7 Debtors due within one year 175.3 158.7 Debtors due after more than one year 11.8 8.6 Short term investments 0.8 0.6 Cash at bank and in hand 47.4 44.1 384.8 327.7 Current liabilities Creditors - amounts falling due within one year (373.4) (332.8) Net current assets 11.4 (5.1) Total assets less current liabilities 58.2 44.3 Creditors - amounts falling due after more than one year (8.6) (5.3) Provisions for liabilities and charges (5.1) (5.5) Net assets 44.5 33.5 Capital and reserves Called up share capital 0.3 0.3 Share premium account 10.8 9.4 Capital redemption reserve 2.7 2.7 Profit and loss account 30.7 21.1 Equity shareholders' funds 44.5 33.5 Consolidated Cash Flow Statement For the year ended 30 June 2000 Notes 2000 1999 £m £m Net cash inflow from operating activities 5 8.1 18.8 Returns on investments and servicing of finance Interest received 4.2 1.5 Interest paid (4.0) (0.2) Interest from investments 0.3 - 0.5 1.3 Taxation UK corporation tax paid (3.7) (3.2) Overseas tax paid (0.7) (0.3) (4.4) (3.5) Capital expenditure and financial investment Purchase of tangible fixed assets (6.6) (12.3) Sale of tangible fixed assets 1.5 0.6 Sale of fixed asset investment 1.5 - (3.6) (11.7) Acquisitions Purchase of subsidiaries - (10.1) Financing Issue of ordinary share capital 1.2 - Purchase of own shares (0.6) - 0.6 - Equity dividends paid (3.0) (1.9) Cash outflow before use of liquid resources (1.8) (7.1) Management of liquid resources Net (increase)/decrease in short term bank deposits (16.2) 14.9 Purchase of short term investment (0.2) (0.6) (16.4) 14.3 (Decrease)/increase in cash during the year (18.2) 7.2 Reconciliation of net cash flow to movement in net funds (Decrease)/Increase in cash during the year (18.2) 7.2 Cash out flow/(inflow) from movement in liquid resources 16.4 (14.3) Movement in net funds in period (1.8) (7.1) Net funds at 1 July 42.2 49.3 Net funds at 30 June 40.4 42.2 Notes to the Financial Statements 1 Turnover, profit and segmental information Segmental analysis of the results is shown below: Turnover Operating Profit profit before tax 2000 1999 2000 1999 2000 1999 £m £m £m £m £m £m Construction & Services 937.4 857.7 6.5 4.0 13.5 11.0 Homes & Property 97.4 105.2 13.2 12.0 10.0 9.0 Corporate Overhead/Finance - - (4.1) (3.4) (5.8) (6.2) 1,034.8 962.9 15.6 12.6 17.7 13.8 Net operating assets Net assets 2000 1999 2000 1999 £m £m £m £m Construction & Services (98.8) (87.3) 52.4 50.2 Homes & Property 100.2 76.9 25.0 21.0 Corporate Overhead/Finance 2.7 1.7 (32.9) (37.7) 4.1 (8.7) 44.5 33.5 Geographical analysis of the results is as follows: Turnover Operating Profit profit before tax 2000 1999 2000 1999 2000 1999 £m £m £m £m £m £m United Kingdom 944.7 884.9 16.8 14.1 19.4 15.9 Rest of World 90.1 78.0 (1.2) (1.5) (1.7) (2.1) 1,034.8 962.9 15.6 12.6 17.7 13.8 Net operating assets Net assets 2000 1999 2000 1999 £m £m £m £m United Kingdom 16.3 (11.6) 43.1 30.9 Rest of World (12.2) 2.9 1.4 2.6 4.1 (8.7) 44.5 33.5 The above analysis of turnover shows the geographical segments from which the products or services are supplied and is not materially different from the geographical segments to which products or services are supplied. 2 Taxation 2000 1999 £m £m UK corporation tax at 30% (1999:30.75%) 4.1 2.2 Overseas taxation 0.2 0.1 Joint venture taxation 0.1 0.5 Deferred tax 0.2 1.1 4.6 3.9 3 Dividends 2000 1999 £m £m Ordinary Shares Paid 3.4 pence (1999:3.0 pence) 1.1 1.0 Proposed 7.3 pence (1999:6.3 pence) 2.4 2.0 3.5 3.0 4 Earnings per Share Earnings per share is calculated as follows: 2000 1999 Basic Diluted Basic Diluted £m £m £m £m Profit after tax 13.1 13.1 9.9 9.9 Less: profit on disposal of fixed asset investment (0.5) (0.5) - - Adjusted profit after tax 12.6 12.6 9.9 9.9 Millions Millions Millions Millions Weighted average number of shares 32.9 32.9 32.4 32.4 Weighted average number of unexercised options - dilutive effect - 0.3 - 0.4 Weighted average impact of LTIP - 0.1 - - Weighted average number of shares used for EPS 32.9 33.3 32.4 32.8 pence pence pence pence Earnings per share 39.8 39.3 30.6 30.2 Adjusted earnings per share (after excluding profit on sale of fixed asset investment) 38.3 37.8 30.6 30.2 5 Cash flow notes Reconciliation of operating profit to operating cash flows 2000 1999 £m £m Group operating profit 15.2 10.9 Depreciation charges 7.8 6.7 (Increase) in stocks (33.8) (29.2) (Increase) in debtors ( 17.3) (30.2) Increase in creditors 36.7 58.9 (Decrease)/increase in provisions (0.5) 1.7 Net cash inflow from operating activities 8.1 18.8 Analysis of changes in net funds 1 July Movement 30 June 2000 1999 £m £m £m Cash at bank and in hand 32.4 (12.9) 19.5 Bank overdrafts (2.5) (5.3) (7.8) Short term bank deposits 11.7 16.2 27.9 Short term investment 0.6 0.2 0.8 42.2 (1.8) 40.4 Net funds include £22.8m (1999: £5.2m) being the Group's share of cash and liquid resources held by joint arrangements. 6 Statutory Accounts The financial information set out above does not constitute statutory accounts for the years ended 30 June 2000 or 1999 but it is derived from these accounts. Statutory accounts for 1999 have been delivered to the Registrar of Companies and those for 2000 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts, their reports were unqualified and did not contain statements under section 237(2) or (3) of the Companies Act 1985.

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