Ian Lawson

Ian Lawson
Chief executive officer

We have made good progress in implementing and developing the new strategy introduced last year, particularly in respect of operating and margin improvements in the UK and creating a sustainable business in India.

This year has seen good progress on all key fronts."

Group overview

This year has seen good progress on all key fronts. The UK operational improvement programme has contributed to an increase in the underlying operating margin from 3.3 per cent to 4.5 per cent, the performance of the Indian joint venture has improved greatly with the Group's share of losses reducing to £0.2m (2014: £3.0m) and cash flow has been good with net funds at year-end increasing to £6.4m (2014: £0.3m), even after an increase in capital investment to £6.6m.

Our health and safety performance has also improved, with the accident frequency rate (AFR) for our UK operations reducing from 0.57 to 0.33 (the Group AFR which includes our Indian joint venture was 0.21).

Our comprehensive review of the Group's brand and market position undertaken in early 2014 has also helped deliver operational improvement. The rebrand has delivered increased brand penetration in our core market sectors, and has had a demonstrable impact on our ability to secure key projects and expand our capability. This has all helped to deliver solid progress with the implementation of the new Group strategy.

During the year, a small number of bolts failed on the Leadenhall building, the construction of which was completed in 2013. A programme of remedial works involving the replacement of all bolts at risk of failure is being undertaken in conjunction with British Land, Laing O'Rourke and Arup and is likely to continue until the end of the 2015 calendar year. Whilst these works progress, discussions continue to agree where the liability for the costs of the programme should rest. The Group incurred costs of £1.0m relating to the remedial works programme during the financial year and estimates that its total costs will be in the region of £6.0m. A non-underlying charge has been recognised for these costs as at 31 March 2015.

Based on the overall progress made by the Group over the past year, I am pleased that the board has agreed to recommend the reintroduction of a final dividend of 0.5p per share.

UK review

As previously stated, our objective moving from 2014 into 2015 has been to prioritise continued improvement in operating margins, rather than revenue growth. UK revenue of £201.5m was lower than the prior year level of £231.3m, consistent with this strategy. The revenue reduction reflected a more disciplined approach to pricing and bidding for work, along with a temporary softening of demand in the middle of the year. Despite this reduction in revenue, underlying operating profit (before the share of results of JVs and associates) increased to £9.0m (2014: £7.6m) reflecting an increase in margin from 3.3 per cent to 4.5 per cent.

The UK business has had a more stable year structurally following the reorganisations in the prior year. We appointed Gary Wintersgill as the new managing director for the main business, Severfield (UK), in November, which allowed Ian Cochrane to step back into his chief operating officer role on a full-time basis. Further changes were made to strengthen management at all levels within the UK and these changes, coupled with the more stable organisation structure, allowed focus to be maintained on the operational improvement programme. This was initiated following the rights issue in 2013 to improve risk assessment and operational and contract management processes across the business. There has been real evidence of progress in all three of these areas during the year and this generates benefits on every new cycle of contracts which the Group undertakes. There continues to be scope for further improvement, particularly in some operational processes. This will help drive margins up to and beyond the previously stated target of 5 to 6 per cent and towards a medium-term target of 8 to 10 per cent. Another important step during the year was the recruitment of a significant number of staff from the infrastructure division of Mabey Bridge, following the announcement of its closure. The Group has existing expertise in the UK bridge building market and this move expands our capability significantly both for bridges and other infrastructure projects, and will support stronger growth in these areas in the coming years.

Order book and market conditions

The UK order book at 1 June 2015 of £194m has strengthened over the year and this provides the platform required to return to revenue growth in 2015/16. The current order book contains over 70 live contracts which are particularly focused in the Group's key market sectors of commercial offices, retail, stadia and leisure, industrial and distribution and transport. New contracts won during the year, which remain in the order book, include London commercial office developments at Principal Place and Angel Court, the Anfield stadium redevelopment for Liverpool Football Club and the Ordsall Chord link bridge between Manchester's Victoria and Piccadilly stations.

The market conditions have shown some improvement over the last few months with the pipeline of opportunities growing particularly in the infrastructure and commercial office building sectors. We are also seeing some clients increasingly recognise the importance and value of efficient and consistent supply levels and production capabilities and this is leading to a more structured and rounded approach to procurement rather than it being solely price led. However, pricing in some areas is still competitive but our more disciplined approach means that we are bringing a clearer sense of value, risk and reward to our pricing decisions.

Case study: New Fetter Lane, London

Sector: Commercial offices
Tonnage: 1,500
Client: Great Portland Estates
Main contractor: Mace

Project overview:

12–14 New Fetter Lane is a 15-storey innovative office building development in the City of London. The building features a tall single-storey ground floor level which includes the main building entrance, retail accommodation and service bay, with 12 floors of office accommodation above. The top of the building, above the final floor of offices, is articulated with a double-stacked plant room which contains two levels of plant, taking the total building height to 60 metres above Fetter Lane.

The Group is providing the connection design, fabrication and construction of just over 1,500 tonnes of structural steel for the project.

Projects

We have continued to deliver projects to our clients' expectations. During the year we worked on over 110 projects covering many of the Group's key market sectors. These included:

  • Westfield Shopping Centre, Bradford
  • Nova, Victoria
  • Carrington Power Station
  • Manchester City Football Club (the expansion of the Etihad Stadium)
  • London Bridge Station Canopies
  • New London Embassy
  • Telehouse Data Centre
  • Manchester Victoria Station
  • South Bank Tower, London
  • Fetter Lane, London
  • Sports Direct, Shirebrook
  • Microsoft, Amsterdam
  • Western Approach Viaduct (WAV Bridge)

India

The Indian joint venture has delivered a much improved performance during the year, with the Group's share of losses reducing to £0.2m from £3.0m in the prior year. The business delivered an operating margin of 9.0 per cent (2014: -18.0 per cent). However, it is the financing costs of the business's current debt structure which turned an operating profit into a net loss of which the Group reports its 50 per cent share. This improved operating performance reflects the benefits of all the changes made in response to the prior year's very disappointing performance, including a significant reduction in overheads and an operational improvement programme. These changes also helped secure a higher volume of work for the factory, which made a major contribution to the success of the business, with 48,000 tonnes of fabricated steel being produced compared with 26,000 tonnes last year. There is now improved confidence amongst the JV partners that JSSL is a sustainable business which can support itself and deliver significant value to the Group in the medium to long term.

The wider market in India is displaying two distinct characteristics at the moment. On the one hand, the initial exuberance following the election of the new Modi government last year has diminished and in many ways the construction market is relatively soft at the moment. This is expected to improve over the next 6–12 months as the government's structural reforms start to take effect. On the other hand, we are seeing continued progress in the conversion of the construction market from concrete to steel. The result is that we are seeing a growing number of enquiries for commercial projects which would previously have been delivered in concrete, when compared to industrial projects (which have traditionally been done in steel but at low margins). The year ahead is likely to see the mix of work in the business between commercial and industrial improve. This should mean another year of stable performance against the soft current market backdrop, whilst the longer-term outlook will continue to improve from the shift in mix towards more commercial work.

Business investment

This year saw a step up in our level of capital investment to £6.6m, following several years at a more restrained level of £2–3m. This investment was focused on replacing and upgrading some of the Group's older fabrication equipment along with increasing its owned fleet of mobile elevated work platforms for construction site work. Other capital investment in the UK included a new canteen and office facility at our Dalton plant in North Yorkshire.

This investment in equipment will enable us to deliver even greater efficiency across the business and we see further opportunity to increase efficiency with our ongoing investment programme which we have set at £4-5m per year. The Group's scale and resources will enable us to invest more readily than our competitors in new and emerging fabrication technology and continue building on our existing competitive advantage.

A further £1.7m of capital was invested in the Indian joint venture in the first half of the year, which was required to finance previous losses generated by the business. With the business now operating at close to a break-even level, the requirement for future support should be reduced although the balance of debt to equity in the capital structure of the business will be kept under constant review as repayments start on the existing term loan in 2015/16.

Safety

The Group's AFR for the year, which includes our Indian joint venture, was 0.21. The current year result of 0.21 includes an AFR of 0.33 for our UK operations which was a significant improvement on the prior year of 0.57. This reflects a continuation of the improving trend seen towards the end of the prior period along with some new initiatives launched in the current year following the appointment of a new Group SHE director in April 2014. These initiatives included a focus on near miss reporting, both in the factory and on-site, improved health and safety communications, investment in technology and training and site SHE visits by directors to drive visible leadership and reaffirm our commitment to a zero accident culture. The safety of all our employees is of paramount importance and continues to receive priority attention from both the executive committee and the board.

Strategy, branding and communication

The change in the Group's name to Severfield plc and the associated simplification of the naming structure of the Group's main operating companies has been well received in the marketplace. It is also supporting a more proactive communication programme to both raise the profile of the Group's capabilities and our role in building many of the iconic structures around the UK. This is being mirrored with improved internal communications and, for the first time ever, an employee engagement survey was undertaken in the year. Improving employee engagement is vital to ensuring that the Group is an attractive place to work for both existing and potential new employees as we seek to develop and grow. During the year we launched a SAYE share scheme. This achieved a 28 per cent take-up rate which was pleasing when compared with more normal levels for these types of schemes of around 20 per cent.

We have made good progress in starting to implement and develop further the new strategy introduced last year, as set out in Our Strategy and elsewhere in this review, particularly in respect of operating and margin improvements in the UK and creating a sustainable business in India. We appointed a Group strategic business development director to ensure that we could continue developing the wider business strategy without distracting operational management from the continued improvement of the core UK business.

Summary and outlook

The Group has made real progress in the UK and India in the year both operationally and financially. The quality of the current order book and sustained increase in the pipeline in the UK gives us the confidence to believe we can deliver improved revenues. We have the skills and capacity to deliver the expected demand as spend in the UK infrastructure markets and the power and energy sectors grows, alongside delivering improved margins.

As the JV in India stabilises with improved market conditions, as government and international funding becomes more readily available for infrastructure and commercial projects, along with the continued move from concrete to steel, we believe we are well placed to take advantage of this growing market. The JV has the potential to generate real shareholder value from a sustainable business over the next few years.

Finally, I would like to thank all of our people for their hard work and commitment over the past 12 months and look forward to their ongoing support as we continue to build a successful business.

Ian Lawson
Chief executive officer
17 June 2015

I would like to thank all of our people for their hard work and commitment over the past 12 months and look forward to their ongoing support as we continue to build a successful business."