The Group has delivered another year of strong profit growth.
Chief executive officer
The Group has delivered another year of strong profit growth in 2018, driven by a combination of revenue growth and continued improvements in UK operational performance, together with another profitable year from our Indian joint venture.
In 2018, we have continued to grow our revenue which has increased by five per cent to £274.2m (2017: £262.2m) and are very pleased with our profit performance with underlying profit before tax up 19 per cent to £23.5m (2017: £19.8m). Year-end net funds were £33.0m (2017: £32.6m) and another year of positive cash generation has further strengthened our balance sheet whilst providing us with the flexibility to invest in our UK businesses and in India, where the term debt was repaid in June 2017.
The market position for our Indian joint venture, JSSL, has improved significantly over recent months and this is reflected in its record order book of £106m and a growing pipeline of commercial opportunities, all of which will benefit the business in 2019 and beyond. In 2018, JSSL continued to perform profitably. Good operational performance and lower financing costs, following the repayment of the term debt, have resulted in the Group's share of profit after tax of £0.5m (2017: £0.2m).
We continue to exceed our ROCE target of 10 per cent and have achieved an improved return of 16.5 per cent in the year (2017: 14.6 per cent), maintaining the Group's alignment with its construction and engineering clients and peers.
We have continued to make good progress during the year towards our strategic targets, including the doubling of 2016 underlying profit before tax to £26m by 2020. Based on this progress, I am delighted that the board is recommending an increase in the final dividend to 1.7p per share, making a total for the year of 2.6p per share (2017: 2.3p per share), a 13 per cent increase on the prior year. Furthermore, the board is also recommending a special dividend of 1.7p per share, which reflects our current balance sheet strength and confidence in the future prospects of the business and delivers a total cash return for shareholders of 4.3p per share.
Revenue is up five per cent over the prior year, predominantly reflecting an increase in order flow and production activity, together with an increase in steel prices. During the year, we have continued to work on four large projects in London, each of which has project revenues in excess of £20m. These include three projects where work is ongoing and will continue into the next financial year, namely the new stadium for Tottenham Hotspur, the retractable roof for Wimbledon No. 1 Court and a new commercial office tower at 22 Bishopsgate. The fourth large project worked on during the year, which is now substantially complete, is for a major new commercial head office building in London.
Our operating margins have improved again to 8.3 per cent (2017: 7.5 per cent), resulting in an underlying operating profit (before JVs and associates) of £22.9m (2017: £19.6m). When we set our strategic 2020 profit target back in 2016, we anticipated that this would be achieved with revenues in the range of £270m to £300m and operating margins in the range of 8 to 10 per cent, depending on the mix of projects in the order book at the time. It is pleasing to us that the 2018 operating margin of 8.3 per cent is now within this strategic margin range for the first time, demonstrating that we remain firmly on course to achieve our strategic profit target.
The operating margin has continued to benefit from improvements to our operational execution, including further developments to our factory processes to drive efficiencies and reduce costs, as well as better risk and contract management processes. In many cases, this execution improvement only becomes apparent towards the end of a contract and this is reflected in the improved 2018 results, together with higher profits from certain project completions which mainly benefitted the first half of the year.
Operational improvements implemented during the period include the continued roll-out of a new Group-wide production management system, the opening of our new paint facilities at Lostock and Ballinamallard which will shorten lead times, improve quality and reduce reliance on external suppliers, further investment in our factories and bridge capability to improve speed and efficiency and the upgrade of our haulage facilities at Dalton.
Building from a strong foundation
'Smarter, Safer, more Sustainable'
The Group continues to be shaped by the programme of projects launched in the previous year under the banner of 'Smarter, Safer, more Sustainable' which provides a framework for the ongoing improvements to our business processes, use of technology and operating efficiencies. Developments in 2018 include the launch of our Lean manufacturing programme and the establishment of a dedicated 'SSS' team to focus on improving many aspects of our internal operations.
In January 2018, to drive further operational improvements in line with the Group's strategy, we reorganised our factory operations in North Yorkshire. This resulted in steel fabrication at Dalton and Sherburn being consolidated into the Dalton facility, making better use of our operational footprint in Yorkshire, and the establishment of a new business venture in Sherburn, Severfield (Products & Processing ) ('SPP'). SPP, which commenced trading in April 2018, has allowed us to address smaller scale projects, a segment of the market which we have not historically focused on. The business provides a one-stop shop to fabricators who specialise in smaller projects to source processed steel and ancillary products, all delivered to the Group's high standards of quality and service.
Underpinning our culture of continuous improvement is the ongoing focus on the training and development of our people and our priority is to recruit, train and retain the highest calibre of workforce. Notwithstanding Ian Lawson's departure which required us to implement our succession plans, the continued stability in our organisational structure and management team has been a key strength of the business for a number of years. During the year, we recruited over 200 people across the Group, strengthening a range of disciplines including our commercial and project management teams. We believe that the recruitment and training of graduates and apprentices is fundamental to business development, another means of ensuring that we have all the desired skill bases available in the future. During 2018, we recruited 66 apprentices and continue to invest in graduate trainees through our apprenticeship and graduate recruitment programmes.
In 2017, demonstrating our ongoing commitment to people development, we launched our Lean manufacturing programme and the Severfield development programme, which focuses on emerging leaders. In 2018, we have continued to develop and support our people to apply Lean manufacturing techniques to develop new skills, achieve new qualifications and, as part of the 'Smarter, Safer, more Sustainable' initiative, continually improve our businesses and client offering. The first cohort of employees have now completed the Severfield development programme, aimed at developing and deepening our management talent, which has delivered clear benefits both for the business and the people involved.
During 2018, to further improve efficiencies and client service, we have continued to invest in research and development into advanced technologies. We have also established an engineering forum to identify new and innovative ways of working which can then be embedded across the Group to become business as usual.
Working closely with our clients and project stakeholders, we continue to demonstrate our capability to deliver complex design solutions and, in 2018, we have designed and delivered some of the most complex engineering solutions in the industry. Our management and integration of the construction process, our capacity and speed of fabrication and our use of technology has allowed us to improve project delivery times as well as meeting and often exceeding client service expectations. We have worked with a number of clients using innovative and collaborative ways of contracting which have enabled cost effective solutions to be developed to meet project challenges.
Our client base, which represents a broad range of sectors and regions, includes Multiplex, Sir Robert McAlpine, LeadLease, Balfour Beatty, BAM, Skanska, Mace, Laing O'Rourke, Canary Wharf Contractors, McLaren, Winvic, Morgan Sindall, Stanhope, Buckingham, Vinci, Readie, Galliford Try, Hitachi, ISG, Interserve, Bowmer and Kirkland, John Sisk, John Graham, Hochtief and Westfield. The Group worked on over 100 projects with our clients during the year including:
|Major projects – over £20 million|
- Wimbledon (No. 1 Court roof), London
- Tottenham Hotspur, London
- London Development Project, London
- 22 Bishopsgate, London
- Southbank Place, London
- Snowhill, Birmingham
- JLR Gaydon Triangle, Midlands
- North Wharf Road, London
- Shard Place, London
|Industrial and distribution|
- Amazon, East Midlands
- Amazon, Bolton
- Large warehouse, Milton Keynes
- Large distribution centre, Tilbury
- Ordsall Chord, Manchester
- London Bridge Station Canopies, London
- Chiswick Bridge, London
- Ely Southern Bridge, Cambridgeshire
|Health and education|
- Graphene Innovation Centre, Manchester
- Manchester Engineering Campus Development
- Kings College Hospital, London
- Large data centres, Dublin and Belgium
|Power and energy|
- Dunbar, Scotland
- Ferrybridge, Yorkshire
Our specialist cold rolled steel joint venture business, CMF, performed well during the year, having a beneficial impact both on operating margins and the share of results from JVs and associates. We continue to be the only hot rolled steel fabricator in the UK to have this cold rolled manufacturing capability, which has now been expanded to include purlins and additional cold formed products, allowing the Group to further integrate elements of its supply chain.
The remedial bolt replacement works at Leadenhall were completed in 2017 with the total expenditure being in line with the non-underlying charge made in 2015. Discussions continue with all stakeholders to determine where the financial liability for the remedial costs should ultimately rest.
Order book and market conditions
The UK order book at 1 June 2018 of £237m is consistent with the level that it has been for the past six months and reflects the anticipated increase from the position of £229m at the time of announcing the 2017 full year results. The order book, of which £200m is for delivery over the next 12 months, remains in line with our 'normal' order book levels, which typically equate to eight to ten months of annualised revenue. This provides us with good visibility of earnings into the next financial year and supports continued progress towards our strategic targets.
The order book contains a healthy mix of projects across a diverse range of sectors including commercial offices, industrial and distribution, data centres and retail. Significant new orders secured during the year include a number of commercial office developments in London and in the regions, including the landmark contract for the new Google Headquarters at Kings Cross, the Engineering Campus Development at Manchester University, the Westfield Stratford City expansion, industrial and distribution projects for a variety of clients, together with two large data centres in the Republic of Ireland and Belgium.
The Google project, which was awarded in December 2017, represents an order in excess of £50m and will require us to provide over 15,000 tonnes of structural steelwork for a new eleven storey head office building. Work is scheduled to commence on-site in the second half of the 2019 financial year.
Despite the uncertainties of Brexit, we continue to see a stable UK market, with modest economic growth forecast, and a pipeline of potential future orders that remains good. This pipeline includes a number of significant projects in the coming months across the commercial offices (both in London and outside), retail, industrial and distribution, data centres and infrastructure sectors. The market for data centres and industrial and distribution appears strong at present and although pricing remains competitive, the projects in these sectors play to our strengths, requiring high-quality, rapid throughput, on-time performance and full co-ordination between stakeholders. Furthermore, we are seeing the continued re-emergence of the market in the Republic of Ireland, where we have historically had a strong presence, as well as a number of opportunities in mainland Europe.
In February 2018, in response to recent changes in the mix of work being experienced by the Group, which is substantially changing the requirement for steel fabrication at our Lostock and Dalton facilities, we transitioned a number of job roles from Lostock to Dalton. These changes will allow us to enhance our market-leading position, whilst continuing to provide our clients and stakeholders with a high-quality cost-effective product and service.
Looking further ahead, UK government policy is helping to drive a strong pipeline of major infrastructure projects, particularly in the transport sector including HS2 stations and bridges, the expansion of Heathrow airport as well as the ongoing Network Rail and Highways England investment programmes. The combination of our in-house bridge capability, which has seen significant investment over recent years, and our historical record in transport infrastructure, leaves us well positioned to win work from such projects, all of which have a significant steel content.
In 2018, our Indian joint venture, JSSL, continued to grow, performing steadily and profitably. The business, once again, generated strong operating margins of 9.2 per cent (2017: 9.7 per cent) and a profit after tax, of which the Group's share is £0.5m (2017: £0.2m). The improved profitability in 2018 reflects both the good operational performance of the business coupled with lower financing costs following the repayment of the joint venture's term debt of £11.0m in June 2017.
The market for structural steel in India has improved significantly over recent months and we are now seeing clear signs of the conversion from concrete to steel which is vital to the long-term growth and value of JSSL. These market developments are evident in JSSL's record order book of £106m at 1 June 2018, which has increased significantly recently and compares favourably to the order book of £73m at 1 June 2017. There is also a growing pipeline of opportunities which mainly comprises higher margin commercial projects, where we now have visibility of a large number of potentially interesting developments, as well as industrial work, including for our joint venture partner, JSW Steel, which is seeking to substantially increase its domestic steel output in the short to medium term. The step up in the pipeline of opportunities is expected to benefit the business in the 2019 financial year and beyond, with demand at these levels likely to fill and exceed our current factory capacity levels. Accordingly, in tandem with our joint venture partner, we are currently reviewing certain incremental investment options for the business.
Overall, we remain confident in the long-term development of the market and of the business, especially considering the recent market upturn and step up in the order book. We believe that the business continues to have a solid foundation from which to deliver future profitable growth, and value will continue to build in the business as it enters the next phase of its development.
The Group has invested £6.4m in capital expenditure during the year (2017: £7.0m) representing the continuation of the Group's capital investment programme. The capital expenditure includes further investment in the new in-house painting facilities at Lostock and Ballinamallard, new equipment for our fabrication lines, further enhancement of our in-house fleet of on-site construction equipment and improvements to our site infrastructure and staff welfare facilities.
The cash generation of the Group remains strong and we will continue to invest £6m to £7m per annum to support the development of our client service offering and our operational improvements and efficiencies.
We are committed to the safety of all who come into contact with our business and over the past three years we have seen an improvement in our overall safety performance. The Group's accident frequency rate ('AFR') for the year, which includes our Indian joint venture, was 0.22, compared to 0.24 recorded last year, which represents another year-on-year improvement. This improvement was again driven by our UK operations which reduced from 0.42 to 0.40 in the year. Whilst year-on-year improvements continue, health and safety continues to be central to all of the Group's activities and our strategic programme of activities and improvements has supported progress in the year.
All members of our board, once again, participated in site safety visits during the year and we continue to further develop the monitoring and analysis of all safety-related incidents, including near misses, high potential incidents and also minor injuries for prevention programmes and campaigns. We have commenced the next stage of our behavioural safety programme and are now seeing further enhancements around behaviour and cultural change.
Our occupational health programme continues to evolve with focus on prevention measures. We have further developed awareness and support protocols on mental and physical health-related issues. In light of this, in addition to supporting the Mates in Mind charitable programme we will also be signing up to the Build UK charter to improve and promote positive mental health in construction.
Sustainability remains a key part of the Group's strategy, aiming to create visible leadership and objectives at all levels and to all stakeholders. A number of projects have been identified and progressed through an established working group, for example emergency lighting upgrades.
We have continued to deliver on our strategic objectives. During the year, as part of the 'Smarter, Safer, more Sustainable' programme, we have implemented a number of improvement initiatives aimed at business processes and operating efficiencies (including the reorganisation of our North Yorkshire factory operations), use of technology and new product development all set within our framework of robust risk management and control. We also continue to work closely with our existing client base, as well as developing new client relationships to target an increased pipeline of opportunities, to ensure that we are meeting their ever-changing requirements.
We continue to adopt an integrated solutions mindset, listening to clients' operational challenges and then designing a package of solutions to help them achieve their goals. Our engineers and designers remain focused on key areas such as value engineering, health and safety through design and the use of more cost-effective and innovative steel solutions, all for the benefit of our clients.
We are now actively pursuing three new areas of organic growth. During the year, we launched our new business venture at Sherburn, Severfield (Products & Processing), which commenced trading in April 2018. We continued to develop our European business venture and have commenced bidding for work in continental Europe, assisted by the new business development director who has now established a small team based in the Netherlands. Finally, we are also targeting the market for medium to high-rise residential construction where we have developed a steel solution. In 2018, we have performed extensive market testing, have had positive discussions with interested parties and believe that we are now close to securing our first order.
Summary and outlook
The strong performance of the Group has continued into 2018, with good revenue and profit growth supported by strong cash generation. The strategic and operational progress that we have made over recent years gives us confidence that the Group is well placed to deliver sustainable future profitable growth. With a high-quality and stable order book of £237m and a strong UK pipeline of opportunities, we expect 2019 to be another year of progress in the UK.
In India, a significantly improving market position, a record order book of £106m and a growing pipeline of commercial opportunities, positions the business well to deliver future profitable growth. It is this improvement in the market which will really drive long-term value in the business and, in tandem with our joint venture partner, we are currently reviewing certain incremental investment options for the business as it enters the next phase of its development.
Overall, both the performance of the UK business and the Indian joint venture are consistent with the continued progress towards our strategic targets, including the doubling of 2016 underlying profit before tax to £26m by 2020.
Finally, I would like to thank all of our employees for their high level of commitment and professionalism during 2018, particularly during a period of change for some of our businesses, which has contributed to another successful year for the Group.
Chief executive officer
20 June 2018
Severfield development programme
In 2017, we launched the Severfield development programme, which is aimed at developing and deepening our management talent across the Group. This programme focuses on leadership skills and providing participants the opportunity to work across different business units on business improvement projects identified by the board. The first group of employees has now completed the 2018 programme, including Martin Clyne, a senior project manager at Severfield (UK) Limited:
"The programme, which was delivered by three tailored week-long workshops over a period of ten months, encouraged professional growth and included 16 participants selected from across each of the Group's businesses. Whilst the training and development of employees has always been an important part of the Group's culture, this programme took a more structured approach and focused on building new relationships, learning from our colleagues from other parts of the Group, personal impact, leadership skills, strategic and commercial awareness (particularly of new and emerging markets), leading and influencing change and improving our presentational skills. Each workshop was tailored to push us beyond our comfort zone, through challenging and 'out of the box' practical activities and assignments.
The programme also provided us with a fantastic opportunity to get to know each other as individuals outside of the busy work environment and gain an understanding of each other's daily challenges and aspirations. This has helped to build strong relationships and has created a close network of managers with an enhanced understanding and appreciation of good leadership."
The programme has delivered clear benefits both for the business and the people involved and, in 2019, we intend to identify the second group of employees to participate in it.
Strategic capital investment – T&I machine
The Group continues to drive efficiency improvements by investing in world-class technology. During the year, the Group completed the installation of a brand new £2m state-of-the-art 'T & I' plate girder line at its production facility in Lostock. In combination with our highly-skilled team specialising in structural bridgework, this will improve our bridge capability and positions us well to take advantage of a strong pipeline of major infrastructure projects which is being driven by UK government policy.
The new plate girder line assembles flat plates into the distinctive top 'T' sections and the vertical 'I' sections and is the biggest of its kind in the UK, capable of fabricating steel beams of up to 3.5 metres in depth and 1.5 metres in width. This investment supplements our existing plate girder lines at Severfield (UK)'s other production site at Dalton, North Yorkshire and following further investment in our on-site paint shops at Lostock and Ballinamallard, will enable Severfield to deliver up to 95 per cent of the current bridge market steelwork requirements.
Commenting on the new investment, Severfield (UK) managing director, Gary Wintersgill, said: "The investment at our facility in Lostock will enable us to build on our capability as the UK's largest bridge provider and deliver not only the volumes required by the market, but also the productivity benefits from modern state-of-the-art equipment."