Q&A with chief executive officer Alan Dunsmore

What do you view as the highlights of the year

Alan: 2018 has been another strong year for the business. We have delivered a third successive year of revenue growth, underlying profit before tax has increased by 19 per cent and another year of positive cash generation has resulted in net funds of £33.0m at the year-end.

Based on these results, the board is recommending a final dividend of 1.7p per share and a special dividend of 1.7p per share. This reflects our current balance sheet strength and our confidence in the future prospects of the business.

What are your strategic priorities over the next few years

Alan: We have continued to deliver on our strategic objectives in 2018, and we remain focused on our 2020 strategic profit target of £26m. This profit target is expected to be achieved with operating margins of between 8 and 10 per cent and it is pleasing to us that the 2018 operating margin of 8.3 per cent is now within this range for the first time.

We have continued to explore new areas for organic growth. During the year we launched our new business venture, Severfield (Products & Processing), to address smaller scale projects, we have commenced bidding for work in continental Europe and we are also targeting the medium to high-rise residential market where we have developed a steel solution.

What is your plan for JSSL, the Indian joint venture

Alan: JSSL has continued to grow in 2018 and its profitability has improved. 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. Our Indian order book stands at £106m, a record high for the business, and we are seeing a growing pipeline of opportunities for higher margin commercial work. This positions JSSL well to deliver long-term profitable growth and to generate future value.

What is the outlook for 2019

Alan: We continue to see a stable UK market, with modest economic growth forecast, and a good UK pipeline of opportunities. The market for data centres and industrial and distribution appears strong at present and our pipeline also includes a number of significant projects across the commercial office (both in London and outside) and infrastructure sectors. This, together with our high-quality and stable order book of £237m, means that we expect 2019 to be another year of progress for the Group.

Our vision is to be recognised as world-class leaders in structural steel.

We will deliver this vision through the Group's strategy which is supported by a focus on five key elements and assisted by our business improvement programme, Smarter, Safer, more Sustainable.

Group strategy

Growth

Clients

India

Operational
excellence

People

Smarter, Safer, more Sustainable

Smarter, Safer, more Sustainable, our business improvement programme, represents the consolidation of all of the Group's ongoing improvement projects, established to help us in achieving the Group's overall strategy. These include improvements in business processes, use of technology, operating efficiencies and new product development, all set within the framework of strong risk management and control.

Smarter

Improve how we deliver our projects with speed, efficiency and accuracy

Safer

Continue our relentless focus on safety and always think 'safety first'

More Sustainable

Focus on working sustainably and reducing our energy consumption

WHAT WE'LL DO
Maximise our skill sets – operational excellence, quality and dealing with complexity.Introduce new technology and equipment that enables safer ways of working.Invest in technology that reduces our emissions.
WHAT THIS WILL MEAN FOR US
Continued development of our expertise and improve our offering to clients.Safeguard employees, clients and shareholders.Care for our environment whilst building our external reputation.

Smarter, Safer, more Sustainable will assist us in unlocking the value in our people and will help to keep our order book strong and secure the future for our clients, shareholders and people.

Safety, health and environment strategy

Our people strategy

Group strategy

Medium-term target: to double 2016 underlying profit before tax by 2020.

Strategic pillarsDescriptionLink to KPIsLink to principal risks
Growth
Our aim is to capitalise on growth opportunities, both in the UK and in overseas markets, and to maximise our market share.1234567123456789
Clients
By understanding, anticipating and responding to client needs we aim to build secure, sustainable and mutually valuable relationships and create lasting client satisfaction.1234567123456789
India
We continue to believe that the Indian market presents great opportunities for steel fabrication.1234567123456789
Operational excellence
Our emphasis is on delivering high-quality projects and reducing costs by driving excellence through our core business processes.1234567123456789
People
Our people are at the heart of our business and are vital to the success of our vision and the achievement of our strategic goals.1234567123456789

Key performance indicator reference number

1Underlying operating profit and margin (before JVs and associates)

2Underlying basic earnings per share ('EPS')

3Revenue growth

4Operating cash conversion

5Return on capital employed ('ROCE')

6Order book

7Accident frequency rate ('AFR')

Key to principal risks

1Health and safety

2Information technology resilience

3Commercial and market environment

4Mispricing a contract (at tender)

5Failure to mitigate onerous contract terms

6Supply chain

7Indian joint venture

8People

9Industrial relations

The progress that we have made in delivering our strategy, together with how this strategy has been further developed in 2018 is set out below:

Strategic priorities

Increase UK market share: growing profitable market share in areas where the business already operates.

Enter new UK market sectors: looking for new market areas where the business has not operated in the past, taking advantage of our existing capacity and capabilities.

Getting traction in Europe: driving more opportunities from European contractors with whom we have strong relationships in the UK and through our new European business venture.

Achievements in 2018

We have grown Group revenues by five per cent (and by 36 per cent since 2015 when we first launched our strategic growth target), taking advantage of the Group's market-leading position.

We have continued to focus on larger projects within our target markets, playing to our strengths of capability and capacity (delivering projects with revenues in excess of £20m for 22 Bishopsgate, Tottenham Hotspur, Wimbledon (new roof for number one court) and a major new commercial head office building in London). We also secured the landmark contract for the new Google Headquarters at Kings Cross.

We have continued our targeted approach with key UK infrastructure project owners, to exploit identified future growth opportunities (infrastructure and bridge markets).

Our investment in CMF positions us as the only hot rolled steel fabricator in the UK to have a cold rolled manufacturing capability. We have expanded CMF's product range during the year to include purlins and other cold formed products.

In order to further develop our product offering we have launched a new business venture at Sherburn, Severfield (Products & Processing). This will provide processed steel and ancillary products to other fabricators who specialise in smaller projects.

We have continued to develop our European business venture and have established a small team based in the Netherlands to support our new business development director. This has enabled us to focus on the tailoring of our established UK offering for expansion into this market.

We are also targeting the market for medium to high-rise residential construction. During the year, we have continued to develop our residential solution and are close to securing our first orders.

Objectives for 2019

To further grow Group revenues and maintain the quality of the order book.

Focus on enhancing our position in existing UK markets where the Group already has specialist expertise (at good margins and with acceptable levels of risk).

Maintain our focus on infrastructure, taking account of our in-house bridge capability and historical record in transport infrastructure. This will leave us well positioned to take advantage of the strong future pipeline of major infrastructure projects in the transport and power and energy sectors (including HS2), all of which have a significant steel content.

Develop our new organic growth areas including our residential offering, Europe and Severfield (Products & Processing). This will also include the ongoing delivery of projects in new UK markets including regional and smaller mid-market opportunities.

To continue the development of further cold formed steel opportunities and expanding the product range in CMF.

The Group also continues to look for complementary acquisition and investment opportunities which support our plans for growth.

Strategic priorities

Quality of service: our industry experience allows us to better understand our customers' own strategic objectives and enables us to design, fabricate and construct structural steelwork solutions to support these objectives.

Achievements in 2018

We have continued to develop our relationships with key clients during the year. We take a long-term approach to relationships with our clients, aiming to deliver exceptional quality and service that encourages them to choose us on their next project.

We have continued to work closely with our clients to ensure that projects run as smoothly as possible, site programmes are met and changes are well managed.

We have also focused on developing new client relationships to target an increased pipeline of opportunities in both existing and adjacent markets.

Objectives for 2019

Continue to deliver a quality, safe and efficient service to our clients.

We will further focus on opportunities to improve client satisfaction and retention, and develop strategically important relationships with existing and new clients in our target markets in support of our growth plans.

We will continue to seek to engage with our clients at an early stage to enhance our understanding of their requirements and to add value throughout the project life-cycle.

We will explore innovative and collaborative ways of working that are mutually beneficial to us and our clients whilst ensuring that risk and reward are appropriately balanced.

Strategic priorities

Sustainability of India: our aim is to ensure that the business develops a sustainable position whilst the market continues its conversion to steel.

Achievements in 2018

The Indian business has continued to grow in 2018, performing steadily and profitably. This reflects good operational performance coupled with lower financing costs following the repayment of the term debt in June 2017.

The market for structural steel in India has improved significantly over recent months and this position is reflected in the Indian order book of £106m and a growing pipeline of opportunities (particularly higher margin commercial work).

We remain confident in the long-term development of the market. 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.

Objectives for 2019

In an improving market, we will target a better mix of work between commercial and industrial projects as we seek to grow the business and increase operating margins. The step up in market demand is likely to fill and exceed current factory and capacity levels which will need to be managed.

We will continue to concentrate on business development opportunities, particularly with key commercial clients in targeted market sectors (including residential).

We will continue to invest in and develop the local management team and workforce in support of a growing business.

Strategic priorities

Drive operational improvements and efficiencies: the objective of our comprehensive operational improvement programme is to improve the Group's risk assessment, operational and contract management processes.

Invest in market-leading technology: we will make this investment in the short and medium term in order to support the Group's ongoing requirements and for growth.

Achievements in 2018

Our profit performance in 2018 (underlying PBT was £23.5m) keeps us firmly on track to deliver our 2020 strategic profit target of £26m. We have also continued to improve our operating margin to 8.3 per cent in 2018 (2017: 7.5 per cent).

2018 operating profit has continued to benefit from the embedding of operational efficiencies across the Group through better risk and contract management processes and production process improvements, together with higher profits from certain project completions in the first half of the year.

Our 'Smarter, Safer, more Sustainable' business improvement programme, which was launched in 2017, continues to drive improvements to our business processes, use of technology and operating efficiencies. In 2018, as part of this initiative, we reorganised our factory operations in North Yorkshire. This resulted in the consolidation of steel fabrication at Dalton and Sherburn into the Dalton facility and a new business venture, Severfield (Products & Processing) ('SPP'), being launched at Sherburn. The reorganisation will allow us to make more efficient use of our operational footprint in Yorkshire and also, through SPP, to address new smaller scale projects.

We have completed the implementation of our new production management system which will assist in embedding operational efficiencies and improved factory processes and have also rolled out a Lean manufacturing programme.

The Group's improvement programme has included further capital investment in 2018 of £6.4m, taking our capital investment in the business to £24m over a four-year period. The investment in 2018 represents further factory machinery, completion of the in-house painting projects at Lostock and Ballinamallard, office and yard improvements, a new trailer park and additional site construction machinery.

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 are then embedded across the Group to become business as usual.

Objectives for 2019

Our target remains the achievement of underlying PBT of £26m by 2020.

We will develop our 'Smarter, Safer, more Sustainable' business improvement programme and have recently established a dedicated 'SSS' team whose sole focus is on improving many aspects of our internal operations.

We will continue to drive operational efficiencies following the establishment of the new manufacturing arrangements at Dalton.

The roll out of the second phase of our production management system across the Group will support further improvements to estimating, production and contract and commercial management processes. This will help optimise processes between factories, production lines and projects.

This improved profitability will continue to generate surplus cash flows and support future dividends, in accordance with the Group's business model.

As part of the Group's capital investment programme, we will continue to invest at levels in excess of depreciation. This will include focused capital expenditure to target market opportunities and to maximise the benefits of our IT programme.

We will continue to invest in new state-of-the-art manufacturing technology and in our research and development programme to help drive production efficiencies. We have project teams focusing on various areas of development including introducing Lean into the design process, refining our production planning system, developing collaborative tools to provide real-time support to our project and commercial teams and reducing waste in our coatings application.

We will continue to upgrade and replace existing equipment where appropriate and to expand the capital equipment base where there is a strong return on investment case.

Strategic priorities

Develop our people: our aim is to attract and recruit the right person at every level and to keep them engaged so that we can deliver our goals and customer commitments whilst maintaining a safe working environment.

Achievements in 2018

We recruited 221 people across the Group, strengthening a range of disciplines. This included the appointment of 21 apprentices in IT, maintenance, drawing office and fabrication/welding and 45 construction and production trainees.

We rolled out our first Severfield development programme to 16 people. This programme will help us build sustainable leadership capability within our next generation of leaders.

We implemented a training programme on Lean production techniques that has led to increased employee engagement and many employees developing new skills and achieving recognised qualifications.

We have continued to review all internal communications across the Group. This included introducing further feedback opportunities for our employees, as well as creating and implementing new, more informative internal communication channels and messages suitable for all our internal audience groups, including a new newsletter and employee magazine.

We have continued our behavioural safety training and awareness programme, the objective of which is to have a significant and lasting benefit on the Group's safety culture.

We implemented an integrated Group-wide HR information system that has provided greater visibility of talent across the business and enabled us to make better people-related decisions.

Objectives for 2019

We will continue to prioritise investment in our people (including in apprenticeships) to ensure a healthy pipeline of talent to achieve our strategic goals.

We will implement a strategy to improve diversity and reduce our gender pay gap.

We will implement a project management development programme to improve our management of risk and create a pipeline of talent to support growth.

We will launch a further save as you earn ('SAYE') scheme to provide our employees with continued choice in the way in which they participate. This will support buy-in to the long-term success of the business and assist in employee retention.

We are committed to a target of zero injuries and we will continue to apply the highest standards in health and safety across all operations to further improve the Group's AFR.

We will continue to seek and exploit opportunities for increasing employee engagement. This will include the launch of a Group-wide intranet and an employee recognition scheme that underpins our values.